-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C3OKMEvUUowKXV9eJX9kt0Mxh0mmmWQkw2Hy45o0ZlRMvumBu98tLYQCcASwov4w 8ceCv0bGRIfUZQUtR8Xrdw== 0000930413-07-005443.txt : 20070625 0000930413-07-005443.hdr.sgml : 20070625 20070625130415 ACCESSION NUMBER: 0000930413-07-005443 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20070618 ITEM INFORMATION: Termination of a Material Definitive Agreement ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20070625 DATE AS OF CHANGE: 20070625 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTEC INTERNATIONAL INC CENTRAL INDEX KEY: 0000889992 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 113068704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27368 FILM NUMBER: 07938301 BUSINESS ADDRESS: STREET 1: 3960 BROADWAY STREET 2: BLDG 28 CITY: NEW YORK STATE: NY ZIP: 10032 BUSINESS PHONE: 7183264698 8-K/A 1 c49144_8ka.htm

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 18, 2007

Ortec International, Inc.

(Exact Name of Registrant as Specified in its Charter)


DE (State or other Jurisdiction of Incorporation)	0-27368 (Commission File Number)	11-3068704 (I.R.S. Employer Identification No.)

3960 Broadway New York, NY (Address of Principal Executive Offices)		10032 (Zip Code)

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

(Former name or former address, if changed from last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:


o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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Item 1.02 Termination of a Material Definitive Agreement

On June 18, 2007 we entered into the Amended and Restated Exchange Agreement (Exchange Agreement) with Paul Royalty Fund, L.P. (“PRF”) and PRF exchanged its interest in our future revenues (recorded as a $38,450,000 liability at December 31, 2006) for 500 shares of our new Series A-l Convertible Preferred Stock (A-l Preferred) and 500 shares of our of Series A-2 Convertible Preferred Stock (A-2 Preferred), each share having a stated value/liquidation preference of $10,000. The stated values of the A-l and A-2 Preferred can be converted to common stock at conversion rates of $0.50 and $5.00 per share, respectively, or an aggregate of 11,000,000 common shares on an as converted basis for both the A-l and A-2 Preferred. Our earlier agreements with PRF were cancelled and PRF’s liens were therefore removed from our intellectual property.

Our Exchange Agreement with PRF also provided for the following:


	•	Reimbursement of PRF for its legal expenses which we paid from the proceeds of the simultaneous June 18, 2007 closing of the sale of Series A Convertible Preferred Stock (A Preferred) with warrants attached.

	•	Resignation of five of our seven directors which are described below in Item 5.02.

	•	Resignations of our Chairman and Chief Executive Officer, and the execution by us and our Chairman and Chief Executive Officer of agreements canceling the termination of employment agreements we entered into with our Chairman and Chief Executive Officer in 2002. Such termination of employment agreements require us to make payments to our Chairman and Chief Executive Officer based upon a multiple of their five year average annual salaries, as they are defined in those 2002 agreements, if we terminate their employment with us. The cancellation agreements are described in. Item 5.02 below.

	•	After the closing there will be a change in our Board of Directors with one new director designated by PRF and at least one more director. The Exchange Agreement contemplates the election of our President, Dr. Constantin Papastephanou, as our new chief executive officer shortly after June 19, 2007. See Item 5.02 below.

We incurred fees payable in warrants to the placement agent in the sale of our A Preferred with warrants attached under a financial advisory agreement. Such advisory agreement is described below under Item 3.01.

The exchange of our Series A-l and A-2 preferred stock under the Exchange Agreement was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to the provisions of Regulation D promulgated under the Act, since PRF is an accredited investor, as that term is defined in Rule 501 in Regulation D.

The foregoing description of the Exchange Agreement is qualified in its entirety by reference to the actual terms of the Exchange Agreement, a copy of which is attached as Exhibit 10.1 and incorporated by reference herein in its entirety.

Item 3.02 Unregistered Sales of Equity Securities

We completed a private placement of our Series A Convertible Preferred Stock (A Preferred) with warrants attached to a group of accredited investors. We sold 579.148 shares of A Preferred for $10,000 per share (its stated value) and received gross cash proceeds from such sales of $ 5,791,475. At the same time holders of bridge notes who had loaned us an aggregate of $2,701,500, with $94,264 of accrued interest, or $2,795,764, exchanged their bridge notes for an aggregate of 349.470 shares of our A Preferred with warrants attached at 125% of the face value, or $3,494,705, of their bridge notes.. We repaid $197,500 of bridge notes, or $226,936 including a $19,750 premium and $9,686 of accrued interest. All noteholders also received our five year Series A warrants to purchase an aggregate of 2,899,000 shares of common stock at $1.00 per share. Each $10,000 A Preferred share converts into 20,000 shares of our common stock at a conversion rate of $0.50 per common share. Our outstanding 928.618 shares of A Preferred can be converted into an aggregate of 18,572,360 shares of our common stock. Each holder of A Preferred shares received a five year warrant to purchase 50% of the number of such holder’s A Preferred as converted shares, or to all such holders warrants to purchase an aggregate 9,286,180 shares of our common stock exercisable at $1.00 per share. Additionally each purchaser and bridge loan investor who acquired A Preferred shares also received Series M warrants which are exercisable at $0.50 per share at any time hereafter until thirty days after we

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have announced receipt of written notice from the FDA clearing our right to sell ORCEL for the treatment of venous stasis ulcers. The number of Series M warrants issued was correlated to the type of investor. Purchasers and bridge note investors who participated in the private placement received Series M warrants to purchase 50% of the A Preferred as converted shares that they received in the private placement, and 100% if they invested $3,500,000 or more (Lead Investor(s)) in the purchase of A Preferred shares. We issued Series M warrants to purchase an aggregate 12,386,180 shares of common stock to investors in the private placement and to our bridge loan investors. Those purchasers and bridge loan investors who received Series M warrants also received five year Series M-l warrants, exercisable at $1.00 per share, entitling them to purchase 50% of the number of our common shares they purchase upon exercise of their Series M warrants.

The placement agent who arranged the private placement financing received 10% of the cash proceeds we received from the bridge note loans and in the private placement, and five year warrants to purchase 1,857,236 shares of our common stock exercisable at $0.55 per share (10% of the as converted amount of Series A Preferred shares), and warrants to purchase 641,809 shares of our common stock exercisable at $0.55 per share (5% of the amount of our as exercised Series M warrants). Under an advisory agreement with our placement agent, primarily as compensation for negotiating our recent restructuring transactions (the exchange transaction with PRF and the cancellation of termination of employment agreements with our CEO and chairman, both described in this report, and in connection with the exchange of our outstanding Series H warrants for shares of our common stock and our new Series A warrants, reported in a report on Form 8-K filed on June 12, 2007) we agreed to issue warrants, identical to those issued in the Series A financing, to purchase 2,000,000 shares of our common stock exercisable at $0.55 per share. In addition we agreed to exchange our common stock for our outstanding Series E, Series E PA, Series F and Series F PA warrants held by our placement agent, its affiliates or designees, or sub-agents that participated in the Series A Financing.. We also agreed in such advisory agreement that the placement agent will be paid a transaction fee based on the closing of a strategic transaction in the future of 3% of the first $50 million, 2% of the next $50 million up to $100 million, and 1% of aggregate consideration we receive un excess of $100 million. Such advisory agreement will be in effect until June 15, 2008.

The sale of our Series A preferred stock and the attached warrants in the private placement was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”) pursuant to the provisions of Regulation D promulgated under the Act, since all the purchasers were accredited investors, as that term is defined in Rule 501 in Regulation D.

Other significant aspects of the private placement and financing transactions were:


	i.	We are required to file a registration statement by September 17, 2007 for the shares of our common stock (a) into which the A Preferred and the A-l Preferred can be converted and (ii) issuable upon exercise of our Series M warrants. We are required to have such registration statement declared effective within 150 days of filing (Effectiveness Date). If we fail to file on time we will pay liquidated damages in cash of 2% of the Holders initial investment in the A Preferred and the stated value of the A-l Preferred. If the filing is not declared effective by the 30th day following the Effectiveness Date we will pay 1% of that amount. If we are limited by the SEC as to the number of shares we can register pursuant to SEC Rule 415, the 1% fee will be applied only to those shares that could have been registered as required by our agreement. In either case our liquidated damages are capped at 24% in the aggregate.

	ii.	The exercise prices of the warrants and the conversion price of the Series A and A-l Preferred will be adjusted downward (full-ratchet anti-dilution protection) for any equity issuances (other than permitted issuances) hereafter made by us at a price lower than the conversion price of the preferred stock or the exercise price of the warrants. Such full ratchet protection will cease and become standard weighted average anti-dilution protection 30 days after and if we publicly announce that we were successful in obtaining FDA approval for commercial sale of ORCEL for the treatment of venous stasis ulcers.

	iii.	Subject to a registration statement being in effect or Rule 144 (k) being available for public sale of the shares of our common stock issuable upon conversion of the A Preferred (a) if the closing bid price of the our common stock is equal to or greater than $1.50 for ten (10) consecutive trading days, 1/3 of the A Preferred stated value shall automatically convert into shares of our common stock; (b) if the closing bid price is equal to or greater than $2.00 for ten (10) consecutive trading days then such portion of the A Preferred stated value shall automatically convert into shares of our common stock so that, together with the earlier automatic conversion, 2/3 of the original stated value shall have converted, and (c) if the closing

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		bid price of our common stock is equal to or greater than $3.00 for ten (10) consecutive trading days then all of the A Preferred holders stated value not theretofore converted shall automatically convert into shares of our common stock.

	iv.	Beginning June 18, 2008, the Series A Warrants may be exercised pursuant to a cashless exercise if the common shares underlying the warrants are not included for public sale in an effective registration statement. Subject to ownership blockers, which may be waived by the holder on 61 days notice, the Series A Warrants shall be redeemable for $0.01 per warrant if (i) the common shares underlying the warrants are subject to an effective registration statement, and (ii) the closing bid price for our common stock is equal to or greater than $3.00 for ten (10) consecutive trading days.

	v.	With the exception of $3,000,000 of securities issued prior to December 31, 2007, ranking pari passu with the A, A-l, and A-2 Preferred allowable only if the FDA approval has not yet been obtained, as long as $2 million of stated valued of the Series A and A-l remain outstanding we are prohibited from issuing any securities that rank senior to or pari passu with the A, A-l, and A-2 Preferred without the approval of at least 50% of the A Preferred and 50% of the A-l Preferred outstanding.

	vi.	As long as the A Preferred is outstanding, the Lead Investor will receive the right for the next two years to purchase up to 40% of the securities being offered in subsequent financing (as defined) on the terms being offered in such future financing.

	vii.	As long as the A and A-l Preferred are outstanding, and as long as we have not received FDA approval, these holders may exchange their preferred shares at their stated values for equity securities which have more favorable terms in a future financing.

We are in the process of evaluating the accounting ramifications of the June 18, 2007 transactions and based on our preliminary analysis we expect the transactions will have a material effect on our balance sheet and statement of operations.

The foregoing description of the transaction is qualified in its entirety by reference to the actual terms of the Series A Convertible Preferred Stock Purchase Agreement, a copy of which is attached as Exhibit 10.3 and incorporated by reference herein in its entirety.

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compen

We entered into Cancellation Agreements with our chief executive officer (CEO) and Chairman canceling termination of employment agreements we entered into with them in 2002. Such termination of employment agreements required substantial payments we would have to make to them in the event of the involuntary termination of their employments with us. Under such Cancellation Agreements we will make initial payments of $235,000 and $65,000, respectively, to them (including $25,000 to each as part of the consideration for cancellation of the deferred compensation we owed them). Thirty days after we receive the first response from the FDA to our pre-market application for clearance to make commercial sales of ORCEL to treat venous stasis ulcers (FDA’s 100 Day Letter), we will pay them $90,000 and $45,000, respectively. Seven months after we receive the FDA’s 100 Day Letter we will pay them $190,000 and $75,000, respectively. The post 100 Day Letter payments of $90,000 and $45,000, respectively, will be accelerated in certain events. Our CEO and Chairman will receive five-year warrants to purchase 2,105,819 and 2,051,798 shares, respectively, of our common stock at $0.55 per share. These share amounts will increase by 3½% of any shares in excess of 27,858,540 shares of common stock which we are required to issue upon conversion of A Preferred shares and upon exercise of Series A warrants which we may hereafter sell. We will also issue additional five year warrants to each of them entitling them to purchase so many shares of our common stock equal to 3½% of the number of shares of our common stock we issue, or are required to issue upon conversion or exercise of

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securities we issue, in the period ending 30 days after (and if) we publicly announce that we have received FDA clearance for commercial sales of our ORCEL product for the treatment of venous leg ulcers: (i) in financings in which we receive up to $6,300,000 and (ii) to our creditors in satisfaction of our obligations to them in excess of the number of shares we issue in such period in satisfaction of $3,000,000 of debt we owe. The additional warrants we may issue to our CEO and Chairman will also be exercisable at $0.55 per common share. Our CEO and Chairman agreed to cancel all their presently held options and warrants to purchase our common stock.

We owed deferred compensation to our CEO and our chairman of $233,300 and $366,221, respectively. Our chairman and CEO agreed to cancel these obligations we owed them in exchange for payments of $25,000 each and an option to purchase 12 shares of our A Preferred for our CEO and 8 shares of our A Preferred for our Chairman (stated value/ liquidation preference of $10,000 per share), plus the number of Series A, M, and M-1 warrants they would have received if they had purchased such A Preferred shares for the $10,000 per share price paid by the investors in the private placement. Such options are exercisable at $100 per A Preferred share (plus the percentage of Series A, M and M-l warrants comparable to the percentage that the purchased A Preferred share(s) has to the total of A Preferred shares that could be purchased upon the full exercise of the option. The option expires thirty days after we publicly announce FDA clearance for sale of our ORCEL product to treat venous stasis ulcers.

The issuance of the warrants and the options to purchase our A Preferred with warrants attached are exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”) pursuant to the provisions of Section 4 (2) of the Act, since our CEO and Chairman acquired such warrants and options for investment and not with a view towards distribution.

On June 21, 2007, Costa Papastephanou was named our Chief Executive Officer and also elected to our Board of Directors. Dr. Papastephanou has been employed by us since February 2001 as our President and Chief Operating Officer. Prior to joining us he was employed by Bristol Myers-Squibb for 30 years, the last 14 of which he was with Bristol Myers’ Convatec, a multinational ostomy and wound care management division. His last position at Convatec was as president of the global chronic care division, where he was responsible for that division’s sales and marketing, clinical trials, research and development, manufacturing, quality assurance and regulatory affairs. He holds a Ph.D. in Biochemistry from the University of Miami as well as a Master of Science in Microbial Biochemistry from the University of London.

Pursuant to the terms of our Exchange Agreement with PRF (described in Item 1.01 above), on June 21, 2007, Mark Eisenberg resigned as our director. Also pursuant to such agreement, on June 22, 2007, Ron Lipstein, our former CEO, and Steven Katz, our chairman, resigned their positions as directors. Dr. Katz was a member of our Compensation Committee.

The foregoing description of the transaction is qualified in its entirety by reference to the actual terms of the Cancellation Agreements with Ron Lipstein and Steven Katz, copies of which are attached as Exhibit 10.6 and 10.7, respectively, and incorporated by reference herein in their entirety.

9.01 EXHIBITS

EXHIBITS LIST

3.1	Certificate of Designations of Series A Convertible Preferred Stock filed with
	Secretary of State of Delaware on June 14, 2007.
3.2	Certificate of Designations of Series A-1 Convertible Preferred Stock filed
	with Secretary of State of Delaware on June 14, 2007.
3.3	Certificate of Designations of Series A-2 Convertible Preferred Stock filed
	with Secretary of State of Delaware on June 14, 2007.
3.4	Certificate of Designations of Series D-2 Convertible Preferred Stock filed
	with Secretary of State of Delaware on June 14, 2007.
10.1	Amended and Restated Exchange Agreement between Ortec International,
	Inc. and Paul Royalty Fund, L.P. dated June 18, 2007.
10.2	Bill of Sale and Termination Agreement between Ortec International, Inc.
	and Paul Royalty Fund, L.P. dated June 18, 2007.
10.3	Series A Convertible Preferred Stock Purchase Agreement including Series
	A, M, and M-1 warrants dated June 18, 2007.
10.4	Placement Agent Agreement between Ortec International, Inc. and Burnham
	Hill Partners, a division of Pali Capital Inc., dated June 15, 2007.
10.5	Financial Advisory Agreement between Ortec International, Inc, and
	Burnham Hill Partners, a division of Pali Capital Inc., dated June 15, 2007.
10.6	Cancellation Agreement between Ortec International, Inc and Ron Lipstein
	dated June 18, 2007.
10.7	Cancellation Agreement between Ortec International, Inc and Steven Katz
	dated June 18, 2007.
10.8	Warrant issued to Ron Lipstein pursuant to Cancellation Agreement dated
	June 18, 2007.
10.9	Warrant issued to Steven Katz pursuant to Cancellation Agreement dated
	June 18, 2007.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	Ortec International, Inc.
	(Registrant)

Date: June 25, 2007	By:	/s/ Alan W. Schoenbart

		Chief Financial Officer

EX-3.1 2 c49144_ex3-1.htm

EXHIBIT 3.1

CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND
REFERENCES
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ORTEC INTERNATIONAL, INC.

The undersigned, the Chief Executive Officer of Ortec International, Inc., a Delaware corporation (the “Company”), in accordance with the provisions of the Delaware General Corporation Law, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, the following resolution creating a series of Series A Convertible Preferred Stock, was duly adopted on June 10, 2007:

RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by provisions of the Certificate of Incorporation of the Company (the “Certificate of Incorporation”), there hereby is created out of the shares of Preferred Stock, par value $.001 per share, of the Company authorized in Article IV of the Certificate of Incorporation (the “Preferred Stock”), a series of Preferred Stock of the Company, to be named “Series A Convertible Preferred Stock,” consisting of two thousand (2,000) shares, which series shall have the following designations, powers, preferences and relative and other special rights and the following qualifications, limitations and restrictions:

1. Designation and Rank.

(a) Designation. The designation of such series of the Preferred Stock shall be the Series A Convertible Preferred Stock, par value $.001 per share (the “Series A Preferred Stock”). The maximum number of shares of Series A Preferred Stock shall be two thousand (2,000) Shares.

(b) Rank. The Series A Preferred Stock shall rank prior to the common stock, par value $.001 per share (the “Common Stock”), and to all other classes and series of equity securities of the Company which by its terms does not rank senior to or pari passu with the Series A Preferred Stock (“Junior Stock”). The Series A Preferred Stock shall be subordinate to and rank junior to all indebtedness of the Company now or hereafter outstanding. The Series A Preferred Stock shall rank on a pari passu basis to the Series A-1 Convertible Preferred Stock, par value $.001 per share (the “Series A-1 Preferred Stock”) and the Series A-2 Convertible Preferred Stock, par value $.001 per share (the “Series A-2 Preferred Stock” and together with the Series A-1 Preferred Stock, the “Pari Passu Preferred Stock”).

2. Dividends. The holders of record of shares of Series A Preferred Stock shall not be entitled to receive dividends.

3. Voting Rights.

(a) Class Voting Rights. The Series A Preferred Stock shall have the following class voting rights (in addition to the voting rights set forth in Section 3(b) hereof). Subject to Section 10 hereof, so long as any shares of the Series A Preferred Stock remain outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least seventy percent (70%) of the shares of the Series A Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting, in which the holders of the Series A Preferred Stock vote separately as a class: (i) amend, alter or repeal the provisions of the Series A Preferred Stock, whether by merger, consolidation or otherwise, so as to adversely affect any right, preference, privilege or voting power of the Series A Preferred Stock; provided, however, that any creation and issuance of another series of Junior Stock and, to the extent approved in accordance with Section 3.16 of the Series A Convertible Preferred Stock Purchase Agreement among the Company and the purchasers listed therein (the “Purchase Agreement”), pari passu stock and senior stock shall not be deemed to adversely affect such rights, preferences, privileges or voting powers; (ii) repurchase, redeem or pay dividends in cash or in kind on shares of the Company’s Junior Stock and pari passu stock and senior stock; (iii) amend the Certificate of Incorporation or By-Laws of the Company so as to affect materially and adversely any right, preference, privilege or voting power of the Series A Preferred Stock; provided, however, that any creation and issuance of another series of Junior Stock and, to the extent approved in accordance with Section 3.16 of the Purchase Agreement, pari passu stock and senior stock shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers; (iv) effect any distribution with respect to Junior Stock and Pari Passu Preferred Stock; or (v) reclassify the Company’s outstanding securities.

(b) General Voting Rights. Except with respect to transactions upon which the Series A Preferred Stock shall be entitled to vote separately as a class pursuant to Section 3(a) above and except as otherwise required by Delaware law, the Series A Preferred Stock shall have no voting rights. The Common Stock into which the Series A Preferred Stock is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding Common Stock of the Company.

4. Liquidation Preference.

(a) In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of shares of the Series A Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company whether such assets are capital or surplus of any nature, an amount equal to $10,000 per share (the “Liquidation Preference Amount”) of the Series A Preferred Stock, on a pro rata and pari passu basis with the Pari Passu Preferred Stock, before any payment shall be made or any assets distributed to the holders of the Common Stock or any other Junior Stock. If the assets of the Company are not sufficient to pay in full the Liquidation Preference Amount payable to the

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holders of outstanding shares of the Series A Preferred Stock and any series of preferred stock or any other class of stock on a parity, including, without limitation, the Pari Passu Preferred Stock, as to rights on liquidation, dissolution or winding up, with the Series A Preferred Stock, then all of said assets will be distributed among the holders of the Series A Preferred Stock, the Pari Passu Preferred Stock and the other classes of stock on a parity with the Series A Preferred Stock, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The liquidation payment with respect to each outstanding fractional share of Series A Preferred Stock shall be equal to a ratably proportionate amount of the liquidation payment with respect to each outstanding share of Series A Preferred Stock. All payments for which this Section 4(a) provides shall be in cash, property (valued at its fair market value as determined by an independent appraiser reasonably acceptable to the holders of a majority of the Series A Preferred Stock) or a combination thereof; provided, however, that no cash shall be paid to holders of Junior Stock unless each holder of the outstanding shares of Series A Preferred Stock has been paid in cash the full Liquidation Preference Amount to which such holder is entitled as provided herein. After payment of the full Liquidation Preference Amount to which each holder is entitled, such holders of shares of Series A Preferred Stock will not be entitled to any further participation as such in any distribution of the assets of the Company.

(b) A consolidation or merger of the Company with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Company, or the effectuation by the Company of a transaction or series of transactions in which more than fifty percent (50%) of the voting shares of the Company is disposed of or conveyed, or other acquisition type transaction, or upon the payment by the Company of interest, dividends or other distributions to the holders of securities or financial instruments (including Indebtedness) ranking senior to or pari passu with the Series A Preferred Stock exceeding $10 million in the aggregate, shall be, at the election of a majority of the holders of the Series A Preferred Stock, deemed to be a liquidation, dissolution, or winding up within the meaning of this Section 4. The grant of an exclusive license for all or substantially all of the Company’s intellectual property assets covered by the Cambrex license shall also be deemed to be a liquidation, dissolution, or winding up within the meaning of this Section 4 in the event that either (i) the holders of the Series A Preferred Stock, and all affiliates of such holders, together own directly or indirectly ten percent (10%) or more of the outstanding equity of the licensee, or (ii) seventy percent (70%) of the Company’s Series A Preferred Stock and Series A-1 Preferred Stock voting together as a class so elect. In the event of the merger or consolidation of the Company with or into another corporation that is not treated as a liquidation pursuant to this Section 4(b), the Series A Preferred Stock shall maintain its relative powers, designations and preferences provided for herein and no merger shall result inconsistent therewith.

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(c) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, stating a payment date and the place where the distributable amounts shall be payable, shall be given by mail, postage prepaid, no less than forty-five (45) days prior to the payment date stated therein, to the holders of record of the Series A Preferred Stock at their respective addresses as the same shall appear on the books of the Company.

5. Conversion. The holder of Series A Preferred Stock shall have the following conversion rights (the “Conversion Rights”):

(a) Right to Convert. At any time on or after the Issuance Date, the holder of any such shares of Series A Preferred Stock may, at such holder’s option, subject to the limitations set forth in Section 7 herein, elect to convert (a “Voluntary Conversion”) all or any portion of the shares of Series A Preferred Stock held by such person into a number of fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the Liquidation Preference Amount of the shares of Series A Preferred Stock being converted thereon divided by (ii) the Conversion Price (as defined in Section 5(d) below) then in effect as of the date of the delivery by such holder of its notice of election to convert. The Company shall keep written records of the conversion of the shares of Series A Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series A Preferred Stock upon complete conversion of the Series A Preferred Stock.

(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of Series A Preferred Stock shall be conducted in the following manner:

(i) Holder’s Delivery Requirements. To convert Series A Preferred Stock into full shares of Common Stock on any date (the “Voluntary Conversion Date”), the holder thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time on such date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”), to the Company, and (B) with respect to the final conversion of shares of Series A Preferred Stock held by any holder, such holder shall surrender to a common carrier for delivery to the Company as soon as practicable following such Conversion Date but in no event later than six (6) business days after such date the original certificates representing the shares of Series A Preferred Stock being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the “Preferred Stock Certificates”).

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designated transfer agent (the “Transfer Agent”), as applicable, shall, within three (3) business days following the date of receipt by the Company of the executed Conversion Notice, issue and deliver to the Depository Trust Company (“DTC”) account on the holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified in the Conversion Notice, registered in the name of the holder or its designee, for the number of shares of Common Stock to which the holder shall be entitled.

(iii) Dispute Resolution. In the case of a dispute as to the arithmetic calculation of the number of shares of Common Stock to be issued upon conversion, the Company shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the arithmetic calculations to the holder via facsimile as soon as possible, but in no event later than two (2) business days after receipt of such holder’s Conversion Notice. If such holder and the Company are unable to agree upon the arithmetic calculation of the number of shares of Common Stock to be issued upon such conversion within one (1) business day of such disputed arithmetic calculation being submitted to the holder, then the Company shall within one (1) business day submit via facsimile the disputed arithmetic calculation of the number of shares of Common Stock to be issued upon such conversion to the Company’s independent, outside accountant. The Company shall cause the accountant to perform the calculations and notify the Company and the holder of the results no later than seventy-two (72) hours from the time it receives the disputed calculations. Such accountant’s calculation shall be binding upon all parties absent manifest error. The reasonable expenses of such accountant in making such determination shall be paid by the Company, in the event the holder’s calculation was correct, or by the holder, in the event the Company’s calculation was correct, or equally by the Company and the holder in the event that neither the Company’s or the holder’s calculation was correct. The period of time in which the Company is required to effect conversions or redemptions under this Certificate of Designation shall be tolled with respect to the subject conversion or redemption pending resolution of any dispute by the Company made in good faith and in accordance with this Section 5(b)(iii).

(iv) Record Holder. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of the Series A Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

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thereof), the Company shall pay additional damages to such holder on each business day after such third (3^rd) business day that such conversion is not timely effected in an amount equal 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which such holder is entitled and (B) the Closing Bid Price (as defined in Section 5(d)(ii) hereof) of the Common Stock on the last possible date which the Company could have issued such Common Stock to such holder without violating Section 5(b)(ii). If the Company fails to pay the additional damages set forth in this Section 5(b)(v) within five (5) business days of the date incurred, then such payment shall bear interest at the rate of 2% per month (pro rated for partial months) until such payments are made.

(i) All or a portion of the shares of Series A Preferred Stock outstanding on the Mandatory Conversion Date shall, depending on the Closing Bid Price on such Mandatory Conversion Date, automatically and without any action on the part of the holder thereof, convert into a number of fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the Liquidation Preference Amount of the shares of Series A Preferred Stock outstanding on the Mandatory Conversion Date divided by (ii) the Conversion Price in effect on the Mandatory Conversion Date. If the Closing Bid Price of the Common Stock on the Mandatory Conversion Date is equal to or greater than $1.50 but less than $2.00, one-third (1/3) of the shares of Series A Preferred Stock outstanding shall automatically convert into shares of Common Stock in accordance with this Section 5(c)(i). If the Closing Bid Price of the Common Stock on the Mandatory Conversion Date is equal to or greater than $2.00 but less than $3.00, two-thirds (2/3) of the original shares of Series A Preferred Stock outstanding shall automatically convert into shares of Common Stock in accordance with this Section 5(c)(i). If the Closing Bid Price of the Common Stock on the Mandatory Conversion date is greater than $3.00, all of the shares of Series A Preferred Stock outstanding shall automatically convert into shares of Common Stock in accordance with this Section 5(c)(i).

(ii) As used herein, a “Mandatory Conversion Date” shall be the date which is at least one (1) day after the Effectiveness Date (as defined in the Registration Rights Agreement), provided, that the Closing Bid Price of the Common Stock exceeds $1.50 for a period of ten (10) consecutive trading days; and provided further that the Registration Statement (as defined in the Registration Rights Agreement) is effective with respect to all shares of Common Stock issuable upon such Mandatory Conversion or the shares of Common Stock into which the Series A Preferred Stock can be converted may be offered for sale to the public pursuant to Rule 144(k) (“Rule 144(k)”) under the Securities Act of 1933, as amended. Notwithstanding the foregoing, no Mandatory Conversion shall be effected if, on the Mandatory Conversion Date, the conversion of such share of Preferred Stock would violate Section 7. The

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Mandatory Conversion Date and the Voluntary Conversion Date collectively are referred to in this Certificate of Designation as the “Conversion Date.”

(iii) On the Mandatory Conversion Date, the outstanding shares of Series A Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the Preferred Stock Certificates are surrendered to the Company or its transfer agent; provided, however, that the Company shall not be obligated to issue the shares of Common Stock issuable upon conversion of any shares of Series A Preferred Stock unless the Preferred Stock Certificates evidencing such shares of Series A Preferred Stock are either delivered to the Company or the holder notifies the Company that such Preferred Stock Certificates have been lost, stolen, or destroyed, and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. Upon the occurrence of the automatic conversion of the Series A Preferred Stock pursuant to this Section 5, the holders of the Series A Preferred Stock shall surrender the Preferred Stock Certificates representing the Series A Preferred Stock for which the Mandatory Conversion Date has occurred to the Company and the Company shall deliver the shares of Common Stock issuable upon such conversion (in the same manner set forth in Section 5(b)(ii)) to the holder within three (3) business days of the holder’s delivery of the applicable Preferred Stock Certificates.

(d) Conversion Price.

(i) The term “Conversion Price” shall mean $0.50 per share, subject to adjustment under Section 5(e) hereof. Notwithstanding any adjustment hereunder, at no time shall the Conversion Price be greater than $0.50 per share other than pursuant to the second sentence of Section 5(e)(i) in connection with a reverse stock split effected by the Company.

(ii) The term “Closing Bid Price” shall mean, for any security as of any date, the last closing bid price of such security on the OTC Bulletin Board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the “pink sheets” by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of a majority of the outstanding shares of Series A Preferred Stock.

(iii) The term “Release Event” means, with respect to a holder’s shares of Series A Preferred Stock, the date on which the Company files a Form 8-K with the

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Commission disclosing the Company’s receipt of written notice from the U.S. Food and Drug Administration regarding the granting the Company the right to commercialize and market (i.e., formal approval of the Company’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers.

(e) Adjustments of Conversion Price.

(i) Adjustments for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock, the Conversion Price shall be proportionately decreased. If the Company shall at any time or from time to time after the Issuance Date, combine the outstanding shares of Common Stock, the Conversion Price shall be proportionately increased. Any adjustments under this Section 5(e)(i) shall be effective at the close of business on the date the stock split or combination occurs.

(ii) Adjustments for Certain Dividends and Distributions. If the Company shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in shares of Common Stock, then, and in each event, the Conversion Price shall be decreased as of the time of such issuance or, in the event such record date shall have been fixed, as of the close of business on such record date, by multiplying, as applicable, the Conversion Price then in effect by a fraction:

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

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which they would have received had their Series A Preferred Stock been converted into Common Stock immediately prior to such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this Section 5(e)(iii) with respect to the rights of the holders of the Series A Preferred Stock.

(iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock issuable upon conversion of the Series A Preferred Stock at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 5(e)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section 5(e)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series A Preferred Stock shall have the right thereafter to convert such share of Series A Preferred Stock into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which such share of Series A Preferred Stock might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.

(v) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets. If at any time or from time to time after the Issuance Date there shall be a capital reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions provided for in Section 5(e)(i), (ii) and (iii), or a reclassification, exchange or substitution of shares provided for in Section 5(e)(iv)), or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s properties or assets to any other person that is not deemed a liquidation pursuant to Section 4(b) (an “Organic Change”), then as a part of such Organic Change an appropriate revision to the Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series A Preferred Stock shall have the right thereafter to convert such share of Series A Preferred Stock into the kind and amount of shares of stock and other securities or property of the Company or any successor corporation resulting from the Organic Change as the holder would have received as a result of the Organic Change and if the holder had converted its Series A Preferred Stock into the Company’s Common Stock prior to the Organic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5(e)(v) with respect to the rights of the holders of the Series A Preferred Stock after the Organic Change to the end that the provisions of this Section 5(e)(v) (including any adjustment in the Conversion Price then

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in effect and the number of shares of stock or other securities deliverable upon conversion of the Series A Preferred Stock) shall be applied after that event in as nearly an equivalent manner as may be practicable.

(vi) Adjustments for Issuance of Additional Shares of Common Stock.

(A) In the event the Company, shall, at any time, from time to time, prior to a Release Event, issue or sell any additional shares of Common Stock (otherwise than as provided in the foregoing subsections (i) through (v) of this Section 5(e) or upon exercise or conversion of Common Stock Equivalents (hereafter defined) granted or issued prior to the Issuance Date) (the “Additional Shares of Common Stock”), at a price per share less than the Conversion Price, or without consideration, the Conversion Price then in effect upon each such issuance shall be adjusted to a price equal to the consideration per share paid for such Additional Shares of Common Stock. Upon and after a Release Event, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Conversion Price by a fraction:

(1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the Conversion Price then in effect, and

(2) the denominator of which shall be equal to the number of shares of Common Stock outstanding immediately after the issuance of such Additional Shares of Common Stock.

No adjustment of the number of shares of Common Stock shall be made under paragraph (A) of Section 5(e)(vi) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Common Stock Equivalents (as defined below), if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Common Stock Equivalents (or upon the issuance of any warrant or other rights therefor) pursuant to Section 5(e)(vii).

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Preferred Stock and the Series A-2 Preferred Stock pursuant to the Exchange Agreement as in effect on the date hereof, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold (collectively, the “Common Stock Equivalents”) and the aggregate of the price per share for which Additional Shares of Common Stock may be issuable thereafter pursuant to such Common Stock Equivalent, plus the consideration received by the Company for issuance of such Common Stock Equivalent, divided by the number of shares of Common Stock issuable pursuant to such Common Stock Equivalent (the “Aggregate Per Common Share Price”), shall be less than the Conversion Price, or if, after any such issuance of Common Stock Equivalents, the price per share for which Additional Shares of Common Stock may be issuable thereafter is amended or adjusted, and such price as so amended shall make the Aggregate Per Common Share Price be less than Conversion Price in effect at the time of such amendment, then the Conversion Price then in effect shall upon each such issuance be adjusted to a price equal to the consideration per share paid for such Additional Shares of Common Stock. Upon and after a Release Event, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Conversion Price by a fraction:

(1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance of such Common Stock Equivalents plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the Aggregate Per Common Share Price multiplied by the number of shares of Common Stock issuable upon the exercise or conversion of all such Common Stock Equivalents, would purchase at a price per share equal to the Conversion Price then in effect, and

(2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such Common Stock Equivalents.

No adjustment of the Conversion Price shall be made under this subsection (vii) upon the issuance of any Convertible Security which is issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any adjustment shall previously have been made to the exercise price of such warrants then in effect upon the issuance of such warrants or other rights pursuant to this subsection (vii).

(viii) Consideration for Stock. In case any shares of Common Stock or Convertible Securities other than the Series A Preferred Stock, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed to or exchanged for the stock or other securities of another corporation), the amount of consideration therefor shall be deemed to be the fair value,

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as determined reasonably and in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or warrants or options, as the case may be.

(ix) Record Date. In case the Company shall take record of the holders of its Common Stock or any other Preferred Stock for the purpose of entitling them to subscribe for or purchase Common Stock or Convertible Securities, then the date of the issue or sale of the shares of Common Stock shall be deemed to be such record date.

(x) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment of the Conversion Price of shares of Common Stock issuable upon conversion of the Series A Preferred Stock upon (i) the Company’s issuance of Additional Shares of Common Stock and/or Common Stock Equivalents in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital, (ii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the Company’s (A) issuance of Additional Shares of Common Stock to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company, whether pursuant to the 2006 Stock Award and Incentive Plan, any other plan hereafter adopted, or otherwise, so long as such issuances under this subsection (ii) which would cause the provisions of Section 5(e) hereof to be applied in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Issuance Date, and (B) grant of stock options or warrants to purchase shares of Common Stock, whether the grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award and Incentive Plan, as they now exist, an employee or director stock option plan and a stock award and incentive plan hereafter adopted or otherwise, so long as such issuances under this subsection (ii) which would cause the provisions of Section 5(e) hereof to be applied in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Issuance Date, (iii) securities issued upon the exercise, conversion or exchange of any Common Stock Equivalents outstanding on the Issuance Date at the conversion price in effect on the Issuance Date, as may be adjusted by the anti-dilution provisions thereof as in effect on the date hereof, (iv) issuance of Series A Preferred Stock or warrants issued by the Company pursuant to the Purchase Agreement, or Common Stock issued upon conversion or exercise thereof, (v) issuance of Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock, Series D-2 Convertible Preferred Stock or Common Stock issued upon conversion thereof at the conversion price in effect on the Issuance Date, as such conversion price may be adjusted pursuant to Section 5 hereof, or (vi) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc. or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement and the shares of

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Common Stock issued upon exercise thereof at the conversion price in effect on the Issuance Date, as may be adjusted by the anti-dilution provisions thereof as in effect on the date hereof, or (vii) warrants issued to Ron Lipstein and Steven Katz in connection with the agreements terminating their employment with the Company at the conversion price in effect on the Issuance Date or as may be adjusted by the anti-dilution provision thereof as in effect on the Issuance Date.

(f) No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith, assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. In the event a holder shall elect to convert any shares of Series A Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such holder or any one associated or affiliated with such holder has been engaged in any violation of law, unless, an injunction from a court, on notice, restraining and/or enjoining conversion of all or of said shares of Series A Preferred Stock shall have been issued and the Company posts a surety bond for the benefit of such holder in an amount equal to 130% of the Liquidation Preference Amount of the Series A Preferred Stock such holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such holder in the event it obtains judgment.

(g) Certificates as to Adjustments. Upon occurrence of each adjustment or readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock pursuant to this Section 5, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such Series A Preferred Stock a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request of the holder of such affected Series A Preferred Stock, at any time, furnish or cause to be furnished to such holder a like certificate setting forth such adjustments and readjustments, the Conversion Price in effect at the time, and the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of a share of such Series A Preferred Stock. Notwithstanding the foregoing, the Company shall not be obligated to deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent of such adjusted amount.

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(h) Issue Taxes. The Company shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A Preferred Stock pursuant thereto; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion.

(i) Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile or three (3) business days following being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed to the holder of record at its address appearing on the books of the Company. The Company will give written notice to each holder of Series A Preferred Stock at least twenty (20) days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public. The Company will also give written notice to each holder of Series A Preferred Stock at least twenty (20) days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to such holder prior to such information being made known to the public.

(j) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall at its option either (i) pay cash equal to the product of such fraction multiplied by the average of the Closing Bid Prices of the Common Stock for the five (5) consecutive trading days immediately preceding the Voluntary Conversion Date or Mandatory Conversion Date, as applicable, or (ii) in lieu of issuing such fractional shares issue one additional whole share to the holder.

(k) Reservation of Common Stock. The Company shall, so long as any shares of Series A Preferred Stock are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series A Preferred Stock then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 120% of the number of shares of Common Stock for which the shares of Series A Preferred Stock are at any time convertible (without regard to limitations on conversion set forth in Section 7). The initial number of shares of Common Stock reserved for conversions of the Series A Preferred Stock and each increase in the number of shares so reserved shall be allocated pro rata

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among the holders of the Series A Preferred Stock based on the number of shares of Series A Preferred Stock held by each holder at the time of issuance of the Series A Preferred Stock or increase in the number of reserved shares, as the case may be. In the event a holder shall sell or otherwise transfer any of such holder’s shares of Series A Preferred Stock, each transferee shall be allocated a pro rata portion of the number of reserved shares of Common Stock reserved for such transferor. Any shares of Common Stock reserved and which remain allocated to any person or entity which does not hold any shares of Series A Preferred Stock shall be allocated to the remaining holders of Series A Preferred Stock, pro rata based on the number of shares of Series A Preferred Stock then held by such holder.

(1) Retirement of Series A Preferred Stock. Conversion of Series A Preferred Stock shall be deemed to have been effected on the applicable Voluntary Conversion Date or Mandatory Conversion Date. The Company shall keep written records of the conversion of the shares of Series A Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series A Preferred Stock upon complete conversion of the Series A Preferred Stock.

(m) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of Series A Preferred Stock require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Company shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.

6. No Preemptive Rights. Except as provided in Section 5 hereof and in the Purchase Agreement, no holder of the Series A Preferred Stock shall be entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class, or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable.

7. Conversion Restriction. Notwithstanding anything to the contrary set forth in Section 5 of this Certificate of Designation, at no time may a holder of shares of Series A Preferred Stock convert shares of the Series A Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of

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Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.99% of all of the Common Stock outstanding at such time; provided, however, that upon a holder of Series A Preferred Stock providing the Company with sixty-one (61) days notice (pursuant to Section 5(i) hereof) (the “Waiver Notice”) that such holder would like to waive Section 7 of this Certificate of Designation with regard to any or all shares of Common Stock issuable upon conversion of Series A Preferred Stock, this Section 7 shall be of no force or effect with regard to those shares of Series A Preferred Stock referenced in the Waiver Notice.

8. Most Favored Nations Exchange Right. If the Company enters into any equity or equity linked financing (“Subsequent Financing”) on terms more favorable than the terms governing the Series A Preferred Stock, then the holders of the Series A Preferred Stock together the holders of the Company’s Series A-1 Preferred Stock in their sole discretion may exchange their Series A Preferred Stock and Series A-1 Preferred Stock, as the case may be, valued at their Liquidation Preference Amount, for the securities issued or to be issued in the Subsequent Financing to the extent a Release Event has not occurred.

9. Inability to Fully Convert.

(a) Holder’s Option if Company Cannot Fully Convert. If, upon the Company’s receipt of a Conversion Notice, the Company cannot issue shares of Common Stock registered for resale to the extent required under the Registration Statement for any reason, including, without limitation, because the Company (x) does not have a sufficient number of shares of Common Stock authorized and available, (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or its securities from issuing all of the Common Stock which is to be issued to a holder of Series A Preferred Stock pursuant to a Conversion Notice or (z) fails to have a sufficient number of shares of Common Stock registered for resale required under the Registration Statement, then the Company shall issue as many shares of Common Stock as it is able to issue in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above and, with respect to the unconverted Series A Preferred Stock, the holder, solely at such holder’s option, can elect, in addition to other remedies available to such holder, within five (5) business days after receipt of notice from the Company thereof to:

(i) require the Company to redeem from such holder those Series A Preferred Stock for which the Company is unable to issue Common Stock in accordance with such holder’s Conversion Notice (“Mandatory Redemption”) at a price per share equal to the

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100% of the Liquidation Preference Amount as of such Conversion Date (the “Mandatory Redemption Price”).

(ii) if the Company’s inability to fully convert Series A Preferred Stock is pursuant to Section 9(a)(z) above, require the Company to issue restricted shares of Common Stock in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above.

(iii) void its Conversion Notice and retain or have returned, as the case may be, the shares of Series A Preferred Stock that were to be converted pursuant to such holder’s Conversion Notice (provided that a holder’s voiding its Conversion Notice shall not effect the Company’s obligations to make any payments which have accrued prior to the date of such notice).

In the event a Holder shall elect to convert any shares of Series A Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, violation of an agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or of said shares of Series A Preferred Stock shall have issued and the Company posts a surety bond for the benefit of such Holder in an amount equal to 130% of the amount of shares of Series A Preferred Stock the Holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder in the event it obtains judgment.

(b) Mechanics of Fulfilling Holder’s Election. The Company shall immediately send via facsimile to a holder of Series A Preferred Stock, upon receipt of a facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 9(a) above, a notice of the Company’s inability to fully satisfy such holder’s Conversion Notice (the “Inability to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Company is unable to fully satisfy such holder’s Conversion Notice, (ii) the number of Series A Preferred Stock which cannot be converted and (iii) the applicable Mandatory Redemption Price. Such holder shall notify the Company of its election pursuant to Section 9(a) above by delivering written notice via facsimile to the Company (“Notice in Response to Inability to Convert”).

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Notice in Response to Inability to Convert the Company has not delivered a notice to such holder stating, to the satisfaction of the holder, that the event or condition resulting in the Mandatory Redemption has been cured and all Conversion Shares issuable to such holder can and will be delivered to the holder in accordance with the terms of Section 2(g). If the Company shall fail to pay the applicable Mandatory Redemption Price to such holder on a timely basis as described in this Section 9(c) (other than pursuant to a dispute as to the determination of the arithmetic calculation of the Redemption Price), in addition to any remedy such holder of Series A Preferred Stock may have under this Certificate of Designation and the Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid in full. Until the full Mandatory Redemption Price is paid in full to such holder, such holder may (i) void the Mandatory Redemption with respect to those Series A Preferred Stock for which the full Mandatory Redemption Price has not been paid, (ii) receive back such Series A Preferred Stock, and (iii) require that the Conversion Price of such returned Series A Preferred Stock be adjusted to the lesser of (A) the Conversion Price and (B) the lowest Closing Bid Price during the period beginning on the Conversion Date and ending on the date the holder voided the Mandatory Redemption.

(d) Pro-rata Conversion and Redemption. In the event the Company receives a Conversion Notice from more than one holder of Series A Preferred Stock on the same day and the Company can convert and redeem some, but not all, of the Series A Preferred Stock pursuant to this Section 9, the Company shall convert and redeem from each holder of Series A Preferred Stock electing to have Series A Preferred Stock converted and redeemed at such time an amount equal to such holder’s pro-rata amount (based on the number shares of Series A Preferred Stock held by such holder relative to the number shares of Series A Preferred Stock outstanding) of all shares of Series A Preferred Stock being converted and redeemed at such time.

10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of the holders of not less than a majority of the then outstanding shares of Series A Preferred Stock, shall be required (a) for any change to this Certificate of Designation or the Company’s Certificate of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A Preferred Stock or (b) for the issuance of shares of Series A Preferred Stock other than pursuant to the Purchase Agreement. Notwithstanding anything herein to the contrary, Section 8, the first sentence of Section 5(e)(vi)(A) and the first sentence of Section 5(e)(vii) hereof may only be waived with the written consent of the holders of not less than thirty percent (30%) of the then outstanding shares of Series A Preferred Stock and Series A-1 Preferred Stock voting together as one class; provided, that, such waiver shall be effective for all shares of Series A Preferred Stock and Series A-1 Preferred Stock; provided, further, that a separate class vote shall not be required from the holders of the Series A Preferred Stock to effect the waiver of Section 8, the first sentence of Section 5(e)(vi)(A) and the first sentence of

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Section 5(e)(vii). No consideration shall be offered or paid to any holder of Series A Preferred Stock or Series A-1 Preferred Stock to consent to a waiver of Section 8, the first sentence of Section 5(e)(vi)(A) or the first sentence of Section 5(e)(vii) hereof unless the same consideration is also offered to all of the holders of Series A Preferred Stock and Series A-1 Preferred Stock.

11. Lost or Stolen Certificates. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the shares of Series A Preferred Stock, and, in the case of loss, theft or destruction, of any indemnification undertaking by the holder to the Company and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock certificate(s) of like tenor and date.

12. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under this Certificate of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Series A Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holders of the Series A Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

13. Specific Shall Not Limit General; Construction. No specific provision contained in this Certificate of Designation shall limit or modify any more general provision contained herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and all initial purchasers of the Series A Preferred Stock and shall not be construed against any person as the drafter hereof.

14. Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of Series A Preferred Stock in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

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IN WITNESS WHEREOF, the undersigned has executed and subscribed this Amended Certificate and does affirm the foregoing as true this 14th day of June, 2007.


	ORTEC INTERNATIONAL, INC.

	By:	/s/ Ron Lipstein

		Name: Ron Lipstein
		Title: Chief Executive Officer

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EXHIBIT I

ORTEC INTERNATIONAL, INC.
CONVERSION NOTICE

Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the Series A Preferred Stock of Ortec International, Inc. (the “Certificate of Designation”). In accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to convert the number of shares of Series A Preferred Stock, par value $.001 per share (the “Preferred Shares”), of Ortec International, Inc., a Delaware corporation (the “Company”), indicated below into shares of Common Stock, par value $.001 per share (the “Common Stock”), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below.


	Date of Conversion:

Number of Preferred Shares to be converted: ___________

Stock certificate no(s). of Preferred Shares to be converted: ___________

The Common Stock have been sold pursuant to the Registration Statement (as defined in the Registration Rights Agreement): YES _____ NO _____

Please confirm the following information:


	Conversion Price:

	Number of shares of Common Stock to be issued:


	Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion determined in accordance with Section 16 of the Securities Exchange Act of 1934, as amended: _________ _____________________

Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:


	Issue to:


	Facsimile Number:

	Authorization:

		By:

		Title:
	Dated:

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PRICES ATTACHED

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EX-3.2 3 c49144_ex3-2.htm

EXHIBIT 3.2

CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND
PREFERENCES
OF THE
SERIES A-1 CONVERTIBLE PREFERRED STOCK
OF
ORTEC INTERNATIONAL, INC.

The undersigned, the Chief Executive Officer of Ortec International, Inc., a Delaware corporation (the “Company”), in accordance with the provisions of the Delaware General Corporation Law, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, the following resolution creating a series of Series A-1 Convertible Preferred Stock, was duly adopted on June 10, 2007:

RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by provisions of the Certificate of Incorporation of the Company (the “Certificate of Incorporation”), there hereby is created out of the shares of Preferred Stock, par value $.001 per share, of the Company authorized in Article IV of the Certificate of Incorporation (the “Preferred Stock”), a series of Preferred Stock of the Company, to be named “Series A-1 Convertible Preferred Stock,” consisting of five hundred (500) shares, which series shall have the following designations, powers, preferences and relative and other special rights and the following qualifications, limitations and restrictions:

1. Designation and Rank.

(a) Designation. The designation of such series of the Preferred Stock shall be the Series A-1 Convertible Preferred Stock, par value $.001 per share (the “Series A-1 Preferred Stock”). The maximum number of shares of Series A-1 Preferred Stock shall be five hundred (500) Shares.

(b) Rank. The Series A-1 Preferred Stock shall rank prior to the common stock, par value $.001 per share (the “Common Stock”), and to all other classes and series of equity securities of the Company which by its terms does not rank senior to or pari passu with the Series A-1 Preferred Stock (“Junior Stock”). The Series A-1 Preferred Stock shall be subordinate to and rank junior to all indebtedness of the Company now or hereafter outstanding. The Series A-1 Preferred Stock shall rank on a pari passu basis to the Series A Convertible Preferred Stock, par value $.001 per share (the “Series A Preferred Stock”) and the Series A-2 Convertible Preferred Stock, par value $.001 per share (the “Series A-2 Preferred Stock” and together with the Series A Preferred Stock, the “Pari Passu Preferred Stock”).

2. Dividends. The holders of record of shares of Series A-1 Preferred Stock shall not be entitled to receive dividends.

3. Voting Rights.

(a) Class Voting Rights. The Series A-1 Preferred Stock shall have the following class voting rights (in addition to the voting rights set forth in Section 3(b) hereof). Subject to Section 10 hereof, so long as any shares of the Series A-1 Preferred Stock remain outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least seventy percent (70%) of the shares of the Series A-1 Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting, in which the holders of the Series A-1 Preferred Stock vote separately as a class: (i) amend, alter or repeal the provisions of the Series A-1 Preferred Stock, whether by merger, consolidation or otherwise, so as to adversely affect any right, preference, privilege or voting power of the Series A-1 Preferred Stock; provided, however, that any creation and issuance of another series of Junior Stock and, to the extent approved in accordance with Section 7(q) of the Amended and Restated Exchange Agreement between the Company and Paul Royalty Fund, L.P. (the “Exchange Agreement”), pari passu stock and senior stock shall not be deemed to adversely affect such rights, preferences, privileges or voting powers; (ii) repurchase, redeem or pay dividends in cash or in kind on shares of the Company’s Junior Stock and pari passu stock and senior stock; (iii) amend the Certificate of Incorporation or By-Laws of the Company so as to affect materially and adversely any right, preference, privilege or voting power of the Series A-1 Preferred Stock; provided, however, that any creation and issuance of another series of Junior Stock and, to the extent approved in accordance with Section 7(q) of the Exchange Agreement, pari passu stock and senior stock shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers; (iv) effect any distribution with respect to Junior Stock and Pari Passu Preferred Stock; or (v) reclassify the Company’s outstanding securities.

(b) General Voting Rights. Except with respect to transactions upon which the Series A-1 Preferred Stock shall be entitled to vote separately as a class pursuant to Section 3(a) above and except as otherwise required by Delaware law, the Series A-1 Preferred Stock shall have no voting rights. The Common Stock into which the Series A-1 Preferred Stock is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding Common Stock of the Company.

4. Liquidation Preference.

(a) In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of shares of the Series A-1 Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company whether such assets are capital or surplus of any nature, an amount equal to $10,000 per share (the “Liquidation Preference Amount”) of the Series A-1 Preferred Stock, on a pro rata and pari passu basis with the Pari Passu Preferred Stock, before any payment shall be made or any assets distributed to the holders of the Common Stock or any other Junior Stock. If the assets of the Company are not sufficient to pay in full the Liquidation Preference Amount payable to the

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holders of outstanding shares of the Series A-1 Preferred Stock and any series of preferred stock or any other class of stock on a parity, including, without limitation, the Pari Passu Preferred Stock, as to rights on liquidation, dissolution or winding up, with the Series A-1 Preferred Stock, then all of said assets will be distributed among the holders of the Series A-1 Preferred Stock, the Pari Passu Preferred Stock and the other classes of stock on a parity with the Series A-1 Preferred Stock, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The liquidation payment with respect to each outstanding fractional share of Series A-1 Preferred Stock shall be equal to a ratably proportionate amount of the liquidation payment with respect to each outstanding share of Series A-1 Preferred Stock. All payments for which this Section 4(a) provides shall be in cash, property (valued at its fair market value as determined by an independent appraiser reasonably acceptable to the holders of a majority of the Series A-1 Preferred Stock) or a combination thereof; provided, however, that no cash shall be paid to holders of Junior Stock unless each holder of the outstanding shares of Series A-1 Preferred Stock has been paid in cash the full Liquidation Preference Amount to which such holder is entitled as provided herein. After payment of the full Liquidation Preference Amount to which each holder is entitled, such holders of shares of Series A-1 Preferred Stock will not be entitled to any further participation as such in any distribution of the assets of the Company.

(b) A consolidation or merger of the Company with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Company, or the effectuation by the Company of a transaction or series of transactions in which more than fifty percent (50%) of the voting shares of the Company is disposed of or conveyed, or other acquisition type transaction, or upon the payment by the Company of interest, dividends or other distributions to the holders of securities or financial instruments (including Indebtedness) ranking senior to or pari passu with the Series A-1 Preferred Stock exceeding $10 million in the aggregate, shall be, at the election of a majority of the holders of the Series A-1 Preferred Stock, deemed to be a liquidation, dissolution, or winding up within the meaning of this Section 4. The grant of an exclusive license for all or substantially all of the Company’s intellectual property assets covered by the Cambrex license shall also be deemed to be a liquidation, dissolution, or winding up within the meaning of this Section 4 in the event that either (i) the holders of the Series A Preferred Stock, and all affiliates of such holders, together own directly or indirectly ten percent (10%) or more of the outstanding equity of the licensee, or (ii) seventy percent (70%) of the Company’s Series A Preferred Stock and Series A-1 Preferred Stock voting together as a class so elect. In the event of the merger or consolidation of the Company with or into another corporation that is not treated as a liquidation pursuant to this Section 4(b), the Series A-1 Preferred Stock shall maintain its relative powers, designations and preferences provided for herein and no merger shall result inconsistent therewith.

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(c) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, stating a payment date and the place where the distributable amounts shall be payable, shall be given by mail, postage prepaid, no less than forty-five (45) days prior to the payment date stated therein, to the holders of record of the Series A-1 Preferred Stock at their respective addresses as the same shall appear on the books of the Company.

5. Conversion. The holder of Series A-1 Preferred Stock shall have the following conversion rights (the “Conversion Rights”):

(a) Right to Convert. At any time on or after the Issuance Date, the holder of any such shares of Series A-1 Preferred Stock may, at such holder’s option, subject to the limitations set forth in Section 7 herein, elect to convert (a “Voluntary Conversion”) all or any portion of the shares of Series A-1 Preferred Stock held by such person into a number of fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the Liquidation Preference Amount of the shares of Series A-1 Preferred Stock being converted thereon divided by (ii) the Conversion Price (as defined in Section 5(d) below) then in effect as of the date of the delivery by such holder of its notice of election to convert. The Company shall keep written records of the conversion of the shares of Series A-1 Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series A-1 Preferred Stock upon complete conversion of the Series A-1 Preferred Stock.

(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of Series A-1 Preferred Stock shall be conducted in the following manner:

(i) Holder’s Delivery Requirements. To convert Series A-1 Preferred Stock into full shares of Common Stock on any date (the “Voluntary Conversion Date”), the holder thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time on such date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”), to the Company, and (B) with respect to the final conversion of shares of Series A-1 Preferred Stock held by any holder, such holder shall surrender to a common carrier for delivery to the Company as soon as practicable following such Conversion Date but in no event later than six (6) business days after such date the original certificates representing the shares of Series A-1 Preferred Stock being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the “Preferred Stock Certificates”).

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(iv) Record Holder. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of the Series A-1 Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

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the initial holder of the Series A-1 Preferred Stock (the “Exchange Agreement”) (including indemnification pursuant to Section 13 thereof), the Company shall pay additional damages to such holder on each business day after such third (3^rd) business day that such conversion is not timely effected in an amount equal 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which such holder is entitled and (B) the Closing Bid Price (as defined in Section 5(d)(ii) hereof) of the Common Stock on the last possible date which the Company could have issued such Common Stock to such holder without violating Section 5(b)(ii). If the Company fails to pay the additional damages set forth in this Section 5(b)(v) within five (5) business days of the date incurred, then such payment shall bear interest at the rate of 2% per month (pro rated for partial months) until such payments are made.

(d) Conversion Price.

(iii) The term “Release Event” means, with respect to a holder’s shares of Series A-1 Preferred Stock, the date on which the Company files a Form 8-K with the Commission disclosing the Company’s receipt of written notice from the U.S. Food and Drug Administration regarding the granting the Company the right to commercialize and market (i.e., formal approval of the Company’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers.

(e) Adjustments of Conversion Price.

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(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and

(iii) Adjustment for Other Dividends and Distributions. If the Company shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then, and in each event, an appropriate revision to the applicable Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holders of Series A-1 Preferred Stock shall receive upon conversions thereof, in addition to the number of shares of Common Stock receivable thereon, the number of securities of the Company which they would have received had their Series A-1 Preferred Stock been converted into Common Stock immediately prior to such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this Section 5(e)(iii) with respect to the rights of the holders of the Series A-1 Preferred Stock.

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(iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock issuable upon conversion of the Series A-1 Preferred Stock at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 5(e)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section 5(e)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series A-1 Preferred Stock shall have the right thereafter to convert such share of Series A-1 Preferred Stock into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which such share of Series A-1 Preferred Stock might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.

(v) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets. If at any time or from time to time after the Issuance Date there shall be a capital reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions provided for in Section 5(e)(i), (ii) and (iii), or a reclassification, exchange or substitution of shares provided for in Section 5(e)(iv)), or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s properties or assets to any other person that is not deemed a liquidation pursuant to Section 4(b) (an “Organic Change”), then as a part of such Organic Change an appropriate revision to the Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series A-1 Preferred Stock shall have the right thereafter to convert such share of Series A-1 Preferred Stock into the kind and amount of shares of stock and other securities or property of the Company or any successor corporation resulting from the Organic Change as the holder would have received as a result of the Organic Change and if the holder had converted its Series A-1 Preferred Stock into the Company’s Common Stock prior to the Organic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5(e)(v) with respect to the rights of the holders of the Series A-1 Preferred Stock after the Organic Change to the end that the provisions of this Section 5(e)(v) (including any adjustment in the Conversion Price then in effect and the number of shares of stock or other securities deliverable upon conversion of the Series A-1 Preferred Stock) shall be applied after that event in as nearly an equivalent manner as may be practicable.

(vi) Adjustments for Issuance of Additional Shares of Common Stock.

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(2) the denominator of which shall be equal to the number of shares of Common Stock outstanding immediately after the issuance of such Additional Shares of Common Stock.

(vii) Issuance of Common Stock Equivalents. If the Company, at any time after the Issuance Date and prior to a Release Event, shall issue any securities convertible into or exchangeable for, directly or indirectly, Common Stock (“Convertible Securities”), other than (x) the Series A Preferred Stock or warrants issued to the holders of the Series A Preferred Stock pursuant to the Series A Convertible Preferred Stock Purchase Agreement among the Company and the purchasers listed therein (the “Purchase Agreement”) as in effect on the date hereof, or (y) the Series A-1 Preferred Stock and the Series A-2 Preferred Stock pursuant to the Exchange Agreement as in effect on the date hereof, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold (collectively, the “Common Stock Equivalents”) and the aggregate of the price per share for which Additional

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Shares of Common Stock may be issuable thereafter pursuant to such Common Stock Equivalent, plus the consideration received by the Company for issuance of such Common Stock Equivalent, divided by the number of shares of Common Stock issuable pursuant to such Common Stock Equivalent (the “Aggregate Per Common Share Price”), shall be less than the Conversion Price, or if, after any such issuance of Common Stock Equivalents, the price per share for which Additional Shares of Common Stock may be issuable thereafter is amended or adjusted, and such price as so amended shall make the Aggregate Per Common Share Price be less than Conversion Price in effect at the time of such amendment, then the Conversion Price then in effect shall upon each such issuance be adjusted a price equal to the consideration per share paid for such Additional Shares of Common Stock. Upon and after a Release Event, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Conversion Price by a fraction:

(2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such Common Stock Equivalents.

(viii) Consideration for Stock. In case any shares of Common Stock or Convertible Securities other than the Series A-1 Preferred Stock, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed to or exchanged for the stock or other securities of another corporation), the amount of consideration therefor shall be deemed to be the fair value, as determined reasonably and in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such

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Board may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or warrants or options, as the case may be.

(x) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment of the Conversion Price of shares of Common Stock issuable upon conversion of the Series A-1 Preferred Stock upon (i) the Company’s issuance of Additional Shares of Common Stock and/or Common Stock Equivalents in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital, (ii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the Company’s (A) issuance of Additional Shares of Common Stock to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company, whether pursuant to the 2006 Stock Award and Incentive Plan, any other plan hereafter adopted, or otherwise, so long as such issuances under this subsection (ii) which would cause the provisions of Section 5(e) hereof to be applied in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Issuance Date, and (B) grant of stock options or warrants to purchase shares of Common Stock, whether the grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award and Incentive Plan, as they now exist, an employee or director stock option plan and a stock award and incentive plan hereafter adopted or otherwise, so long as such issuances under this subsection (ii) which would cause the provisions of Section 5(e) hereof to be applied in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Issuance Date, (iii) securities issued upon the exercise, conversion or exchange of any Common Stock Equivalents outstanding on the Issuance Date at the conversion price in effect on the Issuance Date, as may be adjusted by the anti-dilution provisions thereof as in effect on the date hereof, (iv) issuance of Series A Preferred Stock or warrants issued by the Company pursuant to the Purchase Agreement, or Common Stock issued upon conversion or exercise thereof, (v) issuance of Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock, Series D-2 Convertible Preferred Stock or Common Stock issued upon conversion thereof at the conversion price in effect on the Issuance Date, as such conversion price may be adjusted pursuant to Section 5 hereof, (vii) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc. or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement and the shares of Common Stock issued upon exercise thereof at the conversion price in effect on the Issuance Date, as may be adjusted by the anti-dilution provisions thereof as in effect on the date hereof, or (vii) warrants issued to Ron Lipstein and Steven Katz in connection with the agreements

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terminating their employment with the Company at the conversion price in effect on the Issuance Date or as may be adjusted by the anti-dilution provision thereof as in effect on the Issuance Date.

(f) No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith, assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A-1 Preferred Stock against impairment. In the event a holder shall elect to convert any shares of Series A-1 Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such holder or any one associated or affiliated with such holder has been engaged in any violation of law, unless, an injunction from a court, on notice, restraining and/or enjoining conversion of all or of said shares of Series A-1 Preferred Stock shall have been issued and the Company posts a surety bond for the benefit of such holder in an amount equal to 130% of the Liquidation Preference Amount of the Series A-1 Preferred Stock such holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such holder in the event it obtains judgment.

(g) Certificates as to Adjustments. Upon occurrence of each adjustment or readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion of the Series A-1 Preferred Stock pursuant to this Section 5, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such Series A-1 Preferred Stock a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request of the holder of such affected Series A-1 Preferred Stock, at any time, furnish or cause to be furnished to such holder a like certificate setting forth such adjustments and readjustments, the Conversion Price in effect at the time, and the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of a share of such Series A-1 Preferred Stock. Notwithstanding the foregoing, the Company shall not be obligated to deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent of such adjusted amount.

(h) Issue Taxes. The Company shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A-1 Preferred Stock pursuant thereto; provided, however, that the Company shall not be obligated to pay any

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transfer taxes resulting from any transfer requested by any holder in connection with any such conversion.

(i) Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile or three (3) business days following being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed to the holder of record at its address appearing on the books of the Company. The Company will give written notice to each holder of Series A-1 Preferred Stock at least twenty (20) days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public. The Company will also give written notice to each holder of Series A-1 Preferred Stock at least twenty (20) days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to such holder prior to such information being made known to the public.

(j) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series A-1 Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall at its option either (i) pay cash equal to the product of such fraction multiplied by the average of the Closing Bid Prices of the Common Stock for the five (5) consecutive trading days immediately preceding the Voluntary Conversion Date, or (ii) in lieu of issuing such fractional shares issue one additional whole share to the holder.

(k) Reservation of Common Stock. The Company shall, so long as any shares of Series A-1 Preferred Stock are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A-1 Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series A-1 Preferred Stock then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 120% of the number of shares of Common Stock for which the shares of Series A-1 Preferred Stock are at any time convertible (without regard to limitations on conversion set forth in Section 7). The initial number of shares of Common Stock reserved for conversions of the Series A-1 Preferred Stock and each increase in the number of shares so reserved shall be allocated pro rata among the holders of the Series A-1 Preferred Stock based on the number of shares of Series A-1 Preferred Stock held by each holder at the time of issuance of the Series A-1 Preferred Stock or increase in the number of reserved shares, as the case may be. In the event a holder shall sell or otherwise transfer any of such holder’s shares of Series A-1 Preferred

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Stock, each transferee shall be allocated a pro rata portion of the number of reserved shares of Common Stock reserved for such transferor. Any shares of Common Stock reserved and which remain allocated to any person or entity which does not hold any shares of Series A-1 Preferred Stock shall be allocated to the remaining holders of Series A-1 Preferred Stock, pro rata based on the number of shares of Series A-1 Preferred Stock then held by such holder.

(l) Retirement of Series A-1 Preferred Stock. Conversion of Series A-1 Preferred Stock shall be deemed to have been effected on the applicable Voluntary Conversion Date. The Company shall keep written records of the conversion of the shares of Series A-1 Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series A-1 Preferred Stock upon complete conversion of the Series A-1 Preferred Stock.

(m) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of Series A-1 Preferred Stock require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Company shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.

6. No Preemptive Rights. Except as provided in Section 5 hereof and in the Exchange Agreement, no holder of the Series A-1 Preferred Stock shall be entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class, or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable.

7. Conversion Restriction. Notwithstanding anything to the contrary set forth in Section 5 of this Certificate of Designation, at no time may a holder of shares of Series A-1 Preferred Stock convert shares of the Series A-1 Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.99% of all of the Common Stock outstanding at such time; provided, however, that upon a holder of Series A-1 Preferred Stock providing the Company with sixty-

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one (61) days notice (pursuant to Section 5(i) hereof) (the “Waiver Notice”) that such holder would like to waive Section 7 of this Certificate of Designation with regard to any or all shares of Common Stock issuable upon conversion of Series A-1 Preferred Stock, this Section 7 shall be of no force or effect with regard to those shares of Series A-1 Preferred Stock referenced in the Waiver Notice.

8. Most Favored Nations Exchange Right. If the Company enters into any equity or equity linked financing (“Subsequent Financing”) on terms more favorable than the terms governing the Series A-1 Preferred Stock, then the holders of the Series A-1 Preferred Stock together the holders of the Company’s Series A Preferred Stock in their sole discretion may exchange their Series A Preferred Stock and Series A-1 Preferred Stock, as the case may be, valued at their Liquidation Preference Amount, for the securities issued or to be issued in the Subsequent Financing to the extent a Release Event has not occurred.

9. Inability to Fully Convert.

(a) Holder’s Option if Company Cannot Fully Convert. If, upon the Company’s receipt of a Conversion Notice, the Company cannot issue shares of Common Stock registered for resale to the extent required under the Registration Statement for any reason, including, without limitation, because the Company (x) does not have a sufficient number of shares of Common Stock authorized and available, (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or its securities from issuing all of the Common Stock which is to be issued to a holder of Series A-1 Preferred Stock pursuant to a Conversion Notice or (z) fails to have a sufficient number of shares of Common Stock registered for resale required under the Registration Statement, then the Company shall issue as many shares of Common Stock as it is able to issue in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above and, with respect to the unconverted Series A-1 Preferred Stock, the holder, solely at such holder’s option, can elect, in addition to other remedies available to such holder, within five (5) business days after receipt of notice from the Company thereof to:

(i) require the Company to redeem from such holder those Series A-1 Preferred Stock for which the Company is unable to issue Common Stock in accordance with such holder’s Conversion Notice (“Mandatory Redemption”) at a price per share equal to the 100% of the Liquidation Preference Amount as of such Conversion Date (the “Mandatory Redemption Price”).

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(ii) if the Company’s inability to fully convert Series A-1 Preferred Stock is pursuant to Section 9(a)(z) above, require the Company to issue restricted shares of Common Stock in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above.

(iii) void its Conversion Notice and retain or have returned, as the case may be, the shares of Series A-1 Preferred Stock that were to be converted pursuant to such holder’s Conversion Notice (provided that a holder’s voiding its Conversion Notice shall not effect the Company’s obligations to make any payments which have accrued prior to the date of such notice).

In the event a Holder shall elect to convert any shares of Series A-1 Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, violation of an agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or of said shares of Series A-1 Preferred Stock shall have issued and the Company posts a surety bond for the benefit of such Holder in an amount equal to 130% of the amount of shares of Series A-1 Preferred Stock the Holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder in the event it obtains judgment.

(b) Mechanics of Fulfilling Holder’s Election. The Company shall immediately send via facsimile to a holder of Series A-1 Preferred Stock, upon receipt of a facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 9(a) above, a notice of the Company’s inability to fully satisfy such holder’s Conversion Notice (the “Inability to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Company is unable to fully satisfy such holder’s Conversion Notice, (ii) the number of Series A-1 Preferred Stock which cannot be converted and (iii) the applicable Mandatory Redemption Price. Such holder shall notify the Company of its election pursuant to Section 9(a) above by delivering written notice via facsimile to the Company (“Notice in Response to Inability to Convert”).

(c) Payment of Redemption Price. If such holder shall elect to have its shares redeemed pursuant to Section 9(a)(i) above, the Company shall pay the Mandatory Redemption Price to such holder within thirty (30) days of the Company’s receipt of the holder’s Notice in Response to Inability to Convert, provided that prior to the Company’s receipt of the holder’s Notice in Response to Inability to Convert the Company has not delivered a notice to such holder stating, to the satisfaction of the holder, that the event or condition resulting in the Mandatory Redemption has been cured and all Conversion Shares issuable to such holder can and will be

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delivered to the holder in accordance with the terms of Section 2(g). If the Company shall fail to pay the applicable Mandatory Redemption Price to such holder on a timely basis as described in this Section 9(c) (other than pursuant to a dispute as to the determination of the arithmetic calculation of the Redemption Price), in addition to any remedy such holder of Series A Preferred Stock may have under this Certificate of Designation and the Exchange Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid in full. Until the full Mandatory Redemption Price is paid in full to such holder, such holder may (i) void the Mandatory Redemption with respect to those Series A Preferred Stock for which the full Mandatory Redemption Price has not been paid, (ii) receive back such Series A Preferred Stock, and (iii) require that the Conversion Price of such returned Series A Preferred Stock be adjusted to the lesser of (A) the Conversion Price and (B) the lowest Closing Bid Price during the period beginning on the Conversion Date and ending on the date the holder voided the Mandatory Redemption.

(d) Pro-rata Conversion and Redemption. In the event the Company receives a Conversion Notice from more than one holder of Series A-1 Preferred Stock on the same day and the Company can convert and redeem some, but not all, of the Series A-1 Preferred Stock pursuant to this Section 9, the Company shall convert and redeem from each holder of Series A-1 Preferred Stock electing to have Series A-1 Preferred Stock converted and redeemed at such time an amount equal to such holder’s pro-rata amount (based on the number shares of Series A-1 Preferred Stock held by such holder relative to the number shares of Series A-1 Preferred Stock outstanding) of all shares of Series A-1 Preferred Stock being converted and redeemed at such time.

10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of the holders of not less than a majority of the then outstanding shares of Series A-1 Preferred Stock, shall be required (a) for any change to this Certificate of Designation or the Company’s Certificate of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A-1 Preferred Stock or (b) for the issuance of shares of Series A-1 Preferred Stock other than pursuant to the Exchange Agreement. Notwithstanding anything herein to the contrary, Section 8, the first sentence of Section 5(e)(vi)(A) and the first sentence of Section 5(e)(vii) hereof may only be waived with the written consent of the holders of not less than thirty percent (30%) of the then outstanding shares of Series A Preferred Stock and Series A-1 Preferred Stock voting together as one class; provided, that, such waiver shall be effective for all shares of Series A Preferred Stock and Series A-1 Preferred Stock; provided, further, that a separate class vote shall not be required from the holders of the Series A-1 Preferred Stock to effect the waiver of Section 8, the first sentence of Section 5(e)(vi)(A) and the first sentence of Section 5(e)(vii). No consideration shall be offered or paid to any holder of Series A Preferred Stock or Series A-1 Preferred Stock to consent to a waiver of Section 8, the

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first sentence of Section 5(e)(vi)(A) or the first sentence of Section 5(e)(vii) hereof unless the same consideration is also offered to all of the holders of Series A Preferred Stock and Series A-1 Preferred Stock.

11. Lost or Stolen Certificates. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the shares of Series A-1 Preferred Stock, and, in the case of loss, theft or destruction, of any indemnification undertaking by the holder to the Company and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock certificate(s) of like tenor and date.

12. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under this Certificate of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Series A-1 Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holders of the Series A-1 Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

13. Specific Shall Not Limit General; Construction. No specific provision contained in this Certificate of Designation shall limit or modify any more general provision contained herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and all initial purchasers of the Series A-1 Preferred Stock and shall not be construed against any person as the drafter hereof.

14. Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of Series A-1 Preferred Stock in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

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IN WITNESS WHEREOF, the undersigned has executed and subscribed this Amended Certificate and does affirm the foregoing as true this 14th day of June, 2007.


ORTEC INTERNATIONAL, INC.

By:	/s/	Ron Lipstein

	Name: Ron Lipstein
	Title: Chief Executive Officer

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EXHIBIT I

ORTEC INTERNATIONAL, INC.
CONVERSION NOTICE

Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the Series A-1 Preferred Stock of Ortec International, Inc. (the “Certificate of Designation”). In accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to convert the number of shares of Series A-1 Preferred Stock, par value $.001 per share (the “Preferred Shares”), of Ortec International, Inc., a Delaware corporation (the “Company”), indicated below into shares of Common Stock, par value $.001 per share (the “Common Stock”), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below.


	Date of Conversion:

	Number of Preferred Shares to be converted:______

	Stock certificate no(s). of Preferred Shares to be converted: ______

The Common Stock have been sold pursuant to the Registration Statement (as defined in the Registration Rights Agreement): YES ____ NO____

Please confirm the following information:


	Conversion Price:

	Number of shares of Common Stock to be issued:


	Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion determined in accordance with Section 16 of the Securities Exchange Act of 1934, as amended:________________

Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:


	Issue to:



	Facsimile Number:


	Authorization:

		By:

		Title:


	Dated:

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PRICES ATTACHED

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EX-3.3 4 c49144_ex3-3.htm

EXHIBIT 3.3

CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND
PREFERENCES
OF THE
SERIES A-2 CONVERTIBLE PREFERRED STOCK
OF
ORTEC INTERNATIONAL, INC.

The undersigned, the Chief Executive Officer of Ortec International, Inc., a Delaware corporation (the “Company”), in accordance with the provisions of the Delaware General Corporation Law, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, the following resolution creating a series of Series A-2 Convertible Preferred Stock, was duly adopted on June 10, 2007:

RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by provisions of the Certificate of Incorporation of the Company (the “Certificate of Incorporation”), there hereby is created out of the shares of Preferred Stock, par value $.001 per share, of the Company authorized in Article IV of the Certificate of Incorporation (the “Preferred Stock”), a series of Preferred Stock of the Company, to be named “Series A-2 Convertible Preferred Stock,” consisting of five hundred (500) shares, which series shall have the following designations, powers, preferences and relative and other special rights and the following qualifications, limitations and restrictions:

1. Designation and Rank.

(a) Designation. The designation of such series of the Preferred Stock shall be the Series A-2 Convertible Preferred Stock, par value $.001 per share (the “Series A-2 Preferred Stock”). The maximum number of shares of Series A-2 Preferred Stock shall be five hundred (500) Shares.

(b) Rank. The Series A-2 Preferred Stock shall rank prior to the common stock, par value $.001 per share (the “Common Stock”), and to all other classes and series of equity securities of the Company which by its terms does not rank senior to or pari passu with the Series A-2 Preferred Stock (“Junior Stock”). The Series A-2 Preferred Stock shall be subordinate to and rank junior to all indebtedness of the Company now or hereafter outstanding. The Series A-2 Preferred Stock shall rank on a pari passu basis to the Series A Convertible Preferred Stock, par value $.001 per share (the “Series A Preferred Stock”) and the Series A-1 Convertible Preferred Stock, par value $.001 per share (the “Series A-1 Preferred Stock” and together with the Series A Preferred Stock, the “Pari Passu Preferred Stock”).

2. Dividends. The holders of record of shares of Series A-2 Preferred Stock shall not be entitled to receive dividends.

3. Voting Rights.

(a) Class Voting Rights. The Series A-2 Preferred Stock shall have the following class voting rights (in addition to the voting rights set forth in Section 3(b) hereof). So long as any shares of the Series A-2 Preferred Stock remain outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least seventy-five percent (75%) of the shares of the Series A-2 Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting, in which the holders of the Series A-2 Preferred Stock vote separately as a class: (i) amend, alter or repeal the provisions of the Series A-2 Preferred Stock, whether by merger, consolidation or otherwise, so as to adversely affect any right, preference, privilege or voting power of the Series A-2 Preferred Stock; provided, however, that any creation and issuance of another series of Junior Stock and, to the extent approved in accordance with Section 7(q) of the Amended and Restated Exchange Agreement between the Company and Paul Royalty Fund, L.P. (the “Exchange Agreement”), pari passu stock and senior stock shall not be deemed to adversely affect such rights, preferences, privileges or voting powers; (ii) repurchase, redeem or pay dividends in cash or in kind on shares of the Company’s Junior Stock and pari passu stock and senior stock; (iii) amend the Certificate of Incorporation or By-Laws of the Company so as to affect materially and adversely any right, preference, privilege or voting power of the Series A-2 Preferred Stock; provided, however, that any creation and issuance of another series of Junior Stock and, to the extent approved in accordance with Section 7(q) of the Exchange Agreement, pari passu stock and senior stock shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers; (iv) effect any distribution with respect to Junior Stock and Pari Passu Preferred Stock; or (v) reclassify the Company’s outstanding securities.

(b) General Voting Rights. Except with respect to transactions upon which the Series A-2 Preferred Stock shall be entitled to vote separately as a class pursuant to Section 3(a) above and except as otherwise required by Delaware law, the Series A-2 Preferred Stock shall have no voting rights. The Common Stock into which the Series A-2 Preferred Stock is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding Common Stock of the Company.

4. Liquidation Preference.

(a) In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of shares of the Series A-2 Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company whether such assets are capital or surplus of any nature, an amount equal to $10,000 per share (the “Liquidation Preference Amount”) of the Series A-2 Preferred Stock, on a pro rata and pari passu basis with the Pari Passu Preferred Stock, before any payment shall be made or any assets distributed to the holders of the Common Stock or any other Junior Stock. If the assets of the Company are not sufficient to pay in full the Liquidation Preference Amount payable to the

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holders of outstanding shares of the Series A-2 Preferred Stock and any series of preferred stock or any other class of stock on a parity, including, without limitation, the Pari Passu Preferred Stock, as to rights on liquidation, dissolution or winding up, with the Series A-2 Preferred Stock, then all of said assets will be distributed among the holders of the Series A-2 Preferred Stock, the Pari Passu Preferred Stock and the other classes of stock on a parity with the Series A-2 Preferred Stock, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The liquidation payment with respect to each outstanding fractional share of Series A-2 Preferred Stock shall be equal to a ratably proportionate amount of the liquidation payment with respect to each outstanding share of Series A-2 Preferred Stock. All payments for which this Section 4(a) provides shall be in cash, property (valued at its fair market value as determined by an independent appraiser reasonably acceptable to the holders of a majority of the Series A-2 Preferred Stock) or a combination thereof; provided, however, that no cash shall be paid to holders of Junior Stock unless each holder of the outstanding shares of Series A-2 Preferred Stock has been paid in cash the full Liquidation Preference Amount to which such holder is entitled as provided herein. After payment of the full Liquidation Preference Amount to which each holder is entitled, such holders of shares of Series A-2 Preferred Stock will not be entitled to any further participation as such in any distribution of the assets of the Company.

(c) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, stating a payment date and the place where the distributable amounts shall be payable, shall be given by mail, postage prepaid, no less than forty-five (45) days prior to the payment date stated therein, to the holders of record of the Series A-2 Preferred Stock at their respective addresses as the same shall appear on the books of the Company.

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5. Conversion. The holder of Series A-2 Preferred Stock shall have the following conversion rights (the “Conversion Rights”):

(a) Right to Convert. At any time on or after the Issuance Date, the holder of any such shares of Series A-2 Preferred Stock may, at such holder’s option, subject to the limitations set forth in Section 7 herein, elect to convert (a “Voluntary Conversion”) all or any portion of the shares of Series A-2 Preferred Stock held by such person into a number of fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the Liquidation Preference Amount of the shares of Series A-2 Preferred Stock being converted thereon divided by (ii) the Conversion Price (as defined in Section 5(d) below) then in effect as of the date of the delivery by such holder of its notice of election to convert. The Company shall keep written records of the conversion of the shares of Series A-2 Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series A-2 Preferred Stock upon complete conversion of the Series A-2 Preferred Stock.

(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of Series A-2 Preferred Stock shall be conducted in the following manner:

(i) Holder’s Delivery Requirements. To convert Series A-2 Preferred Stock into full shares of Common Stock on any date (the “Voluntary Conversion Date”), the holder thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time on such date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”), to the Company, and (B) with respect to the final conversion of shares of Series A-2 Preferred Stock held by any holder, such holder shall surrender to a common carrier for delivery to the Company as soon as practicable following such Conversion Date but in no event later than six (6) business days after such date the original certificates representing the shares of Series A-2 Preferred Stock being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the “Preferred Stock Certificates”).

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(iv) Record Holder. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of the Series A-2 Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

(v) Company’s Failure to Timely Convert. If within three (3) business days of the Company’s receipt of the Conversion Notice (the “Share Delivery Period”) the Company shall fail to issue and deliver to a holder the number of shares of Common Stock to which such holder is entitled upon such holder’s conversion of the Series A-2 Preferred Stock (a “Conversion Failure”), in addition to all other available remedies which such holder may pursue hereunder and under the Amended and Restated Exchange Agreement among the Company and the and the initial holder of the Series A-2 Preferred Stock (the “Exchange Agreement”) between the Company and the initial holders of the Series A-2 Preferred Stock (including indemnification pursuant to Section 13 thereof), the Company shall pay additional damages to such holder on each business day after such third (3^rd) business day that such conversion is not timely effected in an amount equal 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which such holder is entitled and (B) the Closing Bid Price (as defined in Section 5(d)(ii)

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hereof) of the Common Stock on the last possible date which the Company could have issued such Common Stock to such holder without violating Section 5(b)(ii). If the Company fails to pay the additional damages set forth in this Section 5(b)(v) within five (5) business days of the date incurred, then such payment shall bear interest at the rate of 2% per month (pro rated for partial months) until such payments are made.

(d) Conversion Price.

(i) The term “Conversion Price” shall mean $5.00 per share, subject to adjustment under Section 5(e) hereof. Notwithstanding any adjustment hereunder, at no time shall the Conversion Price be greater than $5.00 per share other than pursuant to the second sentence of Section 5(e)(i) in connection with a reverse stock split effected by the Company.

(e) Adjustments of Conversion Price.

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Price shall be decreased as of the time of such issuance or, in the event such record date shall have been fixed, as of the close of business on such record date, by multiplying, as applicable, the Conversion Price then in effect by a fraction:

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and

(iii) Adjustment for Other Dividends and Distributions. If the Company shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then, and in each event, an appropriate revision to the applicable Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holders of Series A-2 Preferred Stock shall receive upon conversions thereof, in addition to the number of shares of Common Stock receivable thereon, the number of securities of the Company which they would have received had their Series A-2 Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this Section 5(e)(iii) with respect to the rights of the holders of the Series A-2 Preferred Stock.

(iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock issuable upon conversion of the Series A-2 Preferred Stock at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 5(e)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section 5(e)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series A-2 Preferred Stock shall have the right thereafter to convert such share of Series A-2 Preferred Stock into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which such share of

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Series A-2 Preferred Stock might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.

(v) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets. If at any time or from time to time after the Issuance Date there shall be a capital reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions provided for in Section 5(e)(i), (ii) and (iii), or a reclassification, exchange or substitution of shares provided for in Section 5(e)(iv)), or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s properties or assets to any other person that is not deemed a liquidation pursuant to Section 5.14(b) (an “Organic Change”), then as a part of such Organic Change an appropriate revision to the Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series A-2 Preferred Stock shall have the right thereafter to convert such share of Series A-2 Preferred Stock into the kind and amount of shares of stock and other securities or property of the Company or any successor corporation resulting from the Organic Change as the holder would have received as a result of the Organic Change and if the holder had converted its Series A-2 Preferred Stock into the Company’s Common Stock prior to the Organic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5(e)(v) with respect to the rights of the holders of the Series A-2 Preferred Stock after the Organic Change to the end that the provisions of this Section 5(e)(v) (including any adjustment in the Conversion Price then in effect and the number of shares of stock or other securities deliverable upon conversion of the Series A-2 Preferred Stock) shall be applied after that event in as nearly an equivalent manner as may be practicable.

(vi) Intentionally Omitted.

(vii) Intentionally Omitted.

(viii) Consideration for Stock. In case any shares of Common Stock or Convertible Securities other than the Series A-2 Preferred Stock, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed to or exchanged for the stock or other securities of another corporation), the amount of consideration therefor shall be deemed to be the fair value, as determined reasonably and in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such

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Board may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or warrants or options, as the case may be.

(x) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment of the Conversion Price of shares of Common Stock issuable upon conversion of the Series A Preferred Stock upon (i) the Company’s issuance of Additional Shares of Common Stock and/or Common Stock Equivalents in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital, (ii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the Company’s (A) issuance of Additional Shares of Common Stock to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company, whether pursuant to the 2006 Stock Award and Incentive Plan, any other plan hereafter adopted, or otherwise, so long as such issuances under this subsection (ii) which would cause the provisions of Section 5(e) hereof to be applied in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Issuance Date, and (B) grant of stock options or warrants to purchase shares of Common Stock, whether the grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award and Incentive Plan, as they now exist, an employee or director stock option plan and a stock award and incentive plan hereafter adopted or otherwise, so long as such issuances under this subsection (ii) which would cause the provisions of Section 5(e) hereof to be applied in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Issuance Date, (iii) securities issued upon the exercise, conversion or exchange of any Common Stock Equivalents outstanding on the Issuance Date at the conversion price in effect on the Issuance Date as may be adjusted by the anti-dilution provisions thereof as in effect on the date hereof, (iv) issuance of Series A Preferred Stock or warrants issued by the Company pursuant to the Series A Convertible Preferred Stock Purchase Agreement among the Company and the purchasers listed therein (the “Purchase Agreement”), or Common Stock issued upon conversion or exercise thereof, as may be adjusted by the anti-dilution provisions thereof as in effect on the date hereof, (v) issuance of Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock, Series D-2 Convertible Preferred Stock or Common Stock issued upon conversion thereof at the conversion price in effect on the Issuance Date, as such conversion price may be adjusted pursuant to Section 5 hereof, (vi) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc. or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement and the shares of

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(f) No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith, assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A-2 Preferred Stock as provided herein. In the event a holder shall elect to convert any shares of Series A-2 Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such holder or any one associated or affiliated with such holder has been engaged in any violation of law, unless, an injunction from a court, on notice, restraining and/or enjoining conversion of all or of said shares of Series A-2 Preferred Stock shall have been issued and the Company posts a surety bond for the benefit of such holder in an amount equal to 130% of the Liquidation Preference Amount of the Series A-2 Preferred Stock such holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such holder in the event it obtains judgment.

(g) Certificates as to Adjustments. Upon occurrence of each adjustment or readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion of the Series A-2 Preferred Stock pursuant to this Section 5, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such Series A-2 Preferred Stock a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request of the holder of such affected Series A-2 Preferred Stock, at any time, furnish or cause to be furnished to such holder a like certificate setting forth such adjustments and readjustments, the Conversion Price in effect at the time, and the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of a share of such Series A-2 Preferred Stock. Notwithstanding the foregoing, the Company shall not be obligated to deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent of such adjusted amount.

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(h) Issue Taxes. The Company shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A-2 Preferred Stock pursuant thereto; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion.

(i) Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile or three (3) business days following being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed to the holder of record at its address appearing on the books of the Company. The Company will give written notice to each holder of Series A-2 Preferred Stock at least twenty (20) days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public. The Company will also give written notice to each holder of Series A-2 Preferred Stock at least twenty (20) days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to such holder prior to such information being made known to the public.

(j) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series A-2 Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall at its option either (i) pay cash equal to the product of such fraction multiplied by the average of the Closing Bid Prices of the Common Stock for the five (5) consecutive trading days immediately preceding the Voluntary Conversion Date, or (ii) in lieu of issuing such fractional shares issue one additional whole share to the holder.

(k) Reservation of Common Stock. The Company shall, so long as any shares of Series A-2 Preferred Stock are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A-2 Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series A-2 Preferred Stock then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 120% of the number of shares of Common Stock for which the shares of Series A-2 Preferred Stock are at any time convertible(without regard to limitations on conversion set forth in Section 7). The initial number of shares of Common Stock reserved for conversions of the Series A-2 Preferred Stock and each increase in the number of shares so reserved shall be

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allocated pro rata among the holders of the Series A-2 Preferred Stock based on the number of shares of Series A-2 Preferred Stock held by each holder at the time of issuance of the Series A-2 Preferred Stock or increase in the number of reserved shares, as the case may be. In the event a holder shall sell or otherwise transfer any of such holder’s shares of Series A-2 Preferred Stock, each transferee shall be allocated a pro rata portion of the number of reserved shares of Common Stock reserved for such transferor. Any shares of Common Stock reserved and which remain allocated to any person or entity which does not hold any shares of Series A-2 Preferred Stock shall be allocated to the remaining holders of Series A-2 Preferred Stock, pro rata based on the number of shares of Series A-2 Preferred Stock then held by such holder.

(l) Retirement of Series A-2 Preferred Stock. Conversion of Series A-2 Preferred Stock shall be deemed to have been effected on the applicable Voluntary Conversion Date. The Company shall keep written records of the conversion of the shares of Series A-2 Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series A-2 Preferred Stock upon complete conversion of the Series A-2 Preferred Stock.

(m) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of Series A-2 Preferred Stock require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Company shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.

6. No Preemptive Rights. Except as provided in Section 5 hereof, no holder of the Series A-2 Preferred Stock shall be entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class, or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable.

7. Conversion Restriction. Notwithstanding anything to the contrary set forth in Section 5 of this Certificate of Designation, at no time may a holder of shares of Series A-2 Preferred Stock convert shares of the Series A-2 Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of

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Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.99% of all of the Common Stock outstanding at such time; provided, however, that upon a holder of Series A-2 Preferred Stock providing the Company with sixty-one (61) days notice (pursuant to Section 5(i) hereof) (the “Waiver Notice”) that such holder would like to waive Section 7 of this Certificate of Designation with regard to any or all shares of Common Stock issuable upon conversion of Series A-2 Preferred Stock, this Section 7 shall be of no force or effect with regard to those shares of Series A-2 Preferred Stock referenced in the Waiver Notice.

8. Intentionally Omitted.

9. Inability to Fully Convert.

(a) Holder’s Option if Company Cannot Fully Convert. If, upon the Company’s receipt of a Conversion Notice, the Company cannot issue shares of Common Stock registered for resale to the extent required under the Registration Statement for any reason, including, without limitation, because the Company (x) does not have a sufficient number of shares of Common Stock authorized and available, (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or its securities from issuing all of the Common Stock which is to be issued to a holder of Series A-2 Preferred Stock pursuant to a Conversion Notice or (z) fails to have a sufficient number of shares of Common Stock registered for resale required under the Registration Statement, then the Company shall issue as many shares of Common Stock as it is able to issue in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above and, with respect to the unconverted Series A-2 Preferred Stock, the holder, solely at such holder’s option, can elect, in addition to other remedies available to such holder, within five (5) business days after receipt of notice from the Company thereof to:

(i) require the Company to redeem from such holder those Series A-2 Preferred Stock for which the Company is unable to issue Common Stock in accordance with such holder’s Conversion Notice (“Mandatory Redemption”) at a price per share equal to the 100% of the Liquidation Preference Amount as of such Conversion Date (the “Mandatory Redemption Price”);

(ii) if the Company’s inability to fully convert Series A-2 Preferred Stock is pursuant to Section 9(a)(z) above, require the Company to issue restricted shares of

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Common Stock in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above.

(iii) void its Conversion Notice and retain or have returned, as the case may be, the shares of Series A-2 Preferred Stock that were to be converted pursuant to such holder’s Conversion Notice (provided that a holder’s voiding its Conversion Notice shall not effect the Company’s obligations to make any payments which have accrued prior to the date of such notice).

In the event a Holder shall elect to convert any shares of Series A-2 Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, violation of an agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or of said shares of Series A-2 Preferred Stock shall have issued and the Company posts a surety bond for the benefit of such Holder in an amount equal to 130% of the amount of shares of Series A-2 Preferred Stock the Holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder in the event it obtains judgment.

(b) Mechanics of Fulfilling Holder’s Election. The Company shall immediately send via facsimile to a holder of Series A-2 Preferred Stock, upon receipt of a facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 9(a) above, a notice of the Company’s inability to fully satisfy such holder’s Conversion Notice (the “Inability to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Company is unable to fully satisfy such holder’s Conversion Notice, (ii) the number of Series A-2 Preferred Stock which cannot be converted, and (iii) the applicable Mandatory Redemption Price. Such holder shall notify the Company of its election pursuant to Section 9(a) above by delivering written notice via facsimile to the Company (“Notice in Response to Inability to Convert”).

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this Section 9(c) (other than pursuant to a dispute as to the determination of the arithmetic calculation of the Redemption Price), in addition to any remedy such holder of Series A Preferred Stock may have under this Certificate of Designation and the Exchange Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid in full. Until the full Mandatory Redemption Price is paid in full to such holder, such holder may (i) void the Mandatory Redemption with respect to those Series A Preferred Stock for which the full Mandatory Redemption Price has not been paid, (ii) receive back such Series A Preferred Stock, and (iii) require that the Conversion Price of such returned Series A Preferred Stock be adjusted to the lesser of (A) the Conversion Price and (B) the lowest Closing Bid Price during the period beginning on the Conversion Date and ending on the date the holder voided the Mandatory Redemption.

(d) Pro-rata Conversion and Redemption. In the event the Company receives a Conversion Notice from more than one holder of Series A-2 Preferred Stock on the same day and the Company can convert and redeem some, but not all, of the Series A-2 Preferred Stock pursuant to this Section 9, the Company shall convert from each holder of Series A-2 Preferred Stock electing to have Series A-2 Preferred Stock converted at such time an amount equal to such holder’s pro-rata amount (based on the number shares of Series A-2 Preferred Stock held by such holder relative to the number shares of Series A-2 Preferred Stock outstanding) of all shares of Series A-2 Preferred Stock being converted and redeemed at such time.

11. Lost or Stolen Certificates. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the shares of Series A-2 Preferred Stock, and, in the case of loss, theft or destruction, of any indemnification undertaking by the holder to the Company and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock certificate(s) of like tenor and date.

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herein shall limit a holder’s right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Series A-2 Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holders of the Series A-2 Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

13. Specific Shall Not Limit General; Construction. No specific provision contained in this Certificate of Designation shall limit or modify any more general provision contained herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and all initial purchasers of the Series A-2 Preferred Stock and shall not be construed against any person as the drafter hereof.

14. Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of Series A-2 Preferred Stock in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

IN WITNESS WHEREOF, the undersigned has executed and subscribed this Amended Certificate and does affirm the foregoing as true this 14th day of June, 2007.


	ORTEC INTERNATIONAL, INC.

	By:	/s/ Ron Lipstein

		Name: Ron Lipstein
		Title: Chief Executive Officer

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EXHIBIT I

ORTEC INTERNATIONAL, INC.
CONVERSION NOTICE

Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the Series A-2 Preferred Stock of Ortec International, Inc. (the “Certificate of Designation”). In accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to convert the number of shares of Series A-2 Preferred Stock, par value $.001 per share (the “Preferred Shares”), of Ortec International, Inc., a Delaware corporation (the “Company”), indicated below into shares of Common Stock, par value $.001 per share (the “Common Stock”), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below.


	Date of Conversion:


	Number of Preferred Shares to be converted: _____

	Stock certificate no(s). of Preferred Shares to be converted: _____

The Common Stock have been sold pursuant to the Registration Statement (as defined in the Registration Rights Agreement): YES ____ NO____

Please confirm the following information:


	Conversion Price:


	Number of shares of Common Stock to be issued:


	Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion determined in accordance with Section 16 of the Securities Exchange Act of 1934, as amended:
		__________________________________________

Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:


	Issue to:




	Facsimile Number:


	Authorization:

		By:

		Title:

	Dated:

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PRICES ATTACHED

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EX-3.4 5 c49144_ex3-4.htm

EXHIBIT 3.4

CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND
PREFERENCES
OF THE
SERIES D-2 CONVERTIBLE PREFERRED STOCK
OF
ORTEC INTERNATIONAL, INC.

The undersigned, the Chief Executive Officer of Ortec International, Inc., a Delaware corporation (the “Company”), in accordance with the provisions of the Delaware General Corporation Law, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, the following resolution creating a series of Series D-2 Convertible Preferred Stock, was duly adopted on June 10, 2007:

RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by provisions of the Certificate of Incorporation of the Company (the “Certificate of Incorporation”), there hereby is created out of the shares of Preferred Stock, par value $.001 per share, of the Company authorized in Article IV of the Certificate of Incorporation (the “Preferred Stock”), a series of Preferred Stock of the Company, to be named “Series D-2 Convertible Preferred Stock,” consisting of Twenty Thousand (20,000) shares, which series shall have the following designations, powers, preferences and relative and other special rights and the following qualifications, limitations and restrictions:

1. Designation and Rank. The designation of such series of the Preferred Stock shall be the Series D-2 Convertible Preferred Stock, par value $.001 per share (the “Series D-2 Preferred Stock”). The maximum number of shares of Series D-2 Preferred Stock shall be Twenty Thousand (20,000) shares. The Series D-2 Preferred Stock shall rank prior to the common stock, par value $.001 per share (the “Common Stock”) for purposes of liquidation preference, and to all other classes and series of equity securities of the Company that by their terms do not rank senior to the Series D-2 Preferred Stock (“Junior Stock”). Specifically, the Series D-2 Preferred Stock shall be subordinate to and rank junior to the Series A Preferred Stock, Series A-1 Preferred Stock and Series A-2 Preferred Stock and all other classes of Preferred Stock of the Company, whether or not outstanding as of the date hereof, which by their terms do not rank junior to the Series D-2 Preferred Stock. The Series D-2 Preferred Stock shall be subordinate to and rank junior to all indebtedness of the Company now or hereafter outstanding. The Series D-2 Preferred Stock shall be issued only pursuant to the exercise of Series M Warrants of the Company issued on June 18, 2007.

2. Dividends. Whenever the Board of Directors declares a dividend on the Common Stock each holder of record of a share of Series D-2 Preferred Stock, or any fraction of a share of Series D-2 Preferred Stock, on the date set by the Board of Directors to determine the owners of the Common Stock of record entitled to receive such dividend (the “Record Date”) shall be entitled to receive, out of any assets at the time legally available therefore, an amount equal to such dividend declared on one share of Common Stock multiplied by the number of shares of

Common Stock into which such share, or such fraction of a share, of Series D-2 Preferred Stock could be converted on the Record Date.

3. Voting Rights.

(a) Class Voting Rights. The Series D-2 Preferred Stock shall have the following class voting rights. So long as any shares of the Series D-2 Preferred Stock remain outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least three-fourths (3/4) of the shares of the Series D-2 Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting, in which the holders of the Series D-2 Preferred Stock vote separately as a class: (i) amend, alter or repeal the provisions of the Series D-2 Preferred Stock so as to adversely affect any right, preference, privilege or voting power of the Series D-2 Preferred Stock; or (ii) effect any distribution with respect to Junior Stock except that the Company may effect a distribution on the Common stock if the Company makes a like kind distribution on each share, or fraction of a share, of Series D-2 Preferred Stock in an amount equal to the distribution on one share of Common Stock multiplied by the number of shares of Common Stock into which such one share, or such fraction of a share, of Series D-2 Preferred Stock can be converted at the time of such distribution.

(b) General Voting Rights. Except with respect to transactions upon which the Series D-2 Preferred Stock shall be entitled to vote separately as a class pursuant to Section 3(a) above, the Series D-2 Preferred Stock shall have no voting rights. The Common Stock into which the Series D-2 Preferred Stock is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding Common Stock of the Company.

4. Liquidation Preference.

(a) In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Company, the holders of shares of the Series D-2 Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company, whether such assets are capital or surplus of any nature, an amount equal an amount per share of Series D-2 Preferred Stock calculated by taking the total amount available for distribution to holders of all the Company’s outstanding Common Stock before deduction of any preference payments for the Series D-2 Preferred Stock, divided by the total of (x) all of the then outstanding shares of the Company’s Common Stock, plus (y) all of the shares of the Company’s Common Stock into which all of the outstanding shares of the Series D-2 Preferred Stock can be converted (the “Liquidation Preference Amount”) before any payment shall be made or any assets distributed to the holders of the Common Stock or any other Junior Stock. If the assets of the Company are sufficient to pay in part, but are not sufficient to pay in full, the Liquidation Preference Amount payable to the holders of outstanding shares of the Series D-2 Preferred Stock and any series of preferred stock or any other class of stock on a parity, as to rights on liquidation, dissolution or winding up, with the Series D-2 Preferred Stock, then all of said assets available to pay a part of the Liquidation Preference Amount to the holders of the outstanding shares of Series D-2

Preferred Stock and the other classes of stock on a parity as to rights on liquidation, dissolution or winding up, will be distributed among the holders of the Series D-2 Preferred Stock and the other classes of stock on a parity with the Series D-2 Preferred Stock, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The liquidation payment with respect to each outstanding fractional share of Series D-2 Preferred Stock shall be equal to a ratably proportionate amount of the liquidation payment with respect to each outstanding share of Series D-2 Preferred Stock. All payments for which this Section 4(a) provides shall be in cash, property (valued at its fair market value as determined by an independent appraiser reasonably acceptable to the holders of a majority of the Series D-2 Preferred Stock), or a combination thereof; provided, however, that no cash shall be paid to holders of Junior Stock unless each holder of the outstanding shares of Series D-2 Preferred Stock has been paid in cash the full Liquidation Preference Amount to which such holder is entitled as provided herein. After payment of the full Liquidation Preference Amount to which each holder is entitled, such holders of shares of Series D-2 Preferred Stock will not be entitled to any further participation as such in any distribution of the assets of the Company.

(c) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, stating a payment date and the place where the distributable amounts shall be payable, shall be given by mail, postage prepaid, no less than forty-five (45) days prior to the payment date stated therein, to the holders of record of the Series D-2 Preferred Stock at their respective addresses as the same shall appear on the books of the Company.

5. Conversion. The holder of Series D-2 Preferred Stock shall have the following conversion rights (the “Conversion Rights”):

(a) Right to Convert. At any time on or after the Issuance Date, the holder of any such shares of Series D-2 Preferred Stock may, at such holder’s option, subject to the limitations set forth in Section 7 herein, elect to convert (a “Voluntary Conversion”) all or any portion of the shares of Series D-2 Preferred Stock held by such person into a number of fully paid and nonassessable shares of Common Stock at a conversion rate of One Thousand (1,000) shares of Common Stock for each share of Preferred Stock (subject to adjustments set forth in

Section 7(e) herein, the “Conversion Rate”). The Company shall keep written records of the conversion of the shares of Series D-2 Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series D-2 Preferred Stock upon any conversion of the Series D-2 Preferred Stock as provided in Section 5(b) below.

(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of Series D-2 Preferred Stock shall be conducted in the following manner:

(i) Holder’s Delivery Requirements. To convert Series D-2 Preferred Stock into full shares of Common Stock on any date (the “Voluntary Conversion Date”), the holder thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time on such date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”), to the Company, and (B) with respect to the conversion of shares of Series D-2 Preferred Stock held by any holder, such holder shall surrender to a common carrier for delivery to the Company as soon as practicable following such Conversion Date, but in no event later than six (6) business days after such date, the original certificates representing the shares of Series D-2 Preferred Stock being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the “Preferred Stock Certificates”).

(ii) Company’s Response. Upon receipt by the Company of a facsimile copy of a Conversion Notice, the Company shall immediately send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder and the Company or its designated transfer agent (the “Transfer Agent”), as applicable, shall, within three (3) business days following the date of receipt by the Company of the certificate representing the shares of Series D-2 Preferred Stock being converted, (x) issue and deliver to the Depository Trust Company (“DTC”) account on the holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified in the Conversion Notice, registered in the name of the holder or its designee, for the number of shares of Common Stock to which the holder shall be entitled, and (y) if the certificate so surrendered represents more shares of Series D-2 Preferred Stock than those being converted, issue and deliver to the holder a new certificate for such number of shares of Series D-2 Preferred Stock represented by the surrendered certificate which were not converted.

(iii) Intentionally Omitted.

(iv) Record Holder. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of the Series D-2 Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

which such holder is entitled upon such holder’s conversion of the Series D-2 Preferred Stock (a “Conversion Failure”), in addition to all other available remedies which such holder may pursue hereunder, the Company shall pay additional damages to such holder on each business day after such third (3^rd) business day that such conversion is not timely effected in an amount equal 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which such holder is entitled and (B) the closing bid price of the Common Stock on the last possible date which the Company could have issued such Common Stock to such holder without violating Section 5(b)(ii). If the Company fails to pay the additional damages set forth in this Section 5(b)(v) within five (5) business days of the date incurred, then such payment shall bear interest at the rate of 2% per month (pro rated for partial months) until such payments are made.

(i) Upon the Company’s written request a holder of Series D-2 Preferred Stock shall advise the Company in writing the number of shares of Common Stock that are beneficially owned (“Beneficially Owned”, as defined in Section 13(d) of the Securities and Exchange Act of 1934 and the rules promulgated thereunder) by such holder. If the shares of Common Stock Beneficially Owned by such holder amount to less than 9.999% of the Shares of Common Stock outstanding at such time, the Company may, at its option, compel such holder, by written notice to such holder (the “Mandatory Conversion Notice”), to convert such portion of the Series D-2 Preferred Stock owned by him into so many shares of Common Stock so that the total number of shares of Common Stock Beneficially Owned by such holder after such conversion shall equal up to 9.999%, but not more, of the shares of Common Stock outstanding after such conversion. A Mandatory Conversion Date shall not occur more than once every 30 days.

(ii) As used herein, a “Mandatory Conversion Date” shall be the date when the Mandatory Conversion Notice shall be deemed delivered pursuant to Section 5(i). The Mandatory Conversion Date and the Voluntary Conversion Date collectively are referred to in this Certificate of Designation as the “Conversion Date.”

(iii) Each share of Series D-2 Preferred Stock required to be converted pursuant to the Mandatory Conversion Notice shall on the Mandatory Conversion Date, automatically and without any action on the part of the holder thereof, convert into a number of fully paid and nonassessable shares of Common Stock based on the Conversion Rate in effect on the Mandatory Conversion Date; provided, however, that the Company shall not be obligated to issue the shares of Common Stock issuable upon conversion of any shares of Series D-2 Preferred Stock unless the Preferred Stock certificates representing such shares of Series D-2 Preferred Stock are either delivered to the Company or the holder notifies the Company that such Preferred Stock certificates have been lost, stolen, or destroyed, and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. Upon the occurrence of the automatic conversion of the Series D-2 Preferred Stock pursuant to this Section 5, the holders of the Series D-2 Preferred Stock shall

surrender the Preferred Stock certificates representing the Series D-2 Preferred Stock for which the Mandatory Conversion Date has occurred to the Company and the Company shall deliver the shares of Common Stock issuable upon such conversion (in the same manner set forth in Section 5(b)(ii)) to the holder within three (3) business days of the holder’s delivery of the applicable Preferred Stock certificates. If the certificates of Series D-2 Preferred Stock so surrendered represent more shares of Series D-2 Preferred Stock than those being converted, the Company shall issue to the holder a new certificate for such number of Series D-2 Preferred Stock represented by the surrendered certificates which were not converted.

(d) Intentionally Omitted.

(e) Adjustments of Conversion Rate.

(i) Adjustments for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock, the Conversion Rate shall be proportionately increased. If the Company shall at any time or from time to time after the Issuance Date, combine the outstanding shares of Common Stock, the Conversion Rate shall be proportionately decreased. Any adjustments under this Section 5(e)(i) shall be effective at the close of business on the date the stock split or combination occurs.

(ii) Adjustments for Certain Dividends and Distributions. If the Company shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in shares of Common Stock, then, and in each event, the Conversion Rate shall be increased as of the time of such issuance or, in the event such record date shall have been fixed, as of the close of business on such record date, by multiplying, as applicable, the Conversion Rate then in effect by a fraction:

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately after such issuance on the close of business on such record date; and

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance on the close of business on such record date.

number of shares of Common Stock receivable thereon, the number of securities of the Company which they would have received had their Series D-2 Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this Section 5(e)(iii) with respect to the rights of the holders of the Series D-2 Preferred Stock.

(iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock issuable upon conversion of the Series D-2 Preferred Stock at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 5(e)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section 5(e)(v)), then, and in each event, an appropriate revision to the Conversion Rate shall be made and provisions shall be made so that the holder of each share of Series D-2 Preferred Stock shall have the right thereafter to convert such share of Series D-2 Preferred Stock into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which such share of Series D-2 Preferred Stock might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.

(vi) Record Date. In case the Company shall take record of the holders of its Common Stock or any other Preferred Stock for the purpose of entitling them to subscribe for or purchase Common Stock or Convertible Securities, then the date of the issue or sale of the shares of Common Stock shall be deemed to be such record date.

(f) No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith, assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series D-2 Preferred Stock against impairment. In the event a holder shall elect to convert any shares of Series D-2 Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such holder or any one associated or affiliated with such holder has been engaged in any violation of law, unless, an injunction from a court, on notice, restraining and/or adjoining conversion of all or of said shares of Series D-2 Preferred Stock shall have been issued.

(g) Certificates as to Adjustments. Upon occurrence of each adjustment or readjustment of the Conversion Rate or number of shares of Common Stock issuable upon conversion of the Series D-2 Preferred Stock pursuant to this Section 5, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such Series D-2 Preferred Stock a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request of the holder of such affected Series D-2 Preferred Stock, at any time, furnish or cause to be furnished to such holder a like certificate setting forth such adjustments and readjustments, the Conversion Rate in effect at the time, and the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of a share of such Series D-2 Preferred Stock. Notwithstanding the foregoing, the Company shall not be obligated to deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent of such adjusted amount.

(h) Issue Taxes. The Company shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series D-2 Preferred Stock pursuant hereto; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion.

Stock or (III) for determining rights to vote with respect to any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public. The Company will also give written notice to each holder of Series D-2 Preferred Stock at least twenty (20) days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to such holder prior to such information being made known to the public.

(j) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series D-2 Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company, at its option, shall pay cash equal to the product of such fraction multiplied by the average of the closing bid prices of the Common Stock for the five (5) consecutive trading immediately preceding the Voluntary Conversion Date or Mandatory Conversion Date, as applicable, or (ii) issue one whole share of Common Stock to the holder.

(k) Reservation of Common Stock. The Company shall, so long as any shares of Series D-2 Preferred Stock are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series D-2 Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series D-2 Preferred Stock then outstanding (without giving effect to the limitations set forth in Section 7 hereof).

(l) Retirement of Series D-2 Preferred Stock. Conversion of Series D-2 Preferred Stock shall be deemed to have been effected on the applicable Voluntary Conversion Date or Mandatory Conversion Date. The Company shall keep written records of the conversion of the shares of Series D-2 Preferred Stock converted by each holder. A holder shall be required to deliver the original certificates representing the shares of Series D-2 Preferred Stock upon any conversion of the Series D-2 Preferred Stock represented by such certificates.

(m) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of Series D-2 Preferred Stock require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Company shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.

6. No Preemptive or Redemption Rights. Except as provided in Section 5 hereof no holder of the Series D-2 Preferred Stock shall be entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class, or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such

consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable. Except as provided in Section 5 neither the Company nor the holder has the right to have the Company redeem the Series D-2 Preferred Stock.

7. Conversion Restriction. Notwithstanding anything to the contrary set forth in Section 5 of this Certificate of Designation, at no time may a holder of shares of Series D-2 Preferred Stock convert shares of the Series D-2 Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) more than 9.99% of all of the Common Stock outstanding at such time; provided, however, that upon a holder of Series D-2 Preferred Stock providing the Company with sixty-one (61) days notice (pursuant to Section 5(i) hereof) (the “Waiver Notice”) that such holder would like to waive Section 7(a) of this Certificate of Designation with regard to any or all shares of Common Stock issuable upon conversion of Series D-2 Preferred Stock, this Section 7(a) shall be of no force or effect with regard to those shares of Series D-2 Preferred Stock referenced in the Waiver Notice.

8. Inability to Fully Convert.

(a) Holder’s Option if Company Cannot Fully Convert. If, upon the Company’s receipt of a Conversion Notice, or on the Mandatory Conversion Date, the Company cannot issue shares of Common Stock for any reason, including, without limitation, because the Company (x) does not have a sufficient number of shares of Common Stock authorized and available or (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or its securities, from issuing all of the Common Stock which is to be issued to a holder of Series D-2 Preferred Stock pursuant to a Conversion Notice or a Mandatory Conversion Notice, then the Company shall issue as many shares of Common Stock as it is able to issue in accordance with such holder’s Conversion Notice or a Mandatory Conversion Notice and with respect to the unconverted Series D-2 Preferred Stock (the “Unconverted Preferred Stock”) the holder, solely at such holder’s option, can elect, at any time after receipt of notice from the Company that there is Unconverted Preferred Stock, to void the holder’s Conversion Notice or the Mandatory Conversion Notice as to the number of shares of Common Stock the Company is unable to issue and retain or have returned, as the case may be, the certificates for the shares of the Unconverted Preferred Stock.

In the event a Holder shall elect to convert any shares of Series D-2 Preferred Stock as provided herein, the Company cannot refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, violation of an agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or any of said shares of Series D-2 Preferred Stock shall have issued.

(b) Mechanics of Fulfilling Holder’s Election. The Company shall immediately send via facsimile to a holder of Series D-2 Preferred Stock, upon receipt of a facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 8(a) above, a notice of the Company’s inability to fully satisfy such holder’s Conversion Notice (the “Inability to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Company is unable to fully satisfy such holder’s Conversion Notice and (ii) the number of shares of Series D-2 Preferred Stock which cannot be converted.

(c) Pro-rata Conversion. In the event the Company within a period of ten days receives Voluntary Conversion Notices from more than one holder of Series D-2 Preferred Stock and the Company can convert some, but not all, of the Series D-2 Preferred Stock required to be converted as a result of such Voluntary Conversion Notices, the Company shall convert from each holder of Series D-2 Preferred Stock electing to have Series D-2 Preferred Stock converted within such ten day period, an amount equal to the number of shares of Series D-2 Preferred Stock the Company can convert in such ten day period multiplied by a fraction, the numerator of which shall be the number of shares of Series D-2 Preferred Stock such holder elected to have converted in such ten day period and the denominator of which shall be the total number of shares of Series D-2 Preferred Stock all holders elected to have converted in such ten day period. The Company shall not convert any Series D-2 Preferred Stock pursuant to a Mandatory Conversion Notice until it shall have converted all Series D-2 Preferred Stock pursuant to any Voluntary Conversion Notice.

9. Vote to Change the Terms of or Issue Preferred Stock. The affirmative vote at a meeting duly called for such purpose, or the written consent without a meeting, of the holders of not less than three-fourths (3/4) of the then outstanding shares of Series D-2 Preferred Stock, shall be required for any change to this Certificate of Designation or the Company’s Certificate of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series D-2 Preferred Stock.

10. Lost or Stolen Certificates. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the shares of Series D-2 Preferred Stock, and, in the case of loss, theft or destruction, of any indemnification undertaking by the holder to the Company and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock certificate(s) of like tenor and date.

11. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under this Certificate of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Company to

comply with the terms of this Certificate of Designation. Amounts set forth or provided for herein with respect to conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Series D-2 Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holders of the Series D-2 Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

12. Specific Shall Not Limit General; Construction. No specific provision contained in this Certificate of Designation shall limit or modify any more general provision contained herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and all initial purchasers of the Series A Convertible Preferred Stock and Series M Warrants of the Company which is exercisable into Series D-2 Preferred Stock and shall not be construed against any person as the drafter hereof.

13. Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of Series D-2 Preferred Stock in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

IN WITNESS WHEREOF, the undersigned has executed and subscribed this Amended Certificate and does affirm the foregoing as true this 24th day of June, 2007.


ORTEC INTERNATIONAL, INC.

By:	/s/	Ron Lipstein

	Name: Ron Lipstein
	Title: CEO

EXHIBIT I

ORTEC INTERNATIONAL, INC.
CONVERSION NOTICE

Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the Series D-2 Preferred Stock of Ortec International, Inc. (the “Certificate of Designation”). In accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to convert the number of shares of Series D-2 Preferred Stock, par value $.001 per share (the “Preferred Shares”), of Ortec International, Inc., a Delaware corporation (the “Company”), indicated below into shares of Common Stock, par value $.001 per share (the “Common Stock”), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below.


	Date of Conversion:

	Number of Preferred Shares to be converted: _______

	Stock certificate no(s). of Preferred Shares to be converted: ______

	The Common Stock have been sold: YES ____ NO____

Please confirm the following information:

	Conversion Rate:

	Number of shares of Common Stock
	to be issued:

	Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion determined in accordance with Section 16 of the Securities Exchange Act of 1934, as amended: _________________________

Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:


	Issue to:


	Facsimile Number:

	Authorization:
		By:

		Title:


	Dated:

EX-10.1 6 c49144_ex10-1.htm

EXHIBIT 10.1

AMENDED AND RESTATED EXCHANGE AGREEMENT

Amended and Restated Exchange Agreement (as amended, supplemented or otherwise modified from time to time, this “Agreement”) entered into as of June 18, 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”).

RECITALS

A. Ortec and Paul Capital are parties to that certain Exchange Agreement dated January 29, 2007, as amended by Amendment No. 1 dated March 22, 2007, and as further amended by Amendment No. 2 dated May 11, 2007 (“Original Exchange Agreement”), pursuant to which, among other things, Paul Capital agreed to convert its Revenue Interests into Ortec preferred equity securities, and Ortec agreed to issue and sell such securities, upon the terms and subject to the conditions set forth therein.

B. Ortec and Paul Capital now desire to amend and restate the Original Exchange Agreement in its entirety to eliminate certain provisions, add certain other provisions, and make certain other changes as have been agreed to between the parties as hereinafter provided.

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 $2,800,000 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 issued by Ortec evidencing loans made to Ortec after January 25, 2007 and prior to the Exchange Closing and aggregating no more than $1,518,000.

(d) “Cancellation Agreements” means the Katz Cancellation Agreement and the Lipstein Cancellation Agreement.

(e) “Certificate” means Ortec’s Certificate of Incorporation as in effect on the date hereof.

(f) “Code” means the Internal Revenue Code of 1986, and any successor statute, as it may be amended from time to time.

(g) “Common Stock” means the common stock of Ortec, par value $0.001 per share.

(h) “Conversion Shares” means any shares of Common Stock issuable upon conversion of the Series A-1 Preferred Stock or the Series A-2 Preferred Stock.

(i) “Environmental Laws” means all applicable laws relating to the protection of the environment including, without limitation, all requirements pertaining to reporting, licensing, permitting, controlling, investigating or remediating emissions, discharges, releases or threatened releases of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, material or wastes, whether solid, liquid or gaseous in nature.

(j) “Environmental Liabilities” means all liabilities of a person (whether such liabilities are owed by such person to governmental authorities, third parties or otherwise) whether currently in existence or arising hereafter which arise under or relate to any Environmental Law.

(k) “Exchange Act” means the Securities Exchange Act of 1934, and any successor statute, as it may be amended from time to time.

(l) “Exchange Closing” means the closing referred to in Section 10 hereof.

(m) “Exchange Closing Date” has the meaning provided in Section 10 hereof.

(n) “FDA” means the United States Food and Drug Administration.

(o) “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 and the amendment thereto filed with the SEC on April 17, 2007.

(p) “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.

(q) “Form 8-K” has the meaning provided in Section 7(l).

(r) “Form 10-K” has the meaning provided in Section 7(s).

(s) “Form 10-QSB” has the meaning provided in Section 2(f).

(t) “GAAP” has the meaning provided in Section 2(f).

(u) “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.

(v) “Indebtedness” means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptance, current swap agreements, interest rate agreements, interest rate swaps, or other financial products, (c) all capital lease obligations that exceed $100,000 in any fiscal year to the extent incurred in the ordinary course of business, (d) all obligations or liabilities secured by a lien or encumbrance on any asset of Ortec or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations for the deferred purchase price of assets, together with trade debt and other accounts payable that exceed $100,000 in any fiscal year to the extent incurred in the ordinary course of business,, (f) all synthetic leases, and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse) any of the foregoing obligations of any other person; provided, however, Indebtedness shall not include (a) usual and customary trade debt incurred in the ordinary course of business and (b) endorsements for collection or deposit in the ordinary course of business.

(w) “Irrevocable Transfer Agent Instructions” has the meaning provided in Section 7(o).

(x) “Katz” means Steven Katz, having an office at 3960 Broadway, New York, New York 10032.

(y) “Katz Cancellation Agreement” means the Cancellation Agreement to be entered into by Ortec and Katz at or prior to the Exchange Closing.

(z) “Lien” means any lien, encumbrance, security interest, mortgage or charge of any kind.

(aa) “Lipstein” means Ron Lipstein having an office at 3960 Broadway, New York, New York 10032.

(bb) “Lipstein Cancellation Agreement” means the Cancellation Agreement to be entered into by Ortec and Lipstein at or prior to the Exchange Closing.

(cc) “Material Agreements” has the meaning provided in Section 2(u).

(dd) “Material Adverse Effect” means (i) any adverse effect on the business, operations, properties, prospects or financial condition of Ortec or its Subsidiaries and which is material to such entity or other entities controlling or controlled by such entity and/or (ii) any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of Ortec to perform any of its obligations under this Agreement or any of the Transaction Documents in any material respect.

(ee) “New Funding Amount” means additional gross cash proceeds from the sale of Series A Preferred Stock (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, 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 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.

(ff) “New Investors” means the entities or persons providing the New Funding Amount.

(gg) “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.

(hh) “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.

(ii) “Permitted Financing” has the meaning provided in Section 7(r).

(jj) “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.

(kk) “Preferred Stock” means the Series A-1 Preferred Stock and the Series A-2 Preferred Stock.

(ll) “PRF Entitlement” has the meaning provided in Section 8(a).

(mm) “Press Release” has the meaning provided in Section 7(l).

(nn) “Priority Repayment Amount” has the meaning provided in Section 8(a).

(oo) “Purchase Agreement” means the Series A Convertible Preferred Stock Purchase Agreement dated as of June 18, 2007 among Ortec and the New Investors.

(pp) “Registration Rights Agreement” means the Registration Rights Agreement to be entered into between Ortec, Paul Capital and the New Investors, substantially in the form attached hereto as Exhibit A.

(qq) “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.

(rr) “Release Event” means, with respect to a holder’s shares of Series A Preferred Stock and Series A-1 Preferred Stock, the date on which Ortec files a Form 8-K with the SEC disclosing Ortec’s receipt of written notice from the FDA regarding the granting to Ortec the right to commercialize and market (i.e., formal approval of the PMA) its OrCel product for the treatment of venous leg ulcers.

(ss) “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.

(tt) “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.

(uu) “SEC” means the U.S. Securities and Exchange Commission.

(vv) “SEC Documents” has the meaning provided in Section 2(f).

(ww) “Securities Act” means the Securities Act of 1933, and any successor statute, as it may be amended from time to time.

(xx) “Series A Certificate of Designation” means the Certificate of Designation of Relative Rights and Preferences of the Series A Convertible Preferred Stock, substantially in the form attached hereto as Exhibit B.

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

(zz) “Series A-1 Certificate of Designation” means the Certificate of Designation of Relative Rights and Preferences of the Series A-1 Convertible Preferred Stock, substantially in the form attached hereto as Exhibit C.

(aaa) “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.

(bbb) “Series A-2 Certificate of Designation” means the Certificate of Designation of Relative Rights and Preferences of the Series A-2 Convertible Preferred Stock, substantially in the form attached hereto as Exhibit D.

(ccc) “Series A-2 Preferred Stock” means another new series of Ortec convertible preferred stock to be created by the Series A-2 Certificate of Designation.

(ddd) “Subsequent Financing” has the meaning provided in Section 7(r).

(eee) “Subsidiaries” has the meaning provided in Section 2(g).

(fff) “Trading Day” has the meaning provided in Section 7(l).

(ggg) “Transaction Documents” means this Agreement and the Registration Rights Agreement, the Series A-1 Certificate of Designation and the Series A-2 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, Good Standing and Power. Ortec is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted. Ortec does not have any Subsidiaries except OrCel, LLC, Hapto Biotech, Inc. and Hapto Biotech (Israel), Ltd., or own securities of any kind in any other entity. Ortec and each such Subsidiary is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary except for any jurisdiction(s) (alone or in the aggregate) in which the failure to be so qualified will not have a Material Adverse Effect.

(b) Authorization; Enforcement. Ortec has the requisite corporate power and authority to enter into and perform this Agreement, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation, the Registration Rights Agreement and the Irrevocable Transfer Agent Instructions and to issue and sell the Series A-1 Preferred Stock and the Series A-2 Preferred Stock in accordance with the terms hereof. The execution, delivery and performance of the Transaction Documents by Ortec and the consummation by it of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action and no further consent or authorization of Ortec or its Board of Directors or stockholders is required. This Agreement has been duly executed and delivered by Ortec. The other Transaction Documents will have been duly executed and delivered by Ortec at the Exchange Closing. Each of the Transaction Documents constitutes, or shall constitute when executed and delivered, a valid and binding obligation of Ortec enforceable against Ortec in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

(c) Capitalization. The authorized capital stock of Ortec and the shares thereof currently issued and outstanding as of June 18, 2007 is set forth on Schedule 2(c)(i) hereto. All of the outstanding shares of Ortec’s Common Stock and any other security of Ortec have been duly and validly authorized. Except as set forth in Schedule 2(c)(i) hereto, no shares of Common Stock or any other security of Ortec are entitled to preemptive rights or to registration rights which have not already been complied with, and except as set forth in Schedule 2(c)(i) hereto, there are no outstanding options, warrants, scrip, rights to subscribe to, call or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of Ortec. Furthermore, except as set forth in this Agreement and as set forth in Schedule 2(c)(i) hereto, there are no contracts, commitments, understandings, or arrangements by which Ortec is or may become bound to issue additional shares of the capital stock of Ortec or options, securities or rights convertible into shares of capital stock of Ortec. Except for customary transfer restrictions contained in agreements entered into by Ortec in order to sell restricted securities Ortec is not a party to or bound by any agreement or understanding granting registration or anti-dilution rights to any person with respect to any of its equity or debt securities. Except as set forth on Schedule 2(c)(i) hereto, Ortec is not a party to, and it has no knowledge of, any agreement or understanding restricting the voting or transfer of any shares of the capital stock of Ortec. The offer and sale of all capital stock, convertible securities, rights, warrants, or options of Ortec issued prior to the Exchange Closing complied with all applicable federal and state securities laws, and no holder of such securities has a right of rescission or claim for damages with respect thereto which could have a Material Adverse Effect. Ortec has furnished or made available to Paul Capital true and correct copies of the Certificate and the Bylaws.

(d) Issuance of Securities. The Series A-1 Preferred Stock and the Series A-2 Preferred Stock to be issued at the Exchange Closing have been duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock shall be validly issued and outstanding, fully paid and nonassessable and free and clear of all liens, encumbrances and rights of refusal of any kind and the holders of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock shall

be entitled to all rights accorded to them in their respective Certificates of Designation. When the Conversion Shares are issued upon conversion of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, such shares will be duly authorized by all necessary corporate action and validly issued and outstanding, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of refusal of any kind and the holders shall be entitled to all rights accorded to a holder of Common Stock.

(e) No Conflicts. The execution, delivery and performance of the Transaction Documents by Ortec and the consummation by Ortec of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock) do not and will not (i) violate or conflict with any provision of Ortec’s Certificate or Bylaws or its Subsidiaries’ comparable charter documents, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which Ortec or any of its Subsidiaries is a party or by which Ortec or any of its Subsidiaries’ respective properties or assets are bound, (iii) create or impose a lien, mortgage, security interest, charge or encumbrance of any nature on any property or asset of Ortec or its Subsidiaries under any agreement or any commitment to which Ortec or any of its Subsidiaries is a party or by which Ortec or any of its Subsidiaries is bound or by which any of their respective properties or assets are bound, or (iv) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to Ortec or any of its Subsidiaries or by which any property or asset of Ortec or any of its Subsidiaries are bound or affected, except, in all cases other than violations pursuant to clauses (i) or (iv) (with respect to federal and state securities laws) above, for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect. The business of Ortec and its Subsidiaries is not being conducted in violation of any laws, ordinances or regulations of any governmental entity, except for possible violations which singularly or in the aggregate do not and will not have a Material Adverse Effect. Neither Ortec nor any of its Subsidiaries is required under federal, state, foreign or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents or issue and sell the Series A-1 Preferred Stock and the Series A-2 Preferred Stock and the Conversion Shares in accordance with the terms hereof or thereof (other than any filings which may be required to be made by Ortec with the SEC, prior to or subsequent to the Exchange Closing, or state securities administrators subsequent to the Exchange Closing, or any registration statement which may be filed pursuant hereto or the Registration Rights Agreement).

(f) SEC Documents, Financial Statements. The Common Stock of Ortec is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and except as set forth on Schedule 2(f) hereto, Ortec has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of the foregoing including filings incorporated by reference therein being referred to herein as the “SEC Documents”). Ortec has delivered or made available to Paul Capital true and

complete copies of the latest SEC Documents filed with the SEC. Ortec has not provided to Paul Capital any material non-public information or other information which, according to applicable law, rule or regulation, should have been disclosed publicly by Ortec but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement. At the time of its filing, the Form 10-QSB for the fiscal quarter ended September 30, 2006, as amended on April 17, 2007 (the “Form 10-QSB”) complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such documents, and the Form 10-Q did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of Ortec included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of Ortec and its Subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(g) Subsidiaries. Ortec’s only Subsidiaries are OrCel, LLC, a limited liability company organized under the laws of the State of Delaware, Hapto Biotech, Inc., a corporation organized under the laws of the State of Delaware, and Hapto Biotech (Israel) Ltd., a corporation organized under the laws of Israel. Such Subsidiaries are each wholly-owned by Ortec. All of the outstanding membership interests and other securities of such Subsidiaries have been duly authorized and validly issued, and are fully paid and nonassessable. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any such Subsidiary for the purchase or acquisition of any membership interests or other securities of such Subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to subscribe for any membership interests or other securities of such Subsidiary except for agreements between Ortec, OrCel, LLC and Paul Capital. Neither Ortec nor any such Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any membership interests or other securities of such Subsidiary or any convertible securities, rights, warrants or options of the type described in the preceding sentence. Neither Ortec nor any such Subsidiary is party to, nor has any knowledge of, any agreement restricting the voting or transfer of any membership interests of such Subsidiary except for agreements between Ortec, OrCel, LLC and Paul Capital.

(h) No Material Adverse Change. Since September 30, 2006, Ortec has not experienced or suffered any Material Adverse Effect, except for use of its cash in the regular course of its development stage activities, without offsetting income, as set forth on Schedule 2(h) hereto.

(i) No Undisclosed Liabilities. Except as included in the financial statements in the SEC Documents or as set forth on Schedule 2(i) hereto, neither Ortec nor any of its Subsidiaries

has any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) other than those incurred in the ordinary course of Ortec’s or its Subsidiaries’ respective businesses since September 30, 2006 and which, individually or in the aggregate, do not or would not have a Material Adverse Effect on Ortec or its Subsidiaries.

(j) No Undisclosed Events or Circumstances. Since September 30, 2006, no event or circumstance has occurred or exists with respect to Ortec or any of its Subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by Ortec but which has not been so publicly announced or disclosed.

(k) Indebtedness. Ortec’s financial statements and other information in the SEC Documents set forth as of the date hereof all outstanding secured and unsecured Indebtedness of Ortec or its Subsidiaries, or for which Ortec or its Subsidiaries have commitments, except for additional indebtedness incurred by Ortec and its Subsidiaries in the regular course of their development stage activities, without offsetting income.

(l) Title to Assets. Each of Ortec and its Subsidiaries has good and marketable title to all of its real and personal property, free and clear of any mortgages, pledges, charges, liens, security interests or other encumbrances of any nature whatsoever, except for those indicated in the SEC Documents or such that, individually or in the aggregate, do not have a Material Adverse Effect. All leases of Ortec and its Subsidiaries are valid and subsisting and in full force and effect except that Ortec is in violation of its lease with Columbia University for its office and laboratory facilities because Ortec is in arrears in its rental payments.

(m) Actions Pending. There is no action, suit, claim, investigation, arbitration, alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of Ortec, threatened against Ortec or its Subsidiaries which questions the validity of this Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby or thereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth on Schedule 2(m) hereto, there is no action, suit, claim, investigation, arbitration, alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of Ortec, threatened, against or involving Ortec, any of its Subsidiaries or any of their respective properties or assets, which individually or in the aggregate, would have a Material Adverse Effect. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against Ortec or any of its Subsidiaries or any officers or directors of Ortec or its Subsidiaries in their capacities as such, which individually or in the aggregate, would have a Material Adverse Effect.

(n) Compliance with Law. The business of Ortec and its Subsidiaries has been and is presently being conducted in accordance with all applicable federal, state and local governmental laws, rules, regulations and ordinances, except or such that, individually or in the aggregate, the noncompliance therewith would have a Material Adverse Effect. Ortec and its Subsidiaries have all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of their business as now being conducted by them unless the failure to possess such franchises, permits, licenses, consents and other

governmental or regulatory authorizations and approvals, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

(o) Taxes. Ortec and its Subsidiaries have accurately prepared and filed all federal, state, foreign and other tax returns required by law to be filed by them, has paid or made provisions for the payment of all taxes shown to be due and all additional assessments, and adequate provisions have been and are reflected in the financial statements of Ortec and its Subsidiaries for all current taxes and other charges to which Ortec or its Subsidiaries are subject and which are not currently due and payable. None of the federal income tax returns of Ortec or its Subsidiaries have been audited by the Internal Revenue Service. Ortec has no knowledge of any additional assessments, adjustments or contingent tax liability (whether federal, state or foreign) of any nature whatsoever, whether pending or threatened against Ortec or any of its Subsidiaries for any period, nor of any basis for any such assessment, adjustment or contingency.

(p) Certain Fees. Except as set forth on Schedule 2(p) hereto, Ortec has not employed any broker or finder or incurred any liability for any brokerage or investment banking fees, commissions, finders’ structuring fees, financial advisory fees or other similar fees in connection with the Transaction Documents.

(q) Disclosure. Ortec confirms that neither it nor anyone working on its behalf has provided any of Paul Capital or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. To the best of Ortec’s knowledge, neither this Agreement or the Schedules hereto nor any other documents, certificates or instruments furnished to Paul Capital by or on behalf of Ortec or its Subsidiaries in connection with the transactions contemplated by this Agreement contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading.

(r) Operation of Business. Ortec and its Subsidiaries own or possess all patents, trademarks, domain names (whether or not registered) and any patentable improvements or copyrightable derivative works thereof, websites and intellectual property rights relating thereto, service marks, trade names, copyrights, licenses and authorizations, and all rights with respect to the foregoing, which are necessary for the conduct of its business as now conducted without any conflict with the rights of others. However, Paul Capital has been assigned Ortec’s United States patents and trademarks as security for payment of Ortec’s obligations to Paul Capital.

(s) Environmental Compliance. Ortec and its Subsidiaries have obtained all material approvals, authorization, certificates, consents, licenses, orders and permits or other similar authorizations of all governmental authorities, or from any other person, that are required under any Environmental Laws. Ortec has all necessary governmental approvals required under all Environmental Laws and used in its business or in the business of its Subsidiaries, except for such instances as would not individually or in the aggregate have a Material Adverse Effect. Ortec and its Subsidiaries are also in compliance with all other limitations, restrictions, conditions, standards, requirements, schedules and timetables required or imposed under all Environmental Laws. Except for such instances as would not individually or in the aggregate have a Material Adverse Effect, there are no past or present events, conditions, circumstances, incidents, actions or omissions relating to or in any way affecting Ortec or its Subsidiaries that

violate or may violate any Environmental Law after the Exchange Closing or that may give rise to any environmental liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study or investigation (i) under any Environmental Law, or (ii) based on or related to the manufacture, processing, distribution, use, treatment, storage (including, without limitation, underground storage tanks), disposal, transport or handling, or the emission, discharge, release or threatened release of any hazardous substance.

(t) Books and Records; Internal Accounting Controls. The records and documents of Ortec and its Subsidiaries accurately reflect in all material respects the information relating to the business of Ortec and its Subsidiaries, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of Ortec or its Subsidiaries. Ortec and its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of Ortec’s Board of Directors, to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate actions are taken with respect to any differences.

(u) Material Agreements. Except for those described or referred to in the SEC Documents, neither Ortec nor any of its Subsidiaries is a party to any written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a copy of which would be required to be filed with the SEC (collectively, “Material Agreements”) if Ortec or any of its Subsidiaries were registering securities under the Securities Act. Except as set forth on Schedule 2(u) hereto, Ortec and its Subsidiaries have in all material respects performed all the obligations required to be performed by them to date under the foregoing agreements, have received no notice of default and, to the best of Ortec’s knowledge are not in default under any other Material Agreement now in effect, the result of which could cause a Material Adverse Effect. Except as set forth in Schedule 2(u) hereto, no written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement of Ortec or of any of its Subsidiaries limits the payment of dividends on its Common Stock.

(v) Transactions with Affiliates. Except as disclosed in the SEC Documents and except for the employment of Raphael Hofstein, a director of Ortec, by Hadasit, a supplier to a Subsidiary of Ortec, there are no loans, leases, agreements, contracts, royalty agreements, management contracts or arrangements or other continuing transactions between (a) Ortec, its Subsidiaries or any of their respective customers or suppliers on the one hand, and (b) on the other hand, any executive officer, or to the knowledge of Ortec, any employee, consultant or director of Ortec, or its Subsidiaries, or any member of the immediate family of such executive officer, employee, consultant or director or any corporation or other entity controlled by such executive officer, employee, consultant or director.

(w) Securities Act. Ortec has complied and will comply with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Conversion Shares hereunder. Neither Ortec nor anyone acting on its behalf, directly or indirectly, has or will sell, offer to sell or solicit

offers to buy any of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock and the Conversion Shares, or similar securities to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any person, or has taken or will take any action so as to bring the issuance and sale of any of Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares under the registration provisions of the Securities Act and applicable state securities laws. Neither Ortec nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of any of the Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares.

(x) Governmental Approvals. Except for the filing of any notice prior or subsequent to the Exchange Closing that may be required under applicable state and/or federal securities laws (which if required, shall be filed on a timely basis), no authorization, consent, approval, license, exemption of, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the execution or delivery of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, or for the performance by Ortec of its obligations under the Transaction Documents.

(y) Employees. Neither Ortec nor its Subsidiaries have any collective bargaining arrangements or agreements covering any of their employees. Neither Ortec nor its Subsidiaries have any employment contract, agreement regarding proprietary information, non-competition agreement, non-solicitation agreement, confidentiality agreement, or any other similar contract or restrictive covenant, relating to the right of any officer, employee or consultant to be employed or engaged by Ortec or such Subsidiary. Since September 30, 2006, no officer, consultant or key employee of Ortec or its Subsidiary whose termination, either individually or in the aggregate, could have a Material Adverse Effect, has terminated or, to the knowledge of Ortec, has any present intention of terminating his or her employment or engagement with Ortec or any Subsidiary, except for the possible terminations of the employment of Ron Lipstein and Steven Katz as provided hereunder.

(z) Absence of Certain Developments. Except as set forth in the SEC Documents and on Schedule 2(z), since September 30, 2006 neither Ortec nor any of its Subsidiaries has:


	(i) issued any stock, bonds or other corporate securities or any rights, options or warrants with respect thereto, except for additional options granted under Ortec’s Employee Stock Option Plan;

	(ii) borrowed any amount or incurred or become subject to any liabilities (absolute or contingent) except trade payables incurred in the ordinary course of business;

	(iii) discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business;


	(iv) declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock;

	(v) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business;

	(vi) sold, assigned or transferred any patent rights, trademarks, trade names, copyrights, trade secrets or other intangible assets or intellectual property rights, or disclosed any proprietary confidential information to any person except in the ordinary course of business or to Paul Capital or its representatives;

	(vii) suffered any substantial losses (except for losses incurred in connection with its development stage operations in the ordinary course without offsetting income as set forth on Schedule 2(z)(vii)) or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of prospective business;

	(viii) made any changes in employee compensation except in the ordinary course of business and consistent with past practices;

	(ix) made capital expenditures or commitments in excess of $100,000 therefor except in the ordinary course of its development stage operations as set forth on Schedule 2(z)(ix);

	(x) entered into any other transaction other than in the ordinary course of business, or entered into any other material transaction, whether or not in the ordinary course of business;

	(xi) made charitable contributions or pledges in excess of $25,000;

	(xii) suffered any material damage, destruction or casualty loss, whether or not covered by insurance;

	(xiii) experienced any material problems with labor or management in connection with the terms and conditions of their employment;

	(xiv) effected any two or more events of the foregoing kind which in the aggregate would cause a Material Adverse Effect; or

	(xv) entered into an agreement, written or otherwise, to take any of the foregoing actions.

(aa) Use of Proceeds. The proceeds from the sale of the Series A Preferred Stock to the New Investors will be used by the Company for working capital and general corporate purposes.

(bb) Public Utility Holding Company Act and Investment Company Act Status. Ortec is not a “holding company” or a “public utility company” as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. Ortec is not, and as a result of and immediately upon the Exchange Closing will not be, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

(cc) ERISA. No liability to the Pension Benefit Guaranty Corporation has been incurred with respect to any Plan by Ortec or any of its subsidiaries which is or would be materially adverse to Ortec and its subsidiaries. The execution and delivery of this Agreement and the issue and sale of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code, as amended, provided that, if Paul Capital, or any person or entity that owns a beneficial interest in Paul Capital, is an “employee pension benefit plan” (within the meaning of Section 3(2) of ERISA) with respect to which Ortec is a “party in interest” (within the meaning of Section 3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this Section, the term “Plan” shall mean an “employee pension benefit plan” (as defined in Section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by Ortec or any of its Subsidiaries or by any trade or business, whether or not incorporated, which, together with Ortec or any of its Subsidiaries, is under common control, as described in Section 414(b) or (c) of the Code.

(dd) Dilutive Effect. Ortec understands and acknowledges that the number of Conversion Shares issuable upon conversion of shares of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of shares of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock in accordance with this Agreement and the Series A-1 Certificate of Designation and the Series A-2 Certificate of Designation, is, in each case, absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interest of other stockholders of Ortec.

(ee) No Integrated Offering. Neither Ortec, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock pursuant to this Agreement to be integrated with prior offerings by Ortec for purposes of the Securities Act which would prevent Ortec from selling the Series A-1 Preferred Stock and the Series A-2 Preferred Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will Ortec or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock to be integrated with other offerings. Ortec does not have any registration statement pending before the SEC or currently under the SEC’s review and since October 1, 2006, Ortec has not offered or sold any of its equity securities or debt securities convertible into shares of Common Stock.

(ff) Sarbanes Oxley; Transfer Agent. Ortec has complied with its obligations under the Sarbanes Oxley Act of 2002 and the rules and regulations promulgated thereunder. Ortec’s

transfer agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository Trust Company Automated Securities Transfer Program. The name, address, contact person and telephone number of Ortec’s transfer agent is set forth on Schedule 2(ff) hereto.

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 the Registration Rights Agreement and to perform all of the obligations to be performed by it thereunder and hereunder. Each of this Agreement and the Registration Rights 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 or the Registration Rights Agreement nor the performance or consummation of the transactions contemplated hereby or thereby 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.

(d) Acquisition for Investment. Paul Capital is acquiring the Series A-1 Preferred Stock and the Series A-2 Preferred Stock solely for its own account for the purpose of investment and not with a view to or for sale in connection with distribution. Paul Capital does not have a present intention to sell the Series A-1 Preferred Stock or the Series A-2 Preferred Stock, nor a present arrangement (whether or not legally binding) or intention to effect any distribution of the Series A-1 Preferred Stock or the Series A-2 Preferred Stock to or through any person or entity, provided that by making the representations herein and subject to Section 3(h) below, Paul Capital does not agree to hold the Series A-1 Preferred Stock or the Series A-2 Preferred Stock for any minimum or other specific term and reserves the right to dispose of the Series A-1 Preferred Stock or the Series A-2 Preferred Stock at any time in accordance with Federal and state securities laws applicable to such disposition. Paul Capital acknowledges that

it is able to bear the financial risks associated with an investment in the Series A-1 Preferred Stock and the Series A-2 Preferred Stock and that it has been given full access to such records of Ortec and the subsidiaries and to the officers of Ortec and the subsidiaries and received such information as it has deemed necessary or appropriate to conduct its due diligence investigation.

(e) Accredited Purchasers. Paul Capital is an “accredited investor” as defined in Regulation D promulgated under the Securities Act and has such knowledge and experience in financial and business matters that Paul Capital is capable of evaluating the merits and risks of the prospective investment in the Series A-1 Preferred Stock and the Series A-2 Preferred Stock.

(f) Opportunities for Additional Information. Paul Capital acknowledges that Paul Capital has had the opportunity to ask questions of and receive answers from, or obtain additional information from, the executive officers of Ortec concerning the financial and other affairs of Ortec, and to the extent deemed necessary in light of Paul Capital’s personal knowledge of Ortec’s affairs, Paul Capital has asked such questions and received answers to the full satisfaction of Paul Capital, and Paul Capital desires to invest in Ortec.

(g) No General Solicitation. Paul Capital acknowledges that the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Conversion Shares were not offered to Paul Capital by means of any form of general or public solicitation or general advertising, or publicly disseminated advertisements or sales literature, including (i) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which Paul Capital was invited by any of the foregoing means of communications.

(h) Rule 144. Paul Capital understands that the Series A-1 Preferred Stock and the Series A-2 Preferred Stock must be held indefinitely unless such Series A-1 Preferred Stock and the Series A-2 Preferred Stock is registered under the Securities Act or an exemption from registration is available. Paul Capital acknowledges that it is familiar with Rule 144 of the rules and regulations of the SEC, as amended, promulgated pursuant to the Securities Act (“Rule 144”), and that it has been advised that Rule 144 permits resales only under certain circumstances. Paul Capital understands that to the extent that Rule 144 is not available, it will be unable to sell any shares of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock or the Conversion Shares without either registration under the Securities Act or the existence of another exemption from such registration requirement.

(i) No Shorting. Paul Capital has not engaged in any short sales of the Common Stock or instructed any third parties to engage in any short sales of the Common Stock on its behalf prior to the Exchange Closing. Paul Capital covenants and agrees that it will not be in a net short position with respect to the shares of Common Stock. For purposes of this Section, a “net short position” means a sale of Common Stock by Paul Capital that is marked as a short sale and that is made at a time when there is no equivalent offsetting long position in Common Stock held by Paul Capital.

(j) General. Paul Capital understands that the Series A-1 Preferred Stock and the Series A-2 Preferred Stock is being offered and sold in reliance on a transactional exemption from the registration requirement of Federal and state securities laws and Ortec is relying upon

the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Paul Capital set forth herein in order to determine the applicability of such exemptions and the suitability of Paul Capital to acquire the Series A-1 Preferred Stock and the Series A-2 Preferred Stock.

(k) Certain Exchanges Excepted. For purposes of Section 5(e)(x) of the Series A-1 Certificate of Designation, Paul Capital acknowledges that the exchange of certain warrants outstanding on the date hereof for shares of Ortec’s Common Stock shall not require Ortec to make an adjustment of the Conversion Price under Section 5(e)(vi) of the Series A-1 Certificate of Designation.

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 Series A-1 Preferred Stock having an aggregate stated value of $5,000,000 and Series A-2 Preferred Stock having an aggregate stated value of $5,000,000 at the Exchange Closing. To effect such exchange Paul Capital, Ortec and Orcel LLC shall simultaneously with the issuance to Paul Capital of such shares of the Series A-1 Preferred Stock and Series A-2 Preferred Stock, cancel the Revenue Interests Assignment Agreement and all the Related Agreements to which Paul Capital is a party 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 (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. Intentionally Omitted.

6. Terms of the Preferred Stock. The parties acknowledge that simultaneously with the consummation of the transactions contemplated by this Agreement, Ortec shall consummate the transactions contemplated by the Purchase Agreement pursuant to which Ortec shall receive from the New Investors at least the minimum amount of cash proceeds required by the New Funding Amount in exchange for shares of the Series A Preferred Stock. The Series A Preferred Stock shall rank pari passu with the Series A-1 Preferred Stock and the Series A-2

Preferred Stock with respect to liquidation and dividend rights. The form of the Certificate of Designation for the Series A Preferred Shares is attached hereto as Exhibit B.

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

(a) Additional Transaction Document. Ortec agrees to enter into with Paul Capital the Registration Rights Agreement.

(b) Securities Compliance. Ortec shall notify the SEC in accordance with their rules and regulations, of the transactions contemplated by any of the Transaction Documents, including filing a report on Form 8-K and filing a Form D with respect to the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Conversion Shares, if required by the SEC’s rules, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Conversion Shares to Paul Capital or subsequent holders. Ortec is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Paul Capital set forth herein in order to determine the applicability of Federal and state securities laws exemptions and the suitability of Paul Capital to acquire the Series A-1 Preferred Stock and the Series A-2 Preferred Stock.

(c) Registration and Listing. Ortec will cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, will comply with all requirements related to any registration statement filed pursuant to this Agreement, and will not take any action or file any document (whether or not permitted by the Securities Act or the rules promulgated thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the Exchange Act or Securities Act, except as permitted herein. Ortec will take all action necessary to continue the listing or trading of its Common Stock on the over-the-counter electronic bulletin board and on such other exchange or market on which the Common Stock is trading. If required, Ortec will apply any listing application for the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Conversion Shares. Ortec further covenants and agrees that it will take such further action as Paul Capital may reasonably request, all to the extent required from time to time to enable Paul Capital to sell the Series A-1 Preferred Stock and the Series A-2 Preferred Stock without registration under the Securities Act within the limitation of the exemptions provided in Rule 144 promulgated under the Securities Act. Upon the request of Paul Capital, Ortec shall deliver to Paul Capital a written certification of a duly authorized officer as to whether it has complied with such requirement.

(d) Inspection Rights. Ortec shall permit, during normal business hours and upon reasonable request and reasonable notice, Paul Capital or any of its employees, agents or representatives, so long as Paul Capital shall be obligated hereunder to purchase the Series A-1 Preferred Stock and Series A-2 Preferred Stock or shall beneficially own any Series A-1 Preferred Stock or Series A-2 Preferred Stock, or shall own Conversion Shares which, in the aggregate, represent more than 2% of the total combined voting power of all voting securities then outstanding, for purposes reasonably related to Paul Capital’s interests as a stockholder to

examine and make reasonable copies of and extracts from the records and books of account of, and visit and inspect the properties, assets, operations and business of Ortec and any subsidiary, and to discuss the affairs, finances and accounts of Ortec and any subsidiary with any of its officers, consultants, directors, and key employees.

(e) Compliance with Laws. Ortec shall comply, and cause each subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could have a Material Adverse Effect.

(f) Keeping of Records and Books of Account. Ortec shall keep and cause each of its Subsidiaries to keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied, reflecting all financial transactions of Ortec and its Subsidiaries, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made.

(g) Reporting Requirements. If Ortec ceases to file its periodic reports with the SEC, or if the SEC ceases making these periodic reports available via the Internet without charge, then at Paul Capital ‘s request Ortec shall furnish the following to Paul Capital so long as Paul Capital shall beneficially own any Series A-1 Preferred Stock and the Series A-2 Preferred Stock, or shall own Conversion Shares which, in the aggregate, represent more than 2% of the total combined voting power of all voting securities then outstanding:


	(i) Quarterly Reports filed with the SEC on Form 10-Q or Form 10-QSB as soon as available, and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of Ortec;

	(ii) Annual Reports filed with the SEC on Form 10-K or Form 10-KSB as soon as available, and in any event within ninety (90) days after the end of each fiscal year of Ortec; and

	(iii) Copies of all notices and information, including without limitation notices and proxy statements in connection with any meetings, that are provided to holders of shares of Common Stock, contemporaneously with the delivery of such notices or information to such holders of Common Stock.

(h) Amendments. Ortec shall not amend or waive any provision of the Certificate, Ortec’s Bylaws, or the Registration Rights Agreement in any way that would adversely affect the liquidation preferences, conversion rights, registration rights, voting rights or redemption rights of the holders of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, unless in compliance with the terms of such instruments or agreements.

(i) Other Agreements. Ortec shall not enter into any agreement in which the terms of such agreement would restrict or impair the right or ability to perform of Ortec or any subsidiary under any Transaction Document or the Series A-1 Certificate of Designation or the Series A-2 Certificate of Designation.

(j) Distributions; Subsidiaries. So long as any Series A-1 Preferred Stock and Series A-2 Preferred Stock remains outstanding, Ortec agrees that it shall not (i) declare or pay any dividends or make any distributions to any holder(s) of Common Stock or any other equity security of Ortec or (ii) purchase, redeem or otherwise acquire for value, directly or indirectly, any Common Stock or any other equity security of Ortec. So long as any Series A-1 Preferred Stock and Series A-2 Preferred Stock remains outstanding, Ortec agrees that it shall not transfer, assign, pledge, issue or otherwise permit any equity or other ownership interests in the Subsidiaries to be beneficially owned or held by any person other than Ortec.

(k) Status of Dividends. Ortec covenants and agrees that (i) no Federal income tax return or claim for refund of Federal income tax or other submission to the Internal Revenue Service will adversely affect the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, any other series of its Preferred Stock, or the Common Stock, and any deduction shall not operate to jeopardize the availability to Paul Capital of the dividends received deduction provided by Section 243(a)(1) of the Code or any successor provision, (ii) in no report to shareholders or to any governmental body having jurisdiction over Ortec or otherwise will it treat the Series A-1 Preferred Stock and the Series A-2 Preferred Stock other than as equity capital unless required to do so by a governmental body having jurisdiction over the accounts of Ortec or by a change in generally accepted accounting principles required as a result of action by an authoritative accounting standards setting body, and (iii) other than pursuant to this Agreement or the Series A-1 Certificate of Designation or the Series A-2 Certificate of Designation, it will take no action which would result in the dividends paid by Ortec on the Series A-1 Preferred Stock and the Series A-2 Preferred Stock out of Ortec’s current or accumulated earnings and profits being ineligible for the dividends received deduction provided by Section 243(a)(1) of the Code. The preceding sentence shall not be deemed to prevent Ortec from designating the Series A-1 Preferred Stock and the Series A-2 Preferred Stock as “Convertible Preferred Stock” in its annual and quarterly financial statements in accordance with its prior practice concerning other series of preferred stock of Ortec. Notwithstanding the foregoing, Ortec shall not be required to restate or modify its tax returns for periods prior to the Exchange Closing. In the event that Paul Capital has reasonable cause to believe that dividends paid by Ortec on the Series A-1 Preferred Stock and the Series A-2 Preferred Stock out of Ortec’s current or accumulated earnings and profits will not be treated as eligible for the dividends received deduction provided by Section 243(a)(1) of the Code, or any successor provision, Ortec will, at the reasonable request of Paul Capital, join with Paul Capital in the submission to the Internal Revenue Service of a request for a ruling that dividends paid on the Series A-1 Preferred Stock and the Series A-2 Preferred Stock will be so eligible for Federal income tax purposes, at Paul Capital’s expense. In addition, Ortec will reasonably cooperate with Paul Capital (at Paul Capital’s expense) in any litigation, appeal or other proceeding challenging or contesting any ruling, technical advice, finding or determination that earnings and profits are not eligible for the dividends received deduction provided by Section 243(a)(1) of the Code, or any successor provision to the extent that the position to be taken in any such litigation, appeal, or other proceeding is not contrary to any provision of the Code or incurred in connection with any such submission, litigation, appeal or other proceeding. Notwithstanding the foregoing, nothing herein contained shall be deemed to preclude Ortec from claiming a deduction with respect to such dividends if (i) the Code shall hereafter be amended, or final Treasury regulations thereunder are issued or modified, to provide that dividends on the Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares should not be treated as dividends for Federal income tax purposes or that a

deduction with respect to all or a portion of the dividends on the Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares is allowable for Federal income tax purposes, or (ii) in the absence of such an amendment, issuance or modification and after a submission of a request for ruling or technical advice, the service shall rule or advise that dividends on the shares should not be treated as dividends for Federal income tax purposes. If the Internal Revenue Service determines that the Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares constitute debt, Ortec may file protective claims for refund.

(l) Disclosure of Transaction. Ortec shall issue a press release describing the material terms of the transactions contemplated hereby (the “Press Release”) on the Exchange Closing Date; provided, however, that if such Closing occurs after 4:00 P.M. Eastern Time on any Trading Day, Ortec shall issue the Press Release no later than 9:00 A.M. Eastern Time on the first Trading Day following such Exchange Closing Date. Ortec shall also file with the SEC a Current Report on Form 8-K (the “Form 8-K”) describing the material terms of the transactions contemplated hereby (and attaching as exhibits thereto this Agreement, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation, the Registration Rights Agreement and the Press Release) as soon as practicable following the Exchange Closing Date but in no event more than four (4) Trading Days following the Exchange Closing Date, which Press Release and Form 8-K shall be subject to prior review and reasonable comment by Paul Capital. “Trading Day” means any day during which the principal exchange on which the Common Stock is traded shall be open for trading.

(m) Conversions; Opinions. Ortec will provide, at Ortec’s expense, such legal opinions in the future as are reasonably necessary but only in conformance with federal and state securities regulations for the issuance and resale of the Common Stock issuable upon conversion of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock pursuant to an effective registration statement, Rule 144 under the 1933 Act or an exemption from registration. In the event that Common Stock is sold in a manner that complies with an exemption from registration, Ortec will promptly instruct its counsel (at its expense) to issue to the transfer agent an opinion permitting removal of the legend (indefinitely, if pursuant to Rule 144(k) of the 1933 Act, or to permit sale of the shares if pursuant to the other provisions of Rule 144 of the 1933 Act).

(n) Reservation of Shares. So long as any shares of the Series A-1 Preferred Stock or the Series A-2 Preferred Stock remain outstanding, Ortec shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than 120% of the aggregate number of shares of Common Stock needed to provide for the issuance of the Conversion Shares.

(o) Transfer Agent Instructions. Ortec shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of Paul Capital or its respective nominee(s), for the Conversion Shares in such amounts as specified from time to time by Paul Capital to Ortec upon conversion of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock (the “Irrevocable Transfer Agent Instructions”). Prior to registration of the Conversion Shares under the Securities Act, all such certificates shall bear the restrictive legend specified in Section 12 of this Agreement. Ortec warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section will be given by

Ortec to its transfer agent and that the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Conversion Shares shall otherwise be freely transferable on the books and records of Ortec as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way Paul Capital’s obligations and agreements set forth in Section 12 to comply with all applicable prospectus delivery requirements, if any, upon resale of Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares. If Paul Capital provides Ortec with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares may be made without registration under the Securities Act or Paul Capital provides Ortec with reasonable assurances that the Series A-1 Preferred Stock, the Series A-2 Preferred Stock or the Conversion Shares can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold, Ortec shall permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by Paul Capital and, without any restrictive legend. Ortec acknowledges that a breach by it of its obligations under this Section 7(p) will cause irreparable harm to Paul Capital by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, Ortec acknowledges that the remedy at law for a breach of its obligations under this Section will be inadequate and agrees, in the event of a breach or threatened breach by Ortec of the provisions of this Section, that Paul Capital shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

(p) Disposition of Assets. So long as any Series A-1 Preferred Stock and the Series A-2 Preferred Stock remains outstanding, neither Ortec nor any of its Subsidiaries shall sell, transfer or otherwise dispose of any of its properties, assets and rights including, without limitation, its software and intellectual property, to any person except for sales to customers in the ordinary course of business or with the prior written consent of the holders of a majority of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock then outstanding.

(q) No Issuance of Senior Securities. So long as Series A Preferred Stock and Series A-1 Preferred Stock with an aggregate of $2,000,000 of stated value (as stated in the Series A Certificate of Designation and the Series A-1 Certificate of Designation) remains outstanding, Ortec shall not, and shall not permit any Subsidiary to, whether by operation of law or otherwise, offer, sell or issue or allow to exist, any securities or financial instruments that would rank senior to or pari passu with the Series A Preferred Stock, the Series A-1 Preferred Stock or the Series A-2 Preferred Stock (or securities or financial instruments convertible or exchangeable into any such securities or financial instruments) with respect to dividends or distribution of assets on liquidation, dissolution or winding up, including, without limitation, any Indebtedness, or any ownership or other interest in any Subsidiary, without the prior written approval of at least fifty percent (50%) of the Series A Preferred Stock and Series A-1 Preferred Stock outstanding (together as one class); provided, however, that no such senior or pari passu securities or financial instruments shall contain (a) a liquidation preference in excess of one (1) times the purchase price paid to Ortec therefor, or (b) an annual dividend or interest rate in excess of LIBOR, plus 6 basis points without, in the case of either (a) or (b), the prior written approval of thirty percent (30%) of the Series A Preferred Stock and the Series A-1 Preferred

Stock outstanding, each voting separately as a class. The provisions of this Section shall not apply to (a) the issuance prior to December 31, 2007 of up to $3,000,000 of securities used to settle trade payables ranking pari passu with the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, provided that a Release Event has not occurred as of the date of the issuance of such securities and (b) a working capital line of credit, containing typical and customary terms and conditions of up to $2,000,000 issued by a bank, credit, union, governmental agency or similar unaffiliated corporate or institutional lender.

(r) Most Favored Nations Exchange Right. So long as any shares of the Series A Preferred Stock and the Series A-1 Preferred Stock remain outstanding, if Ortec enters into any equity or equity linked financing (“Subsequent Financing”) on terms more favorable than the terms governing the Series A Preferred Stock and the Series A-1 Preferred Stock, then Paul Capital and the New Investors in their sole discretion may exchange their Series A Preferred Stock and Series A-1 Preferred Stock, as the case may be, valued at their stated value, for the securities issued or to be issued in the Subsequent Financing to the extent a Release Event has not occurred with respect to such shares. For purposes of this Agreement, a Permitted Financing shall not be considered a Subsequent Financing. A “Permitted Financing” shall mean (i) securities issued (other than for cash) in connection with a merger, acquisition, or consolidation, (ii) securities issued pursuant to the conversion or exercise of convertible or exercisable securities issued or outstanding on or prior to the date of this Agreement or issued pursuant to this Agreement (so long as the conversion or exercise price in such securities are not amended to lower such price and/or adversely affect Paul Capital), (iii) securities issued in connection with bona fide strategic license agreements or other partnering arrangements so long as such issuances are not for the purpose of raising capital, (iv) Common Stock issued or the issuance or grants of options to purchase Common Stock pursuant to Ortec’s stock option plans and employee stock purchase plans or stock incentive plans as they exist on the date of this Agreement or are hereafter adopted or otherwise so long as such issuances in the aggregate do not exceed ten percent (10%) of the issued and outstanding shares of Common Stock as of the Exchange Closing Date, and (v) any warrants issued to the placement agent and its designees for the transactions contemplated by the Purchase Agreement.

(s) Form 10-KSB. Ortec shall use its best efforts to file its Form 10-KSB for the period ending December 31, 2006 (“Form 10-K”) promptly after the Closing.

(t) Executive Management. Following the filing of the Form 10-K, Costa Papastephanou, Ph.D., President and COO, shall be named Chief Executive Officer of Ortec, and Ron Lipstein and Steven Katz shall resign from all positions as an officer and/or director of Ortec and all of its Subsidiaries in accordance with their Cancellation Agreements.

(u) Board of Directors. Promptly after the filing of the Form 10-K, the Board of Directors shall be reconstituted to consist of no fewer than five (5) members, of which no more than two (2) directors shall be from the current Board of Directors and one (1) member that Paul Capital shall have the right to designate. Paul Capital shall have a continuing right from and after the Exchange Closing to designate one other person to attend meetings of the Board of Directors as an observer.

(v) Restrictions on Use of Proceeds. Ortec agrees that it shall not use more than $300,000 from the proceeds of the sale of shares of Series A Preferred Stock and warrants to the New Investors until the Form 10-KSB for the period ending December 31, 2006 has been filed.

(w) Affiliate Transaction. Without the prior written consent of holders of at least 50% of the Series A-1 Preferred Stock and Series A-2 Preferred Stock, Ortec and its Subsidiaries shall not engage in any transactions with any officer, director, employee or any Affiliate of Ortec or any Subsidiary, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of Ortec, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of an aggregate of $150,000 each fiscal year, other than (i) for payment of salary, bonus or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of Ortec, (iii) for other employee benefits, including stock option agreements under any stock option plan, or stock grants under any plan, of Ortec, (iv) stock or option grants authorized by the Board of Directors or by a committee of the Board of Directors the majority of the members of which are independent directors, and (v) all payments to Ron Lipstein and Steven Katz pursuant to Cancellation Agreements.

(x) Relisting on the Bulletin Board. Promptly following the filing of the Form 10-K, Ortec will take all action necessary to re-list its Common Stock on the OTC Bulletin Board.

(y) Disclosure of FDA Approval. Promptly following the receipt thereof, Ortec shall file a Form 8-K with the SEC disclosing the receipt of written notice from the FDA regarding the granting to Ortec the right to commercialize and market (i.e., formal approval of the PMA) its OrCel product for the treatment of venous leg ulcers.

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 May 2007 and (ii) $2,800,000 (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 a 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-1 Preferred Stock and Series A-2 Preferred Stock at the Exchange Closing.

9. Intentionally omitted.

10. Exchange Closing. The closing of the issuance of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock by Ortec to Paul Capital, and the cancellation by Paul Capital of the Revenue Interests Assignment Agreement and Related Agreements, 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 (the “Exchange Closing Date”). Ortec shall provide at least three (3) business days notice to Paul Capital of a possible Exchange Closing. At the Exchange Closing, Ortec shall deliver to Paul Capital certificates, registered in Paul Capital’s name, representing the number of shares of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock to be issued to Paul Capital pursuant to this Agreement.

11. Conditions to Exchange Closing.

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


	(i) Each of the representations and warranties of Ortec in this Agreement and the other agreements contemplated hereby shall be true and correct in all material respects as of the date when made and as of the date of the Exchange Closing as though made at that time (except for representations and warranties that speak as of a particular date), which shall be true and correct as of such date.

	(ii) Ortec shall have performed, satified and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Ortec at or prior to the Exchange Closing.


	(iii) Ortec shall have delivered to Paul Capital a certificate of Ortec executed by an executive officer of Ortec, dated as of the date of the Exchange Closing, confirming the accuracy of Ortec’s representations, warranties and covenants as of the date of the Exchange Closing and confirming the compliance by Ortec of with the conditions precedent set forth in this Section 11(a) as of the date of the Exchange Closing.

	(iv) Ortec shall have obtained all permits and qualifications required by any state for the issuance of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, or shall have the availability of exemptions therefrom.

	(v) From the date hereof to the date of the Exchange Closing, trading in Ortec’s Common Stock shall not have been suspended by the SEC (except for any suspension of trading of limited duration agreed to by Ortec, which suspension shall be terminated prior to the Exchange Closing), and, at any time prior to the Exchange Closing, trading in securities generally as reported by Bloomberg Financial Markets (“Bloomberg”) shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by Bloomberg, or on the New York Stock Exchange, nor shall a banking moratorium have been declared either by the United States or New York State authorities, nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on, or any material adverse change in any financial market which, in each case, in the judgment of Paul Capital, makes it impracticable or inadvisable to exchange its Revenue Interests for the Preferred Stock.

	(vi) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

	(vii) No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against Ortec or any of its Subsidiaries, or any of the officers, directors or affiliates of Ortec or any of its Subsidiaries seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

	(viii) Prior to the Exchange Closing, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation and the Series A Certificate of Designation shall have been filed with and accepted by the Secretary of State of the State of Delaware.

	(ix) Paul Capital shall have received an opinion of counsel to Ortec, dated the date of the Exchange Closing, in the form of Exhibit E hereto, and such other certificates and documents as Paul Capital or its counsel shall reasonably require incident to the Exchange Closing.


	(x) At the Exchange Closing, Ortec and the New Investors shall have executed and delivered the Registration Rights Agreement.

	(xi) The Board of Directors of Ortec shall have adopted resolutions consistent with Section 2(b) above in a form reasonably acceptable to Paul Capital (the “Resolutions”).

	(xii) As of the date of the Exchange Closing, Ortec shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Stock, a number of shares of Common Stock equal to at least 120% of the aggregate number of Conversion Shares issuable upon conversion of the Preferred Stock outstanding on the date of the Exchange Closing (after giving effect to the Preferred Stock to be issued on date of the Exchange Closing and assuming all shares of such Preferred Stock were fully convertible on such date regardless of any limitation on the timing or amount of such conversions).

	(xiii) The Irrevocable Transfer Agent Instructions, in the form of Exhibit F attached hereto, shall have been delivered to and acknowledged in writing by the Ortec’s transfer agent.

	(xiv) No Material Adverse Effect shall have occurred at or before the Closing Date.

	(xv) Ortec shall have paid Paul Capital’s legal expenses required to be paid at the Exchange Closing pursuant to Section 14(a) of this Agreement.

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

	(xvii) Ortec and the New Investors shall have executed and delivered the Purchase Agreement, in form and substance reasonably satisfactory to Paul Capital, and the transactions contemplated therein shall have been consummated. Ortec shall have received gross cash proceeds from the New Investors at least equal to the minimum amount required by the New Funding Amount.

	(xviii) 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) Ortec Conditions. 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 of Paul Capital in Section 3 hereof shall be true and correct in all material respects as of the date when made and as of the date of the Exchange Closing as though made at that time, except for representations and warranties that are expressly made as of a particular date, which shall be true and correct in all material respects as of such date..


	(ii) Paul Capital shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Paul Capital at or prior to the ExchangeClosing.

	(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 11(b)(i) and 11(b)(ii) of this Agreement.

	(iv) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

	(v) Paul Capital shall have cancelled the Revenue Interests Assignment Agreement and all Related Agreements to which it is a party and assigned, reassigned or released to Ortec or to Orcel LLC any and all interests that Paul Capital may have in Ortec or Orcel LLC intellectual property thereunder.

	(vi) The Registration Rights Agreement shall have been duly executed and delivered by Paul Capital to Ortec.

12. Certificate Legend. Each certificate representing the Preferred Stock, and, if appropriate, the Conversion Shares, shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required by applicable state securities or “blue sky” laws):

THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

Ortec agrees to reissue certificates representing the Preferred Stock or the Conversion Shares without the legend set forth above if at such time, prior to making any transfer of any Preferred Stock or Conversion Shares, as applicable, such holder thereof shall give written notice to Ortec describing the manner and terms of such transfer and removal as Ortec may reasonably request, and (x) the Preferred Stock or Conversion Shares, as applicable, have been registered for sale under the Securities Act and the holder is selling such securities and is complying with its prospectus delivery requirement under the Securities Act, (y) the holder is selling such securities

in compliance with the provisions of Rule 144 or (z) the provisions of paragraph (k) of Rule 144 apply to such securities.

13. Indemnification.

(a) General Indemnity. Ortec agrees to indemnify and hold harmless Paul Capital (and its directors, officers, affiliates, agents, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by Paul Capital as a result of any inaccuracy in or breach of the representations, warranties or covenants made by Ortec herein. Paul Capital agrees to indemnify and hold harmless Ortec and its directors, officers, affiliates, agents, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by Ortec as result of any inaccuracy in or breach of the representations, warranties or covenants made by Paul Capital herein. The maximum aggregate liability of Paul Capital pursuant to its indemnification obligations under this Section 13 shall not exceed the stated value of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock.

(b) Indemnification Procedure. Any party entitled to indemnification under this Section 13 (an “indemnified party”) will give written notice to the indemnifying party of any matters giving rise to a claim for indemnification; provided, that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 13 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an indemnified party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the indemnified party a conflict of interest between it and the indemnifying party may exist with respect of such action, proceeding or claim, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. In the event that the indemnifying party advises an indemnified party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the indemnified party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the indemnified party’s costs and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The indemnified party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the indemnified party which relates to such action or claim. The indemnifying party shall keep the indemnified party fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action or claim, then the indemnified party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any action, claim or proceeding effected without its prior written consent. Notwithstanding anything in this Section 13 to the

contrary, the indemnifying party shall not, without the indemnified party’s prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the indemnified party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the indemnified party of a release from all liability in respect of such claim. The indemnification required by this Section 13 shall be made by periodic payments of the amount thereof during the course of investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, so long as the indemnified party irrevocably agrees to refund such moneys if it is ultimately determined by a court of competent jurisdiction that such party was not entitled to indemnification. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar rights of the indemnified party against the indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law.

14. Miscellaneous

(a) Payment of Paul Capital’s Legal Expenses. Ortec shall pay at the Exchange Closing:


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

	(ii) all expenses for legal services and disbursements incurred by Paul Capital in connection with the preparation, negotiation, drafting, execution and delivery of this Agreement and the 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.

Ortec shall also pay the expenses for legal services and disbursements incurred by Paul Capital in connection with the filing and declaration of effectiveness by the SEC of the Registration Statement and any amendments, modifications or waivers of this Agreement or any of the other Transaction Documents. In addition, Ortec shall pay all reasonable fees and expenses incurred by Paul Capital in connection with the enforcement of this Agreement or any of the other Transaction Documents, including without limitation, all reasonable attorneys’ fees and expenses. Ortec shall pay all stamp or other similar taxes and dutes levied in connection with the issuance of the Preferred Stock pursuant hereto. Except as otherwise provided above or in the Certificates of Designation, each party shall pay the fees and expenses its advisors, counsel, accountants and other experts, if any, and all other expenses, incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.

(b) Specific Enforcement, Consent to Jurisdiction.

(i) Ortec and Paul Capital acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation or the Registration Rights Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement,


	the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation or the Registration Rights Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity.

	(ii) Each of Ortec and Paul Capital (a) hereby irrevocably submits to the jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in New York County for the purposes of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Transaction Documents or the transactions contemplated hereby or thereby and (b) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of Ortec and Paul Capital consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 14(b) shall affect or limit any right to serve process in any other manner permitted by law. The parties hereto agree that the prevailing party in any suit, action or proceeding arising out of or relating to the Series A-1 Preferred Stock, the Series A-2 Preferred Stock, this Agreement or the other agreements between the Ortec and Paul Capital contemplated hereby shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party.

(c) Entire Agreement; Amendment. This Agreement contains the entire understanding of the parties with respect to the matters covered hereby and, except as specifically set forth herein or in the Transaction Documents, neither Ortec nor Paul Capital makes any representations, warranty, covenant or undertaking with respect to such matters and they supersede all prior understandings and agreements with respect to said subject matter, all of which are merged herein. Except as set forth elsewhere herein and except for Section 7(q) hereof which shall require the consent of fifty percent (50%) of the shares of the Series A Preferred Stock and the Series A-1 Preferred Stock (voting together as one class), no provision of this Agreement may be waived or amended other than by a written instrument signed by Ortec and the holders of at least two-thirds (2/3) of the shares of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock then outstanding and no provision hereof may be waived other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the shares of A-1 Preferred Stock and A-2 Preferred Stock then outstanding.

(d) Notices. 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) 541-5369

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

(e) Waivers by Party. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provisions, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

(f) Waivers by Majority Holders. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the holders of not less than two-thirds (2/3) of the then outstanding shares of Series A-1 Preferred Stock and Series A-2 Preferred Stock may waive any of the obligations of Ortec or the then rights of Paul Capital set forth in this Agreement (except with respect to Section 7(q) hereof which shall require the consent of fifty percent (50%) of the shares of the Series A Preferred Stock and the Series A-1 Preferred Stock (voting together as one class)).

(g) Headings. The section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

(h) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. After the Closing, the assignment by a party to this Agreement of any rights hereunder shall not affect the obligations of such party under this Agreement.

(i) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

(j) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to the choice of law provisions.

(k) Survival. The representations and warranties of the Company contained in Sections 2(o) and (s) should survive indefinitely and those contained in Section 2, with the exception of Sections 2(o) and (s), and the representations and warranties of Paul Capital contained in Section 3, shall survive the execution and delivery hereof and the Exchange Closing until the date three (3) years from the date of the Exchange Closing, and the agreements and covenants set forth in Sections 4, 6, 7, 13 and 14 of this Agreement shall survive the execution and delivery hereof and the Exchange Closing hereunder until Paul Capital beneficially owns (determined in accordance with Rule 13d-3 under the Exchange Act) less than 2% of the total combined voting power of all voting securities then outstanding, provided that Sections 7(b), 7(c), 7(e), 7(f), 7(g), 7(h), 7(i), 7(j), 7(k), 7(n), 7(o), 7(q), 7(r) and 7(w) shall in no event expire until the Registration Statement required by Section 2 of the Registration Rights Agreement is no longer required to be effective under the terms and conditions of the Registration Rights Agreement.

(l) 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 14(m) hereof.

(m) Extension of Forbearance Period. The definition of “Forbearance Period” provided in the Forbearance Agreements is hereby amended by changing the date “January 1, 2007” to “June 30, 2007.”

(n) 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.

(o) Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other party hereto, it being understood that both parties need not sign the same counterpart. Any signature may be delivered by facsimile transmission.

(p) Severability. The provisions of this Agreement, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation and the Registration Rights Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation or the Registration Rights Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation or the Registration Rights Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible.

(q) Further Assurances. From and after the date of this Agreement, upon the request of Paul Capital or Ortec, each of Ortec and Paul Capital shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement, the Series A-1 Preferred Stock, the Series A-2 Preferred Stock, the Conversion Shares, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation and the Registration Rights Agreement.

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


	Ortec International, Inc.

	By:	/s/ Alan Schoenbart

		Print Name: Alan Schoenbart Title: CFO

	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, L.L.C.,
		its Manager

		By: /s/ Lionel Leventhal

		Print Name: Lionel Leventhal Title: Manager

[Signature page to Amended and Restated Exchange Agreement]

EXHIBIT A

Form of Registration Rights Agreement

EXHIBIT B

Form of Series A Certificate of Designation

EXHIBIT C

Form of Series A-1 Certificate of Designation

EXHIBIT D

Form of Series A-2 Certificate of Designation

EXHIBIT E

Form of Opinion of Counsel to Ortec

1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Delaware and has the requisite corporate power to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary.

2. The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents and to issue the Preferred Stock and the Common Stock issuable upon conversion of the Preferred Stock. The execution, delivery and performance of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required. Each of the Transaction Documents have been duly executed and delivered, and the Preferred Stock has been duly executed, issued and delivered by the Company and each of the Transaction Documents constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms. The shares of Common Stock issuable upon conversion of the Preferred Stock are not subject to any preemptive rights under the Certificate of Incorporation or the Bylaws.

3. The Preferred Stock has been duly authorized and, when delivered against payment in full as provided in the Exchange Agreement, will be validly issued, fully paid and nonassessable. The shares of Common Stock issuable upon conversion of the Preferred Stock have been duly authorized and reserved for issuance, and, when delivered upon conversion as provided in the Certificate of Designation, as applicable, will be validly issued, fully paid and nonassessable.

4. The execution, delivery and performance of and compliance with the terms of the Transaction Documents and the issuance of the Preferred Stock and the Common Stock issuable upon conversion of the Preferred Stock do not (i) violate any provision of the Certificate of Incorporation or Bylaws, (ii) to our knowledge conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (iii) to our knowledge create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, or (iv) (a) result in a violation of any federal, state or local statute, rule or regulation, or to our knowledge, any order, judgment, injunction or decree (including Federal and state securities laws and regulations) applicable to the Company or

by which any property or asset of the Company is bound or affected, except, in all cases other than violations pursuant to clause (i) above, for such conflicts, default, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect.

5. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required under Federal, state or local law, rule or regulation in connection with the valid execution, delivery and performance of the Transaction Documents, or the offer, sale or issuance of the Preferred Stock or the Common Stock issuable upon conversion of the Preferred Stock other than the Certificate of Designation, the Registration Statement, report on Form 8-K and Form D, both to be filed with the Securities and Exchange Commission.

6. To our knowledge, there is no action, suit, claim, investigation or proceeding pending or threatened against the Company which questions the validity of the Exchange Agreement or the transactions contemplated thereby or any action taken or to be taken pursuant thereto. To our knowledge, there is no action, suit, claim, investigation or proceeding pending, or to our knowledge, threatened, against or involving the Company or any of its properties or assets and which, if adversely determined, is reasonably likely to result in a Material Adverse Effect. To our knowledge, there are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any officers or directors of the Company in their capacities as such.

7. The offer, issuance and sale of the Preferred Stock and the offer, issuance and sale of the shares of Common Stock issuable upon conversion of the Preferred Stock pursuant to the Exchange Agreement and the Certificate of Designation are based on the Purchasers’ representations in the Exchange Agreement, exempt from the registration requirements of the Securities Act.

8. The Company is not, and as a result of and immediately upon Closing will not be, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

Very truly yours,

EXHIBIT F

Form of Irrevocable Transfer Agent Instructions

ORTEC INTERNATIONAL, INC.

as of June __, 2007

[Name and address of Transfer Agent]
Attn: _____________

Ladies and Gentlemen:

Reference is made to that certain Amended and Restated Exchange Agreement (the “Exchange Agreement”), dated as of June __, 2007, by and among Ortec International, Inc., a Delaware corporation (the “Company”), and Paul Royalty Fund, L.P. (formerly known as Paul Capital Royalty Acquisition Fund, L.P.), a Delaware limited partnership (“Paul Capital”) pursuant to which the Company is issuing to Paul Capital shares of its Series A-1 Convertible Preferred Stock, par value $.001 per share, and Series A-2 Convertible Preferred Stock, par value $0.001 per share (collectively, the “Preferred Shares”), which are convertible into shares of the Company’s common stock, par value $.001 per share (the “Common Stock”), in connection with the sale and issuance of Preferred Shares to Paul Capital. This letter shall serve as our irrevocable authorization and direction to you (provided that you are the transfer agent of the Company at such time) to issue shares of Common Stock upon conversion of the Preferred Shares (the “Conversion Shares”) to or upon the order of Paul Capital from time to time upon (i) surrender to you of a properly completed and duly executed Conversion Notice, in the form attached hereto as Exhibit I, (ii) a copy of the certificates (with the original certificates delivered to the Company) representing Preferred Shares being converted (or an indemnification undertaking with respect to such share certificates in the case of their loss, theft or destruction), and (iii) delivery of a treasury order or other appropriate order duly executed by a duly authorized officer of the Company. So long as you have previously received (x) written confirmation from counsel to the Company that a registration statement covering resales of the Conversion Shares has been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), and no subsequent notice by the Company or its counsel of the suspension or termination of its effectiveness and (y) a copy of such registration statement, and if Paul Capital represents in writing that the Conversion Shares were sold pursuant to the Registration Statement, then certificates representing the Conversion Shares shall not bear any legend restricting transfer of the Conversion Shares thereby and should not be subject to any stop-transfer restriction. Provided, however, that if you have not previously received (i) written confirmation from counsel to the Company that a registration statement covering resales of the Conversion Shares has been declared effective by the SEC under the 1933 Act, and (ii) a copy of such registration statement, then the certificates for the Conversion Shares shall bear the following legend:


	“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT”), OR ANY STATE SECURITIES


	LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.”

and, provided further, that the Company may from time to time notify you to place stop-transfer restrictions on the certificates for the Conversion Shares in the event a registration statement covering the Conversion Shares is subject to amendment for events then current or the prospectus which is part of such registration statement may no longer be used for sales of Conversion Shares.

A form of written confirmation from counsel to the Company that a registration statement covering resales of the Conversion Shares has been declared effective by the SEC under the 1933 Act is attached hereto as Exhibit II.

Please be advised that Paul Capital is relying upon this letter as an inducement to enter into the Exchange Agreement and, accordingly, Paul Capital is a third party beneficiary to these instructions.

Please execute this letter in the space indicated to acknowledge your agreement to act in accordance with these instructions. Should you have any questions concerning this matter, please contact me at ___________.


	Very truly yours,
	ORTEC INTERNATIONAL, INC.
	By:

		Name:

		Title:


ACKNOWLEDGED AND AGREED:
[TRANSFER AGENT]
By:

	Name:

	Title:

	Date:

EXHIBIT I

ORTEC INTERNATIONAL, INC.
CONVERSION NOTICE

Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the [Series A-1][Series A-2] Preferred Stock of Ortec International, Inc. (the “Certificate of Designation”). In accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to convert the number of shares of [Series A-1][Series A-2] Preferred Stock, par value $.001 per share (the “Preferred Shares”), of Ortec International, Inc., a Delaware corporation (the “Company”), indicated below into shares of Common Stock, par value $.001 per share (the “Common Stock”), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below.


	Date of Conversion:

	Number of Preferred Shares to be converted: ____

	Stock certificate no(s). of Preferred Shares to be converted: ____

	The Common Stock have been sold pursuant to the registration statement:
	YES____ NO____

Please confirm the following information:

	Conversion Price:


	Number of shares of Common Stock to be issued:

Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:


	Issue to:



	Facsimile Number:


	Authorization:

		By:

		Title:

	Dated:

PRICES ATTACHED

EXHIBIT I-A

ASSIGNMENT

FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto ________________. _________ of the Preferred Shares evidenced by the within stock certificate together with all rights therein, and does irrevocably constitute and appoint ___________________, attorney, to transfer that part of the said Preferred Shares on the books of the within named corporation.


Dated:			Signature


			Address

EXHIBIT II

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[Name and address of Transfer Agent]
Attn: _____________


	Re:	Ortec International, Inc.

Ladies and Gentlemen:

We are counsel to Ortec International, Inc., a Delaware corporation (the “Company”), and have represented the Company in connection with that certain Amended and Restated Exchange Agreement (the “Exchange Agreement”), dated as of June __, 2007, by and among the Company and Paul Royalty Fund, L.P. (formerly known as Paul Capital Royalty Acquisition Fund, L.P.), a Delaware limited partnership (“Paul Capital”) pursuant to which the Company issued to Paul Capital shares of the Company’s Series A-1 Convertible Preferred Stock, par value $.001 per share, and Series A-2 Convertible Preferred Stock, par value $0.001 per share (collectively, the “Preferred Shares”), which are convertible shares of the Company’s common stock, par value $.001 per share (the “Common Stock”). Pursuant to the Exchange Agreement, the Company agreed, among other things, to register the shares of Common Stock issuable upon conversion of the Preferred Shares (the “Registrable Shares”), under the Securities Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the Exchange Agreement, on ________________, 2007, the Company filed a Registration Statement on Form SB-2 (File No. 333-________) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the resale of the Registrable Shares which names Paul Capital as a selling stockholder thereunder.

In connection with the foregoing, we advise you that a member of the SEC’s staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and accordingly, the Registrable Shares are available for resale under the 1933 Act pursuant to the Registration Statement.


	Very truly yours,
	[COMPANY COUNSEL]

	By:


cc: Paul Capital

[Schedules to be Inserted]

EX-10.2 7 c49144_ex10-2.htm

EXHIBIT 10.2

BILL OF SALE AND TERMINATION AGREEMENT

This BILL OF SALE AND TERMINATION AGREEMENT (this “Bill of Sale”) dated as of June 18, 2007, among Paul Royalty Fund, L.P. (formerly known as Paul Capital Royalty Acquisition Fund, L.P.), a Delaware limited partnership (“Paul Capital”), Ortec International, Inc., a Delaware corporation (“Ortec”), and Orcel LLC, a Delaware limited liability company and wholly-owned subsidiary of Ortec (“Orcel”). All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Exchange Agreement (as defined below), except that the term “Assigned Interests” shall have the meaning ascribed to it in the Revenue Interests Assignment Agreement.

WHEREAS, pursuant to the Amended and Restated Exchange Agreement, dated as of June 18, 2007 by and between Ortec and Paul Capital (as amended, supplemented or otherwise modified from time to time, the “Exchange Agreement”), Ortec agreed to issue and deliver to Paul Capital shares of Ortec Series A-1 Preferred Stock having an aggregate stated value of $5,000,000 and shares of Ortec Series A-2 Preferred Stock having an aggregate stated value of $5,000,000 in exchange for the cancellation and termination of the Revenue Interests Assignment Agreement and all the Related Agreements to which Paul Capital is a party, the assignment by Paul Capital of all its interest in the Assigned Interests to Ortec, and the assignment, reassignment and release by Paul Capital to Ortec and to Orcel of any and all liens, pledges or security interests that Ortec or Orcel may have granted to Paul Capital on the respective assets of Ortec or Orcel to secure their respective obligations to Paul Capital under the Revenue Interest Assignment Agreement and the Related Agreements (the “Exchange”);

WHEREAS, the parties now desire to carry out the purposes of the Exchange Agreement by the execution and delivery of this instrument evidencing the Exchange;

NOW, THEREFORE, in consideration of the foregoing premises and of other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Purchase and Exchange of Assets; Release of Security Interests. Paul Capital hereby sells, transfers, conveys, assigns, and delivers to Ortec, its successors and assigns, without recourse and without representation or warranty (other than as those representations and warranties expressly provided in the Exchange Agreement), and Ortec hereby purchases from Paul Capital, any and all interest that Paul Capital may have in the Revenue Interests. Paul Capital hereby assigns, reassigns and releases to Ortec and Orcel any and all liens, pledges or security interests that Ortec or Orcel may have granted to Paul Capital on the respective assets of Ortec or Orcel to secure their respective obligations to Paul Capital under the Revenue Interest Assignment Agreement and the Related Agreements, including (i) the interest which is the subject of the Patent Security Agreement dated August 29, 2001 between Orcel, as grantor, and Paul Capital, as grantee, (ii) any interest Paul Capital may have in the unregistered intellectual property assigned by Ortec to Orcel by assignment dated September 29, 2001 and (iii) any interest Paul Capital may have in the intellectual property assigned by Ortec to Orcel in the Trademark Assignment also dated August 29, 2001.

2. Termination of Certain Related Agreements. The parties hereto agree that the following agreements are hereby cancelled and terminated according to the terms and provisions as provided therein and are of no further force or effect:


		a.	Revenue Interests Assignment Agreement.

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

		c.	The Membership Interest Pledge Agreement between Ortec and Paul Capital dated as of August 29, 2001.

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

		e.	The Lock Box Agreement dated as of February 28, 2002, among JPMorgan Chase Bank, Paul Capital, Orcel LLC and Ortec.

3. Further Assurances. Paul Capital, Ortec and Orcel each shall execute, acknowledge and deliver to the other parties any and all documents or instruments, and shall take any and all actions, reasonably required by such other parties from time to time, to confirm or effect the matters set forth herein, or otherwise to carry out the purposes of the Exchange Agreement and this Bill of Sale and Termination Agreement and the transactions contemplated thereby and hereby.

4. Exchange Agreement. This Bill of Sale and Termination Agreement is entered into pursuant to and is subject in all respects to all of the terms, provisions and conditions of the Exchange Agreement, and nothing herein shall be deemed to modify any of the representations, warranties, covenants and obligations of the parties thereunder.

5. Interpretation. In the event of any conflict or inconsistency between the terms, provisions and conditions of this Bill of Sale and Termination Agreement and the Exchange Agreement, the terms, provisions and conditions of the Exchange Agreement shall govern.

6. Governing Law. This Bill of Sale and Termination Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York.

7. Counterparts. This Bill of Sale and Termination Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together shall constitute a single agreement.

[Remainder of page intentionally left blank; signature page follows]

IN WITNESS WHEREOF, Paul Royalty, Ortec and Orcel have caused this Bill of Sale and Termination Agreement to be duly executed and delivered, as of the date first above written.


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, L.L.C., its Manager

		By:	/s/ Lionel Leventhal

			Name:	Lionel Leventhal
			Title:	Manager


	ORTEC INTERNATIONAL, INC.

	By:	/s/ Alan Schoenbart

		Name: Alan Schoenbart
		Title: CFO

	ORCEL LLC

	By:	/s/ Ron Lipstein

		Name: Ron Lipstein
		Title: Manager

EX-10.3 8 c49144_ex10-3.htm

EXHIBIT 10.3

SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE

AGREEMENT

Dated as of June 18, 2007

among

ORTEC INTERNATIONAL, INC.

and

THE PURCHASERS LISTED ON EXHIBIT A

TABLE OF CONTENTS


			PAGE

ARTICLE I		Purchase and Sale of Preferred Stock	1

	Section 1.1	Purchase and Sale of Stock	1
	Section 1.2	The Conversion Shares	1
	Section 1.3	Purchase Price and Closing	2
	Section 1.4	Warrants	2
	Section 1.5	Exchange of Revenue Interest	3

ARTICLE II		Representations and Warranties	3

	Section 2.1	Representations and Warranties of the Company	3
	Section 2.2	Representations and Warranties of the Purchasers	14

ARTICLE III		Covenants	17

	Section 3.1	Securities Compliance	17
	Section 3.2	Registration and Listing	17
	Section 3.3	Inspection Rights	17
	Section 3.4	Compliance with Laws	18
	Section 3.5	Keeping of Records and Books of Account	18
	Section 3.6	Reporting Requirements	18
	Section 3.7	Amendments	18
	Section 3.8	Other Agreements	18
	Section 3.9	Distributions; Subsidiaries	19
	Section 3.10	Status of Dividends	19
	Section 3.11	Disclosure of Transaction	20
	Section 3.12	Conversions; Opinions	20
	Section 3.13	Reservation of Shares	20
	Section 3.14	Transfer Agent Instructions	20
	Section 3.15	Disposition of Assets	21
	Section 3.16	No Issuance of Senior Securities	21
	Section 3.17	Most Favored Nations Exchange Right; Subsequent Financing	22
	Section 3.18	Form 10-KSB	23
	Section 3.19	Executive Management	23
	Section 3.20	Board of Directors	24
	Section 3.21	Restrictions on Use of Proceeds	24
	Section 3.22	Affiliate Transaction	24
	Section 3.23	Re-listing on the OTC Bulletin Board	24
	Section 3.24	Disclosure of FDA Approval	24

-i-


ARTICLE IV		Conditions	25

	Section 4.1	Conditions Precedent to the Obligation of the Company to Sell the Shares	25
	Section 4.2	Conditions Precedent to the Obligation of the Purchasers to Purchase the Shares	25

ARTICLE V		Intentionally Omitted	28

ARTICLE VI		Stock Certificate Legend	28

	Section 6.1	Legend	28

ARTICLE VII		Intentionally Omitted	28

ARTICLE VIII		Indemnification	29

	Section 8.1	General Indemnity	29
	Section 8.2	Indemnification Procedure	29

ARTICLE IX		Miscellaneous	30

	Section 9.1	Fees and Expenses	30
	Section 9.2	Specific Enforcement, Consent to Jurisdiction	30
	Section 9.3	Entire Agreement; Amendment	31
	Section 9.4	Notices	31
	Section 9.5	Waivers by Party	32
	Section 9.6	Waivers by Majority Holders	32
	Section 9.7	Headings	33
	Section 9.8	Successors and Assigns	33
	Section 9.9	No Third Party Beneficiaries	33
	Section 9.10	Governing Law	33
	Section 9.11	Survival	33
	Section 9.12	Counterparts	33
	Section 9.13	Publicity	33
	Section 9.14	Severability	33
	Section 9.15	Further Assurances	34

-ii-

SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

This SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”) is dated as of June 18, 2007 by and among Ortec International, Inc., a Delaware corporation (the “Company”), and each of the Purchasers of shares of Series A Convertible Preferred Stock of the Company whose names are set forth on Exhibit A hereto (individually, a “Purchaser” and collectively, the “Purchasers”).

The parties hereto agree as follows:

ARTICLE I

Purchase and Sale of Preferred Stock

Section 1.1 Purchase and Sale of Stock. Upon the following terms and conditions, the Company shall issue and sell to the Purchasers and each of the Purchasers shall, severally but not jointly, purchase from the Company, the number of shares of the Company’s Series A Convertible Preferred Stock, par value $.001 per share (the “Preferred Shares”), at a purchase price of $10,000 per share, set forth with respect to such Purchaser on Exhibit A hereto. The minimum aggregate purchase price for the Preferred Shares shall be $8,000,000 (inclusive of the principal amount of Bridge Notes (as defined below) applied to purchase the Preferred Shares and Warrants) and the maximum aggregate purchase price for the Preferred Shares and the Warrants shall be $12,000,000 (inclusive of the principal amount plus interest outstanding on the Bridge Notes applied to purchase the Preferred Shares and Warrants). The Company acknowledges that a portion of the Purchase Price (as defined in Section 1.2 hereof) shall be paid by certain Purchasers surrendering for cancellation certain bridge notes (the “Bridge Notes”) issued by the Company to such Purchasers. Each Purchaser who applies the principal amount and interest outstanding on the Bridge Notes to purchase the Preferred Shares shall receive Preferred Shares in an amount equal to 125% of the principal amount plus accrued and unpaid interest of such Bridge Note. The designation, rights, preferences and other terms and provisions of the Preferred Shares are set forth in the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock attached hereto as Exhibit C-1 (the “Certificate of Designation”). The Company and the Purchasers are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”) or Section 4(2) of the Securities Act.

Section 1.2 The Conversion Shares. The Company has authorized and has reserved and covenants to continue to reserve, free of preemptive rights and other similar contractual rights of stockholders, such number of shares of Preferred Shares and Common Stock as shall from time to time be sufficient to effect the conversion of all of the Preferred Shares and exercise of the Warrants then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 120% of the number of shares of Common Stock required to be issued upon the conversion of the Preferred Shares and exercise of the Warrants. Any shares of Common Stock issuable upon conversion of the Preferred Shares and exercise of

the Warrants (and such shares when issued) are herein referred to as the “Conversion Shares” and the “Warrant Shares”, respectively. The Preferred Shares, the Conversion Shares and the Warrant Shares are sometimes collectively referred to as the “Shares”.

Section 1.3 Purchase Price and Closing. The Company agrees to issue and sell to the Purchasers and, in consideration of and in express reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, the Purchasers, severally but not jointly, agree to purchase that number of the Preferred Shares and Warrants set forth opposite their respective names on Exhibit A. The aggregate purchase price of the Preferred Shares and Warrants being acquired by each Purchaser is set forth opposite such Purchaser’s name on Exhibit A (for each such purchaser, the “Purchase Price”. The Preferred Shares and Warrants shall be sold and funded in one or more closings (each, a “Closing”). The initial Closing under this Agreement (the “Initial Closing”) shall take place on or about June 18, 2007 (the “Initial Closing Date”). Each subsequent closing under this Agreement (each, a “Subsequent Closing”) shall occur on such date as the Purchasers and the Company may agree upon (each, a “Subsequent Closing Date”) but no later than July 31, 2007.The Initial Closing Date and each Subsequent Closing Date are sometimes referred to in this Agreement as the “Closing Date”. Each closing of the purchase and sale of the Preferred Shares and Warrants to be acquired by the Purchasers from the Company under this Agreement shall take place at the offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036 or at such other place as the Purchasers and the Company may agree upon at 10:00 a.m., New York time on the date on which the last to be fulfilled or waived of the conditions set forth in Article IV hereof and applicable to such Closing shall be fulfilled or waived in accordance herewith. At each Closing, the Company shall deliver or cause to be delivered to each Purchaser a certificate registered in the name of the Purchaser representing the number of Preferred Shares that such Purchaser is purchasing pursuant to the terms hereof and the Warrants to purchase such number of shares of Common Stock as is set forth opposite the name of such Purchaser on Exhibit A. At each Closing, each Purchaser shall deliver its Purchase Price by wire transfer Kramer Levin Naftalis & Frankel LLP, as escrow agent.

Section 1.4 Warrants. The Company agrees to issue to each of the Purchasers: (i) a Series A Warrant, in substantially the form attached hereto as Exhibit B-1 (the “Series A Warrants”), to purchase the number of shares of Common Stock equal to fifty percent (50%) of the number of Conversion Shares issuable upon such Purchasers Preferred Shares purchased hereunder, as set forth opposite such Purchaser’s name on Exhibit A hereto, (ii) a Series M Warrant, in substantially the form attached hereto as Exhibit B-2 (the “Series M Warrants”), to purchase the number of shares of Common Stock (or, as set forth therein, Series D-2 Preferred Stock of the Company) equal to (x) fifty percent (50%) of the number of Conversion Shares issuable upon such Purchaser’s Preferred Shares purchased hereunder, as set forth opposite such Purchaser’s name on Exhibit A hereto, or (y) if any Purchaser purchases at least $3,500,000 of Preferred Shares pursuant to this Agreement, one hundred percent (100%) of the number of Conversion Shares issuable upon such Purchaser’s Preferred Shares purchased hereunder, as set forth opposite such Purchaser’s name on Exhibit A hereto, and (iii) a Series M-1 Warrant, in substantially the form attached hereto as Exhibit B-3 (the “Series M-1 Warrants” and together with the Series A Warrants and the Series M Warrants, the “Warrants”), to purchase the number of shares of Common Stock equal to fifty percent (50%) of the Warrant Shares issuable upon exercise of the Series M Warrant, as set forth opposite such Purchaser’s name on Exhibit A

hereto. The Warrants shall expire five (5) years following the applicable Closing Date, except for the Series M Warrants, which shall expire thirty (30) days following the date the Company files a Form 8-K with the Commission disclosing the Company’s receipt of the written notice from the U.S. Food and Drug Administration regarding granting the Company the right to commercialize and market (i.e., formal approval of the Issuer’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers. Each of the Warrants shall have an exercise price per share equal to the Warrant Price (as defined in the applicable Warrant).

Section 1.5 Exchange of Revenue Interest. The parties acknowledge that simultaneously with the consummation of the transactions contemplated by this Agreement, Paul Royalty Fund, L.P., f/k/a Paul Capital Royalty Acquisition Fund, L.P. (“PRF”) and the Company shall enter into an Exchange Agreement (“PRF Exchange Agreement”) pursuant to which PRF shall exchange its revenue interest for $5,000,000 of Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Shares”) with a conversion price of $0.50 per share and $5,000,000 of Series A-2 Convertible Preferred Stock (the “Series A-1 Preferred Shares”) with a conversion price of $5.00 per share. The Series A-1 Preferred Shares and the Series A-2 Preferred Shares shall rank pari passu with the Preferred Shares with respect to liquidation and dividend rights. The forms of the Certificate of Designations for the Series A-1 Preferred Shares and the Series A-2 Preferred Shares are attached hereto as Exhibit C-2 and C-3, respectively. Upon consummation of the Exchange Agreement, PRF shall have no claims against the Company or any of its Subsidiaries other than as a holder of the Company’s Series A-1 Preferred Shares and Series A-2 Preferred Shares.

ARTICLE II

Representations and Warranties

Section 2.1 Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchasers, except as set forth in the Company’s disclosure schedule delivered with this Agreement (with each numbered schedule corresponding to the section number herein) as follows:

(a) Organization, Good Standing and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted. The Company does not have any Subsidiaries (as defined in Section 2.1(g)) except OrCel, LLC, Hapto Biotech, Inc. and Hapto Biotech (Israel), Ltd., or own securities of any kind in any other entity. The Company and each such Subsidiary is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary except for any jurisdiction(s) (alone or in the aggregate) in which the failure to be so qualified will not have a Material Adverse Effect. For the purposes of this Agreement, “Material Adverse Effect” means (i) any adverse effect on the business, operations, properties, prospects or financial condition of the Company or its Subsidiaries and which is material to such entity or other entities controlling or controlled by such entity and/or (ii) any condition, circumstance, or situation that would prohibit or otherwise materially interfere with

the ability of the Company to perform any of its obligations under this Agreement or any of the Transaction Documents (as defined below) in any material respect.

(b) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Certificate of Designation, the Registration Rights Agreement attached hereto as Exhibit D (the “Registration Rights Agreement”), the Escrow Agreement attached hereto as Exhibit G (the “Escrow Agreement”) the Irrevocable Transfer Agent Instructions (as defined in Section 3.14) and the Warrants (collectively, the “Transaction Documents”), and to issue and sell the Preferred Shares in accordance with the terms hereof and the Warrants, as applicable. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required. This Agreement has been duly executed and delivered by the Company. The other Transaction Documents will have been duly executed and delivered by the Company at the Initial Closing. Each of the Transaction Documents constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

(c) Capitalization. The authorized capital stock of the Company and the shares thereof currently issued and outstanding as of June 18, 2007 is set forth on Schedule 2.1(c)(1) hereto. All of the outstanding shares of the Company’s Common Stock and any other security of the Company have been duly and validly authorized. Except as set forth in Schedule 2.1(c)(1), no shares of Common Stock or any other security of the Company are entitled to preemptive rights or to registration rights which have not already been complied with, and except as set forth in Schedule 2.1(c)(1), there are no outstanding options, warrants, scrip, rights to subscribe to, call or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company. Furthermore, except as set forth in this Agreement and as set forth in Schedule 2.1(c)(1), there are no contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of the capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company. Except for customary transfer restrictions contained in agreements entered into by the Company in order to sell restricted securities the Company is not a party to or bound by any agreement or understanding granting registration or anti-dilution rights to any person with respect to any of its equity or debt securities. Except as set forth on Schedule 2.1(c)(2), the Company is not a party to, and it has no knowledge of, any agreement or understanding restricting the voting or transfer of any shares of the capital stock of the Company. The offer and sale of all capital stock, convertible securities, rights, warrants, or options of the Company issued prior to each Closing complied with all applicable federal and state securities laws, and no holder of such securities has a right of rescission or claim for damages with respect thereto which could have a Material Adverse Effect. The Company has furnished or made available to the Purchasers true and correct copies of the

Company’s Certificate of Incorporation as in effect on the date hereof (the “Certificate”), and the Company’s Bylaws as in effect on the date hereof (the “Bylaws”).

(d) Issuance of Securities. The Preferred Shares and the Warrants to be issued at each Closing have been duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, the Preferred Shares and the Warrants shall be validly issued and outstanding, fully paid and nonassessable and free and clear of all liens, encumbrances and rights of refusal of any kind and the holders of the Preferred Shares shall be entitled to all rights accorded to them in the Certificate of Designation. When the Warrant Shares are issued and paid for in accordance with the terms of this Agreement and as set forth in the Warrants, and when the Conversion Shares are issued upon conversion of the Preferred Shares, such shares will be duly authorized by all necessary corporate action and validly issued and outstanding, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of refusal of any kind and the holders shall be entitled to all rights accorded to a holder of Common Stock.

(e) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Preferred Shares and the Warrants) do not and will not (i) violate or conflict with any provision of the Company’s Certificate or Bylaws or its Subsidiaries’ comparable charter documents, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries’ respective properties or assets are bound, (iii) create or impose a lien, mortgage, security interest, charge or encumbrance of any nature on any property or asset of the Company or its Subsidiaries under any agreement or any commitment to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or by which any of their respective properties or assets are bound, or (iv) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries are bound or affected, except, in all cases other than violations pursuant to clauses (i) or (iv) (with respect to federal and state securities laws) above, for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted in violation of any laws, ordinances or regulations of any governmental entity, except for possible violations which singularly or in the aggregate do not and will not have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is required under federal, state, foreign or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents or issue and sell the Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares in accordance with the terms hereof or thereof (other than any filings which may be required to be made by the Company with the Commission, prior to or subsequent to the

Closing, or state securities administrators subsequent to the Closing, or any registration statement which may be filed pursuant hereto or the Registration Rights Agreement).

(f) Commission Documents, Financial Statements. The Common Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and except as set forth on Schedule 2.1(f), the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the Commission pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of the foregoing including filings incorporated by reference therein being referred to herein as the “Commission Documents”). The Company has delivered or made available to the Purchasers true and complete copies of the latest Commission Documents filed with the Commission. The Company has not provided to the Purchasers any material non-public information or other information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement. At the time of its filing, the Form 10-QSB for the fiscal quarter ended September 30, 2006, as amended on April 17, 2007 (the “Form 10-QSB”) complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such documents, and the Form 10-Q did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the Commission Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company and its Subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(g) Subsidiaries. The Company’s only Subsidiaries are OrCel, LLC, a limited liability company organized under the laws of the State of Delaware, Hapto Biotech, Inc., a corporation organized under the laws of the State of Delaware, and Hapto Biotech (Israel) Ltd., a corporation organized under the laws of Israel. Such Subsidiaries are each wholly-owned by the Company. All of the outstanding membership interests and other securities of such Subsidiaries have been duly authorized and validly issued, and are fully paid and nonassessable. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any such Subsidiary for the purchase or acquisition of any membership interests or other securities of such Subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to subscribe for any membership interests or other securities of such Subsidiary except for agreements between the Company, OrCel, LLC and PRF

which will terminate and be of no force and effect on Initial Closing. Neither the Company nor any such Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any membership interests or other securities of such Subsidiary or any convertible securities, rights, warrants or options of the type described in the preceding sentence. Neither the Company nor any such Subsidiary is party to, nor has any knowledge of, any agreement restricting the voting or transfer of any membership interests of such Subsidiary except for agreements between the Company, OrCel, LLC and PRF.

(h) No Material Adverse Change. Since September 30, 2006, the Company has not experienced or suffered any Material Adverse Effect, except for use of its cash in the regular course of its development stage activities, without offsetting income, as set forth on Schedule 2.1(h) hereto.

(i) No Undisclosed Liabilities. Except as included in the financial statements in the Commission Documents or as set forth on Schedule 2.1 hereto, neither the Company nor any of its Subsidiaries has any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) other than those incurred in the ordinary course of the Company’s or its Subsidiaries’ respective businesses since September 30, 2006 and which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company or its Subsidiaries.

(j) No Undisclosed Events or Circumstances. Since September 30, 2006, no event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

(k) Indebtedness. The Company’s financial statements and other information in the Commission Documents set forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or its Subsidiaries, or for which the Company or its Subsidiaries have commitments, except for additional indebtedness incurred by the Company and its Subsidiaries in the regular course of their development stage activities, without offsetting income, as set forth on Schedule 2.1(k).

(l) Title to Assets. Each of the Company and its Subsidiaries has good and marketable title to all of its real and personal property, free and clear of any mortgages, pledges, charges, liens, security interests or other encumbrances of any nature whatsoever, except for those indicated in the Commission Documents or such that, individually or in the aggregate, do not have a Material Adverse Effect. All leases of the Company and its Subsidiaries are valid and subsisting and in full force and effect except that the Company is in violation of its lease with Columbia University for its office and laboratory facilities because the Company is in arrears in its rental payments.

(m) Actions Pending. There is no action, suit, claim, investigation, arbitration, alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of the Company, threatened against the Company or its Subsidiaries which questions the validity of this

Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby or thereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth on Schedule 2.1(m) hereto, there is no action, suit, claim, investigation, arbitration, alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company, any of its Subsidiaries or any of their respective properties or assets, which individually or in the aggregate, would have a Material Adverse Effect. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any of its Subsidiaries or any officers or directors of the Company or its Subsidiaries in their capacities as such, which individually or in the aggregate, would have a Material Adverse Effect.

(n) Compliance with Law. The business of the Company and its Subsidiaries has been and is presently being conducted in accordance with all applicable federal, state and local governmental laws, rules, regulations and ordinances, except or such that, individually or in the aggregate, the noncompliance therewith would have a Material Adverse Effect. The Company and its Subsidiaries have all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of their business as now being conducted by them unless the failure to possess such franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

(o) Taxes. The Company and its Subsidiaries have accurately prepared and filed all federal, state, foreign and other tax returns required by law to be filed by them, has paid or made provisions for the payment of all taxes shown to be due and all additional assessments, and adequate provisions have been and are reflected in the financial statements of the Company and its Subsidiaries for all current taxes and other charges to which the Company or its Subsidiaries are subject and which are not currently due and payable. None of the federal income tax returns of the Company or its Subsidiaries have been audited by the Internal Revenue Service. The Company has no knowledge of any additional assessments, adjustments or contingent tax liability (whether federal, state or foreign) of any nature whatsoever, whether pending or threatened against the Company or any of its Subsidiaries for any period, nor of any basis for any such assessment, adjustment or contingency.

(p) Certain Fees. Except as set forth in this Section 2.1 (p) and on Schedule 2.1(p) hereto, no brokers, finders or financial advisory fees or commissions will be payable by the Company or any subsidiary or any Purchaser with respect to the transactions contemplated by this Agreement. Brokers, finders and/or financial advisory fees and commissions shall include, but not be limited to, warrants substantially identical to the Warrants and the exchange of certain Series E PA Warrants, Series E Warrants, Series F PA Warrants and Series F Warrants held by such brokers and/or finders in exchange for shares of Common Stock of the Company.

(q) Disclosure. The Company confirms that neither it nor anyone working on its behalf has provided any of the Purchasers or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. To the best of the Company’s knowledge, neither this Agreement or the Schedules hereto nor any other documents, certificates

or instruments furnished to the Purchasers by or on behalf of the Company or its Subsidiaries in connection with the transactions contemplated by this Agreement contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading.

(r) Operation of Business. The Company and its Subsidiaries own or possess all patents, trademarks, domain names (whether or not registered) and any patentable improvements or copyrightable derivative works thereof, websites and intellectual property rights relating thereto, service marks, trade names, copyrights, licenses and authorizations, and all rights with respect to the foregoing, which are necessary for the conduct of its business as now conducted without any conflict with the rights of others. However, PRF has been assigned the Company’s United States patents and trademarks as security for payment of the Company’s obligations to PRF, which assignment will be released on Initial Closing or promptly thereafter.

(s) Environmental Compliance. The Company and its Subsidiaries have obtained all material approvals, authorization, certificates, consents, licenses, orders and permits or other similar authorizations of all governmental authorities, or from any other person, that are required under any Environmental Laws. “Environmental Laws” shall mean all applicable laws relating to the protection of the environment including, without limitation, all requirements pertaining to reporting, licensing, permitting, controlling, investigating or remediating emissions, discharges, releases or threatened releases of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, material or wastes, whether solid, liquid or gaseous in nature. The Company has all necessary governmental approvals required under all Environmental Laws and used in its business or in the business of its Subsidiaries, except for such instances as would not individually or in the aggregate have a Material Adverse Effect. The Company and its Subsidiaries are also in compliance with all other limitations, restrictions, conditions, standards, requirements, schedules and timetables required or imposed under all Environmental Laws. Except for such instances as would not individually or in the aggregate have a Material Adverse Effect, there are no past or present events, conditions, circumstances, incidents, actions or omissions relating to or in any way affecting the Company or its Subsidiaries that violate or may violate any Environmental Law after the Closing or that may give rise to any environmental liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study or investigation (i) under any Environmental Law, or (ii) based on or related to the manufacture, processing, distribution, use, treatment, storage (including, without limitation, underground storage tanks), disposal, transport or handling, or the emission, discharge, release or threatened release of any hazardous substance. “Environmental Liabilities” means all liabilities of a person (whether such liabilities are owed by such person to governmental authorities, third parties or otherwise) whether currently in existence or arising hereafter which arise under or relate to any Environmental Law.

(t) Books and Records; Internal Accounting Controls. The records and documents of the Company and its Subsidiaries accurately reflect in all material respects the

information relating to the business of the Company and its Subsidiaries, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company or its Subsidiaries. The Company and its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company’s board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate actions are taken with respect to any differences.

(u) Material Agreements. Except for those described or referred to in the Commission Documents, neither the Company nor any of its Subsidiaries is a party to any written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a copy of which would be required to be filed with the Commission (collectively, “Material Agreements”) if the Company or any of its Subsidiaries were registering securities under the Securities Act. Except as set forth on Schedule 2.1(u) hereto, , the Company and its Subsidiaries have in all material respects performed all the obligations required to be performed by them to date under the foregoing agreements, have received no notice of default and, to the best of the Company’s knowledge are not in default under any other Material Agreement now in effect, the result of which could cause a Material Adverse Effect. Except as set forth in Section 2.1(u) hereto, no written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement of the Company or of any of its Subsidiaries limits the payment of dividends on its Common Stock.

(v) Transactions with Affiliates. Except as disclosed in the Commission Documents and except for the employment of Raphael Hofstein, a director of the Company, by Hadasit, a supplier to a Subsidiary of the Company, there are no loans, leases, agreements, contracts, royalty agreements, management contracts or arrangements or other continuing transactions between (a) the Company, its Subsidiaries or any of their respective customers or suppliers on the one hand, and (b) on the other hand, any executive officer, or to the knowledge of the Company, any employee, consultant or director of the Company, or its Subsidiaries, or any member of the immediate family of such executive officer, employee, consultant or director or any corporation or other entity controlled by such executive officer, employee, consultant or director.

(w) Securities Act of 1933. The Company has complied and will comply with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares hereunder. Neither the Company nor anyone acting on its behalf, directly or indirectly, has or will sell, offer to sell or solicit offers to buy any of the Securities, or similar securities to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any person, or has taken or will take any action so as to bring the issuance and sale of any of the Securities under the registration provisions of the Securities Act and applicable state securities laws. Neither the Company nor any of its affiliates, nor any person acting on its or

their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of any of the Securities.

(x) Governmental Approvals. Except for the filing of any notice prior or subsequent to the Closing that may be required under applicable state and/or federal securities laws (which if required, shall be filed on a timely basis), no authorization, consent, approval, license, exemption of, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the execution or delivery of the Preferred Shares and the Warrants, or for the performance by the Company of its obligations under the Transaction Documents.

(y) Employees. Neither the Company nor its Subsidiaries have any collective bargaining arrangements or agreements covering any of their employees. Neither the Company nor its Subsidiaries have any employment contract, agreement regarding proprietary information, non-competition agreement, non-solicitation agreement, confidentiality agreement, or any other similar contract or restrictive covenant, relating to the right of any officer, employee or consultant to be employed or engaged by the Company or such Subsidiary. Since September 30, 2006, no officer, consultant or key employee of the Company or its Subsidiary whose termination, either individually or in the aggregate, could have a Material Adverse Effect, has terminated or, to the knowledge of the Company, has any present intention of terminating his or her employment or engagement with the Company or any Subsidiary, except for the possible terminations of the employment of Ron Lipstein and Steven Katz as provided in Section 12(a)(xiii) of the Exchange Agreement dated January 29, 2007 between the Company and PRF, the terms of which shall be acceptable to the Purchasers.

(z) Absence of Certain Developments. Except as set forth in the Commission Documents and on Schedule 2.1(z), since September 30, 2006, neither the Company nor any of its Subsidiaries has:

(i) issued any stock, bonds or other corporate securities or any rights, options or warrants with respect thereto, except for additional options granted under the Company’s Employee Stock Option Plan;

(ii) borrowed any amount or incurred or become subject to any liabilities (absolute or contingent) except trade payables incurred in the ordinary course of business;

(iii) discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business;

(iv) declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock;

(v) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business;

(vi) sold, assigned or transferred any patent rights, trademarks, trade names, copyrights, trade secrets or other intangible assets or intellectual property rights, or disclosed any proprietary confidential information to any person except in the ordinary course of business or to the Purchasers or its representatives;

(vii) suffered any substantial losses (except for losses incurred in connection with its development stage operations in the ordinary course without offsetting income as set forth on Schedule 2.1(z)(vii)) or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of prospective business;

(viii) made any changes in employee compensation except in the ordinary course of business and consistent with past practices;

(ix) made capital expenditures or commitments in excess of $100,000 therefor except in the ordinary course of its development stage operations as set forth on Schedule 2.1(z)(ix);

(x) entered into any other transaction other than in the ordinary course of business, or entered into any other material transaction, whether or not in the ordinary course of business;

(xi) made charitable contributions or pledges in excess of $25,000;

(xii) suffered any material damage, destruction or casualty loss, whether or not covered by insurance;

(xiii) experienced any material problems with labor or management in connection with the terms and conditions of their employment;

(xiv) effected any two or more events of the foregoing kind which in the aggregate would cause a Material Adverse Effect; or

(xv) entered into an agreement, written or otherwise, to take any of the foregoing actions.

(aa) Use of Proceeds. The proceeds from the sale of the Preferred Shares will be used by the Company for working capital and general corporate purposes.

(bb) Public Utility Holding Company Act and Investment Company Act Status. The Company is not a “holding company” or a “public utility company” as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. The Company is not, and as a result of and immediately upon the Closing will not be, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

(cc) ERISA. No liability to the Pension Benefit Guaranty Corporation has been incurred with respect to any Plan by the Company or any of its subsidiaries which is or would be materially adverse to the Company and its subsidiaries. The execution and delivery of this Agreement and the issue and sale of the Preferred Shares will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as amended, provided that, if any of the Purchasers, or any person or entity that owns a beneficial interest in any of the Purchasers, is an “employee pension benefit plan” (within the meaning of Section 3(2) of ERISA) with respect to which the Company is a “party in interest” (within the meaning of Section 3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this Section 2.1(ac), the term “Plan” shall mean an “employee pension benefit plan” (as defined in Section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any of its Subsidiaries or by any trade or business, whether or not incorporated, which, together with the Company or any of its Subsidiaries, is under common control, as described in Section 414(b) or (c) of the Code.

(dd) Dilutive Effect. The Company understands and acknowledges that the number of Conversion Shares issuable upon conversion of the Preferred Shares and the Warrant Shares issuable upon exercise of the Warrants will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Shares in accordance with this Agreement and the Certificate of Designation and its obligations to issue the Warrant Shares upon the exercise of the Warrants in accordance with this Agreement and the Warrants, is, in each case, absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interest of other stockholders of the Company.

(ee) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Preferred Shares and Warrants pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Preferred Shares and Warrants pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Preferred Shares and Warrants to be integrated with other offerings. The Company does not have any registration statement pending before the Commission or currently under the Commission’s review and since October 1, 2006, the Company has not offered or sold any of its equity securities or debt securities convertible into shares of Common Stock.

(ff) Independent Nature of Purchasers. The Company acknowledges that the obligations of each Purchaser under the Transaction Documents are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under the Transaction Documents. The Company acknowledges that the decision of each Purchaser to purchase securities pursuant to this Agreement has been made by such Purchaser independently of any other purchase and

independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company or of its Subsidiaries which may have been made or given by any other Purchaser or by any agent or employee of any other Purchaser, and no Purchaser or any of its agents or employees shall have any liability to any Purchaser (or any other person) relating to or arising from any such information, materials, statements or opinions. The Company acknowledges that nothing contained herein, or in any Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges that each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. The Company acknowledges that for reasons of administrative convenience only, the Transaction Documents have been prepared by counsel for one of the Purchasers and such counsel does not represent all of the Purchasers but only such Purchaser and the other Purchasers have retained their own individual counsel with respect to the transactions contemplated hereby. The Company acknowledges that it has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers. The Company acknowledges that such procedure with respect to the Transaction Documents in no way creates a presumption that the Purchasers are in any way acting in concert or as a group with respect to the Transaction Documents or the transactions contemplated hereby or thereby.

(gg) Sarbanes Oxley; Transfer Agent. The Company has complied with its obligations under the Sarbanes Oxley Act of 2002 and the rules and regulations promulgated thereunder. The Company’s transfer agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository Trust Company Automated Securities Transfer Program. The name, address, contact person and telephone number of the Company’s transfer agent is set forth on Schedule 2.1(gg) hereto.

Section 2.2 Representations and Warranties of the Purchasers. Each of the Purchasers severally and not jointly hereby makes the following representations and warranties to the Company with respect solely to itself and not with respect to any other Purchaser:

(a) Organization and Standing of the Purchasers. If the Purchaser is an entity, such Purchaser is a corporation or partnership duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

(b) Authorization and Power. The Purchaser has the requisite power and authority to enter into and perform this Agreement and to purchase the Preferred Shares being sold to it hereunder. The execution, delivery and performance of this Agreement and the Registration Rights Agreement by such Purchaser and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action (if the Purchaser is an entity), and no further consent or authorization of such

Purchaser or its Board of Directors, stockholders, or partners, as the case may be, is required. Each of this Agreement and the Registration Rights Agreement has been duly authorized, executed and delivered by such Purchaser.

(c) No Conflicts. The execution, delivery and performance of this Agreement and the Registration Rights Agreement and the consummation by such Purchaser of the transactions contemplated hereby and thereby or relating hereto do not and will not (i) result in a violation of such Purchaser’s charter documents or bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which such Purchaser is a party, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Purchaser or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a material adverse effect on such Purchaser). Such Purchaser is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or the Registration Rights Agreement or to purchase the Preferred Shares or acquire the Warrants in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Purchaser is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein.

(d) Acquisition for Investment. Such Purchaser is acquiring the Preferred Shares and the Warrants solely for its own account for the purpose of investment and not with a view to or for sale in connection with distribution. Such Purchaser does not have a present intention to sell the Preferred Shares or the Warrants, nor a present arrangement (whether or not legally binding) or intention to effect any distribution of the Preferred Shares or the Warrants to or through any person or entity, provided that by making the representations herein and subject to Section 2.2(h) below, such Purchaser does not agree to hold the Preferred Shares or the Warrants for any minimum or other specific term and reserves the right to dispose of the Preferred Shares or the Warrants at any time in accordance with Federal and state securities laws applicable to such disposition. Such Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Preferred Shares and the Warrants and that it has been given full access to such records of the Company and the subsidiaries and to the officers of the Company and the subsidiaries and received such information as it has deemed necessary or appropriate to conduct its due diligence investigation.

(e) Accredited Purchasers. Such Purchaser is an “accredited investor” as defined in Regulation D promulgated under the Securities Act and has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of the prospective investment in the Preferred Shares.

(f) Opportunities for Additional Information. Each Purchaser acknowledges that such Purchaser has had the opportunity to ask questions of and receive answers from, or obtain additional information from, the executive officers of the Company concerning the financial and other affairs of the Company, and to the extent deemed necessary in light of such

Purchaser’s personal knowledge of the Company’s affairs, such Purchaser has asked such questions and received answers to the full satisfaction of such Purchaser, and such Purchaser desires to invest in the Company.

(g) No General Solicitation. Each Purchaser acknowledges that the Securities were not offered to such Purchaser by means of any form of general or public solicitation or general advertising, or publicly disseminated advertisements or sales literature, including (i) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which such Purchaser was invited by any of the foregoing means of communications.

(h) Rule 144. Such Purchaser understands that the Shares must be held indefinitely unless such Shares are registered under the Securities Act or an exemption from registration is available. Such Purchaser acknowledges that such Purchaser is familiar with Rule 144 of the rules and regulations of the Commission, as amended, promulgated pursuant to the Securities Act (“Rule 144”), and that such person has been advised that Rule 144 permits resales only under certain circumstances. Such Purchaser understands that to the extent that Rule 144 is not available, such Purchaser will be unable to sell any Shares without either registration under the Securities Act or the existence of another exemption from such registration requirement.

(i) No Shorting. No Purchaser has engaged in any short sales of the Common Stock or instructed any third parties to engage in any short sales of the Common Stock on its behalf prior to the Closing Date. Each Purchaser covenants and agrees that it will not be in a net short position with respect to the shares of Common Stock. For purposes of this Section 2.2(i), a “net short position” means a sale of Common Stock by a Purchaser that is marked as a short sale and that is made at a time when there is no equivalent offsetting long position in Common Stock held by such Purchaser.

(j) General. Such Purchaser understands that the Shares are being offered and sold in reliance on a transactional exemption from the registration requirement of Federal and state securities laws and the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of such Purchaser to acquire the Shares.

(k) Certain Exchanges Excepted. For purposes of Section 5(e)(x) of the Series A Certificate of Designation and Series A-1 Certificate of Designation and the definition of “Permitted Issuances” as defined in Section 9 of the Warrants, each Purchaser acknowledges that the exchange of certain warrants outstanding on the date hereof for shares of the Company’s Common Stock shall not require the Company to make an adjustment of the Conversion Price under Section 5(e)(vi) of the Series A Certificate of Designation and Series A-1 Certificate of Designation or an adjustment of the Warrant Price under Section 4(d) of the Warrants

ARTICLE III

Covenants

The Company covenants with each of the Purchasers as follows, which covenants are for the benefit of the Purchasers and their permitted assignees (as defined herein).

Section 3.1 Securities Compliance.

(a) The Company shall notify the Commission in accordance with their rules and regulations, of the transactions contemplated by any of the Transaction Documents, including filing a report on Form 8-K and filing a Form D with respect to the Preferred Shares, Warrants, Conversion Shares and Warrant Shares, if required by the Commission’s rules, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares to the Purchasers or subsequent holders.

(b) The Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Purchasers set forth herein in order to determine the applicability of Federal and state securities laws exemptions and the suitability of such Purchasers to acquire the Preferred Shares.

Section 3.2 Registration and Listing. The Company will cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, will comply with all requirements related to any registration statement filed pursuant to this Agreement or the Registration Rights Agreement, and will not take any action or file any document (whether or not permitted by the Securities Act or the rules promulgated thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the Exchange Act or Securities Act, except as permitted herein. The Company will take all action necessary to continue the listing or trading of its Common Stock on the over-the-counter electronic bulletin board and on such other exchange or market on which the Common Stock is trading. If required, the Company will apply any listing application for the Shares and Warrant Shares. The Company further covenants and agrees that it will take such further action as the Purchasers may reasonably request, all to the extent required from time to time to enable the Purchasers to sell the Securities without registration under the Securities Act within the limitation of the exemptions provided in Rule 144 promulgated under the Securities Act. Upon the request of the Purchasers, the Company shall deliver to the Purchasers a written certification of a duly authorized officer as to whether it has complied with such requirement.

Section 3.3 Inspection Rights. The Company shall permit, during normal business hours and upon reasonable request and reasonable notice, each Purchaser or any employees, agents or representatives thereof, so long as such Purchaser shall be obligated hereunder to purchase the Preferred Shares or shall beneficially own any Preferred Shares, or shall own Conversion Shares which, in the aggregate, represent more than 2% of the total combined voting power of all voting securities then outstanding, for purposes reasonably related

to such Purchaser’s interests as a stockholder to examine and make reasonable copies of and extracts from the records and books of account of, and visit and inspect the properties, assets, operations and business of the Company and any subsidiary, and to discuss the affairs, finances and accounts of the Company and any subsidiary with any of its officers, consultants, directors, and key employees.

Section 3.4 Compliance with Laws. The Company shall comply, and cause each subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could have a Material Adverse Effect.

Section 3.5 Keeping of Records and Books of Account. The Company shall keep and cause each of its Subsidiaries to keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied, reflecting all financial transactions of the Company and its Subsidiaries, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made.

Section 3.6 Reporting Requirements. If the Company ceases to file its periodic reports with the Commission, or if the Commission ceases making these periodic reports available via the Internet without charge, then at a Purchaser’s request the Company shall furnish the following to such Purchaser so long as such Purchaser shall be obligated hereunder to purchase the Preferred Shares or shall beneficially own any Preferred Shares, or shall own Conversion Shares which, in the aggregate, represent more than 2% of the total combined voting power of all voting securities then outstanding:

(a) Quarterly Reports filed with the Commission on Form 10-Q or Form 10-QSB as soon as available, and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of the Company;

(b) Annual Reports filed with the Commission on Form 10-K or Form 10-KSB as soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Company; and

(c) Copies of all notices and information, including without limitation notices and proxy statements in connection with any meetings, that are provided to holders of shares of Common Stock, contemporaneously with the delivery of such notices or information to such holders of Common Stock.

Section 3.7 Amendments. The Company shall not amend or waive any provision of the Certificate, Bylaws or the Registration Rights Agreement in any way that would adversely affect the liquidation preferences, conversion rights, voting rights or redemption rights of the holders of the Preferred Shares, unless in compliance with the terms of such instruments or agreements.

Section 3.8 Other Agreements. The Company shall not enter into any agreement in which the terms of such agreement would restrict or impair the right or ability to

perform of the Company or any subsidiary under any Transaction Document or the Certificate of Designation.

Section 3.9 Distributions; Subsidiaries. So long as any Preferred Shares or Warrants remain outstanding, the Company agrees that it shall not (i) declare or pay any dividends or make any distributions to any holder(s) of Common Stock or (ii) purchase or otherwise acquire for value, directly or indirectly, any Common Stock or other equity security of the Company. So long as any Preferred Shares or Warrants remain outstanding, the Company agrees that it shall not transfer, assign, pledge, issue or otherwise permit any equity or other ownership interests in the Subsidiaries to be beneficially owned or held by any person other than the Company.

Section 3.10 Status of Dividends. The Company covenants and agrees that (i) no Federal income tax return or claim for refund of Federal income tax or other submission to the Internal Revenue Service will adversely affect the Preferred Shares, any other series of its Preferred Stock, or the Common Stock, and any deduction shall not operate to jeopardize the availability to Purchasers of the dividends received deduction provided by Section 243(a)(1) of the Code or any successor provision, (ii) in no report to shareholders or to any governmental body having jurisdiction over the Company or otherwise will it treat the Preferred Shares other than as equity capital unless required to do so by a governmental body having jurisdiction over the accounts of the Company or by a change in generally accepted accounting principles required as a result of action by an authoritative accounting standards setting body, and (iii) other than pursuant to this Agreement or the Certificate of Designation, it will take no action which would result in the dividends paid by the Company on the Preferred Shares out of the Company’s current or accumulated earnings and profits being ineligible for the dividends received deduction provided by Section 243(a)(1) of the Code. The preceding sentence shall not be deemed to prevent the Company from designating the Preferred Stock as “Convertible Preferred Stock” in its annual and quarterly financial statements in accordance with its prior practice concerning other series of preferred stock of the Company. Notwithstanding the foregoing, the Company shall not be required to restate or modify its tax returns for periods prior to the Closing Date. In the event that the Purchasers have reasonable cause to believe that dividends paid by the Company on the Preferred Shares out of the Company’s current or accumulated earnings and profits will not be treated as eligible for the dividends received deduction provided by Section 243(a)(1) of the Code, or any successor provision, the Company will, at the reasonable request of the Purchasers of 51% of the outstanding Preferred Shares, join with the Purchasers in the submission to the Service of a request for a ruling that dividends paid on the Shares will be so eligible for Federal income tax purposes, at the Purchasers expense. In addition, the Company will reasonably cooperate with the Purchasers (at Purchasers’ expense) in any litigation, appeal or other proceeding challenging or contesting any ruling, technical advice, finding or determination that earnings and profits are not eligible for the dividends received deduction provided by Section 243(a)(1) of the Code, or any successor provision to the extent that the position to be taken in any such litigation, appeal, or other proceeding is not contrary to any provision of the Code or incurred in connection with any such submission, litigation, appeal or other proceeding. Notwithstanding the foregoing, nothing herein contained shall be deemed to preclude the Company from claiming a deduction with respect to such dividends if (i) the Code shall hereafter be amended, or final Treasury regulations thereunder are issued or modified, to

provide that dividends on the Preferred Shares or Conversion Shares should not be treated as dividends for Federal income tax purposes or that a deduction with respect to all or a portion of the dividends on the Shares is allowable for Federal income tax purposes, or (ii) in the absence of such an amendment, issuance or modification and after a submission of a request for ruling or technical advice, the service shall rule or advise that dividends on the shares should not be treated as dividends for Federal income tax purposes. If the Service determines that the Preferred Shares or Conversion Shares constitute debt, the Company may file protective claims for refund.

Section 3.11 Disclosure of Transaction. The Company shall issue a press release describing the material terms of the transactions contemplated hereby (the “Press Release”) on each Closing Date; provided, however, that if such Closing occurs after 4:00 P.M. Eastern Time on any Trading Day, the Company shall issue the Press Release no later than 9:00 A.M. Eastern Time on the first Trading Day following such Closing Date. The Company shall also file with the Commission a Current Report on Form 8-K (the “Form 8-K”) describing the material terms of the transactions contemplated hereby (and attaching as exhibits thereto this Agreement, the Certificate of Designation, the Registration Rights Agreement, the form of Warrant and the Press Release) as soon as practicable following each Closing Date but in no event more than four (4) Trading Days following each Closing Date, which Press Release and Form 8-K shall be subject to prior review and reasonable comment by the Purchasers. “Trading Day” means any day during which the principal exchange on which the Common Stock is traded shall be open for trading.

Section 3.12 Conversions; Opinions. The Company will provide, at the Company’s expense, such legal opinions in the future as are reasonably necessary but only in conformance with federal and state securities regulations for the issuance and resale of the Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants pursuant to an effective registration statement, Rule 144 under the 1933 Act or an exemption from registration. In the event that Common Stock is sold in a manner that complies with an exemption from registration, the Company will promptly instruct its counsel (at its expense) to issue to the transfer agent an opinion permitting removal of the legend (indefinitely, if pursuant to Rule 144(k) of the 1933 Act, or to permit sale of the shares if pursuant to the other provisions of Rule 144 of the 1933 Act).

Section 3.13 Reservation of Shares. So long as any of the Preferred Shares or Warrants remain outstanding, the Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than 120% of the aggregate number of shares of Common Stock needed to provide for the issuance of the Conversion Shares and the Warrant Shares.

Section 3.14 Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of each Purchaser or its respective nominee(s), for the Conversion Shares and the Warrant Shares in such amounts as specified from time to time by each Purchaser to the Company upon conversion of the Preferred Shares or exercise of the Warrants in the form of Exhibit E attached hereto (the “Irrevocable Transfer Agent Instructions”). Prior to registration of the Conversion Shares and the Warrant Shares under the Securities Act, all such certificates shall

bear the restrictive legend specified in Section 6.1 of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 3.14 will be given by the Company to its transfer agent and that the Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section 3.14 shall affect in any way each Purchaser’s obligations and agreements set forth in Section 6.1 to comply with all applicable prospectus delivery requirements, if any, upon resale of the Shares. If a Purchaser provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Shares may be made without registration under the Securities Act or the Purchaser provides the Company with reasonable assurances that the Shares can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold, the Company shall permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by such Purchaser and, without any restrictive legend. The Company acknowledges that a breach by it of its obligations under this Section 3.14 will cause irreparable harm to the Purchasers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 3.14 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 3.14, that the Purchasers shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

Section 3.15 Disposition of Assets. So long as the Preferred Shares remain outstanding, neither the Company nor any of its Subsidiaries shall sell, transfer or otherwise dispose of any of its properties, assets and rights including, without limitation, its software and intellectual property, to any person except for sales to customers in the ordinary course of business or with the prior written consent of the holders of a majority of the Preferred Shares then outstanding.

Section 3.16 No Issuance of Senior Securities. So long as Preferred Shares and Series A-1 Convertible Preferred Shares with an aggregate of $2,000,000 of stated value (as stated in the Certificate of Designation for the Preferred Shares and Series A-1 Preferred Shares) remains outstanding, the Company shall not, and shall not permit any Subsidiary to, whether by operation of law or otherwise, offer, sell or issue or allow to exist, any securities or financial instruments that would rank senior to or pari passu with the Preferred Shares, Series A-1 Convertible Preferred Stock or Series A-2 Convertible Preferred Stock (or securities or financial instruments convertible or exchangeable into any such securities or financial instruments) with respect to dividends or liquidation, including, without limitation, any Indebtedness, or any ownership or other interest in any Subsidiary, without the prior written approval of at least fifty percent (50%) of the Preferred Shares and Series A-1 Convertible Preferred Stock outstanding (together as one class); provided, however, that no such senior or pari passu securities or financial instruments shall contain (a) a liquidation preference in excess of one (1) times the purchase price paid to the Company therefor, or (b) an annual dividend or interest rate in excess of LIBOR, plus 6 basis points without, in the case of either (a) or (b), the prior written approval of thirty percent (30%) of the Preferred Shares and the Series A-1 Convertible Preferred Stock

outstanding, each voting separately as a class. The provisions of this Section 3.16 shall not apply to (a) the issuance prior to December 31, 2007 of up to $3,000,000 of securities used to settle trade payables ranking pari passu with the Preferred Shares and the Series A-1 Convertible Preferred Shares, provided, that a Release Event has not occurred as of the date of the issuance of such securities and (b) a working capital line of credit, containing typical and customary terms and conditions of up to $2,000,000 issued by a bank, credit, union, governmental agency or similar unaffiliated corporate or institutional lender. For purposes of this Section 3.16, “Indebtedness” means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptance, current swap agreements, Interest Rate Agreements, interest rate swaps, or other financial products, (c) all capital lease obligations that exceed $100,000 in any fiscal year to the extent incurred in the Company’s ordinary course of business, (d) all obligations or liabilities secured by a lien or encumbrance on any asset of the Company or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations for the deferred purchase price of assets, together with trade debt and other accounts payable that exceed $100,000 in any fiscal year to the extent incurred in the Company’s ordinary course of business, (f) all synthetic leases, and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse) any of the foregoing obligations of any other person; provided, however, Indebtedness shall not include (a) usual and customary trade debt incurred in the ordinary course of business and (b) endorsements for collection or deposit in the ordinary course of business.

Section 3.17 Most Favored Nations Exchange Right; Subsequent Financing. So long as the Preferred Shares and Series A-1 Convertible Preferred Stock remain outstanding, if the Company enters into any equity or equity linked financing (“Subsequent Financing”) on terms more favorable than the terms governing the Preferred Shares and Series A-1 Convertible Preferred Shares, then the Purchasers and PRF in their sole discretion may exchange their Preferred Shares and Series A-1 Convertible Preferred Shares, as the case may be, valued at their stated value, for the securities issued or to be issued in the Subsequent Financing to the extent a Release Event has not occurred with respect to such shares. The term “Release Event” means, with respect to a holder’s shares of Series A Preferred Stock and Series A-1 Preferred Stock, the date on which the Company files a Form 8-K with the Commission disclosing the Company’s receipt of written notice from the U.S. Food and Drug Administration regarding the granting the Issuer the right to commercialize and market (i.e., formal approval of the Issuer’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers.

(a) For a period of two (2) years following the Initial Closing Date so long as the Preferred Shares remain outstanding, the Company covenants and agrees to promptly notify (in no event later than five (5) business days after making or receiving an applicable offer) in writing (a “Rights Notice”) the Purchasers who have purchased at least $3,500,000 of Preferred Shares (each, a “Preferred Stockholder” and collectively the “Preferred Stockholders”) of the terms and conditions of any proposed offer or sale to, or exchange with (or other type of distribution to) any third party (a “Subsequent Financing”), of Common Stock or any debt or equity securities convertible, exercisable or exchangeable into Common Stock. The Rights Notice shall describe, in reasonable detail, the proposed Subsequent Financing, the names and investment amounts of all investors participating in the Subsequent Financing (if known), the proposed closing date of the Subsequent Financing, which shall be within twenty (20) calendar

days from the date of the Rights Notice, and all of the terms and conditions thereof and proposed definitive documentation to be entered into in connection therewith. The Rights Notice shall provide each Preferred Stockholder an option (the “Rights Option”) during the ten (10) Trading Days following delivery of the Rights Notice (the “Option Period”) to inform the Company whether such Preferred Stockholder will purchase up to forty percent (40%) of the securities being offered in such Subsequent Financing on the same, absolute terms and conditions as contemplated by such Subsequent Financing. Delivery of any Rights Notice constitutes a representation and warranty by the Company that there are no other material terms and conditions, arrangements, agreements or otherwise except for those disclosed in the Rights Notice, to provide additional compensation to any party participating in any proposed Subsequent Financing, including, but not limited to, additional compensation based on changes in the Purchase Price or any type of reset or adjustment of a purchase or conversion price or to issue additional securities at any time after the closing date of a Subsequent Financing. If the Company does not receive notice of exercise of the Rights Option from the Preferred Stockholder within the Option Period, the Company shall have the right to close the Subsequent Financing on the scheduled closing date with a third party; provided that all of the material terms and conditions of the closing are the same as those provided to the Preferred Stockholder in the Rights Notice. If the closing of the proposed Subsequent Financing does not occur on that date, any closing of the contemplated Subsequent Financing or any other Subsequent Financing shall be subject to all of the provisions of this Section 3.17(a), including, without limitation, the delivery of a new Rights Notice. The provisions of this Section 3.17(a) shall not apply to issuances of securities in a Permitted Financing.

(b) For purposes of this Agreement, a Permitted Financing (as defined hereinafter) shall not be considered a Subsequent Financing. A “Permitted Financing” shall mean (i) securities issued (other than for cash) in connection with a merger, acquisition, or consolidation, (ii) securities issued pursuant to the conversion or exercise of convertible or exercisable securities issued or outstanding on or prior to the date of this Agreement or issued pursuant to this Agreement (so long as the conversion or exercise price in such securities are not amended to lower such price and/or adversely affect the Purchasers), (iii) securities issued in connection with bona fide strategic license agreements or other partnering arrangements so long as such issuances are not for the purpose of raising capital, (iv) Common Stock issued or the issuance or grants of options to purchase Common Stock pursuant to the Company’s stock option plans and employee stock purchase plans or stock incentive plans as they exist on the date of this Agreement or are hereafter adopted or otherwise so long as such issuances in the aggregate do not exceed ten percent (10)% of the issued and outstanding shares of Common Stock as of the Original Issue Date, and (v) any warrants issued to the placement agent and its designees for the transactions contemplated by the Purchase Agreement.

Section 3.18 Form 10-KSB. The Company shall use its best efforts to file its Form 10-KSB for the period ending December 31, 2006 (“Form 10-K”) promptly after the Initial Closing.

Section 3.19 Executive Management. Following the filing of the Form 10-K, Costa Papastephanou, Ph.D., President and COO, shall be named Chief Executive Officer of the Company, and Ron Lipstein and Steven Katz shall resign from the Company’s Board of

Directors and enter into agreements terminating their employment with the Company pursuant to the terms set forth on Schedule 3.19 hereto upon terms acceptable to PRF, the Board of Directors and Montaur Capital Partners.

Section 3.20 Board of Directors. Promptly after the filing of the Form 10-K, the Board of Directors shall be reconstituted to consist of no fewer than five (5) members, of which no more than two (2) directors shall be from the current Board of Directors and one (1) member shall be designated by PRF. PRF shall have a continuing right to designate one other person to attend meetings of the Board of Directors as an observer.

Section 3.21 Restrictions on Use of Proceeds. The Company agrees that it shall not use more than $300,000 from the proceeds of the sale of the Preferred Shares and Warrants until the Form 10-KSB for the period ending December 31, 2006 has been filed.

Section 3.22 Affiliate Transaction. Without the prior written consent of holders of at least 50% of the Preferred Shares, the Company and its Subsidiaries shall not engage in any transactions with any officer, director, employee or any Affiliate of the Company or any Subsidiary, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of an aggregate of $150,000 each fiscal year, other than (i) for payment of salary, bonus or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company, (iii) for other employee benefits, including stock option agreements under any stock option plan, or stock grants under any plan, of the Company, (iv) stock or option grants authorized by the Board of Directors or by a committee of the Board of Directors the majority of the members of which are independent directors, and (v) all payments to Ron Lipstein and Steven Katz pursuant to agreements currently entered or being entered into by them with the Company and referred to in Section 3.19 of this Agreement, the terms of which are outlined in Schedule 3.19 of this Agreement.

Section 3.23 Re-listing on the OTC Bulletin Board. Promptly following the filing of the Form 10-K, the Company will take all action necessary to re-list its Common Stock on the OTC Bulletin Board.

Section 3.24 Disclosure of FDA Approval. Promptly following the receipt thereof, the Company shall file a Form 8-K with the Commission disclosing the receipt of written notice from the U.S. Food and Drug Administration regarding granting the Company the right to commercialize and market (i.e., formal approval of the Issuer’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers.

ARTICLE IV

Conditions

Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the Shares. The obligation hereunder of the Company to issue and sell the Preferred Shares and the Warrants to the Purchasers is subject to the satisfaction or waiver, at or before each Closing, each of the conditions set forth below. These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

(a) Accuracy of Each Purchaser’s Representations and Warranties. The representations and warranties of each Purchaser shall be true and correct in all material respects as of the date when made and as of each Closing Date as though made at that time, except for representations and warranties that are expressly made as of a particular date, which shall be true and correct in all material respects as of such date.

(b) Performance by the Purchasers. Each Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Purchaser at or prior to each Closing.

(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

(d) Delivery of Purchase Price. The Purchase Price for the Preferred Shares and Warrants has been delivered to the Company at each Closing Date.

(e) Delivery of Transaction Documents. The Transaction Documents have been duly executed and delivered by the Purchasers to the Company.

Section 4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase the Shares. The obligation hereunder of each Purchaser to acquire and pay for the Preferred Shares and the Warrants is subject to the satisfaction or waiver, at or before the each Closing, of each of the conditions set forth below. These conditions are for each Purchaser’s sole benefit and may be waived by such Purchaser at any time in its sole discretion.

(a) Accuracy of the Company’s Representations and Warranties. Each of the representations and warranties of the Company in this Agreement or the other agreements contemplated hereby shall be true and correct in all material respects as of the date when made and as of each Closing Date as though made at that time (except for representations and warranties that speak as of a particular date), which shall be true and correct in all material respects as of such date.

(b) Performance by the Company. The Company shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to each Closing.

(c) No Suspension, Etc. From the date hereof to the Closing Date, trading in the Company’s Common Stock shall not have been suspended by the Commission (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing, trading in securities generally as reported by Bloomberg Financial Markets (“Bloomberg”) shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by Bloomberg, or on the New York Stock Exchange, nor shall a banking moratorium have been declared either by the United States or New York State authorities, nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on, or any material adverse change in any financial market which, in each case, in the judgment of such Purchaser, makes it impracticable or inadvisable to purchase the Preferred Shares.

(d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

(e) No Proceedings or Litigation. No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Company or any of its Subsidiaries, or any of the officers, directors or affiliates of the Company or any of its Subsidiaries seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

(f) Certificate of Designation of Rights and Preferences. Prior to the Initial Closing, the Certificate of Designation in the form of Exhibit C-1 attached hereto shall have been filed with and accepted by the Secretary of State of Delaware. The Certificate of Designations for the Series A-1 Preferred Shares and the Series A-2 Preferred Shares, in the forms attached hereto, shall have been filed with and accepted by the Secretary of State of Delaware. The Certificate of Designation for the Series D-2 Preferred Stock of the Company shall have been filed with and accepted by the Secretary of State of the State of Delaware, in the form attached hereto as Exhibit C-4.

(g) Opinion of Counsel, Etc. At each Closing, the Purchasers shall have received an opinion of counsel to the Company, dated the date of such Closing, in the form of Exhibit F hereto, and such other certificates and documents as the Purchasers or its counsel shall reasonably require incident to each Closing.

(h) Registration Rights Agreement. At the Initial Closing, the Company shall have executed and delivered the Registration Rights Agreement to each Purchaser.

(i) Certificates. The Company shall have executed and delivered to the Purchasers the certificates (in such denominations as such Purchaser shall request) for the Preferred Shares and Warrants being acquired by such Purchaser at each Closing.

(j) Resolutions. The Board of Directors of the Company shall have adopted resolutions consistent with Section 2.1(b) above in a form reasonably acceptable to such Purchaser (the “Resolutions”).

(k) Reservation of Shares. As of each Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and the exercise of the Warrants, a number of shares of Common Stock equal to at least 120% of the aggregate number of Conversion Shares issuable upon conversion of the Preferred Shares outstanding on the Closing Date and the number of Warrant Shares issuable upon exercise of the number of Warrants assuming such Warrants were granted on the Closing Date (after giving effect to the Preferred Shares and the Warrants to be issued on the Closing Date and assuming all such Preferred Shares and Warrants were fully convertible or exercisable on such date regardless of any limitation on the timing or amount of such conversions or exercises). The Company shall have reserved, solely for the purposes of exercise of the Series M Warrants, at least 120% of the shares of the Series D-2 Preferred Stock issuable upon exercise the Series M Warrants.

(l) Transfer Agent Instructions. The Irrevocable Transfer Agent Instructions, in the form of Exhibit E attached hereto, shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

(m) Secretary’s Certificate. The Company shall have delivered to such Purchaser a secretary’s certificate, dated as of each Closing Date, as to (i) the Resolutions, (ii) the Certificate, (iii) the Bylaws, (iv) the Certificate of Designation, each as in effect at the Closing, and (iv) the authority and incumbency of the officers of the Company executing the Transaction Documents and any other documents required to be executed or delivered in connection therewith.

(n) Officer’s Certificate. The Company shall have delivered to the Purchasers a certificate of an executive officer of the Company, dated as of each Closing Date, confirming the accuracy of the Company’s representations, warranties and covenants as of the Closing Date and confirming the compliance by the Company with the conditions precedent set forth in this Section 4.2 as of the Closing Date.

(o) Material Adverse Effect. No Material Adverse Effect shall have occurred at or before each Closing Date.

(p) Escrow Agreement. The Company and the parties thereto shall have executed and delivered the Escrow Agreement.

(q) Amended and Restated PRF Exchange Agreement. The Company and PRF shall have executed and delivered the Amended and Restated PRF Exchange Agreement, in

form and substance reasonably satisfactory to the Purchasers, and the transactions contemplated therein shall have been consummated. PRF shall have released any and all security interests in any assets of the Company held by it (including patents and trademarks).

ARTICLE V

Intentionally Omitted.

ARTICLE VI

Stock Certificate Legend

Section 6.1 Legend. Each certificate representing the Preferred Shares and the Warrants, and, if appropriate, securities issued upon conversion or exercise thereof, shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required by applicable state securities or “blue sky” laws):


	THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

The Company agrees to reissue certificates representing the Shares without the legend set forth above if at such time, prior to making any transfer of any Shares or Shares, such holder thereof shall give written notice to the Company describing the manner and terms of such transfer and removal as the Company may reasonably request, and (x) the Shares have been registered for sale under the Securities Act and the holder is selling such shares and is complying with its prospectus delivery requirement under the Securities Act, (y) the holder is selling such Shares in compliance with the provisions of Rule 144 or (z) the provisions of paragraph (k) of Rule 144 apply to such Shares.

ARTICLE VII

Intentionally Omitted.

ARTICLE VIII

Indemnification

Section 8.1 General Indemnity. The Company agrees to indemnify and hold harmless the Purchasers and any finder (and their respective directors, officers, affiliates, agents, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Purchasers as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company herein. Each Purchaser severally but not jointly agrees to indemnify and hold harmless the Company and its directors, officers, affiliates, agents, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Company as result of any inaccuracy in or breach of the representations, warranties or covenants made by such Purchaser herein. The maximum aggregate liability of each Purchaser pursuant to its indemnification obligations under this Article 8 shall not exceed the portion of the Purchase Price paid by such Purchaser hereunder.

Section 8.2 Indemnification Procedure. Any party entitled to indemnification under this Article VIII (an “indemnified party”) will give written notice to the indemnifying party of any matters giving rise to a claim for indemnification; provided, that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Article VIII except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an indemnified party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the indemnified party a conflict of interest between it and the indemnifying party may exist with respect of such action, proceeding or claim, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. In the event that the indemnifying party advises an indemnified party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the indemnified party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the indemnified party’s costs and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The indemnified party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the indemnified party which relates to such action or claim. The indemnifying party shall keep the indemnified party fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action or claim, then the indemnified party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for

any settlement of any action, claim or proceeding effected without its prior written consent. Notwithstanding anything in this Article VIII to the contrary, the indemnifying party shall not, without the indemnified party’s prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the indemnified party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the indemnified party of a release from all liability in respect of such claim. The indemnification required by this Article VIII shall be made by periodic payments of the amount thereof during the course of investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, so long as the indemnified party irrevocably agrees to refund such moneys if it is ultimately determined by a court of competent jurisdiction that such party was not entitled to indemnification. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar rights of the indemnified party against the indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law.

ARTICLE IX

Miscellaneous

Section 9.1 Fees and Expenses. Except as otherwise set forth in this Agreement or the Certificate of Designation, each party shall pay the fees and expenses of its advisors, counsel, accountants and other experts, if any, and all other expenses, incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, provided that the Company shall pay, at the Initial Closing (i) all actual attorneys’ fees and expenses (exclusive of disbursements and out-of-pocket expenses) incurred by Platinum Partners, Montaur Capital Partners and Burnham Hill Partners in connection with the preparation, negotiation, execution and delivery of this Agreement and the transactions contemplated hereunder and (ii) in connection with the filing and declaration of effectiveness by the Commission of the Registration Statement and any amendments, modifications or waivers of this Agreement or any of the other Transaction Documents. In addition, the Company shall pay all reasonable fees and expenses incurred by the Purchasers in connection with the enforcement of this Agreement or any of the other Transaction Documents, including, without limitation, all reasonable attorneys’ fees and expenses. The Company shall pay all stamp or other similar taxes and duties levied in connection with issuance of the Preferred Shares pursuant hereto.

Section 9.2 Specific Enforcement, Consent to Jurisdiction.

(a) The Company and the Purchasers acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement, the Certificate of Designation or the Registration Rights Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement or the Registration Rights Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity.

(b) Each of the Company and the Purchasers (i) hereby irrevocably submits to the jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in New York County for the purposes of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Transaction Documents or the transactions contemplated hereby or thereby and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Company and the Purchasers consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 9.2 shall affect or limit any right to serve process in any other manner permitted by law. The parties hereto agree that the prevailing party in any suit, action or proceeding arising out of or relating to the Preferred Shares, the Warrants, this Agreement or the other agreements between the Purchasers and the Company contemplated hereby shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party.

Section 9.3 Entire Agreement; Amendment. This Agreement contains the entire understanding of the parties with respect to the matters covered hereby and, except as specifically set forth herein or in the Transaction Documents or the Certificate of Designation, neither the Company nor any of the Purchasers makes any representations, warranty, covenant or undertaking with respect to such matters and they supersede all prior understandings and agreements with respect to said subject matter, all of which are merged herein. Except as set forth elsewhere herein and except for Section 3.16 hereof which shall require the consent of fifty percent (50%) of the Preferred Shares and Series A-1 Preferred Stock (voting together as one class), no provision of this Agreement may be waived or amended other than by a written instrument signed by the Company and the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding and no provision hereof may be waived other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Preferred Shares then outstanding. No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents or the Certificate of Designation unless the same consideration is also offered to all of the parties to the Transaction Documents or holders of Preferred Shares, as the case may be. Copies of any requests for waivers or amendments from the Purchasers shall also be delivered to the Paul Royalty Fund, L.P., c/o Paul Capital Advisors, L.L.C., Two Grand Central Tower, 140 East 45^th Street, 44^th Floor, New York, New York 10017, Attention: Lionel Leventhal, Tel No.: (646) 264-1106, Fax No.: (646) 264-1101 and to Morton E. Grosz, Esq., 30 Rockefeller Plaza, New York, New York 10112, Tel No.: (212) 408-5592, Fax No.: (212) 541-5369.

Section 9.4 Notices. 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 telex (with correct answer back received), 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. The addresses for such communications shall be:


	If to the Company:	Ortec International, Inc.
		3960 Broadway
		New York, NY 10032
		Attention: Chief Financial Officer
		Tel. No.: (646) 218-1885
		Fax No.: (212) 740-2570

	with copies to:	Feder Kaszovitz Isaacson Weber Skala Bass & Rhine, LLP
		750 Lexington Avenue
		New York, New York 10022
		Attention: Gabriel Kaszovitz, Esq.
		Tel. No.: (212) 888-8200
		Fax No.: (212) 888-7776

	If to any Purchaser:	At the address of such Purchaser set forth on Exhibit A to this Agreement, with copies to Purchaser’s counsel as set forth on Exhibit A or as specified in writing by such Purchaser with copies to:

		Christopher S. Auguste, Esq.
		Kramer Levin Naftalis & Frankel LLP
		1177 Avenue of the Americas
		New York, New York 10036
		Tel No.: (212) 715-9100
		Fax No.: (212) 715-8000

Any party hereto may from time to time change its address for notices by giving at least ten (10) days written notice of such changed address to the other party hereto.

Section 9.5 Waivers by Party. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provisions, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

Section 9.6 Waivers by Majority Holders. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the holders of not less than two-thirds (2/3) of the then outstanding Preferred Shares may waive any of the obligations of the Company or the then rights of the Purchasers set forth in this Agreement (except with respect to Section 3.16 hereof which shall require the consent of fifty percent (50%) of the Preferred Shares and Series A-1 Preferred Stock (voting together as one class)).

Section 9.7 Headings. The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

Section 9.8 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. After the Closing, the assignment by a party to this Agreement of any rights hereunder shall not affect the obligations of such party under this Agreement.

Section 9.9 No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 9.10 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to the choice of law provisions. This Agreement shall not interpreted or construed with any presumption against the party causing this Agreement to be drafted.

Section 9.11 Survival. The representations and warranties of the Company and the Purchasers contained in Sections 2.1(o) and (s) should survive indefinitely and those contained in Article II, with the exception of Sections 2.1(o) and (s), shall survive the execution and delivery hereof and the Closing until the date three (3) years from the Closing Date, and the agreements and covenants set forth in Articles I, III, VIII and IX of this Agreement shall survive the execution and delivery hereof and the Closing hereunder until the Purchasers in the aggregate beneficially own (determined in accordance with Rule 13d-3 under the Exchange Act) less than 2% of the total combined voting power of all voting securities then outstanding, provided, that Sections 3.1, 3.2, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9, 3.10, 3.13, 3.14, 3.16, 3.17 and 3.22 shall in no event expire until the Registration Statement required by Section 2 of the Registration Rights Agreement is no longer required to be effective under the terms and conditions of the Registration Rights Agreement.

Section 9.12 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. Any signature may be delivered by facsimile transmission.

Section 9.13 Publicity. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchasers without the consent of the Purchasers unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement.

Section 9.14 Severability. The provisions of this Agreement, the Certificate of Designation and the Registration Rights Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement, the Certificate of Designation or the Registration Rights Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect,

such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement, the Certificate of Designation or the Registration Rights Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible.

Section 9.15 Further Assurances. From and after the date of this Agreement, upon the request of any Purchaser or the Company, each of the Company and the Purchasers shall execute and deliver such instrument, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement, the Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares, the Certificate of Designation and the Registration Rights Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officer as of the date first above written.


	ORTEC INTERNATIONAL, INC.


	By:	/s/ Alan W. Schoenbart

		Name:
		Title:


	PURCHASER


	By:

		Name:
		Title:

EXHIBIT A to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENTFOR ORTEC
INTERNATIONAL, INC.


Names and Addresses	Number of Preferred Shares	Dollar Amount
of Purchasers	& Warrants Purchased	of Investment

EXHIBIT B-1 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF SERIES A WARRANT

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

SERIES A WARRANT TO PURCHASE

SHARES OF COMMON STOCK

ORTEC INTERNATIONAL, INC.

Expires June 18, 2012


No.: W-A -___ Date of Issuance: June 18, 2007	Number of Shares: ______

FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the undersigned, Ortec International, Inc., a Delaware corporation (together with its successors and assigns, the “Issuer”), hereby certifies that ______________________ or its registered assigns is entitled to subscribe for and purchase, during the period specified in this Warrant, up to _______________ (________) shares (subject to adjustment as hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect, subject, however, to the provisions and upon the terms and conditions hereinafter set forth. Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective meanings specified in Section 9 hereof.

1. Term. The right to subscribe for and purchase shares of Warrant Stock represented hereby shall commence on June 18, 2007 and shall expire at 5:00 p.m., eastern time, on June 18, 2012 (such period being the “Term”).

2. Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.

(a) Time of Exercise. The purchase rights represented by this Warrant may be exercised in whole or in part at any time and from time to time during the Term commencing on June 18, 2007.

(b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at the principal office of the Issuer, and by the payment to the Issuer of an amount of consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at such Holder’s election (i) by certified or official bank check or by wire transfer to an account designated by the Issuer, (ii) by “cashless exercise” in accordance with the provisions of subsection (c) of this Section 2, but only when a registration statement under the Securities Act providing for resale of all of the Warrant Stock is not then in effect, or (iii) by a combination of the foregoing methods of payment selected by the Holder of this Warrant.

(c) Cashless Exercise. Notwithstanding any provisions herein to the contrary and commencing one (1) year following the Original Issue Date, if (i) the Per Share Market Value of one share of Common Stock is greater than the Warrant Price (at the date of calculation as set forth below) and (ii) a registration statement under the Securities Act providing for the resale of all of the Warrant Stock is not then in effect, in lieu of exercising this Warrant by payment of cash, the Holder may exercise this Warrant by a cashless exercise and shall receive the number of shares of Common Stock equal to an amount (as determined below) by surrender of this Warrant at the principal office of the Issuer together with the properly endorsed Notice of Exercise in which event the Issuer shall issue to the Holder a number of shares of Common Stock computed using the following formula:


	X = Y - (A)(Y)
	B

Where	X =	the number of shares of Common Stock to be issued to the Holder.

	Y =	the number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised.

	A =	the Warrant Price.

	B =	the Per Share Market Value of one share of Common Stock.

(d) Issuance of Stock Certificates. In the event of any exercise of the rights represented by this Warrant in accordance with and subject to the terms and conditions hereof, (i) certificates for the shares of Warrant Stock so purchased shall be dated the date of such exercise and delivered to the Holder hereof within a reasonable time, not exceeding three (3) Trading Days after such exercise or, at the request of the Holder, issued and delivered to the Depository Trust Company (“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) within a reasonable time, not exceeding three (3) Trading Days after such exercise, and the Holder hereof shall be deemed for all purposes to be the Holder of the shares of Warrant Stock so purchased as of the date of such exercise and (ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant shall not then have been exercised (less any amount thereof which shall have been canceled in payment or partial payment of the Warrant

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Price as hereinabove provided) shall also be issued to the Holder hereof at the Issuer’s expense within such time.

(e) Transferability of Warrant. Subject to Section 2(g), this Warrant may be transferred by a Holder without the consent of the Issuer. If transferred pursuant to this paragraph, this Warrant may be transferred on the books of the Issuer by the Holder hereof in person or by the Holder’s duly authorized attorney, upon surrender of this Warrant at the principal office of the Issuer, properly endorsed (by the Holder executing an assignment in the form attached hereto) and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. This Warrant is exchangeable at the principal office of the Issuer for Warrants for the purchase of the same aggregate number of shares of Warrant Stock, each new Warrant to represent the right to purchase such number of shares of Warrant Stock as the Holder hereof shall designate at the time of such exchange. All Warrants issued on transfers or exchanges shall be dated the Original Issue Date and shall be identical with this Warrant except as to the number of shares of Warrant Stock issuable pursuant hereto.

(f) Continuing Rights of Holder. The Issuer will, at the time of or at any time after each exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing the extent, if any, of its continuing obligation to afford to such Holder all rights to which such Holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant, provided that if any such Holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Issuer to afford such rights to such Holder.

(g) Compliance with Securities Laws.


	(i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws.

	(ii) Except as provided in paragraph (iii) below, this Warrant and all certificates representing shares of Warrant Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form:

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SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

(iii) The restrictions imposed by this subsection (g) upon the transfer of this Warrant or the shares of Warrant Stock to be purchased upon exercise hereof shall terminate (A) when such securities shall have been resold pursuant to an effective registration statement under the Securities Act, (B) upon the Issuer’s receipt of an opinion of counsel, in form and substance reasonably satisfactory to the Issuer, addressed to the Issuer to the effect that such restrictions are no longer required to ensure compliance with the Securities Act and state securities laws or (C) upon the Issuer’s receipt of other evidence reasonably satisfactory to the Issuer that such registration and qualification under the Securities Act and state securities laws are not required. Whenever such restrictions shall cease and terminate as to any such securities, the Holder thereof shall be entitled to receive from the Issuer (or its transfer agent and registrar), without expense (other than applicable transfer taxes, if any), new Warrants (or, in the case of shares of Warrant Stock, new stock certificates) of like tenor not bearing the applicable legend required by paragraph (ii) above relating to the Securities Act and state securities laws.

(h) Buy In.

In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Stock pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to the Holder in connection with the exercise at issue times, (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Issuer timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.

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3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

(a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees that all shares of Warrant Stock which may be issued upon the exercise of this Warrant or otherwise hereunder will, upon issuance, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by or through Issuer. The Issuer further covenants and agrees that during the period within which this Warrant may be exercised, the Issuer will at all times have authorized and reserved for the purpose of the issue upon exercise of this Warrant a number of shares of Common Stock equal to at least 120% of the aggregate number of shares of Common Stock exercisable hereunder to provide for the exercise of this Warrant (without regard to limitations or exercisability set forth in Section 8).

(b) Reservation. If any shares of Common Stock required to be reserved for issuance upon exercise of this Warrant or as otherwise provided hereunder require registration or qualification with any governmental authority under any federal or state law before such shares may be so issued, the Issuer will in good faith use its best efforts as expeditiously as possible at its expense to cause such shares to be duly registered or qualified. If the Issuer shall list any shares of Common Stock on any securities exchange or market it will, at its expense, list thereon, maintain and increase when necessary such listing, of, all shares of Warrant Stock from time to time issued upon exercise of this Warrant or as otherwise provided hereunder, and, to the extent permissible under the applicable securities exchange’s rules, all unissued shares of Warrant Stock which are at any time issuable hereunder, so long as any shares of Common Stock shall be so listed. The Issuer will also so list on each securities exchange or market, and will maintain such listing of, any other securities which the Holder of this Warrant shall be entitled to receive upon the exercise of this Warrant if at the time any securities of the same class shall be listed on such securities exchange or market by the Issuer.

(c) Covenants. The Issuer shall not by any action including, without limitation, amending the Certificate of Incorporation or the by-laws of the Issuer, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision of the Certificate of Incorporation or by-laws of the Issuer in any manner that would adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may be reasonably necessary in order that the Issuer may validly and legally issue fully paid and nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its obligations under this Warrant.

(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence satisfactory to the Issuer of the ownership of and the loss, theft, destruction or mutilation of any Warrant and, in the

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case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Issuer or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Issuer will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same number of shares of Common Stock.

4. Adjustment of Warrant Price and Warrant Share Number. The number of shares of Common Stock for which this Warrant is exercisable, and the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Issuer shall give the Holder notice of any event described below which requires an adjustment pursuant to this Section 4 in accordance with Section 5. Notwithstanding any adjustment hereunder, at no time shall the Warrant Price be greater than $1.00 per share except if it is adjusted pursuant to Section 4(b).

(a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.


	(i) In case the Issuer after the Original Issue Date shall do any of the following (each, a “Triggering Event”): (a) consolidate with or merge into any other Person and the Issuer shall not be the continuing or surviving corporation of such consolidation or merger, or (b) permit any other Person to consolidate with or merge into the Issuer and the Issuer shall be the continuing or surviving Person but, in connection with such consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged for Securities of any other Person or cash or any other property, or (c transfer all or substantially all of its properties or assets to any other Person, or (d) effect a capital reorganization or reclassification of its Capital Stock, then, and in the case of each such Triggering Event, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant shall be entitled upon the exercise hereof at any time after the consummation of such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering Event, to receive at the Warrant Price in effect at the time immediately prior to the consummation of such Triggering Event in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such Triggering Event, the Securities, cash and property to which such Holder would have been entitled upon the consummation of such Triggering Event if such Holder had exercised the rights represented by this Warrant immediately prior thereto (including the right to elect the type of consideration, if applicable), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 4. In the event that the surviving entity in any such Triggering Event is not a public company under the Securities Exchange Act of 1934, the common equity securities of which are traded or quoted on a national securities exchange or the OTC Bulletin Board (a “Qualifying Entity”), then the Holder, at its option, shall be permitted to require that the Company pay to the Holder an amount equal to the Black-Scholes value of this Warrant.

	(ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity is a Qualifying Entity, the Issuer will not be deemed to have effected any Triggering Event if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon

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the exercise of this Warrant as provided herein shall assume, by written instrument delivered to the Holder of this Warrant and reasonably satisfactory to the Holder, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such shares of Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto.

(b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:


	(i) set a record date or take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock,

	(ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or

	(iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock,

then (1) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (2) the Warrant Price then in effect shall be adjusted to equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment.

(c) Certain Other Distributions. If at any time the Issuer shall set a record date or take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of:


	(i) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Issuer),

	(ii) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances), or

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	(iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances),

then (1) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment multiplied by a fraction (A) the numerator of which shall be the Per Share Market Value of Common Stock at the date of taking such record and (B) the denominator of which shall be such Per Share Market Value minus the amount allocable to one share of Common Stock of any such cash so distributable and of the fair value (as determined in good faith by the Board of Directors of the Issuer) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable, and (2) the Warrant Price then in effect shall be adjusted to equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Issuer to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4(c) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4(b).

(d) Issuance of Additional Shares of Common Stock.

(i) In the event the Issuer shall at any time following the Original Issue Date and prior to a Release Event (as defined below) issue any Additional Shares of Common Stock (otherwise than as provided in the foregoing subsections (a) through (c) of this Section 4), at a price per share less than the Warrant Price then in effect or without consideration, then the Warrant Price upon each such issuance shall be adjusted to the price equal to the consideration per share paid for such Additional Shares of Common Stock. Upon and after a Release Event, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction:

(A) the numerator of which shall be equal to the sum of (x) the number of shares of Outstanding Common Stock immediately prior to the issuance of such Additional Shares of Common Stock plus (y) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the Warrant Price then in effect, and

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	(B) the denominator of which shall be equal to the number of shares of Outstanding Common Stock immediately after the issuance of such Additional Shares of Common Stock.

(ii) No adjustment of the Warrant Price shall be made under paragraph (i) of Section 4(d) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise or conversion of any Common Stock Equivalents if any such adjustment shall previously have been made upon the issuance of such Common Stock Equivalents, or upon the issuance of any warrant or other rights therefor pursuant to Sections 4(e) or 4(f), or in connection with any Permitted Issuances. The term “Release Event” means, with respect to the holder’s Warrant Stock, the date on which the Company files a Form 8-K with the Commission disclosing the Company’s receipt of written notice from the U.S. Food and Drug Administration regarding the granting the Issuer the right to commercialize and market (i.e., formal approval of the Issuer’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers.

(e) Issuance of Warrants or Other Rights. If at any time prior to a Release Event the Issuer shall take a record of the Holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Issuer is the surviving corporation) issue or sell any warrants or options, whether or not immediately exercisable, and the Warrant Consideration (hereafter defined) per share for which Common Stock is issuable upon the exercise of such warrant or option shall be less than the Warrant Price in effect immediately prior to the time of such issue or sale, then the Warrant Price then in effect immediately prior to the time of such issue or sale, shall be adjusted to the price equal to the Warrant Consideration per share for which Common Stock is issuable upon the exercise of such warrant or option. Upon and after a Release Event, this right shall cease. In the event the Issuer shall at any time following a Release Event issue any warrants or options at a price per share less than the Warrant Price then in effect or without consideration, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction: (1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance or sale of such warrants or options plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the Warrant Consideration multiplied by the number of shares of Common Stock issuable upon the exercise or conversion of all such warrants or options, would purchase at a price per share equal to the Warrant Price then in effect, and (2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such warrants and options. No adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock or of such Common Stock Equivalents upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(e) in connection with any Permitted Issuances.

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Equivalents, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the Common Stock Equivalent Consideration (hereafter defined) per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Warrant Price in effect immediately prior to the time of such issue or sale, or if, after any such issuance of Common Stock Equivalents, the price per share for which Additional Shares of Common Stock may be issuable thereafter is amended or adjusted, and such price as so amended shall be less than the applicable Conversion Price in effect at the time of such amendment or adjustment, then the Warrant Price then in effect immediately prior to the time of such issue or sale, shall upon each such issuance or sale be adjusted to the price equal to the Common Stock Equivalent Consideration per share paid for such Common Share Equivalents. Upon and after a Release Event, this right shall cease. In the event the Issuer shall at any time following a Release Event issue any Common Stock Equivalents for Common Stock Equivalent Consideration per share less than the Warrant Price then in effect or without consideration, then the Warrant Price upon each issuance shall be adjusted to that price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction: (1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance or sale of such Common Stock Equivalents plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the Common Stock Equivalent Consideration multiplied by the number of shares of Common Stock issuable upon the exercise or conversion of all such Common Stock Equivalents, would purchase at a price per share equal to the Warrant Price then in effect, and (2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such Common Stock Equivalents. No further adjustment of the Warrant Price then in effect shall be made under this Section 4(f) upon the issuance of any Common Stock Equivalents which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 4(e). No further adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(f) in connection with any Permitted Issuances.

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basis of: (i) treating the number of Additional Shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or other rights or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such Common Stock Equivalents; whereupon a new adjustment of the Warrant Price then in effect shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled.

(h) Purchase of Common Stock by the Issuer. If the Issuer at any time while this Warrant is outstanding shall, directly or indirectly through a Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares of Common Stock at a price per share greater than the Per Share Market Value, then the Warrant Price upon each such purchase, redemption or acquisition shall be adjusted to that price determined by multiplying such Warrant Price by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such purchase, redemption or acquisition minus the number of shares of Common Stock which the aggregate consideration for the total number of such shares of Common Stock so purchased, redeemed or acquired would purchase at the Per Share Market Value; and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such purchase, redemption or acquisition. For the purposes of this subsection (h), the date as of which the Per Share Market Price shall be computed shall be the earlier of (x) the date on which the Issuer shall enter into a firm contract for the purchase, redemption or acquisition of such Common Stock, or (y) the date of actual purchase, redemption or acquisition of such Common Stock. For the purposes of this subsection (h), a purchase, redemption or acquisition of a Common Stock Equivalent shall be deemed to be a purchase of the underlying Common Stock, and the computation herein required shall be made on the basis of the full exercise, conversion or exchange of such Common Stock Equivalent on the date as of which such computation is required hereby to be made, whether or not such Common Stock Equivalent is actually exercisable, convertible or exchangeable on such date.

(i) Other Provisions applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the Warrant Price then in effect provided for in this Section 4:

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	then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as mutually determined in good faith by the Board of Directors of the Issuer and the Majority Holders. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Issuer for issuing such warrants or other rights divided by the number of shares of Common Stock issuable upon the exercise of such warrant or right plus the additional consideration payable to the Issuer upon exercise of such warrant or other right for one share of Common Stock (together the “Warrant Consideration”). The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Common Stock Equivalents shall be the consideration received by the Issuer for issuing such Common Stock Equivalent, divided by the number of shares of Common Stock issuable upon the conversion or other exercise of such Common Stock Equivalent, plus the additional consideration, if any, payable to the Issuer upon the exercise of the right of conversion or exchange in such Common Stock Equivalent for one share of Common Stock (together the “Common Stock Equivalent Consideration”). In case of the issuance at any time of any Additional Shares of Common Stock or Common Stock Equivalents in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Issuer shall be deemed to have received for such Additional Shares of Common Stock or Common Stock Equivalents a consideration equal to the amount of such dividend so paid or satisfied.

	(ii) No Adjustments of Number of Shares. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made because of any adjustments of the Warrant Price pursuant to Sections (d), (e), (f), (g) and (h) of this Section 4.

	(iii) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one one-hundredth (1/100^th) of a share.

	(iv) When Adjustment Not Required. If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

(j) Form of Warrant after Adjustments. The form of this Warrant need not be changed because of any adjustments in the Warrant Price or the number and kind of securities purchasable upon exercise of this Warrant.

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upon and to the extent that the event actually takes place, upon payment of the then current Warrant Price. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed property shall be returned to the Issuer.

5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall be adjusted pursuant to Section 4 hereof (for purposes of this Section 5, each an “adjustment”), the Issuer shall cause its Chief Financial Officer to prepare and execute a certificate setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Warrant Price and Warrant Share Number after giving effect to such adjustment, and shall cause copies of such certificate to be delivered to the Holder of this Warrant promptly after each adjustment. Any dispute between the Issuer and the Holder of this Warrant with respect to the matters set forth in such certificate may at the option of the Holder of this Warrant be submitted to one of the national accounting firms currently known as the “big five” selected by the Holder, provided that the Issuer shall have ten (10) days after receipt of notice from such Holder of its selection of such firm to object thereto, in which case such Holder shall select another such firm and the Issuer shall have no such right of objection. The firm selected by the Holder of this Warrant as provided in the preceding sentence shall be instructed to deliver a written opinion as to such matters to the Issuer and such Holder within thirty (30) days after submission to it of such dispute. Such opinion shall be final and binding on the parties hereto.

7. Intentionally Omitted.

8. Certain Exercise Restrictions. Notwithstanding anything to the contrary set forth in this Warrant, at no time may a holder of this Warrant exercise this Warrant if the number of shares of Common Stock to be issued pursuant to such exercise would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.999% of all of the Common Stock outstanding at such time; provided, however, that upon a holder of this Warrant providing the Issuer with sixty-one (61) days notice (pursuant to Section 13 hereof) (the “Waiver Notice”) that such holder would like to waive this Section 8 with regard to any or all shares of Common Stock issuable upon exercise of this Warrant, this Section 8 will be of no force or effect with regard to all or a portion of the Warrant referenced in the Waiver Notice; provided, further, that this provision shall be of no further force or effect during the sixty-one (61) days immediately preceding the expiration of the term of this Warrant.

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9. Definitions. For the purposes of this Warrant, the following terms have the following meanings:


	“Additional Shares of Common Stock” means all shares of Common Stock issued by the Issuer after the Original Issue Date, and all shares of Other Common, if any, issued by the Issuer after the Original Issue Date, except for Permitted Issuances.

	“Board” shall mean the Board of Directors of the Issuer.

	“Capital Stock” means and includes (i) any and all shares, interests, participations or other equivalents of or interests in (however designated) corporate stock, including, without limitation, shares of preferred or preference stock, (ii) all partnership interests (whether general or limited) in any Person which is a partnership, (iii) all membership interests or limited liability company interests in any limited liability company, and (iv) all equity or ownership interests in any Person of any other type.

	“Certificate of Incorporation” means the Certificate of Incorporation of the Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended, modified, supplemented or restated in accordance with the terms hereof and thereof and pursuant to applicable law.

	“Common Stock” means the Common Stock, par value $.001 per share, of the Issuer and any other Capital Stock into which such stock may hereafter be changed.

	“Common Stock Equivalent” means any Convertible Security or warrant, option or other right to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Security.

	“Common Stock Equivalent Consideration” has the meaning specified in Section 4 (i) (i) hereof.

	“Convertible Securities” means evidences of Indebtedness, shares of Capital Stock or other Securities which are or may be at any time convertible into or exchangeable for Additional Shares of Common Stock. The term “Convertible Security” means one of the Convertible Securities.

	“Governmental Authority” means any governmental, regulatory or self-regulatory entity, department, body, official, authority, commission, board, agency or instrumentality, whether federal, state or local, and whether domestic or foreign.

	“Holders” mean the Persons who shall from time to time own any Warrant. The term “Holder” means one of the Holders.

	“Independent Appraiser” means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the

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	Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant.

	“Issuer” means Ortec International, Inc., a Delaware corporation, and its successors.

	“Majority Holders” means at any time the Holders of Warrants exercisable for a majority of the shares of Warrant Stock issuable under the Warrants at the time outstanding.

	“Original Issue Date” means June 18, 2007.

	“OTC Bulletin Board” means the over-the-counter electronic bulletin board.

	“Other Common” means any other Capital Stock of the Issuer of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Issuer without limitation as to amount.

	“Outstanding Common Stock” means, at any given time, the aggregate amount of outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as applicable) of all options, warrants and other Securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that are outstanding at such time.

	“Permitted Issuances” means (i) the issuance of the Warrant Stock; (ii) issuances in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital; (iii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the issuances and/or grant of stock options or warrants to purchase shares of Common Stock whether the grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award or any stock award and incentive plan, as they now exist, or hereafter adopted or otherwise so long as such issuances under this subsection (iii), which would cause the provisions of Section 4 hereof to be applied, in the aggregate do not exceed ten percent (10)% of the issued and outstanding shares of Common Stock as of the Original Issue Date, to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company; (vi) securities issued upon the exercise, conversion or exchange of any Common Stock Equivalents outstanding on the Original Issue Date at the conversion price set forth therein as of the Original Issue Date as adjusted by the anti-dilution provisions thereof in effect on the Original Issue Date; (vii) issuance of Series A Preferred Stock pursuant to the Purchase Agreement, or Common Stock issued upon conversion thereof; (viii) issuance of Series A-1 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date and Series A-2 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, or Common Stock issued upon the conversion of such Series A-1 Convertible Preferred

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	Stock and Series A-2 Convertible Preferred Stock; (ix) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc., or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, and the shares of Common Stock issued upon exercise thereof, (x) warrants issued to Ron Lipstein and Steven Katz in connection with the agreements terminating their employment with the Company at the price set forth therein on the Issuance Date, as adjusted by the anti-dilution provisions thereof in effect on the Original Issue Date; (xi) issuance of Series D-2 Convertible Preferred Stock, or Common Stock issued upon the conversion of such Series D-2 Convertible Preferred Stock; or (xii) the exchange of warrants outstanding prior to the Original Issue Date for shares of Common Stock or the Company’s other equity securities.

	“Person” means an individual, corporation, limited liability company, partnership, joint stock company, trust, unincorporated organization, joint venture, Governmental Authority or other entity of whatever nature.

	“Per Share Market Value” means on any particular date (a) the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (b) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the Common Stock on such date, or (c) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock on such date as determined by the Board in good faith; provided, however, that the Majority Holders, after receipt of the determination by the Board, shall have the right to select, jointly with the Issuer, an Independent Appraiser, in which case, the fair market value shall be the determination by such Independent Appraiser; and provided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during the period between the date as of which such market value was required to be determined and the date it is finally determined. The determination of fair market value shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall be final and binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, or to the existence or absence of, or any limitations on, voting rights.

	“Purchase Agreement” means the Series A Convertible Preferred Stock Purchase Agreement dated as of June 18, 2007 among the Issuer and the investors a party thereto.

	“Securities” means any debt or equity securities of the Issuer, whether now or hereafter authorized, any instrument convertible into or exchangeable for Securities or a

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	Security, and any option, warrant or other right to purchase or acquire any Security. “Security” means one of the Securities.

	“Securities Act” means the Securities Act of 1933, as amended, or any similar federal statute then in effect.

	“Subsidiary” means any corporation at least 50% of whose outstanding Voting Stock, and a limited liability company at least 50% of whose membership interests, shall at the time be owned directly or indirectly by the Issuer or by one or more of its Subsidiaries.

	“Term” has the meaning specified in Section 1 hereof.

	“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

	“Voting Stock” means, as applied to the Capital Stock of any corporation, Capital Stock of any class or classes (however designated) having ordinary voting power for the election of a majority of the members of the Board of Directors (or other governing body) of such corporation, other than Capital Stock having such power only by reason of the happening of a contingency.

	“Warrants” means the Warrants issued and sold pursuant to the Purchase Agreement, including, without limitation, this Warrant, and any other warrants of like tenor issued in substitution or exchange for any thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any of such other Warrants.

	“Warrant Consideration” has the meaning specified in Section 4(i)(i) hereof.

	“Warrant Price” initially means U.S. $1.00, as such price may be adjusted from time to time as shall result from the adjustments specified in this Warrant, including Section 4 hereto.

	“Warrant Share Number” means at any time the aggregate number of shares of Warrant Stock which may at such time be purchased upon exercise of this Warrant, after giving effect to all prior adjustments and increases to such number made or required to be made under the terms hereof.

	“Warrant Stock” means Common Stock issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any Warrant or Warrants.

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10. Other Notices. In case at any time:

	(A)	the Issuer shall make any distributions to the holders of Common Stock; or

	(B)	the Issuer shall authorize the granting to all holders of its Common Stock of rights to subscribe for or purchase any shares of Capital Stock of any class or of any Common Stock Equivalents or other rights; or

	(C)	there shall be any reclassification of the Capital Stock of the Issuer; or

	(D)	there shall be any capital reorganization by the Issuer; or

	(E)	there shall be any (i) consolidation or merger involving the Issuer or (ii) sale, transfer or other disposition of all or substantially all of the Issuer’s property, assets or business (except a merger or other reorganization in which the Issuer shall be the surviving corporation and its shares of Capital Stock shall continue to be outstanding and unchanged and except a consolidation, merger, sale, transfer or other disposition involving a wholly-owned Subsidiary); or

	(F)	there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Issuer or any partial liquidation of the Issuer or distribution to holders of Common Stock;

then, in each of such cases, the Issuer shall give written notice to the Holder of the date on which (i) the books of the Issuer shall close or a record shall be taken for such dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their certificates for Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the action in question and not less than twenty (20) days prior to the record date or the date on which the Issuer’s transfer books are closed in respect thereto. The Holder shall have the right to send two (2) representatives selected by it to each meeting, who shall be permitted to attend, but not vote at, such meeting and any adjournments thereof. This Warrant entitles the Holder to receive copies of all financial and other information distributed or required to be distributed to the holders of the Common Stock.

11. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a

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particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase the Warrant Price, shorten the period during which this Warrant may be exercised or modify any provision of this Section 11 without the consent of the Holder of this Warrant.

12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.

13. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earlier of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified for notice prior to 5:00 p.m., eastern time, on a Trading Day, (ii) the Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified for notice later than 5:00 p.m., eastern time, on any date and earlier than 11:59 p.m., eastern time, on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service or (iv) actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be with respect to the Holder of this Warrant or of Warrant Stock issued pursuant hereto, addressed to such Holder at its last known address or facsimile number appearing on the books of the Issuer maintained for such purposes, or with respect to the Issuer, addressed to:


	Ortec International, Inc.
	3960 Broadway
	New York, NY 10032
	Attention: Chief Financial Officer
	Tel. No.: (212) 740-6999
	Fax No.: (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.
	Tel. No.: (212) 888-8200
	Fax No.: (212) 888-7776

Copies of notices to the Holder shall be sent to Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New York 10036, Attention: Christopher S. Auguste, Tel No.: (212) 715-9100, Fax No.: (212) 715-8000. Any party hereto may from time to time change its address for notices by giving at least ten (10) days written notice of such changed address to the other party hereto.

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14. Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant, appoint an agent having an office in New York, New York for the purpose of issuing shares of Warrant Stock on the exercise of this Warrant pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

15. Remedies. The Issuer stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Issuer in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.

16. Successors and Assigns. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and assigns of the Issuer, the Holder hereof and (to the extent provided herein) the Holders of Warrant Stock issued pursuant hereto, and shall be enforceable by any such Holder or Holder of Warrant Stock.

17. Modification and Severability. If, in any action before any court or agency legally empowered to enforce any provision contained herein, any provision hereof is found to be unenforceable, then such provision shall be deemed modified to the extent necessary to make it enforceable by such court or agency. If any such provision is not enforceable as set forth in the preceding sentence, the unenforceability of such provision shall not affect the other provisions of this Warrant, but this Warrant shall be construed as if such unenforceable provision had never been contained herein.

18. Headings. The headings of the Sections of this Series A Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year first above written.


	ORTEC INTERNATIONAL, INC.

	By:

		Name:
		Title:

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SERIES A WARRANT
EXERCISE FORM

ORTEC INTERNATIONAL, INC.

The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of Ortec International, Inc. covered by the within Warrant.


Dated:		Signature

		Address

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the date of Exercise: _________________________

The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.

The undersigned intends that payment of the Warrant Price shall be made as (check one):

Cash Exercise _______

Cashless Exercise _______

If the Holder has elected a Cash Exercise, the Holder shall pay the sum of $________ by certified or official bank check (or via wire transfer) to the Issuer in accordance with the terms of the Warrant.

If the Holder has elected a Cashless Exercise, a certificate shall be issued to the Holder for the number of shares equal to the whole number portion of the product of the calculation set forth below, which is ___________.


	X = Y -	(A)(Y)

		B

Where:

The number of shares of Common Stock to be issued to the Holder __________________(“X”).

The number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised ___________________________ (“Y”).

The Warrant Price ______________ (“A”).

The Per Share Market Value of one share of Common Stock _______________________ (“B”).

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ASSIGNMENT

FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto __________________ the within Warrant and all rights evidenced thereby and does irrevocably constitute and appoint _____________, attorney, to transfer the said Warrant on the books of the within named corporation.


Dated:		Signature

		Address

PARTIAL ASSIGNMENT

FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto __________________ the right to purchase _________ shares of Warrant Stock evidenced by the within Warrant together with all rights therein, and does irrevocably constitute and appoint ___________________, attorney, to transfer that part of the said Warrant on the books of the within named corporation.


Dated:		Signature

		Address

FOR USE BY THE ISSUER ONLY:

This Warrant No. W-___ canceled (or transferred or exchanged) this _____ day of ___________, _____, shares of Common Stock issued therefor in the name of _______________, Warrant No. W-_____ issued for ____ shares of Common Stock in the name of _______________.

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EXHIBIT B-2 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF SERIES M WARRANT

SERIES M WARRANT TO PURCHASE

SHARES OF COMMON STOCK

ORTEC INTERNATIONAL, INC.

No.: W-M - ____ Number of Shares: ______
Date of Issuance: June 18, 2007

1. Term. The right to subscribe for and purchase shares of Warrant Stock represented hereby shall commence on June 18, 2007 and shall expire at 5:00 p.m., eastern time, on the thirtieth (30^th) day following the date the Issuer files a Form 8-K with the Commission disclosing the Issuer’s receipt of written notice from the U.S. Food and Drug Administration regarding the granting the Issuer the right to commercialize and market (i.e., formal approval of the Issuer’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers (such period being the “Term”).

2. Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.

(a) Time of Exercise. The purchase rights represented by this Warrant may be exercised in whole or in part at any time and from time to time during the Term commencing on June 18, 2007.

(b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at the principal office of the Issuer, and by the payment to the Issuer of an amount of consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at such Holder’s election by certified or official bank check or by wire transfer to an account designated by the Issuer. In the event the Holder is unable to exercise this Warrant due to the restrictions set forth in Section 8 hereof, the Holder may elect to receive Series D-2 Convertible Preferred Stock of the Company in lieu of shares of Common Stock convertible into the number of shares of Common Stock that would have been delivered to the Holder but for the limitations set forth in Section 8 hereof. The Company shall delivery stock certificates representing such Series D-2 Convertible Preferred Stock no later than five (5) Trading Days after such exercise.

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Holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant, provided that if any such Holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Issuer to afford such rights to such Holder.

(g) Compliance with Securities Laws.


	(i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws.

	(ii) Except as provided in paragraph (iii) below, this Warrant and all certificates representing shares of Warrant Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form:


	THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

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(h) Buy In.

In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Stock pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to the Holder in connection with the exercise at issue times, (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Issuer timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursuant any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.

3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

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time issued upon exercise of this Warrant or as otherwise provided hereunder, and, to the extent permissible under the applicable securities exchange’s rules, all unissued shares of Warrant Stock which are at any time issuable hereunder, so long as any shares of Common Stock shall be so listed. The Issuer will also so list on each securities exchange or market, and will maintain such listing of, any other securities which the Holder of this Warrant shall be entitled to receive upon the exercise of this Warrant if at the time any securities of the same class shall be listed on such securities exchange or market by the Issuer.

(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence satisfactory to the Issuer of the ownership of and the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Issuer or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Issuer will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same number of shares of Common Stock.

(a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.

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	with such consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged for Securities of any other Person or cash or any other property, or (c) transfer all or substantially all of its properties or assets to any other Person, or (d) effect a capital reorganization or reclassification of its Capital Stock, then, and in the case of each such Triggering Event, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant shall be entitled upon the exercise hereof at any time after the consummation of such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering Event, to receive at the Warrant Price in effect at the time immediately prior to the consummation of such Triggering Event in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such Triggering Event, the Securities, cash and property to which such Holder would have been entitled upon the consummation of such Triggering Event if such Holder had exercised the rights represented by this Warrant immediately prior thereto (including the right to elect the type of consideration, if applicable), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 4. In the event that the surviving entity in any such Triggering Event is not a public company under the Securities Exchange Act of 1934, the common equity securities of which are traded or quoted on a national securities exchange or the OTC Bulletin Board (a “Qualifying Entity”), then the Holder, at its option, shall be permitted to require that the Company pay to the Holder an amount equal to the Black-Scholes value of this Warrant.

	(ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity is a Qualifying Entity, the Issuer will not be deemed to have effected any Triggering Event if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to the Holder of this Warrant and reasonably satisfactory to the Holder, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such shares of Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto.

(b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:


	(i) set a record date or take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock,

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		(ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or

		(iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock,


	(i) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Issuer),

	(ii) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash), or

	(iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash),

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the meaning of this Section 4(c) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4(b).


	(d)	Intentionally Omitted.

	(e)	Intentionally Omitted.

	(f)	Intentionally Omitted.

	(g)	Intentionally Omitted.

	(h)	Intentionally Omitted.

(i) Other Provisions applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the Warrant Price then in effect provided for in this Section 4:


	(i) Intentionally Omitted.

	(ii) No Adjustments of Number of Shares. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made because of any adjustments of the Warrant Price pursuant to Sections (d), (e), (f), (g) and (h) of this Section 4.

	(iii) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one one-hundredth (1/100^th) of a share.

	(iv) When Adjustment Not Required. If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

(j) Form of Warrant after Adjustments.The form of this Warrant need not be changed because of any adjustments in the Warrant Price or the number and kind of securities purchasable upon exercise of this Warrant.

(k) Escrow of Property. If after any property becomes distributable pursuant to this Section 4 by reason of the taking of any record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, and the Holder exercises this Warrant, such property shall be held in escrow for the Holder by the Issuer to be distributed to the Holder upon and to the extent that the event actually takes place, upon payment of the then current Warrant Price. Notwithstanding any other provision to the contrary herein, if the event for which

-8-

such record was taken fails to occur or is rescinded, then such escrowed property shall be returned to the Issuer.

6. Fractional Shares. No fractional shares of Warrant Stock will be issued in connection with and exercise hereof, but in lieu of such fractional shares, the Issuer shall at its option either (a) make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the Per Share Market Value then in effect or (b) issue one whole share in lieu of such fractional share. Fractional shares of Series D-2 Preferred Stock may be issued by the Company in connection with the exercise of this Warrant for Series D-2 Preferred Stock in lieu of Warrant Stock.

7. Intentionally Omitted.

8. Certain Exercise Restrictions. Notwithstanding anything to the contrary set forth in this Warrant, at no time may a holder of this Warrant exercise this Warrant if the number of shares of Common Stock to be issued pursuant to such exercise would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.999% of all of the Common Stock outstanding at such time; provided, however, that upon a holder of this Warrant providing the Issuer with sixty-one (61) days notice (pursuant to Section 13 hereof) (the “Waiver Notice”) that such holder would like to waive this Section 7(b) with regard to any or all shares of Common Stock issuable upon exercise of this Warrant, this Section 7(b) will be of no force or effect with regard to all or a portion of the Warrant referenced in the Waiver Notice.

If the Holder elects to exercise this Warrant and such exercise would result in such Holder beneficially owning (in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) more than 9.999% of all of the Common Stock

-9-

issued and outstanding at such time, such Holder may elect to exercise this Warrant for the Company’s Series D-2 Convertible Preferred Stock. Notwithstanding the foregoing, the Holder may waive at any time its rights to limit its ownership to 9.999% of all of the Common Stock issued and outstanding at such time in accordance with Section 8 hereof.

9. Definitions. For the purposes of this Warrant, the following terms have the following meanings:


	“Board” shall mean the Board of Directors of the Issuer.

	“Capital Stock” means and includes (i) any and all shares, interests, participations or other equivalents of or interests in (however designated) corporate stock, including, without limitation, shares of preferred or preference stock, (ii) all partnership interests (whether general or limited) in any Person which is a partnership, (iii) all membership interests or limited liability company interests in any limited liability company, and (iv) all equity or ownership interests in any Person of any other type.

	“Certificate of Incorporation” means the Certificate of Incorporation of the Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended, modified, supplemented or restated in accordance with the terms hereof and thereof and pursuant to applicable law.

	“Common Stock” means the Common Stock, par value $.001 per share, of the Issuer and any other Capital Stock into which such stock may hereafter be changed.

	“Governmental Authority” means any governmental, regulatory or self-regulatory entity, department, body, official, authority, commission, board, agency or instrumentality, whether federal, state or local, and whether domestic or foreign.

	“Holders” mean the Persons who shall from time to time own any Warrant. The term “Holder” means one of the Holders.

	“Independent Appraiser” means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant.

	“Issuer” means Ortec International, Inc., a Delaware corporation, and its successors.

	“Majority Holders” means at any time the Holders of Warrants exercisable for a majority of the shares of Warrant Stock issuable under the Warrants at the time outstanding.

	“Original Issue Date” means June 18, 2007.

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	“OTC Bulletin Board” means the over-the-counter electronic bulletin board.

	“Other Common” means any other Capital Stock of the Issuer of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Issuer without limitation as to amount.

	“Outstanding Common Stock” means, at any given time, the aggregate amount of outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as applicable) of all options, warrants and other Securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that are outstanding at such time.

	“Person” means an individual, corporation, limited liability company, partnership, joint stock company, trust, unincorporated organization, joint venture, Governmental Authority or other entity of whatever nature.

	“Per Share Market Value” means on any particular date (a) the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (b) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the Common Stock on such date, or (c) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock on such date as determined by the Board in good faith; provided, however, that the Majority Holders, after receipt of the determination by the Board, shall have the right to select, jointly with the Issuer, an Independent Appraiser, in which case, the fair market value shall be the determination by such Independent Appraiser; and provided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during the period between the date as of which such market value was required to be determined and the date it is finally determined. The determination of fair market value shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall be final and binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, or to the existence or absence of, or any limitations on, voting rights.

	“Purchase Agreement” means the Series A Convertible Preferred Stock Purchase Agreement dated as of June 18, 2007 among the Issuer and the investors a party thereto.

	“Securities” means any debt or equity securities of the Issuer, whether now or hereafter authorized, any instrument convertible into or exchangeable for Securities or a

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	Security, and any option, warrant or other right to purchase or acquire any Security. “Security” means one of the Securities.

	“Securities Act” means the Securities Act of 1933, as amended, or any similar federal statute then in effect.

	“Subsidiary” means any corporation at least 50% of whose outstanding Voting Stock, and a limited liability company at least 50% of whose membership interests, shall at the time be owned directly or indirectly by the Issuer or by one or more of its Subsidiaries.

	“Term” has the meaning specified in Section 1 hereof.

	“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

	“Voting Stock” means, as applied to the Capital Stock of any corporation, Capital Stock of any class or classes (however designated) having ordinary voting power for the election of a majority of the members of the Board of Directors (or other governing body) of such corporation, other than Capital Stock having such power only by reason of the happening of a contingency.

	“Warrants” means the Warrants issued and sold pursuant to the Purchase Agreement, including, without limitation, this Warrant, and any other warrants of like tenor issued in substitution or exchange for any thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any of such other Warrants.

“Warrant Price” initially means U.S. $0.50, as such price may be adjusted from time to time as shall result from the adjustments specified in this Warrant, including Section 4 hereto.


	“Warrant Share Number” means at any time the aggregate number of shares of Warrant Stock which may at such time be purchased upon exercise of this Warrant, after giving effect to all prior adjustments and increases to such number made or required to be made under the terms hereof.

	“Warrant Stock” means Common Stock issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any Warrant or Warrants.

10. Other Notices. In case at any time:

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	(A)	the Issuer shall make any distributions to the holders of Common Stock; or

	(B)	the Issuer shall authorize the granting to all holders of its Common Stock of rights to subscribe for or purchase any shares of Capital Stock of any class or other rights; or

	(C)	there shall be any reclassification of the Capital Stock of the Issuer; or

	(D)	there shall be any capital reorganization by the Issuer; or

	(E)	there shall be any (i) consolidation or merger involving the Issuer or (ii) sale, transfer or other disposition of all or substantially all of the Issuer’s property, assets or business (except a merger or other reorganization in which the Issuer shall be the surviving corporation and its shares of Capital Stock shall continue to be outstanding and unchanged and except a consolidation, merger, sale, transfer or other disposition involving a wholly-owned Subsidiary); or

	(F)	there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Issuer or any partial liquidation of the Issuer or distribution to holders of Common Stock;

then, in each of such cases, the Issuer shall give written notice to the Holder of the date on which (i) the books of the Issuer shall close or a record shall be taken for such dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their certificates for Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the action in question and not less than twenty (20) days prior to the record date or the date on which the Issuer’s transfer books are closed in respect thereto. The Holder shall have the right to send two (2) representatives selected by it to each meeting, who shall be permitted to attend, but not vote at, such meeting and any adjournments thereof. This Warrant entitles the Holder to receive copies of all financial and other information distributed or required to be distributed to the holders of the Common Stock.

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shorten the period during which this Warrant may be exercised or modify any provision of this Section 11 without the consent of the Holder of this Warrant.

12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.


	Ortec International, Inc.
	3960 Broadway
	New York, NY 10032
	Attention: Chief Financial Officer
	Tel. No.: (212) 740-6999
	Fax No.: (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.
	Tel. No.: (212) 888-8200
	Fax No.: (212) 888-7776

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pursuant to subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

18. Headings. The headings of the Sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

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IN WITNESS WHEREOF, the Issuer has executed this Series M Warrant as of the day and year first above written.


	ORTEC INTERNATIONAL, INC.

	By:

		Name:
		Title:

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SERIES M WARRANT
EXERCISE FORM

ORTEC INTERNATIONAL, INC.

The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of Ortec International, Inc. covered by the within Warrant.


Dated:		Signature


		Address

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the date of Exercise determined in accordance with Section 16 of the Securities Exchange Act of 1934, as
amended: _________________________

ASSIGNMENT


Dated:		Signature


		Address

PARTIAL ASSIGNMENT


Dated:		Signature


		Address

FOR USE BY THE ISSUER ONLY:

This Warrant No. W-_____ canceled (or transferred or exchanged) this _____ day of ___________, _____, shares of Common Stock issued therefor in the name of _______________, Warrant No. W-_____ issued for ____ shares of Common Stock in the name of _______________.

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EXHIBIT B-3 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF SERIES M-1 WARRANT

SERIES M-1 WARRANT TO PURCHASE

SHARES OF COMMON STOCK

ORTEC INTERNATIONAL, INC.


No.: W-M-1 - _____	Number of Shares: ____
Date of Issuance: June 18, 2007

1. Term. The right to subscribe for and purchase shares of Warrant Stock represented hereby shall commence on June 18, 2007 and shall expire at 5:00 p.m., eastern time, on the date that is five (5) years from the initial exercise of the Series M Warrant (such period being the “Term”).

2. Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.

(a) Time of Exercise. The purchase rights represented by this Warrant may be exercised in whole or in part at any time and from time to time during the Term for such number of shares of Common Stock (including any Common Stock issuable under Series D-2 Preferred

Stock delivered pursuant to the Series M Warrant, without giving effect to any ownership limitations contained therein for purposes of this calculation) equal to fifty percent (50%) of the number of shares of Common Stock that have been exercised by the Holder pursuant to the Series M Warrant issued to the Holder pursuant to the Purchase Agreement.


	X = Y - (A)(Y)

		B

Where	X =	the number of shares of Common Stock to be issued to the Holder.

	Y =	the number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised.

	A =	the Warrant Price.

	B =	the Per Share Market Value of one share of Common Stock.

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Commission System (“DWAC”) within a reasonable time, not exceeding three (3) Trading Days after such exercise, and the Holder hereof shall be deemed for all purposes to be the Holder of the shares of Warrant Stock so purchased as of the date of such exercise and (ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant shall not then have been exercised (less any amount thereof which shall have been canceled in payment or partial payment of the Warrant Price as hereinabove provided) shall also be issued to the Holder hereof at the Issuer’s expense within such time.

(g) Compliance with Securities Laws.


	(i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws.

	(ii) Except as provided in paragraph (iii) below, this Warrant and all certificates representing shares of Warrant Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form:

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		THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

	(iii) The restrictions imposed by this subsection (g) upon the transfer of this Warrant or the shares of Warrant Stock to be purchased upon exercise hereof shall terminate (A) when such securities shall have been resold pursuant to an effective registration statement under the Securities Act, (B) upon the Issuer’s receipt of an opinion of counsel, in form and substance reasonably satisfactory to the Issuer, addressed to the Issuer to the effect that such restrictions are no longer required to ensure compliance with the Securities Act and state securities laws or (C) upon the Issuer’s receipt of other evidence reasonably satisfactory to the Issuer that such registration and qualification under the Securities Act and state securities laws are not required. Whenever such restrictions shall cease and terminate as to any such securities, the Holder thereof shall be entitled to receive from the Issuer (or its transfer agent and registrar), without expense (other than applicable transfer taxes, if any), new Warrants (or, in the case of shares of Warrant Stock, new stock certificates) of like tenor not bearing the applicable legend required by paragraph (ii) above relating to the Securities Act and state securities laws.

(h) Buy In.

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shares of Common Stock that would have been issued had the Issuer timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.

3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

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taking of all such actions as may be necessary or appropriate to protect the rights of the Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision of the Certificate of Incorporation or by-laws of the Issuer in any manner that would adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may be reasonably necessary in order that the Issuer may validly and legally issue fully paid and nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its obligations under this Warrant.

(a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.

(i) In case the Issuer after the Original Issue Date shall do any of the following (each, a “Triggering Event”): (a) consolidate with or merge into any other Person and the Issuer shall not be the continuing or surviving corporation of such consolidation or merger, or (b) permit any other Person to consolidate with or merge into the Issuer and the Issuer shall be the continuing or surviving Person but, in connection with such consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged for Securities of any other Person or cash or any other property, or (c) transfer all or substantially all of its properties or assets to any other Person, or (d) effect a capital reorganization or reclassification of its Capital Stock, then, and in the case of each such Triggering Event, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant shall be entitled upon the exercise hereof at any time after the consummation of such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering Event, to receive at the Warrant Price in effect at the time immediately prior to the

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	consummation of such Triggering Event in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such Triggering Event, the Securities, cash and property to which such Holder would have been entitled upon the consummation of such Triggering Event if such Holder had exercised the rights represented by this Warrant immediately prior thereto (including the right to elect the type of consideration, if applicable), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 4. In the event that the surviving entity in any such Triggering Event is not a public company under the Securities Exchange Act of 1934, the common equity securities of which are traded or quoted on a national securities exchange or the OTC Bulletin Board (a “Qualifying Entity”), then the Holder, at its option, shall be permitted to require that the Company pay to the Holder an amount equal to the Black-Scholes value of this Warrant.

	(ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity is a Qualifying Entity, the Issuer will not be deemed to have effected any Triggering Event if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to the Holder of this Warrant and reasonably satisfactory to the Holder, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such shares of Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto.

(b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:


	(i) set a record date or take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock,

	(ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or

	(iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock,

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	(i) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Issuer),

	(ii) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances), or

	(iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances),

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reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4(b).

(d) Issuance of Additional Shares of Common Stock.


	(i) In the event the Issuer shall at any time following the Original Issue Date and prior to a Release Event (as defined below) issue any Additional Shares of Common Stock (otherwise than as provided in the foregoing subsections (a) through (c) of this Section 4), at a price per share less than the Warrant Price then in effect or without consideration, then the Warrant Price upon each such issuance shall be adjusted to the price equal to the consideration per share paid for such Additional Shares of Common Stock. Upon and after a Release Event, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction:

		(A) the numerator of which shall be equal to the sum of (x) the number of shares of Outstanding Common Stock immediately prior to the issuance of such Additional Shares of Common Stock plus (y) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the Warrant Price then in effect, and

		(B) the denominator of which shall be equal to the number of shares of Outstanding Common Stock immediately after the issuance of such Additional Shares of Common Stock.

	(ii) No adjustment of the Warrant Price shall be made under paragraph (i) of Section 4(d) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise or conversion of any Common Stock Equivalents if any such adjustment shall previously have been made upon the issuance of such Common Stock Equivalents, or upon the issuance of any warrant or other rights therefor pursuant to Sections 4(e) or 4(f), or in connection with any Permitted Issuances. The term “Release Event” means, with respect to the holder’s Warrant Stock, the date on which the Company files a Form 8-K with the Commission disclosing the Company’s receipt of written notice from the U.S. Food and Drug Administration regarding the granting the Issuer the right to commercialize and market (i.e., formal approval of the Issuer’s Pre-Market Application for) its OrCel product for the treatment of venous leg ulcers.

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Price then in effect immediately prior to the time of such issue or sale, shall be adjusted to the price equal to the Warrant Consideration per share for which Common Stock is issuable upon the exercise of such warrant or option. Upon and after a Release Event, this right shall cease. In the event the Issuer shall at any time following a Release Event issue any warrants or options at a price per share less than the Warrant Price then in effect or without consideration, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction: (1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance or sale of such warrants or options plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the Warrant Consideration multiplied by the number of shares of Common Stock issuable upon the exercise or conversion of all such warrants or options, would purchase at a price per share equal to the Warrant Price then in effect, and (2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such warrants and options. No adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock or of such Common Stock Equivalents upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(e) in connection with any Permitted Issuances.

(f) Issuance of Common Stock Equivalents. If at any time prior to a Release Event the Issuer shall take a record of the Holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Issuer is the surviving corporation) issue or sell, any Common Stock Equivalents, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the Common Stock Equivalent Consideration (hereafter defined) per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Warrant Price in effect immediately prior to the time of such issue or sale, or if, after any such issuance of Common Stock Equivalents, the price per share for which Additional Shares of Common Stock may be issuable thereafter is amended or adjusted, and such price as so amended shall be less than the applicable Conversion Price in effect at the time of such amendment or adjustment, then the Warrant Price then in effect immediately prior to the time of such issue or sale, shall upon each such issuance or sale be adjusted to the price equal to the Common Stock Equivalent Consideration per share paid for such Common Share Equivalents. Upon and after a Release Event, this right shall cease. In the event the Issuer shall at any time following a Release Event issue any Common Stock Equivalents for Common Stock Equivalent Consideration per share less than the Warrant Price then in effect or without consideration, then the Warrant Price upon each such issuance shall be adjusted to that price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction: (1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance or sale of such Common Stock Equivalents plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the Common Stock Equivalent Consideration multiplied by the number of shares of Common Stock issuable upon the exercise or conversion of all such Common Stock Equivalents, would purchase at a price per share equal to the Warrant Price then in effect, and (2) the denominator of which shall be equal to the number of shares of

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Common Stock that would be outstanding assuming the exercise or conversion of all such Common Stock Equivalents. No further adjustment of the Warrant Price then in effect shall be made under this Section 4(f) upon the issuance of any Common Stock Equivalents which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 4(e). No further adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(f) in connection with any Permitted Issuances.

(g) Superseding Adjustment. If, at any time after any adjustment of the Warrant Price then in effect shall have been made pursuant to Section 4(e) or Section 4(f) as the result of any issuance of warrants, other rights or Common Stock Equivalents, and (i) such warrants or other rights, or the right of conversion or exchange in such other Common Stock Equivalents, shall expire, and all or a portion of such warrants or other rights, or the right of conversion or exchange with respect to all or a portion of such other Common Stock Equivalents, as the case may be shall not have been exercised, or (ii) the consideration per share for which shares of Common Stock are issuable pursuant to such Common Stock Equivalents, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Upon the occurrence of an event set forth in this Section 4(g) above, there shall be a recomputation made of the effect of such Common Stock Equivalents on the basis of: (i) treating the number of Additional Shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or other rights or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such Common Stock Equivalents; whereupon a new adjustment of the Warrant Price then in effect shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled.

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outstanding immediately after such purchase, redemption or acquisition. For the purposes of this subsection (h), the date as of which the Per Share Market Price shall be computed shall be the earlier of (x) the date on which the Issuer shall enter into a firm contract for the purchase, redemption or acquisition of such Common Stock, or (y) the date of actual purchase, redemption or acquisition of such Common Stock. For the purposes of this subsection (h), a purchase, redemption or acquisition of a Common Stock Equivalent shall be deemed to be a purchase of the underlying Common Stock, and the computation herein required shall be made on the basis of the full exercise, conversion or exchange of such Common Stock Equivalent on the date as of which such computation is required hereby to be made, whether or not such Common Stock Equivalent is actually exercisable, convertible or exchangeable on such date.

(i) Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Common Stock Equivalents (or any warrants or other rights therefor) shall be issued for cash consideration, the consideration received by the Issuer therefor shall be the amount of the cash received by the Issuer therefor, or, if such Additional Shares of Common Stock or Common Stock Equivalents are offered by the Issuer for subscription, the subscription price, or, if such Additional Shares of Common Stock or Common Stock Equivalents are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by the Issuer for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as mutually determined in good faith by the Board of Directors of the Issuer and the Majority Holders. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Issuer for issuing such warrants or other rights divided by the number of shares of Common Stock issuable upon the exercise of such warrant or right plus the additional consideration payable to the Issuer upon exercise of such warrant or other right for one share of Common Stock (together the “Warrant Consideration”). The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Common Stock Equivalents shall be the consideration received by the Issuer for issuing such Common Stock Equivalent, divided by the number of shares of Common Stock issuable upon the conversion or other exercise of such Common Stock Equivalent, plus the additional consideration, if any, payable to the Issuer upon the exercise of the right of conversion or exchange in such Common Stock Equivalent for one share of Common Stock (together the “Common Stock Equivalent Consideration”). In case of the issuance at any time of any Additional Shares of Common Stock or Common Stock Equivalents in payment or satisfaction of any

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	dividends upon any class of stock other than Common Stock, the Issuer shall be deemed to have received for such Additional Shares of Common Stock or Common Stock Equivalents a consideration equal to the amount of such dividend so paid or satisfied.

	(ii) No Adjustments of Number of Shares. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made because of any adjustments of the Warrant Price pursuant to Sections (d), (e), (f), (g) and (h) of this Section 4.

	(iii) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one one-hundredth (1/100^th) of a share.

	(iv) When Adjustment Not Required. If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

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the Issuer shall have ten (10) days after receipt of notice from such Holder of its selection of such firm to object thereto, in which case such Holder shall select another such firm and the Issuer shall have no such right of objection. The firm selected by the Holder of this Warrant as provided in the preceding sentence shall be instructed to deliver a written opinion as to such matters to the Issuer and such Holder within thirty (30) days after submission to it of such dispute. Such opinion shall be final and binding on the parties hereto.

7. Intentionally Omitted.

9. Definitions. For the purposes of this Warrant, the following terms have the following meanings:


	“Additional Shares of Common Stock” means all shares of Common Stock issued by the Issuer after the Original Issue Date, and all shares of Other Common, if any, issued by the Issuer after the Original Issue Date, except for Permitted Issuances.

	“Board” shall mean the Board of Directors of the Issuer.

	“Capital Stock” means and includes (i) any and all shares, interests, participations or other equivalents of or interests in (however designated) corporate stock, including, without limitation, shares of preferred or preference stock, (ii) all partnership interests (whether general or limited) in any Person which is a partnership, (iii) all membership interests or limited liability company interests in any limited liability company, and (iv) all equity or ownership interests in any Person of any other type.

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	“Certificate of Incorporation” means the Certificate of Incorporation of the Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended, modified, supplemented or restated in accordance with the terms hereof and thereof and pursuant to applicable law.

	“Common Stock” means the Common Stock, par value $.001 per share, of the Issuer and any other Capital Stock into which such stock may hereafter be changed.

	“Common Stock Equivalent” means any Convertible Security or warrant, option or other right to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Security.

	“Common Stock Equivalent Consideration” has the meaning specified in Section 4 (i) (i) hereof.

	“Convertible Securities” means evidences of Indebtedness, shares of Capital Stock or other Securities which are or may be at any time convertible into or exchangeable for Additional Shares of Common Stock. The term “Convertible Security” means one of the Convertible Securities.

	“Governmental Authority” means any governmental, regulatory or self-regulatory entity, department, body, official, authority, commission, board, agency or instrumentality, whether federal, state or local, and whether domestic or foreign.

	“Holders” mean the Persons who shall from time to time own any Warrant. The term “Holder” means one of the Holders.

	“Independent Appraiser” means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant.

	“Issuer” means Ortec International, Inc., a Delaware corporation, and its successors.

	“Majority Holders” means at any time the Holders of Warrants exercisable for a majority of the shares of Warrant Stock issuable under the Warrants at the time outstanding.

	“Original Issue Date” means June 18, 2007.

	“OTC Bulletin Board” means the over-the-counter electronic bulletin board.

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	“Other Common” means any other Capital Stock of the Issuer of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Issuer without limitation as to amount.

	“Outstanding Common Stock” means, at any given time, the aggregate amount of outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as applicable) of all options, warrants and other Securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that are outstanding at such time.

	“Permitted Issuances” means (i) the issuance of the Warrant Stock; (ii) issuances in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital; (iii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the issuances and/or grant of stock options or warrants to purchase shares of Common Stock whether the issuance and/or grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award or any stock award and incentive plan, as they now exist, or hereafter adopted or otherwise so long as such issuances under this subsection (iii), which would cause the provisions of Section 4 hereof to be applied, in the aggregate do not exceed ten percent (10)% of the issued and outstanding shares of Common Stock as of the Original Issue Date, to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company; (vi) securities issued upon the exercise, conversion or exchange of any Common Stock Equivalents outstanding on the Original Issue Date at the conversion price set forth therein as of the Original Issue Date; (vii) issuance of Series A Preferred Stock pursuant to the Purchase Agreement, or Common Stock issued upon conversion thereof; (viii) issuance of Series A-1 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date and Series A-2 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, or Common Stock issued upon the conversion of such Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock; (ix) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc., or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, and the shares of Common Stock issued upon exercise thereof; (x) warrants issued to Ron Lipstein and Steven Katz in connection with the agreements terminating their employment with the Company at the price set forth therein on the Issuance Date; (xi) issuance of Series D-2 Convertible Preferred Stock, or Common Stock issued upon the conversion of such Series D-2 Convertible Preferred Stock; or (xii) the exchange of warrants outstanding prior to the Original Issue Date for shares of Common Stock or the Company’s other equity securities.

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	“Person” means an individual, corporation, limited liability company, partnership, joint stock company, trust, unincorporated organization, joint venture, Governmental Authority or other entity of whatever nature.

	“Per Share Market Value” means on any particular date (a) the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (b) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the Common Stock on such date, or (c) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock on such date as determined by the Board in good faith; provided, however, that the Majority Holders, after receipt of the determination by the Board, shall have the right to select, jointly with the Issuer, an Independent Appraiser, in which case, the fair market value shall be the determination by such Independent Appraiser; and provided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during the period between the date as of which such market value was required to be determined and the date it is finally determined. The determination of fair market value shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall be final and binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, or to the existence or absence of, or any limitations on, voting rights.

	“Purchase Agreement” means the Series A Convertible Preferred Stock Purchase Agreement dated as of June 18, 2007 among the Issuer and the investors a party thereto.

	“Securities” means any debt or equity securities of the Issuer, whether now or hereafter authorized, any instrument convertible into or exchangeable for Securities or a Security, and any option, warrant or other right to purchase or acquire any Security. “Security” means one of the Securities.

	“Securities Act” means the Securities Act of 1933, as amended, or any similar federal statute then in effect.

	“Subsidiary” means any corporation at least 50% of whose outstanding Voting Stock, and a limited liability company at least 50% of whose membership interests, shall at the time be owned directly or indirectly by the Issuer or by one or more of its Subsidiaries.

	“Term” has the meaning specified in Section 1 hereof.

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	“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

	“Voting Stock” means, as applied to the Capital Stock of any corporation, Capital Stock of any class or classes (however designated) having ordinary voting power for the election of a majority of the members of the Board of Directors (or other governing body) of such corporation, other than Capital Stock having such power only by reason of the happening of a contingency.

	“Warrants” means the Warrants issued and sold pursuant to the Purchase Agreement, including, without limitation, this Warrant, and any other warrants of like tenor issued in substitution or exchange for any thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any of such other Warrants.

	“Warrant Consideration” has the meaning specified in Section 4(i)(i) hereof.

	“Warrant Price” initially means U.S. $1.00, as such price may be adjusted from time to time as shall result from the adjustments specified in this Warrant, including Section 4 hereto.

	“Warrant Share Number” means at any time the aggregate number of shares of Warrant Stock which may at such time be purchased upon exercise of this Warrant, after giving effect to all prior adjustments and increases to such number made or required to be made under the terms hereof.

	“Warrant Stock” means Common Stock issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any Warrant or Warrants.

10. Other Notices. In case at any time:


	(A)	the Issuer shall make any distributions to the holders of Common Stock; or

	(B)	the Issuer shall authorize the granting to all holders of its Common Stock of rights to subscribe for or purchase any shares of Capital Stock of any class or of any Common Stock Equivalents or other rights; or

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	(C)	there shall be any reclassification of the Capital Stock of the Issuer; or

	(D)	there shall be any capital reorganization by the Issuer; or

	(E)	there shall be any (i) consolidation or merger involving the Issuer or (ii) sale, transfer or other disposition of all or substantially all of the Issuer’s property, assets or business (except a merger or other reorganization in which the Issuer shall be the surviving corporation and its shares of Capital Stock shall continue to be outstanding and unchanged and except a consolidation, merger, sale, transfer or other disposition involving a wholly-owned Subsidiary); or

	(F)	there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Issuer or any partial liquidation of the Issuer or distribution to holders of Common Stock;

11. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase the Warrant Price, shorten the period during which this Warrant may be exercised or modify any provision of this Section 11 without the consent of the Holder of this Warrant.

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12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.


	Ortec International, Inc.
	3960 Broadway
	New York, NY 10032
	Attention: Chief Financial Officer
	Tel. No.: (212) 740-6999
	Fax No.: (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.
	Tel. No.: (212) 888-8200
	Fax No.: (212) 888-7776

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issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

18. Headings. The headings of the Sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Issuer has executed this Series M-1 Warrant as of the day and year first above written.


	ORTEC INTERNATIONAL, INC.

	By:

		Name:
		Title:

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SERIES M-1 WARRANT
EXERCISE FORM

ORTEC INTERNATIONAL, INC.

The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of Ortec International, Inc. covered by the within Warrant.


Dated:		Signature


		Address

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the date of
Exercise: _________________________

The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.

The undersigned intends that payment of the Warrant Price shall be made as (check one):

Cash Exercise_______

Cashless Exercise_______


	X = Y -	(A)(Y)

		B

Where:

The number of shares of Common Stock to be issued to the Holder __________________(“X”).

The Warrant Price ______________ (“A”).

The Per Share Market Value of one share of Common Stock _______________________ (“B”).

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ASSIGNMENT


Dated:		Signature


		Address

PARTIAL ASSIGNMENT


Dated:		Signature


		Address

FOR USE BY THE ISSUER ONLY:

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EXHIBIT C-1 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF CERTIFICATE OF DESIGNATION FOR SERIES A PREFERRED SHARES

-FILED SEPARATELY-

EXHIBIT C-2 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF CERTIFICATE OF DESIGNATION FOR SERIES A-1 PREFERRED SHARES

-FILED SEPARATELY-

-2-

EXHIBIT C-3 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF CERTIFICATE OF DESIGNATION FOR SERIES A-2 PREFERRED SHARES

-FILED SEPARATELY-

EXHIBIT C-4 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF CERTIFICATE OF DESIGNATION FOR SERIES D-2 PREFERRED SHARES

-FILED SEPARATELY-

EXHIBIT D to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is made and entered into as of June 18, 2007, by and among Ortec International, Inc., a Delaware corporation (the “Company”), Paul Royalty Fund, L.P., a Delaware limited partnership (“PRF”), and the purchasers listed on Schedule I hereto (the “Purchasers”).

This Agreement is being entered into pursuant to the Series A Convertible Preferred Stock Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the “Purchase Agreement”) and the Amended and Restated Exchange Agreement dated as of the date hereof, between the Company and PRF (the “Exchange Agreement”).

The Company, PRF, and the Purchasers hereby agree as follows:

1. Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, “control,” when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of “affiliated,” “controlling” and “controlled” have meanings correlative to the foregoing.

“Board” shall have meaning set forth in Section 3(n).

“Business Day” means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close.

“Closing Date” means the date of the closing of the purchase and sale of the Series A Convertible Preferred Stock and Warrants pursuant to the Purchase Agreement and the sale and exchange of the Series A-1 Convertible Preferred Stock and the Series A-2 Convertible Preferred Stock pursuant to the Exchange Agreement.

“Commission” means the Securities and Exchange Commission.

“Common Stock” means the Company’s Common Stock, par value $0.001 per share.

“Effectiveness Date” means with respect to a Registration Statement the earlier of the one hundred fifty (150) days following the Filing Date or the date which is within five (5) Business Days of the date on which the Commission informs the Company that the Commission (i) will not review the Registration Statement or (ii) that the Company may request the acceleration of the effectiveness of the Registration Statement.

“Effectiveness Period” shall have the meaning set forth in Section 2.

“Event” shall have the meaning set forth in Section 7(e).

“Event Date” shall have the meaning set forth in Section 7(e).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Filing Date” means the ninetieth (90^th) day following the Initial Closing Date.

“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities or of securities giving such holder or holders the right to acquire Registrable Securities.

“Indemnified Party” shall have the meaning set forth in Section 5(c).

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

“Losses” shall have the meaning set forth in Section 5(a).

“Majority Holders” means the Holder or Holders of a majority of (i) the Registrable Securities then outstanding plus (ii) the Registrable Securities that can be acquired.

“Periodic Amount” shall have the meaning set forth in Section 7(d).

“Person” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.

“PRF Counsel” means Chadbourne & Parke LLP, for which PRF will be reimbursed by the Company pursuant to Section 4 for fees in an amount not to exceed $2,000.

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Prospectus” means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A

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promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus.

“Registrable Securities” means the shares of Common Stock issued or issuable to the Purchasers (i) upon the conversion of the Series A Convertible Preferred Stock purchased pursuant to the Purchase Agreement (ii) upon exercise of the Warrants issued pursuant to the Purchase Agreement, (iii) upon the conversion of the Series A-1 Convertible Preferred Stock purchased pursuant to the Exchange Agreement, (iv) upon conversion of the Series A-2 Convertible Preferred Stock purchased pursuant to the Exchange Agreement, and (v) upon conversion of the Series D-2 Convertible Preferred Stock if issued and outstanding at the time of filing of a Registration Statement.

“Registration Statement” means the registration statements and any additional registration statements contemplated by Section 2, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference in such registration statement.

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“Rule 158” means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“Securities Act” means the Securities Act of 1933, as amended.

“Series A Convertible Preferred Stock” means the Company’s Series A Convertible Preferred Stock, par value $0.001 per share.

“Series A-1 Convertible Preferred Stock” means the Company’s Series A-1 Convertible Preferred Stock, par value $0.001 per share.

“Series A-2 Convertible Preferred Stock” means the Company’s Series A-2 Convertible Preferred Stock, par value $0.001 per share.

“Series D-2 Convertible Preferred Stock” means the Company’s Series D-2 Convertible Preferred Stock.

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“Special Counsel” means Kramer Levin Naftalis & Frankel LLP, for which the Holders will be reimbursed by the Company pursuant to Section 4.

2. Shelf Registration.

(a) On or prior to the Filing Date, the Company shall prepare and file with the Commission a “shelf” Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form SB-2 (except if the Company is not then eligible to register for resale the Registrable Securities on Form SB-2, in which case such registration shall be on another appropriate form in accordance with the Securities Act and the rules promulgated thereunder). The Company shall (i) not permit any securities other than the Registrable Securities and the securities listed on Schedule II hereto (the “Other Securities”) to be included in the Registration Statement and (ii) use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until such date as is the earliest of (x) the date when all Registrable Securities covered by such Registration Statement have been sold, (y) the date on which all the Registrable Securities may be sold without any restriction pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent to such effect, or (z) two (2) years following the Effectiveness Date (the “Effectiveness Period”). The Company shall request that the effective time of the Registration Statement is 4:00 p.m. Eastern Time on the effective date. If at any time and for any reason, an additional Registration Statement is required to be filed because at such time the actual number of shares of Common Stock into which the Warrants are exercisable plus the number of shares of Common Stock exceeds the number of shares of Registrable Securities remaining under the Registration Statement, the Company shall have thirty-five (35) Business Days to file such additional Registration Statement, and the Company shall use its best efforts to cause such additional Registration Statement to be declared effective by the Commission as soon as possible, but in no event later than seventy-five (75) days after filing.

(b) Notwithstanding anything to the contrary set forth in this Section 2, in the event the Commission does not permit the Company to register all of the Registrable Securities in the Registration Statement because of the Commission’s application of Rule 415, the Company shall register in the Registration Statement such number of Registrable Securities as is permitted by the Commission, provided, however, that the number of Registrable Securities and the Other Securities, to be included in such Registration Statement or any subsequent registration statement shall be determined in the following order: (i) first, the shares of Common Stock issuable upon conversion of the Series A Convertible Preferred Stock registered and the Other Securities on a pro rata basis among the holders thereof; (ii) second, the shares of Common Stock issuable upon conversion of the Series A-1 Convertible Preferred Stock registered on behalf of PRF and the shares of Common Stock issuable upon exercise of the Series M Warrants registered on a pro rata basis among the holders thereof; (iii) third, the shares of Common Stock issuable upon exercise of the Series A Warrants registered on a pro rata basis among the holders thereof; (iv) fourth, the shares of Common Stock issuable upon conversion of the Series A-2 Convertible Preferred Stock registered on behalf of PRF; and (v) fifth, the shares of Common

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Stock issuable upon exercise of the Series M-1 Warrants and upon conversion of the Series D-2 Preferred Stock if issued and outstanding at the time of filing of the Registration Statement registered on a pro rata basis among the holders thereof. In the event the Commission does not permit the Company to register all of the Registrable Securities in the initial Registration Statement, the Company shall use its best efforts to file subsequent Registration Statements to register the Registrable Securities that were not registered in the initial Registration Statement as promptly as possible and in a manner permitted by the Commission. For purposes of this Section 2(b), “Filing Date” means with respect to each subsequent Registration Statement filed pursuant hereto, the later of (i) sixty (60) days following the sale of substantially all of the Registrable Securities, determined, to the extent permitted by the Commission, on a per holder (and its affiliates) basis, included in the initial Registration Statement or any subsequent Registration Statement and (ii) six (6) months following the effective date of the initial Registration Statement or any subsequent Registration Statement, as applicable, or such earlier date as permitted by the Commission. For purposes of this Section 2(b), “Effectiveness Date” means with respect to each subsequent Registration Statement filed pursuant hereto, the earlier of (A) the ninetieth (90^th) day following the filing date of such Registration Statement (or in the event such Registration Statement receives a “full review” by the Commission, the one hundred twentieth (120^th) day following such filing date) or (B) the date which is within three (3) Business Days after the date on which the Commission informs the Company (i) that the Commission will not review such Registration Statement or (ii) that the Company may request the acceleration of the effectiveness of such Registration Statement and the Company makes such request; provided that, if the Effectiveness Date falls on a Saturday, Sunday or any other day which shall be a legal holiday or a day on which the Commission is authorized or required by law or other government actions to close, the Effectiveness Date shall be the following Business Day.

3. Registration Procedures.

In connection with the Company’s registration obligations hereunder, the Company shall:

(a) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement on Form SB-2 (or if the Company is not then eligible to register for resale the Registrable Securities on Form SB-2 such registration shall be on another appropriate form in accordance with the Securities Act and the rules promulgated thereunder) in accordance with the method or methods of distribution thereof as specified by the Holders (except if otherwise directed by the Holders), and cause the Registration Statement to become effective and remain effective as provided herein; provided, however, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated therein by reference), the Company shall (i) furnish to the Holders (as requested) and the Special Counsel, copies of all such documents proposed to be filed, which documents (other than those incorporated by reference) will be subject to the review of such Holders (as requested) and such Special Counsel, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of such Special Counsel, to conduct a reasonable investigation within the meaning of the Securities Act. The

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Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Special Counsel shall reasonably object in writing within three (3) Business Days of their receipt thereof. If the Special Counsel shall so reasonably object in writing, the Filing Date and Effectiveness Date shall be extended by the time that the Company and the Special Counsel shall reasonably need to respond to and/or comply with such objections.

(b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as possible to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as possible provide the Special Counsel and Holders (as requested) true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented.

(c) Notify the Holders (as requested) and the Special Counsel as promptly as possible (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make

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the statements therein, in the light of the circumstances under which they were made, not misleading.

(d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

(e) If requested by the Special Counsel or by the Majority Holders (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the Company reasonably agrees should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment.

(f) Furnish to the Special Counsel and upon request to each Holder, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission.

(g) Promptly deliver to the Special Counsel and each Holder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.

(h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and the Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject.

(i) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free of all restrictive legends (provided that the issuance of such unlegended certificates is in compliance with applicable securities laws), and to enable such

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Registrable Securities to be in such denominations and registered in such names as any Holder may request at least three (3) Business Days prior to any sale of Registrable Securities.

(j) Upon the occurrence of any event contemplated by Section 3(c)(vi), as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

(k) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed or traded on the OTC Bulletin Board, The Nasdaq SmallCap Market, or any other securities exchange, quotation system or market, if any, on which similar securities issued by the Company are then listed as and when required pursuant to the Purchase Agreement and the Exchange Agreement.

(l) Comply in all material respects with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 3-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall conform to the requirements of Rule 158.

(m) The Company may require each selling Holder to furnish to the Company information regarding such Holder and the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement, and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request.

If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force) the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required.

Each Holder covenants and agrees that (i) it will not sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement.

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Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(v), 3(c)(vi) or 3(n), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(j), or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement.

(n) If (i) there is material non-public information regarding the Company which the Company’s Board of Directors (the “Board”) reasonably determines not to be in the Company’s best interest to disclose and which the Company is not otherwise required to disclose, or (ii) there is a significant business opportunity (including, but not limited to, the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction) available to the Company which the Board reasonably determines not to be in the Company’s best interest to disclose, then the Company may postpone or suspend filing or effectiveness of a registration statement for a period not to exceed twenty (20) consecutive days, provided that the Company may not postpone or suspend its obligation under this Section 3(n) for more than forty-five (45) days in the aggregate during any twelve (12) month period; provided, however, that no such postponement or suspension shall be permitted for consecutive twenty (20) day periods, arising out of the same set of facts, circumstances or transactions.

4. Registration Expenses.

All fees and expenses incident to the performance of or compliance with this Agreement by the Company, except as and to the extent specified in Section 4, shall be borne by the Company whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings, if any, required to be made with The Nasdaq SmallCap Market and each other securities exchange or market on which Registrable Securities are required hereunder to be listed, (B) with respect to filings required to be made with the National Association of Securities Dealers, Inc. and the NASD Regulation, Inc. and (C) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the Majority Holders may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of photocopying prospectuses if the photocopying of prospectuses is requested by any Holder), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement, including, without limitation, the Company’s independent

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public accountants (including the expenses of any comfort letters, if needed, or costs associated with the delivery by independent public accountants of such needed comfort letter or comfort letters). In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.

5. Indemnification.

(a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder or such other Indemnified Party furnished in writing to the Company by such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.

(b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, the directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review), as incurred, arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated

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therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such information was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. Notwithstanding anything to the contrary contained herein, the Holders shall be liable under this Section 5(b) for only that amount as does not exceed the lesser of (i) the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation and (ii) the aggregate purchase price paid by the Holder (other than PRF) for the Shares pursuant to the Purchase Agreement or, in the case of PRF, the stated value of the Series A-1 Preferred Stock and Series A-2 Preferred stock purchased by PRF pursuant to the Exchange Agreement.

(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the “Indemnifying Party) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel (which shall be reasonably acceptable to the Indemnifying Party) that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel, reasonably acceptable to the Indemnifying Party, at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any

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pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).

(d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. In no event shall any selling Holder be required to contribute an amount under this Section 5(d) in excess of the net proceeds received by such Holder upon sale of such Holder’s Registrable Securities pursuant to the Registration Statement giving rise to such contribution obligation.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

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6. Rule 144.

As long as any Holder owns any Registrable Securities or securities entitling the Holder to acquire Registrable Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and, at the Holder’s request, to promptly furnish the Holders with true and complete copies of all such filings. As long as any Holder owns Registrable Securities or securities entitling the Holder to acquire Registrable Securities, if the Company is not required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Holder, at the Holder’s request, and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Person to sell its Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including providing any legal opinions relating to such sale pursuant to Rule 144. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements.

7. Miscellaneous.

(a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.

(b) No Inconsistent Agreements. Neither the Company nor any of its subsidiaries has, as of the date hereof entered into and currently in effect, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as disclosed in Section 2.1(c) of the Purchase Agreement or Section 2.1(c) of the Exchange Agreement, neither the Company nor any of its subsidiaries has previously entered into any agreement currently in effect granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the

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right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict with the provisions of this Agreement.

(c) No Piggyback on Registrations. Neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto or as disclosed in Section 2.1(c) of the Purchase Agreement, Section 2.1(c) of the Exchange Agreement or Schedule II hereto) may include securities of the Company in the Registration Statement and the Company shall not after the date hereof enter into any agreement providing such right to any of its securityholders, unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict with the provisions of this Agreement.

(d) Piggy-Back Registrations. If at any time when there is not an effective Registration Statement covering the Registrable Securities, the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each Holder written notice of such determination and, if within thirty (30) days after receipt of such notice, any such Holder shall so request in writing, (which request shall specify the Registrable Securities intended to be disposed of by such Holder), the Company will cause the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holder, to the extent requisite to permit the disposition of the Registrable Securities so to be registered, provided that if at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to such holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay expenses in accordance with Section 4 hereof), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities being registered pursuant to this Section 7(d) for the same period as the delay in registering such other securities. The Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, however, that the Company shall not be required to register any Registrable Securities pursuant to this Section 7(d) that are eligible for sale pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten public offering, if the managing underwriter(s) or underwriter(s) should reasonably object to the inclusion of the Registrable Securities in such registration statement, then if the Company after consultation with the managing underwriter should reasonably determine that the inclusion of such Registrable Securities, would materially adversely affect the offering contemplated in such registration statement, and based on such determination recommends inclusion in such registration statement of fewer or none of the Registrable Securities of the Holders, then the number of Registrable Securities of the Holders included in

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such registration statement shall be reduced pro-rata among such Holders (based upon the number of Registrable Securities requested to be included in the registration statement), if the Company after consultation with the underwriter(s) recommends the inclusion of fewer Registrable Securities; provided, however, that such reduction shall not represent a greater fraction of the number of Registrable Securities intended to be offered by the Holders than the fraction of similar reductions imposed on such other persons or entities (including the Company).

(e) Failure to File Registration Statement and Other Events. The Company and the Holders agree that the Holders will suffer damages if the Registration Statement is not filed on or prior to the Filing Date and not declared effective by the Commission on or prior to the Effectiveness Date and maintained in the manner contemplated herein during the Effectiveness Period or if certain other events occur. The Company and the Holders further agree that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, if (A) (i) the Registration Statement is not filed on or prior to the Filing Date or (ii) is not declared effective by the Commission on or prior to the thirtieth (30^th) day following the Effectiveness Date, or (B) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act within three (3) Business Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be “reviewed,” or not subject to further review, or (C) the Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities included therein at any time prior to the expiration of the Effectiveness Period, without being succeeded immediately by a subsequent Registration Statement filed with and declared effective by the Commission, or (D) trading in the Common Stock shall hereafter be suspended or if the Common Stock is hereafter delisted from the OTC Bulletin Board (or other principal exchange on which the Common Stock is traded) for any reason for more than three (3) Business Days in the aggregate, or (E) the Company breaches in a material respect any covenant or other material term or condition to this Agreement, the Purchase Agreement (other than a representation or warranty contained therein), the Exchange Agreement (other than a representation or warranty contained therein) or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated hereby and thereby, and such breach continues for a period of thirty (30) days after written notice thereof to the Company, or (F) the Company has breached Section 3(n) (any such failure or breach being referred to as an “Event,” and for purposes of clauses (A) and (D) the date on which such Event occurs, or for purposes of clause (B) the date on which such three (3) Business Day period is exceeded, or for purposes of clause (C) after more than fifteen (15) Business Days, or for purposes of clause (D) the date on which such three (3) Business Day period is exceeded, or for clause (E) the date on which such thirty (30) day period is exceeded, or for clause (F) the date the Company has breached Section 3(n) hereof, being referred to as “Event Date”), the Company shall pay in cash as liquidated damages to each Holder only with respect to the Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock held by such Holder in an amount equal to (x) solely in the case of clause (A)(i) two percent (2%) of the Holders’ initial investment in the Series A Convertible Preferred Stock and the stated value of the Series A-1 Convertible Preferred Stock (provided, however, that in the case of clause (A)(i), the Event shall be deemed to commence on the sixtieth (60) day prior to the Event Date), and (y) in all other cases, one percent (1.0%) for each thirty (30) day period thereafter or portion thereof of the Holder’s initial investment in the Series A

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Convertible Preferred Stock and the stated value of the Series A-1 Convertible Preferred Stock from the Event Date until the earlier of (x) the date when the applicable Event has been cured, or (y) when the Effectiveness Period ends, which shall be pro rated for such periods less than thirty (30) days (the “Periodic Amount”); provided, however, that in no event shall the amount of liquidated damages payable at any time and from time to time to any Holder pursuant to this Section 7(e) exceed an aggregate of twenty-four percent (24%) of the amount of the Holder’s initial investment in the Series A Convertible Preferred Stock and the stated value of the Series A-1 Convertible Preferred Stock; and provided, further, that in the event the Commission does not permit all of the Registrable Securities to be included in the Registration Statement because of its application of Rule 415, liquidated damages payable pursuant to clause (A)(ii) above shall be payable by the Company based on one percent (1%) of the portion of the Holder’s initial investment in the Series A Convertible Preferred Shares and the stated value of the Series A-1 Convertible Preferred Stock that corresponds to the number of such Holder’s Registrable Securities permitted to be registered by the Commission pursuant to Rule 415. Notwithstanding anything to the contrary in this paragraph (e), if (a) any of the Events described in clauses (A), (B), (C), (D) or (F) shall have occurred, (b) on or prior to the applicable Event Date, the Company shall have exercised its rights under Section 3(n) hereof and (c) the postponement or suspension permitted pursuant to such Section 3(n) shall remain effective as of such applicable Event Date, then the applicable Event Date shall be deemed instead to occur on the second Business Day following the termination of such postponement or suspension. Liquidated damages payable by the Company pursuant to this Section 7(e) shall be payable on the first (1^st) Business Day of each thirty (30) day period following the Event Date. Notwithstanding anything to the contrary contained herein, in no event shall any liquidated damages be payable with respect to the Warrants or the Warrant Shares. The parties agree that the Periodic Amount represents a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of damages that may be incurred by the Holders if the Registration Statement is not filed on or prior to the Filing Date or has not been declared effective by the Commission on or prior to the Effectiveness Date and maintained in the manner contemplated herein during the Effectiveness Period or if any other Event as described herein has occurred.

(f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Majority Holders. Notwithstanding anything herein to the contrary, (i) no amendment, modification, supplement, or waiver of or consent to a departure from the first sentence of Section 2(b) hereof shall adversely effect PRF’s rights without the written consent of PRF, (ii) liquidated damages payable by the Company pursuant to Section 7(e) hereof shall not be waived or modified unless the same waiver or modification is applied to all holders of the Series A Preferred Stock and Series A-1 Preferred Stock and (iii) no other amendment, modification, supplement, waiver or consent shall apply to the holders of the Series A-1 Preferred Stock or Series A-2 Preferred Stock unless it also applies to all holders of the Series A Preferred Stock. No consideration shall be offered or paid to any person to amend, modify, supplement, waive or consent to a departure from any provision hereof unless the same consideration is also offered to all Holders. All Holders shall be notified by the Company of any request for an amendment, modification, supplement, waiver or consent concurrently.

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(g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earlier of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified for notice prior to 5:00 p.m., New York City time, on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified for notice later than 5:00 p.m., New York City time, on any date and earlier than 11:59 p.m., New York City time, on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service or (iv) actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be with respect to each Holder at its address set forth under its name on Schedule 1 attached hereto, or with respect to the Company, addressed to:

Ortec International, Inc.
3960 Broadway
New York, NY 10032
Attention: Chief Financial Officer
Tel. No.: (212) 740-6999
Fax No.: (212) 740-2570

or to such other address or addresses or facsimile number or numbers as any such party may most recently have designated in writing to the other parties hereto by such notice. Copies of notices to the Company shall be sent to Feder Kaszovitz Isaacson Weber Skala Bass & Rhine, LLP, 750 Lexington Ave., New York, New York 10022, Attention: Gabriel Kaszovitz, Esq., Tel. No.: (212) 888-8200, Fax No.: (212) 888-7776.

(g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns and shall inure to the benefit of each Holder and its successors and assigns. The Company may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of each Holder, except that the assumption of the Company’s obligations by the surviving company in a merger of the Company with and into such surviving company, shall not constitute an assignment of the Company’s obligations or rights hereunder. Each Purchaser may assign its rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement and PRF may assign its rights hereunder in the manner and to the persons permitted under the Exchange Agreement.

(h) Assignment of Registration Rights. The rights of each Holder hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by each Holder to any Affiliate of such Holder or any other Holder or Affiliate of any other Holder of the Registrable Securities if: (i) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii)

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following such transfer or assignment the further disposition of such securities by the transferee or assignees is restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, (v) such transfer by a Purchaser shall have been made in accordance with the applicable requirements of the Purchase Agreement and (vi) such transfer by PRF shall be in accordance with the Exchange Agreement. In addition, each Holder shall have the right to assign its rights hereunder to any other Person with the prior written consent of the Company, which consent shall not be unreasonably withheld. The rights to assignment shall apply to the Holders (and to subsequent) successors and assigns.

(i) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

(j) Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted. The Company and the Holders agree that venue for any dispute arising under this Agreement will lie exclusively in the state or federal courts located in New York County, New York, and the parties irrevocably waive any right to raise forum non conveniens or any other argument that New York is not the proper venue. The Company and the Holders irrevocably consent to personal jurisdiction in the state and federal courts of the state of New York. The Company and the Holders consent to process being served in any such suit, action or proceeding by delivering a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 7(j) shall affect or limit any right to serve process in any other manner permitted by law. The Company and the Holders hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Agreement, the Purchase Agreement or the Exchange Agreement, shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party. The parties hereby waive all rights to a trial by jury.

(k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

(l) Severability. If any term, provision, covenant or restriction of this Agreement is held to be invalid, illegal, void or unenforceable in any respect, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or

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restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

(m) Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

(n) Shares Held by the Company and its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than any Holder or transferees or successors or assigns thereof if such Holder is deemed to be an Affiliate solely by reason of its holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.

(o) Termination. This Agreement shall terminate on the date when all remaining Registrable Securities may be sold without restriction pursuant to paragraph (k) of Rule 144.

(o) Independent Nature of Purchasers and PRF. The Company acknowledges that the obligations of each Purchaser under the Transaction Documents and of PRF under the Exchange Agreement, this Agreement, and the Certificates of Designation of the Series A-1 Convertible Preferred Stock and the Series A-2 Convertible Preferred Stock (collectively, the “PRF Transaction Documents”) are several and not joint with the obligations of any other Purchaser or PRF, as the case may be, and no Purchaser nor PRF shall be responsible in any way for the performance of the obligations of any other Purchaser under the Transaction Documents or of PRF under the PRF Transaction Documents. The Company acknowledges that the decision of each Purchaser to purchase securities pursuant to the Purchase Agreement has been made by such Purchaser, and by PRF to exchange revenue interests for securities pursuant to the Exchange Agreement has been made by PRF, independently of any other purchase or exchange and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company or of its Subsidiaries which may have been made or given by any other Purchaser or PRF or by any agent or employee of any other Purchaser or PRF, and no Purchaser nor PRF nor any of their respective agents or employees shall have any liability to any other Purchaser or PRF (or any other person) relating to or arising from any such information, materials, statements or opinions. The Company acknowledges that nothing contained herein, or in any Transaction Document or PRF Transaction Document, and no action taken by any Purchaser or PRF pursuant hereto or thereto (including, but not limited to, the (i) inclusion of a Purchaser or PRF in the Registration Statement and (ii) review by, and consent to, such Registration Statement by a Purchaser or PRF) shall be deemed to constitute the Purchasers or PRF as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers and PRF are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents and the PRF Transaction Documents. The Company acknowledges that each Purchaser and PRF shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents and PRF

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Transaction Documents, and it shall not be necessary for any other Purchaser or PRF to be joined as an additional party in any proceeding for such purpose. The Company acknowledges that for reasons of administrative convenience only, the Transaction Documents and the PRF Transaction Documents have been prepared or reviewed by counsel for one of the Purchasers and separate counsel for PRF and neither of such counsel represents all of the Purchasers but only such Purchaser (in the case of Special Counsel) or PRF (in the case of PRF Counsel) and the other Purchasers have had the opportunity to retain their own individual counsel with respect to the transactions contemplated hereby. The Company acknowledges that it has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers. The Company acknowledges that such procedure with respect to the Transaction Documents and the PRF Transaction Documents in no way creates a presumption that the Purchasers and PRF are in any way acting in concert or as a group with respect to the Transaction Documents or PRF Transaction Documents or the transactions contemplated hereby or thereby.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized persons as of the date first indicated above.


ORTEC INTERNATIONAL, INC.

By:	/s/ Alan W. Schoenbart

	Name: Alan W. Schoenbart
	Title: CFO

PURCHASER

By:

	Name:
	Title:

PAUL ROYALTY FUND, L.P.

By:	Paul Capital Management, LLC,
	Its General Partner

	By:	Paul Capital Advisors, L.L.C.
		Its Manager

		By:	/s/	Lionel Leventhal

			Name: Lionel Leventhal
			Title: Manager

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Schedule I
Purchasers

-22-

Schedule II
Other Securities Permitted to be Included in the Registration Statement


		Common		Warrants		Totals

Series B-1					11,747
Series B-2					7,520
Series C					6,800
Quality Resolve					19,000
Elite Financial					5,000
Bristol Bridge Loan					3,334
Rodman & Renshaw – Hapto					266,667
Cambrex BioScience					73,674
Special Warrant Offer	Series E				27,646
January 2005 PIPE					141,840
January 2005 PIPE	Series E PA				183,092
January 2005 PIPE – Ser C Exchange					225,319
January 2005 PIPE – P/N Conversion					715,858
Fields Placement					4,000
Additional Right Offer Feb 2005					1,359
October 2005 Placement	Series F		1,395,846		1,162,927
October 2005 Placement	Series F PA				211,975
Rodman & Renshaw	April				153,017
MRC Investments	April				39,517
Subtotal Above			1,395,846		3,260,292		4,656,138

Additionally we need to register the following:
April 2006 Placement Shares			5,130,396				5,130,396
25% Warrant Kicker on H Warrant Exchange					492,278		492,278
Hapto			2,031,119		200,000		2,231,119
Cambrex			68,667				68,667
Placement Agency and Designees issued 2006 from 2006 Financing			113,147				113,147
Bridge Note Warrants					3,009,000		3,009,000
Warrants that don’t convert from April 2006 Placement					200,000		200,000
Approximate Total			8,739,175		7,161,570		15,900,745

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EXHIBIT E to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

ORTEC INTERNATIONAL, INC.

as of June 18, 2007

[Name and address of Transfer Agent]
Attn: _____________

Ladies and Gentlemen:

Reference is made to that certain Series A Convertible Preferred Stock Purchase Agreement, dated as of June 18, 2007, by and among Ortec International, Inc., a Delaware corporation (the “Company”), and the purchasers named therein (collectively, the “Purchasers”) pursuant to which the Company is issuing to the Purchasers shares of its Series A Convertible Preferred Stock, par value $.001 per share, (the “Preferred Shares”) and warrants (the “Warrants”) to purchase shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) in connection with the sale and issuance of Preferred Shares and Warrants to the Purchasers. This letter shall serve as our irrevocable authorization and direction to you (provided that you are the transfer agent of the Company at such time) to issue shares of Common Stock upon conversion of the Preferred Shares (the “Conversion Shares”) and exercise of the Warrants (the “Warrant Shares”) to or upon the order of a Purchaser from time to time upon (i) surrender to you of a properly completed and duly executed Conversion Notice or Exercise Notice, as the case may be, in the form attached hereto as Exhibit I and Exhibit II, respectively, (ii) in the case of the conversion of Preferred Shares, a copy of the certificates (with the original certificates delivered to the Company) representing Preferred Shares being converted or, in the case of Warrants being exercised, a copy of the Warrants (with the original Warrants delivered to the Company) being exercised (or, in each case, an indemnification undertaking with respect to such share certificates or the warrants in the case of their loss, theft or destruction), and (iii) delivery of a treasury order or other appropriate order duly executed by a duly authorized officer of the Company. So long as you have previously received (x) written confirmation from counsel to the Company that a registration statement covering resales of the Conversion Shares or Warrant Shares, as applicable, has been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), and no subsequent notice by the Company or its counsel of the suspension or termination of its effectiveness and (y) a copy of such registration statement, and if the Purchaser represents in writing that the Conversion Shares or the Warrant Shares, as the case may be, were sold pursuant to the Registration Statement, then certificates representing the Conversion Shares and the Warrant Shares, as the case may be, shall not bear any legend restricting transfer of the Conversion Shares and the Warrant Shares, as the case may be, thereby and should not be subject to any stop-transfer restriction. Provided, however, that if you have not previously received (i) written confirmation from counsel to the Company that a registration statement covering resales of the Conversion Shares or Warrant Shares, as applicable, has been declared effective by the SEC under the 1933 Act, and (ii) a copy of such registration statement, then the certificates for the Conversion Shares and the Warrant Shares shall bear the following legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.”

and, provided further, that the Company may from time to time notify you to place stop-transfer restrictions on the certificates for the Conversion Shares and the Warrant Shares in the event a registration statement covering the Conversion Shares and the Warrant Shares is subject to amendment for events then current or the prospectus which is part of such registration statement may no longer be used for sales of Conversion Shares or Warrant Shares.

A form of written confirmation from counsel to the Company that a registration statement covering resales of the Conversion Shares and the Warrant Shares has been declared effective by the SEC under the 1933 Act is attached hereto as Exhibit III.

Please be advised that the Purchasers are relying upon this letter as an inducement to enter into the Securities Purchase Agreement and, accordingly, each Purchaser is a third party beneficiary to these instructions.


	Very truly yours,

	ORTEC INTERNATIONAL, INC.

	By:

			Name:

			Title:

ACKNOWLEDGED AND AGREED:

[TRANSFER AGENT]


By:

Name:

Title:

Date:

-2-

EXHIBIT I

ORTEC INTERNATIONAL, INC.
CONVERSION NOTICE


	Date of Conversion:

	Number of Preferred Shares to be converted: _______

	Stock certificate no(s). of Preferred Shares to be converted: ______

	The Common Stock have been sold pursuant to the registration statement:
	YES ____	NO____

Please confirm the following information:

	Conversion Price:

	Number of shares of Common Stock to be issued:

Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:


	Issue to:



	Facsimile Number:

	Authorization:
		By:

		Title:

	Dated:

PRICES ATTACHED

-3-

EXHIBIT I-A

ASSIGNMENT


Dated:		Signature


		Address

-4-

EXHIBIT II

FORM OF EXERCISE NOTICE

EXERCISE FORM

ORTEC INTERNATIONAL, INC.

The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of Ortec International, Inc. covered by the within Warrant.


Dated:		Signature


		Address

ASSIGNMENT


Dated:		Signature


		Address

PARTIAL ASSIGNMENT


Dated:		Signature


		Address

FOR USE BY THE ISSUER ONLY:

This Warrant No. W-_____ canceled (or transferred or exchanged) this _____ day of _____________. ______ shares of Common Stock issued therefor in the name of _______________, Warrant No. W- _____ issued for ____ shares of Common Stock in the name of _______________.

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EXHIBIT III

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[Name and address of Transfer Agent]
Attn: _____________

Re: Ortec International, Inc.

Ladies and Gentlemen:

We are counsel to Ortec International, Inc., a Delaware corporation (the “Company”), and have represented the Company in connection with that certain Series A Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”), dated as of June 18, 2007, by and among the Company and the purchasers named therein (collectively, the “Purchasers”) pursuant to which the Company issued to the Purchasers shares of its Series A Convertible Preferred Stock, par value $.001 per share, (the “Preferred Shares”) and warrants (the “Warrants”) to purchase shares of the Company’s common stock, par value $.001 per share (the “Common Stock”). Pursuant to the Purchase Agreement, the Company agreed, among other things, to register the shares of Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants (together the “Registrable Shares”), under the Securities Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the Purchase Agreement, on ________________, 2007, the Company filed a Registration Statement on Form SB-2 (File No. 333-________) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the resale of the Registrable Shares which names each of the present Purchasers as a selling stockholder thereunder.


	Very truly yours,

	[COMPANY COUNSEL]

	By:


cc: [LIST NAMES OF PURCHASERS]

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EXHIBIT F to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

FORM OF OPINION OF COUNSEL

1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Delaware and has the requisite corporate power to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary.

2. The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents and to issue the Preferred Stock, the Warrants and the Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants. The execution, delivery and performance of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required. Each of the Transaction Documents have been duly executed and delivered, and the Preferred Stock and the Warrants have been duly executed, issued and delivered by the Company and each of the Transaction Documents constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms. The Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants are not subject to any preemptive rights under the Certificate of Incorporation or the Bylaws.

3. The Preferred Stock and the Warrants have been duly authorized and, when delivered against payment in full as provided in the Purchase Agreement, will be validly issued, fully paid and nonassessable. The shares of Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants, have been duly authorized and reserved for issuance, and, when delivered upon conversion or against payment in full as provided in the Certificate of Designation and the Warrants, as applicable, will be validly issued, fully paid and nonassessable.

4. The execution, delivery and performance of and compliance with the terms of the Transaction Documents and the issuance of the Preferred Stock, the Warrants and the Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants do not (i) violate any provision of the Certificate of Incorporation or Bylaws, (ii) to our knowledge conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (iii) to our knowledge create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, or (iv) (a) result in a violation of any federal, state or local statute, rule or regulation, or to our knowledge, any order, judgment, injunction or decree (including Federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected, except, in all cases other than violations pursuant to clause (i) above, for such conflicts, default, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect.

-7-

5. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required under Federal, state or local law, rule or regulation in connection with the valid execution, delivery and performance of the Transaction Documents, or the offer, sale or issuance of the Preferred Stock, the Warrants or the Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants other than the Certificate of Designation, the Registration Statement, report on Form 8-K and Form D, both to be filed with the Securities and Exchange Commission.

6. To our knowledge, there is no action, suit, claim, investigation or proceeding pending or threatened against the Company which questions the validity of this Agreement or the transactions contemplated hereby or any action taken or to be taken pursuant hereto or thereto. To our knowledge, there is no action, suit, claim, investigation or proceeding pending, or to our knowledge, threatened, against or involving the Company or any of its properties or assets and which, if adversely determined, is reasonably likely to result in a Material Adverse Effect. To our knowledge, there are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any officers or directors of the Company in their capacities as such.

7. The offer, issuance and sale of the Preferred Stock and the Warrants and the offer, issuance and sale of the shares of Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants pursuant to the Purchase Agreement, the Certificate of Designation and the Warrants, as applicable, are based on the Purchasers’ representations in the Agreement, exempt from the registration requirements of the Securities Act.


	Very truly yours,

-8-

EXHIBIT G to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ORTEC INTERNATIONAL, INC.

ESCROW AGREEMENT

THIS ESCROW AGREEMENT (this “Agreement”) is made as of June 18, 2007, by and among Ortec International, Inc., a Delaware corporation (the “Company”), the purchasers signatory hereto (each a “Purchaser” and together the “Purchasers”), Burnham Hill Partners, a division of Pali Capital, Inc. (the “Placement Agent”), and Kramer Levin Naftalis & Frankel LLP, with an address at 1177 Avenue of the Americas, New York, New York 10036 (the “Escrow Agent”). Capitalized terms used but not defined herein shall have the meanings set forth in the Purchase Agreement (as defined below).

WITNESSETH:

WHEREAS, the Purchasers will be purchasing from the Company shares of Series A Convertible Preferred Stock (the “Preferred Shares”) convertible into shares of the Company’s common stock, par value $0.001 per share, pursuant to a Series A Convertible Preferred Stock Purchase Agreement dated as of the date hereof by and among the Company and the Purchasers (the “Purchase Agreement”);

WHEREAS, the Company and the Purchasers have requested that the Escrow Agent hold the subscription amounts with respect to the purchase of the Preferred Shares in escrow until the Escrow Agent has received all closing documents and deliveries required under Article IV of the Purchase Agreement; and

NOW, THEREFORE, in consideration of the covenants and mutual promises contained herein and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the parties agree as follows:

ARTICLE 1

TERMS OF THE ESCROW

1.1. The parties hereby agree to establish an escrow account with the Escrow Agent whereby the Escrow Agent shall hold the funds for the purchase of the Preferred Shares as contemplated by the Purchase Agreement.

1.2. Upon the Escrow Agent’s receipt of the aggregate subscription amounts into its master escrow account, together with copies of counterpart signature pages of the Transaction Documents from each Purchaser and the Company and all other closing documents and deliveries required under Article IV of the Purchase Agreement with respect to the Closing, it shall advise the Company and the Placement Agent, or their designated attorney or agent, of

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the amount of funds it has received into its master escrow account.

1.3. Wire transfers to the Escrow Agent shall be made as follows:


	Bank:	Citibank, N.A. 666 Fifth Avenue New York, NY 10103
	ABA No.:	021000089
	Account Name:	Kramer Levin Naftalis & Frankel LLP IOLA Account
	Account No.:	37317968
	Reference:	Ortec International, Inc. / Burnham Hill Partners

1.4. The Company and the Placement Agent, promptly after being advised by the Escrow Agent that it has received the subscription amounts for the Closing, copies of counterpart signature pages of the Transaction Documents from each Purchaser and the Company and all other closing documents and deliveries required under Article IV of the Purchase Agreement, shall deliver to the Escrow Agent a Release Notice, in the form attached hereto as Exhibit A (the “Release Notice”).

1.5. Once the Escrow Agent receives the Release Notice executed by the Company and the Placement Agent, the Escrow Agent shall wire the subscription proceeds per the written instructions of the Company and the Placement Agent, net of fees, expenses and any other disbursements as set forth in the Release Notice.

1.6. Wire transfers to the Company shall be made pursuant to written instructions from the Company provided to the Escrow Agent.

1.7. In the event that the Closing does not occur within five (5) business days of the date of this Agreement, upon the written request from a Purchaser to the Escrow Agent, the Escrow Agent shall promptly return the subscription proceeds to each Purchaser pursuant to written wire instructions to be delivered by such Purchaser to the Escrow Agent.

ARTICLE 2

MISCELLANEOUS

2.1. No waiver or any breach of any covenant or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of the time for performance of any other obligation or act.

2.2. All notices or other communications required or permitted hereunder shall be in writing, and shall be sent as set forth in the Purchase Agreement.

2.3. This Escrow Agreement shall be binding upon and shall inure to the benefit of the permitted successors and permitted assigns of the parties hereto.

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2.4. This Escrow Agreement is the final expression of, and contains the entire agreement between, the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Escrow Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived, except by written instrument signed by the parties to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein.

2.5. Whenever required by the context of this Escrow Agreement, the singular shall include the plural and masculine shall include the feminine. This Escrow Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to Articles are to this Escrow Agreement.

2.6. The parties hereto expressly agree that this Escrow Agreement shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of New York, without regard to conflicts of law principles that would result in the application of the substantive laws of another jurisdiction. Any action to enforce, arising out of, or relating in any way to, any provisions of this Escrow Agreement shall only be brought in a state or Federal court sitting in New York City, Borough of Manhattan.

2.7. The Escrow Agent’s duties hereunder may be altered, amended, modified or revoked only by a writing signed by the Company, each Purchaser and the Escrow Agent.

2.8. The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by the Escrow Agent to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent shall not be personally liable for any act the Escrow Agent may do or omit to do hereunder as the Escrow Agent while acting in good faith and in the absence of gross negligence, fraud and willful misconduct, and any act done or omitted by the Escrow Agent pursuant to the advice of the Escrow Agent’s attorneys-at-law shall be conclusive evidence of such good faith, in the absence of gross negligence, fraud and willful misconduct.

2.9. The Escrow Agent is hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and is hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case the Escrow Agent obeys or complies with any such order, judgment or decree, the Escrow Agent shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

2.10. The Escrow Agent shall not be liable in any respect on account of the identity, authorization or rights of the parties executing or delivering or purporting to execute or deliver the Purchase Agreement or any documents or papers deposited or called for thereunder in the absence of gross negligence, fraud and willful misconduct.

2.11. The Escrow Agent shall be entitled to employ such legal counsel and other

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experts as the Escrow Agent may deem necessary properly to advise the Escrow Agent in connection with the Escrow Agent’s duties hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor which shall be paid by the Escrow Agreement unless otherwise provided for in Section 2.14. The Escrow Agent has acted as legal counsel for the Placement Agent and may continue to act as legal counsel for the Placement Agent from time to time, notwithstanding its duties as the Escrow Agent hereunder. The Company and the Placement Agent consent to the Escrow Agent in such capacity as legal counsel for the Placement Agent and waives any claim that such representation represents a conflict of interest on the part of the Escrow Agent. The Company and the Placement Agent understand that the Escrow Agent is relying explicitly on the foregoing provision in entering into this Escrow Agreement.

2.12. The Escrow Agent’s responsibilities as escrow agent hereunder shall terminate if the Escrow Agent shall resign by giving written notice to the Company and the Purchasers. In the event of any such resignation, the Purchasers and the Company shall appoint a successor Escrow Agent and the Escrow Agent shall deliver to such successor Escrow Agent any escrow funds and other documents held by the Escrow Agent.

2.13. If the Escrow Agent reasonably requires other or further instruments in connection with this Escrow Agreement or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

2.14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the documents or the escrow funds held by the Escrow Agent hereunder, the Escrow Agent is authorized and directed in the Escrow Agent’s sole discretion (1) to retain in the Escrow Agent’s possession without liability to anyone all or any part of said documents or the escrow funds until such disputes shall have been settled either by mutual written agreement of the parties concerned by a final order, decree or judgment or a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but the Escrow Agent shall be under no duty whatsoever to institute or defend any such proceedings or (2) to deliver the escrow funds and any other property and documents held by the Escrow Agent hereunder to a state or Federal court having competent subject matter jurisdiction and located in the City of New York, Borough of Manhattan, in accordance with the applicable procedure therefor.

2.15. The Company and each Purchaser agree severally but not jointly to indemnify and hold harmless the Escrow Agent and its partners, employees, agents and representatives from any and all claims, liabilities, costs or expenses in any way arising from or relating to the duties or performance of the Escrow Agent hereunder or the transactions contemplated hereby or by the Purchase Agreement other than any such claim, liability, cost or expense to the extent the same shall have been determined by final, unappealable judgment of a court of competent jurisdiction to have resulted from the gross negligence, fraud or willful misconduct of the Escrow Agent.

[SIGNATURE PAGE FOLLOWS]

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[SIGNATURE PAGE TO ESCROW AGREEMENT]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of this 18th day of June, 2007.


ORTEC INTERNATIONAL, INC.

By:	/s/	Alan W. Schoenbart

	Name: Alan W. Schoenbart
	Title: CFO

ESCROW AGENT:

Kramer Levin Naftalis & Frankel LLP

By	/s/	Chris Auguste

	Name: Chris Auguste
	Title: Partner

Burnham Hill Partners,
a division of Pali Capital, Inc.

By:	/s/	Jason Adelman

	Name: Jason Adelman
	Title: President

[PURCHASERS’ SIGNATURE PAGE FOLLOWS]

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[PURCHASER’S SIGNATURE PAGE TO ESCROW AGREEMENT]

Name of Investing Entity: __________________________________

Signature of Authorized Signatory of Investing Entity: __________________________________

Name of Authorized Signatory: _____________________________________

Title of Authorized Signatory: ______________________________________

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Exhibit A to
Escrow Agreement

RELEASE NOTICE

The UNDERSIGNED, pursuant to the Escrow Agreement dated as of June __, 2007 among the Company, the Purchasers signatory thereto and Kramer Levin Naftalis & Frankel LLP, as Escrow Agent (the “Escrow Agreement”), hereby notify the Escrow Agent that each of the conditions precedent to the purchase and sale of the Preferred Shares have been satisfied or waived in accordance with Article IV of the Purchase Agreement. The Company hereby confirms that all of its respective representations and warranties contained in the Purchase Agreement remain true and correct and authorize the release by the Escrow Agent of the funds to be released as described in the Escrow Agreement and as set forth below. This Release Notice shall not be effective until executed by the Company and the Placement Agent.

Capitalized terms used herein and not defined shall have the meaning ascribed to such terms in the Escrow Agreement.

This Release Notice may be signed in one or more counterparts, each of which shall be deemed an original.

Please release the $____________ that has been deposited in the escrow account pursuant to the Escrow Agreement according to the following instructions:

[to be completed]

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IN WITNESS WHEREOF, the undersigned have caused this Release Notice to be duly executed and delivered as of this 18th day of June, 2007.


ORTEC INTERNATIONAL, INC.

By: /s/ Alan W. Schoenbart
	Name: Alan W. Schoenbart
	Title: CFO


PLACEMENT AGENT:

Burnham Hill Partners, a division of Pali Capital, Inc.

By: /s/ Jason Adelman
	Name:
	Title:

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DISCLOSURE SCHEDULES

Schedule 2.1

Preferred stock, $.001 par value, authorized, 1,000,000 shares Convertible Series D-1, stated value $10 per share; authorized 20,000 shares; Common Stock, $.001 par value; authorized 200,000,000 shares; 9,073,890 issued and outstanding

-17-

Schedule 2.1(c)(1)

Commitment to exchange Series H warrants for common and 25% warrant coverage
Commitment to issued 500,000 shares to management on 1/1/08

-18-

Schedule 2.1(c)(2)

Section 4.4 of the agreement dated as of April 14, 2006, among the Company, ORTN Acquisition Corp. (whose name after the merger referred to in such April 14, 2006 agreement was changed to Hapto Biotech, Inc.), Hapto Biotech, Inc. and certain shareholders and option holders of Hapto Biotech, Inc. for the merger of Hapto Biotech, Inc. with and into ORTN Acquisition Corp., provides that until April 14, 2007, none of the approximately 2,057,360 shares of Common Stock acquired by the former shareholders and option holders of Hapto Biotech, Inc. could be sold, pledged, encumbered or otherwise disposed of by them.

-19-

Schedule 2.1(f)

12/31/2006 10-KSB
3/31/2007 10-QSB

-20-

Schedule 2.1(h)

None

-21-

Schedule 2.1 (i)(k)


Loss Incurred in the 4^th Qtr of 2006	$	3,916,960	Audit not completed
Loss Incurred in the 1^st Qtr of 2007		4,312,867	Unaudited
Aggregate Six month Loss	$	8229,827


		3/31/2007
		*Unaudited*
Accounts payable and accrued expenses	$	5,037,018
Convertible bridge financing payable		2,434,000
Insurance Premium Financing		107,981
Loan payable-current		39,411
Capital lease obligation		6,094
Obligation under revenue interest assignment		41,006,000
Total Liabilities	$	48,630,503

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Cap Table


		Common Eq.	Warrants	Options

Outstanding Shares	Note 2	9,073,890
Penny warrants considered shares		811,333	811,333
Series D-1 Preferred	5948,6148 shs	1,586,297
		11,471,520
Full Ratchel H Warrants	Note 3	2,169,111	2,169,111
		13,640,631


Other Warrant Series
B-1		$	60.00	11,747
B-2		$	75.00	7,520
C		$	54.00	6,800
E		$	11.34	47,840
E		$	13.06	254,279
E PA		$	5.02	183,092
F		$	8.45	1,162,926
F PA		$	4.50	211,975
G		$	4.50	200,000
Other various expirations		$	3.75	19,000
Other various expirations		$	4.50	266,667
Other various expirations		$	6.00	192,534
Other various expirations		$	7.50	3,334
Other various expirations		$	7.50	1,667
Other various expirations		$	8.50	1,688
Other various expirations		$	11.25	73,674
Other various expirations		$	15.00	1,667
Other various expirations		$	27.00	103,000
					2,749,390
Total outstanding warrants					5,729,834



Outstanding stock opinions	W/A exerc price		19.50			538,473	Note 1

Note 1 – 508,909 options will go away when RL and SK above

Note 2 – Does not include 500,000 to be issued to management on 1/1/08

Note 3 – We expect all of these to exchange their shares. Still trying to contact Avitan Ami – 3,333 Series H

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Schedule 2.1(m)

The Company is in default of its leases with Columbia University and such lease has terminated as of 4/30/07. We have extended the cure period to 5/30/07 to pay all rent in arrears which is in excess of $250,000

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Schedule 2.1(p)

Burnham Hill Partners
ViewTrade

-25-

Schedule 2.1(u)

Columbia Lease Agreement disclosed above

-26-

Schedule 2.1(z)(ix)

None

-27-

Schedule 2.1(ee)

Ortec has issued bridge notes in the amount of $2,899,000 which the holders may use to purchase the Series A Preferred Stock and the Warrants being sold as described in Section 1.

-28-

Schedule 2.1(gg)

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 866-1340, Fausto Rodriguez (Ext. 2509)

EX-10.4 9 c49144_ex10-4.htm

EXHIBIT 10.4

BURNHAM HILL PARTNERS
A DIVISION OF PALI CAPITAL INC.


590 MADISON AVENUE	TEL 212-980-2200
NEW YORK, NEW YORK 10022	FAX 212-980-9466


	June 15, 2007

	Mr. Alan Schoenbart
	Chief Financial Officer
	Ortec International, Inc.
	3960 Broadway
	New York, NY 10032

	Dear Mr. Schoenbart:

	This letter Agreement (the “Agreement”) confirms the engagement of Burnham Hill Partners (“BHP”), a division of Pali Capital, Inc., by Ortec International, Inc. (the “Company”) to act as its exclusive placement agent in connection with the issuance and sale of up to $12 million of Series A Convertible Preferred Stock (the “Series A Preferred”) and common stock purchase warrants through a transaction or transactions exempt from registration under the Securities Act of 1933, as amended, and in compliance with the applicable securities laws and regulations (a “Financing”). This Agreement and the separate Advisory Agreement entered into this day supersede all previous agreements with the Company either written or verbal.

	In connection with BHP’s engagement hereunder, the Company shall pay BHP a cash fee equal to ten percent (10%) of the gross proceeds received by the Company in the Financing, which shall include cash amounts received by the Company in connection with bridge notes issued by the Company in relation to this Financing. BHP shall be paid five percent (5%) of any proceeds received by the Company upon the cash exercise of the investor warrants issued in connection with the Series A Financing and related activity. In addition, the Company shall issue 5-year warrants equal to ten percent (10%) of the number of as converted Series A Preferred shares and five percent (5%) of the Series M Warrants issued with an initial exercise price per share equal to 110% of the Series A Preferred conversion price and 110% of the Series M exercise price respectively (the “Placement Warrants”). The shares underlying the Placement Warrants shall have standard piggyback registration rights, be exercisable pursuant to a cashless exercise provision, be non-redeemable and be included in any registration statement covering the shares issued pursuant to any financing activity under this Agreement.

	In addition to the above, the Company shall promptly reimburse BHP for reasonable out-of-pocket expenses (which amount shall not exceed $10,000 without the prior written approval of the Company) incurred in connection with this Agreement. All fees and expenses hereunder are payable in cash, unless otherwise noted by wire transfer upon the Closing of the Financing.

	In connection with this Agreement, the Company will furnish BHP with all information concerning the Company which BHP reasonably deems appropriate and will provide BHP with access to its officers, directors, employees, accountants, counsel and other representatives (collectively, the “Representatives”), it being understood that BHP will rely solely upon such information supplied by the Company and its Representatives without assuming any responsibility for the independent investigation or verification thereof. All non-public information concerning the Company that is given to BHP will be used solely in the course of the performance of our services hereunder and will be treated confidentially by us for so long as it remains non-public. Except as otherwise required by law, BHP will not disclose any information to any third party without the consent of the Company.

	Notice given pursuant to any of the provisions of this Agreement shall be given in writing and shall be sent by overnight courier or personally delivered (a) if to the Company, to the Company’s Chief Executive Officer at the address listed above; and (b) if to BHP, to its offices at 590 Madison Avenue, 5^th floor, New York, NY 10022, Attention: Jason Adelman, Managing Director.

	No advice or opinion rendered by BHP, whether formal or informal, may be disclosed, in whole or in part, or summarized, excerpted from or otherwise referred to without our prior written consent. In addition, BHP may not be otherwise referred to without its prior written consent. Since BHP will be acting on behalf of the Company in


	connection with its engagement hereunder, the Company has entered into a separate letter Agreement, dated the date hereof, providing for the indemnification by the Company of BHP and certain related persons and entities.

	For a period of twelve (12) months following the initial closing of the Financing (the “Authorization Period”), BHP shall have the right, but not the obligation, to act as exclusive placement agent in connection with any financing activity by the Company. The fees for such subsequent financing activity shall be mutually agreed to in good faith by the Company and BHP. Provided however, that upon the expiration of the Authorization Period, BHP will continue to be entitled to its full fees provided for herein in the event that at any time prior to the expiration of twelve (12) months after such expiration, a Financing involving the Company occurs that involves a party contacted by BHP on behalf of the Company.

	BHP is a division of Pali Capital, Inc. The letter agreement shall remain in full force and effect as to BHP and the Company, and shall be deemed fully assigned, in the event that BHP becomes an independent entity. Our engagement is for the limited purposes set forth under this Agreement, and the rights and obligations of each of BHP and the Company are herein defined. Each of BHP and the Company agrees that the other party has no fiduciary duty to it or its stockholders, officers and directors as a result of the engagement described in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of law principles thereof. This Agreement may not be amended or modified except in writing signed by each of the parties hereto.

	The invalidity or unenforceability of any provision of this letter Agreement shall not affect the validity or enforceability of any other provisions of this Agreement or the Indemnification Agreement, which shall remain in full force and effect.

	We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this Agreement.


	Very truly yours,

	Burnham Hill Partners

	By /s/ Jason Adelman

	Name: Jason Adelman
	Title: Managing Director


Accepted and agreed to as of the date first written above:

Ortec International, Inc.

By: /s/ Alan Schoenbart

Name: Alan Schoenbart
Title: Chief Financial Officer


TO:	Burnham Hill Partners	Date: June 15, 2007
	A division of Pali Capital Inc.
	590 Madison Avenue
	New York, NY 10022

In connection with your engagement pursuant to our letter Agreement of even date herewith (the “Engagement”), we agree to indemnify and hold harmless Burnham Hill Partners, a division of Pali Capital Inc. (“BHP”) and its affiliates, the respective directors, officers, partners, agents and employees of BHP and its affiliates, and each other person, if any, controlling BHP or any of its affiliates or successor in interest (collectively, “Indemnified Persons”), from and against, and we agree that no Indemnified Person shall have any liability to us or our owners, parents, affiliates, security holders or creditors for, any losses, claims, damages or liabilities (including actions or proceedings in respect thereof) (collectively “Losses”) (A) related to or arising out of (i) our actions or failures to act (including statements or omissions made, or information provided, by us or our agents) or (ii) actions or failures to act by an Indemnified Person with our consent or in reliance on our actions or failures to act, or (B) otherwise related to or arising out of the Engagement or your performance thereof, except that this clause (B) shall not apply to any Losses that are finally judicially determined to have resulted primarily from your bad faith or gross negligence or breach of the letter Agreement. If such indemnification is for any reason not available or insufficient to hold you harmless, we agree to contribute to the Losses involved in such proportion as is appropriate to reflect the relative benefits received (or anticipated to be received) by us and by you with respect to the Engagement or, if such allocation is judicially determined unavailable, in such proportion as is appropriate to reflect other equitable considerations such as the relative fault of us on the one hand and of you on the other hand; provided, however, that, to the extent permitted by applicable law, the Indemnified Persons shall not be responsible for amounts which in the aggregate are in excess of the amount of all fees actually received by you from us in connection with the Engagement. Relative benefits to us, on the one hand, and you, on the other hand, with respect to the Engagement shall be deemed to be in the same proportion as (i) the total value paid or proposed to be paid or received or proposed to be received by us or our security holders, as the case may be, pursuant to the transaction(s), whether or not consummated, contemplated by the Engagement bears to (ii) all fees paid or proposed to be paid to you by us in connection with the Engagement.

We will reimburse each Indemnified Person for all expenses (including reasonable fees and disbursements of counsel) as they are incurred by such Indemnified Person in connection with investigating, preparing for or defending any action, claim, investigation, inquiry, arbitration or other proceeding (“Action”) referred to above (or enforcing this Agreement or any related engagement Agreement), whether or not in connection with pending or threatened litigation in which any Indemnified Person is a party, and whether or not such Action is initiated or brought by you. We further agree that we will not settle or compromise or consent to the entry of any judgment in any pending or threatened Action in respect of which indemnification may be sought hereunder (whether or not an Indemnified Person is a party therein) unless we have given you reasonable prior written notice thereof and used all reasonable efforts, after consultation with you, to obtain an unconditional release of each Indemnified Person from all liability arising therefrom. In the event we are considering entering into one or a series of transactions involving a merger or other business combination or a dissolution or liquidation of all or a significant portion of our assets, we shall promptly notify you in writing. If requested by BHP, we shall then establish alternative means of providing for our obligations set forth herein on terms and conditions reasonably satisfactory to BHP.

If multiple claims are brought against you in any Action with respect to at least one of which indemnification is permitted under applicable law and provided for under this Agreement, we agree that any judgment, arbitration award or other monetary award shall be conclusively deemed to be based on claims as to which indemnification is permitted and provided for. In the event that you are called or subpoenaed to give testimony in a court of law, we agree to pay your expenses related thereto and for every day or part thereof that we are required to be there or in preparation thereof. Our obligations hereunder shall be in addition to any rights that any Indemnified Person may have at common law or otherwise. Solely for the purpose of enforcing this Agreement, we hereby consent to personal jurisdiction and to service and venue in any court in which any claim which is subject to this Agreement is brought by or against any Indemnified Person. We acknowledge that in connection with the Engagement you are acting as an independent contractor with duties owing solely to us. YOU HEREBY AGREE, AND WE HEREBY AGREE ON OUR OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF OUR SECURITY HOLDERS, TO WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM, COUNTER-CLAIM OR ACTION ARISING OUT OF THE ENGAGEMENT, YOUR PERFORMANCE THEREOF OR THIS AGREEMENT.

The provisions of this Agreement shall apply to the Engagement (including related activities prior to the date hereof) and any modification thereof and shall remain in full force and effect regardless of the completion or termination of the Engagement. This Agreement and any other Agreements relating to the Engagement shall be governed by and construed in accordance with the laws of the state of New York, without regard to conflicts of law principles thereof.


			Very truly yours,

Accepted and Agreed:

Burnham Hill Partners			Ortec International, Inc.

By:	/s/ Jason Adelman	By:	/s/ Alan Schoenbart

Name: Jason Adelman			Name: Alan Schoenbart
Title: Managing Director			Title: Chief Financial Officer

EX-10.5 10 c49144_ex10-5.htm

EXHIBIT 10.5

BURNHAM HILL PARTNERS
A DIVISION OF PALI CAPITAL INC.


590 MADISON AVENUE	TEL 212-980-2200
NEW YORK, NEW YORK 10022	FAX 212-980-9466


	June 15, 2007

	Mr. Alan Schoenbart
	Chief Financial Officer
	Ortec International, Inc.
	3960 Broadway
	New York, NY 10032

	Dear Mr. Schoenbart:

	This letter Agreement (the “Agreement”) confirms the engagement of Burnham Hill Partners (“BHP”), a division of Pali Capital, Inc., by Ortec International, Inc. (the “Company”) to act as its exclusive financial advisor in connection with one or more potential strategic transactions, which may include a re-capitalization, acquisition, joint venture, partnership, strategic alliance, merger and/or sale (a “Strategic Transaction”) and for advisory services provided to the Company in connection with the Company’s restructuring completed in connection with the Series A Financing.

	In connection with BHP’s advisory work performed on behalf of the Company related to completion of the Series A Financing, which has included, but has not been limited to, negotiating the exchange of the Paul Capital’s royalty interest into Series A-1 and A-2 Preferred, assisting in structuring the Series H Exchange Agreement, assisting in negotiating the Cancellation Agreements for Ron Lipstein and Steve Katz and reviewing the Company’s operating plan and financial plan following the Closing of the Series A Financing, the Company shall compensate BHP as set forth below:


	1)	BHP shall be issued 2,000,000 Advisory Warrants with an exercise price of $.55, which warrants shall be in identical form to the Placement Warrants issued in connection with the Series A Financing and all Series E PA, Series E, Series F PA and Series F warrants held by BHP, their affiliates or designees, or sub-agents that are participating in the Series A Financing, shall be exchanged for shares of common stock.

	2)	In connection with the closing of a Strategic Transaction completed during the term of this Engagement, a transaction fee based upon a percentage of the total Aggregate Consideration (as defined below) of such Strategic Transaction, calculated as follows (the “Transaction Fee”):


		Aggregate Consideration

		Up to $50 million	Three percent of such amount; plus

		Between $50 million and 100 million	Two percent of such amount; plus

		In excess of $100 million	One percent of such amount.

In addition to the above, the Company agrees to reimburse BHP for reasonable out-of-pocket expenses (which amount shall not exceed $5,000 without the prior approval of the Company) incurred in connection with this Agreement. All fees and expenses hereunder are payable in cash, unless otherwise noted, and shall be a condition to closing of any Strategic Transaction or Financing.

Notice given pursuant to any of the provisions of this Agreement shall be given in writing and shall be sent by overnight courier or personally delivered (a) if to the Company, to the Company’s Chief Executive Officer at the address listed above; and (b) if to BHP, to its offices at 590 Madison Avenue, 5^th floor, New York, NY 10022. Attention: Jason Adelman, Managing Director.

No advice or opinion rendered by BHP, whether formal or informal, may be disclosed, in whole or in part, or summarized, excerpted from or otherwise referred to without our prior written consent. In addition, BHP may not be otherwise referred to without its prior written consent. Since BHP will be acting on behalf of the Company in connection with its engagement hereunder, the Company has entered into a separate letter Agreement, dated the date hereof, providing for the indemnification by the Company of BHP and certain related persons and entities.

BHP’s engagement hereunder shall expire twelve (12) months from the date of this Agreement (the “Authorization Period”). Provided however, that upon the expiration or termination, BHP will continue to be entitled to its full fees provided for herein in the event that at any time prior to the expiration of twelve (12) months after such expiration or termination, a Strategic Transaction involving the Company occurs that involves a party contacted by BHP on behalf of the Company.

The invalidity or unenforceability of any provision of this letter Agreement shall not affect the validity or enforceability of any other provisions of this Agreement or the Indemnification Agreement, which shall remain in full force and effect.

We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this Agreement.


	Very truly yours,

	Burnham Hill Partners

	By: /s/ Jason Adelman

	Name: Jason Adelman
	Title: Managing Director


Accepted and agreed to as of the date first written above:

Ortec International, Inc.

By: /s/ Alan Schoenbart

Name: Alan Schoenbart
Title: Chief Financial Officer

EX-10.6 11 c49144_ex10-6.htm

EXHIBIT 10.6

CANCELLATION AGREEMENT

Cancellation Agreement entered into on the 18^th day of June, 2007, between Ortec International, Inc. (the “Company”) and Ron Lipstein (“Lipstein”).

RECITALS

A. The Company and Lipstein are parties to the Termination of Employment Agreement (hereafter defined).

B. The Company and Lipstein have reached understandings for the cancellation of the Termination of Employment Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows:

1. Definitions. As used in this Agreement the following terms shall have the following meanings ascribed thereto.

“Act” means the Securities Act of 1933, as amended.

“Common Stock” means the Company’s common stock par value $0.001 per share.

“Common Stock Equivalents” means securities which are convertible to or exercisable for Common Stock.

“Common Stock Equivalent Consideration” means the consideration received by the Company for issuing any Common Stock Equivalent, divided by the number of shares of Common Stock issuable upon the conversion or exercise of such Common Stock Equivalent, plus the additional consideration, if any, payable to the Company upon the exercise of the right to convert or exercise such Common Stock Equivalent for one share of Common Stock.


	“Company” means Ortec International, Inc., a corporation created under the laws of Delaware and having an office at 3960 Broadway, New York, New York 10032.

	“Event” shall have the meaning ascribed thereto in Section 3.

	“Excess Shares” shall have the meaning ascribed thereto in Section 4(a).

	“Exchange Agreement” means the Amended and Restated Exchange Agreement dated in June 2007, between the Company and Paul Capital.

	“Extended Financing Period” means the period beginning the date of this Agreement and ending 30 days after the Company’s public announcement of its receipt of written notice from the FDA granting the Company the right to commercialize and market (i.e. formal approval of the Company’s pre-market application for) its OrCel product for the treatment of venous leg ulcers.

	“FDA” means the United States Food and Drug Administration.

	“FDA’s 100 Day Letter” means the letter usually sent by the FDA to a sponsor of a clinical trial within 100 days after the sponsor’s filing of a pre-market application for commercial sales of a drug or device, such letter from the FDA in this instance being in response to the Company’s pre-market application for its OrCel product for the treatment of venous leg ulcers.

	“Financing” means the sales by the Company of its equity securities other than


	(a)	the sale after the first closing of the Private Placement, but no later than July 31, 2007, of the Company’s securities sold in the Private Placement which, together with the proceeds received by the Company in the first closing of the Private Placement (inclusive of the principal amount of the bridge notes issued by

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		the Company between October 2006 and the initial closing of the Private Placement, which are exchanged in the private Placement for the Company’s securities sold in the Private Placement) does not exceed $12,000,000 in aggregate, and

	(b)	as a result of the exercise by the holders thereof of the Company’s Series M Warrants,


	and from the sale of its debt securities, and/or receipt of payments in entering into a licensing or distribution agreement, in any or all of which the Company receives cash proceeds.

	“Initial Registration Statement” means the registration statement under the Act which the Company is required to file registering and qualifying for sale in the public securities markets shares of Common Stock issuable upon conversion of the Company’s Series A Convertible Preferred Stock acquired or to be acquired by the investors in the Private Placement.

	“IRC” means the United States Internal Revenue Code.

	“Lipstein” means Ron Lipstein, having an address at 585 Green Place, Woodmere, New York 11598.

	“Lipstein Option” shall have the meaning ascribed thereto in Section 5.

	“Lipstein Option Securities” shall have the meaning ascribed thereto in Section 5.

	“Lipstein’s Warrants” means the Warrants to be issued to Lipstein pursuant to the provisions of Sections 3(e) and 4.

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	“Medical and Dental Benefits” means the medical and dental benefits currently provided by the Company to Lipstein and to members of Lipstein’s immediate family under the Company’s Medical Plan and under the Company’s Dental Plan.

	“New Funding Amount” means not less than $8,000,000 (inclusive of the principal amount of bridge notes issued by the Company between October 2006 and the initial closing of the Private Placement, which are exchanged in the Private Placement) received by the Company in the initial closing of the Private Placement.

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

	“Private Placement” means the sale of the Company’s Series A Convertible Preferred Stock, Series A Warrants, Series M Warrants and Series M-1 Warrants, the first closing of which is to take place on or about the date of this Agreement and when the Company will receive the New Funding Amount.

	“Registrable Option Shares” means all the shares of Common Stock issued or issuable upon the conversion of all the shares of Series A Convertible Preferred Stock, and upon exercise of all the Series M Warrants, which the holder of the Lipstein Option could acquire upon exercise of the Lipstein Option in full.

	“Registrable Warrant Shares” means all of the shares of Common Stock issued or issuable upon exercise of Lipstein’s Warrants.

	“Revenue Interests” means the interest in the Company’s future revenues owned by Paul Capital pursuant to agreements between the Company and Paul Capital, and all other securities, interests and rights granted by the Company to Paul Capital,

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	which, together with such revenue interest, Paul Capital is exchanging for the Company’s Series A-1 and Series A-2 Convertible Preferred Stock.

	“Termination of Employment Agreement” means that agreement dated December 5, 2002 between the Company and Lipstein.

	“Warrants” means five-year warrants to be issued to Lipstein as in Sections 3(e) and 4 provided, to purchase shares of Common Stock, exercisable at $0.55 per share, in the form annexed hereto which form contains the same provisions as those contained in the Company’s Series A Warrant to be issued to the investors in the Private Placement except for specific provisions applied only to Lipstein. The five-year term of each such Warrant shall commence on the date of the issuance thereof.


	2. Termination of Employment. Upon


	(a)	the Company securing the New Funding Amount,

	(b)	Paul Capital having exchanged its Revenue Interests for shares of the Company’s Series A-1 and A-2 Preferred Stock, and

	(c)	Lipstein receiving (i) the $190,000 cash payment referred to in clause (c) of Section 3 below, (ii) the $20,000 cash payment referred to in clause (d) of Section 3 below, (iii) the $25,000 cash payment referred to Section 5 and (iv) the Warrant referred to in clause (e) of Section 3 below.

then


	(d)	Lipstein’s full-time employment by the Company shall be terminated,

	(e)	Lipstein shall resign as (i) a member of the Company’s board of directors, (ii) all his positions as an officer of the Company and (iii) all positions he

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		holds as an officer, director or manager of any of the Company’s subsidiaries. Lipstein has delivered a written resignation letter to the Company to such effect, conditioned upon events set forth in clauses (a), (b) and (c) above having occurred and effective after the Company has filed its annual report on Form 10-KSB for the year ended December 31, 2006, with the United States Securities and Exchange Commission,

	(f)	Lipstein shall use his best efforts to have the Company’s board of directors elect Costa Papastephanou as a director and to fill the vacancy created by Lipstein’s resignation and as chief executive officer of the Company, and

	(g)	Lipstein shall surrender (i) all warrants and options heretofore issued to him to purchase shares of Common Stock or other securities of the Company, which options and warrants will then be cancelled and (ii) all rights he may have to acquire other options or warrants to purchase shares of Common Stock other than the Warrants he is to receive pursuant to the terms of this Agreement.

After such termination of his full-time employment by the Company Lipstein shall be a consultant to the Company for a period of six months provided that, and only for so long as, the Company makes the payments to or on behalf of Lipstein theretofore required to be made by it, as provided in clauses (c), (d), (f) and (g) in Section 3 below, and issues the Warrant to Lipstein as provided in Section 4 below. The duties to be performed by Lipstein as a consultant shall be limited to his availability to consult with the Company’s officers and other employees concerning the Company’s business affairs provided that Lipstein’s availability for such consultation shall (x) not require Lipstein’s attendance at the Company’s offices or elsewhere and (y) does not interfere with other employment Lipstein then may have or Lipstein’s ability to devote his attention to his business interests or to securing employment.


	3. The Company’s Obligations to Lipstein. Upon


	(a)	the initial closing of the Private Placement and

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	(b)	Paul Capital having exchanged its Revenue Interests for shares of the Company’s Series A-1 and A-2 Convertible Preferred Stock, as provided in the Exchange Agreement,

the Company, in consideration of (i) Lipstein entering into this Cancellation Agreement and (ii) for the consulting services to be rendered by Lipstein, shall simultaneously with the initial closing of the Private Placement (except as provided below)


	(c)	pay $190,000 to Lipstein for entering into this Cancellation Agreement,

	(d)	pay Lipstein an additional $20,000 for the consulting services to be rendered by Lipstein as provided in Section 2 above,

	(e)	issue to Lipstein the Warrants as provided in Section 4(a) of this Agreement,

	(f)	no later than 30 days after the date of the FDA’s 100 Day Letter, pay Lipstein an additional $90,000 and no later than seven months after the date of the FDA’s 100 Day Letter, pay Lipstein a final payment of $190,000, both such payments being further consideration for entering into this Cancellation Agreement, and

	(g)	for the period beginning after the termination of Lipstein’s full-time employment by the Company pursuant to the provisions of Section 2 above, and ending December 31, 2008, provide, at the Company’s sole cost and expense, the Medical and Dental Benefits for Lipstein and members of his immediate family; provided, however, that the Company’s obligation to provide such Medical and Dental Benefits to Lipstein and members of his immediate family shall cease prior to December 31, 2008 if prior to such time Lipstein is employed and medical and dental benefits are made available to him by his new employer with benefits to Lipstein and members of his immediate family reasonably comparable to the benefits Lipstein and

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		members of his immediate family currently receive under the Company’s Medical and Dental Plan.

Provided, however, that if at the time the Company is required to pay Lipstein the $90,000 referred to in clause (f) of this Section 3 the Company (i) has not received an aggregate of at least $1,000,000 from a Financing or Financings and/or from the exercise of the Company’s Series M Warrants and (ii) does not have $500,000 in funds available to it, the payment of such $90,000 to Lipstein may be deferred until the earliest of the times when (iii) the Company receives an aggregate of not less than such $1,000,000 from a Financing or Financings and/or from the exercise of the Company’s Series M Warrants, (iv) the Company has $500,000 of funds available to it or (v) the date the $190,000 payment also referred to in clause (f) of this Section 3 is required to be paid to Lipstein.

In the event that the Company receives funds from a Financing or Financings and/or from the exercise of the Company’s Series M Warrants, which aggregate not less than $1,000,000, or in the event of the merger or consolidation of the Company into or with another entity (whether or not the Company is the surviving entity in such merger), or the sale by the Company of all or substantially all of its assets (each an “Event”) prior to the time that the $90,000 referred to in clause (f) of this Section 3 is required to be paid, the Company shall accelerate payment of the $90,000 referred to in such clause (f) of this Section 3 to no later than 10 days after the occurrence of such Event.

4. The Warrants.


	(a)	The Warrants which the Company is to deliver to Lipstein pursuant to the provisions of clause (e) of Section 3 above shall entitle Lipstein to purchase 2,100,000 shares of Common Stock. Provided, however, that if the total number of shares of Common Stock which the Company is required to issue upon conversion of its Series A Convertible Preferred Stock and upon exercise of its Series A Warrants (both sold by the Company in the Private Placement) exceeds an aggregate of 27,692,278 shares of Common Stock (the

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		“Excess Shares”), then the Warrants which the Company is to deliver to Lipstein pursuant to the provision of clause (e) of Section 3 shall entitle Lipstein to purchase so many shares of Common Stock as shall equal the total of 2,100,000 shares plus 3½% of the Excess Shares.

	(b)	Within 15 days after the end of each 60-day period in which the Company’s Series M Warrants continue to be exercisable the Company shall issue to Lipstein an additional Warrant entitling Lipstein to purchase so many shares of Common Stock as shall equal 3-1/2% of the aggregate of


	(i)	the number of shares of Common Stock


	(x)	issued or required to be issued by the Company to the providers of such Financing or Financings, whether as a result of the exercise of the Series M Warrants (but not upon exercise of the Company’s Series M-1 Warrants) or otherwise, and

	(y)	issuable by the Company to the providers of such Financing or Financings upon the conversion or exercise of Common Stock Equivalents issued or granted by the Company,


		in such 60-day period, as consideration for the first cash proceeds received by the Company prior to the end of the Extended Financing Period, for such Common Stock or such Common Stock Equivalents aggregating not more than $6,300,000 (including proceeds received by the Company for the shares of Common Stock the Company issues upon exercise of the Company’s Series M Warrants), plus

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	(ii)	the number of shares of Common Stock issued by the Company during such 60-day period to its suppliers of goods and services and its other creditors in satisfaction of obligations, which exceed the number of shares of Common Stock issued by the Company during the Extended Financing Period in satisfaction of an aggregate of $3,000,000 owed by the Company to its creditors.


	(c)	If during the Extended Financing Period


	(i)	the exercise price of the Series M Warrants is reduced to less than $0.50 per share of Common Stock and Series M Warrants are exercised at such lower exercise price, or

	(ii)	The Company sells Common Stock for less than $0.50 per share, or

	(iii)	the Company sells Common Stock Equivalents for Common Stock Equivalent Consideration of less than $0.50 per share of Common Stock,


		then the exercise price of the Warrants issued pursuant to Sections 3(e), 4(a) and 4(b) above shall be reduced to an amount equal to $0.05 more than such lower exercise price of the Series M Warrants, or $0.05 more than the Company receives for the per share sales price of its Common Stock, or $0.05 more than the Company receives as the Common Stock Equivalent Consideration for one share of Common Stock issuable upon exercise or conversion of such Common Stock Equivalent.

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5. Satisfaction of Deferred Compensation Obligation.

The Company owes Lipstein deferred compensation in the amount of $233,330. In satisfaction of such obligation and all other obligations owed by the Company to Lipstein other than (x) obligations owed pursuant to the terms of this Agreement and (y) payment of Lipstein’s current salary until the time his employment by the Company is terminated, as provided in clause (d) of Section 2 of this Agreement, the Company (a) shall pay Lipstein $25,000 (which is in addition to the payments to be made to Lipstein or for his behalf as provided in Section 3 of this Agreement) and (b) grants Lipstein an option (the “Lipstein Option”) to purchase the following preferred shares and warrants identical to those which are being sold to investors in the Private Placement (together the “Lipstein Option Securities”):


	(i)	12 shares of the Company’s Series A Convertible Preferred Stock having a stated value/liquidation preference of $10,000 per share with each such preferred share convertible into 20,000 shares of Common Stock;

	(ii)	the Company’s five year Series A Warrants to purchase an aggregate of 120,000 shares of Common Stock at an exercise price of $1.00 per common share;

	(iii)	the Company’s Series M warrants to purchase an additional 120,000 shares of Common Stock at an exercise price of $0.50 per common share, and

	(iv)	the Company’s Series M-1 warrants to purchase one half of the number of shares of Common Stock that Lipstein acquires as the result of Lipstein’s exercise of the Series M Warrants which Lipstein acquires upon the exercise of the Lipstein Option.

The Lipstein Option may be exercised by Lipstein or by his successors or assigns at any time up to 30 days after the Company files a report on Form 8-K with the United States

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Securities and Exchange Commission announcing FDA clearance for the commercial sale of the Company’s OrCel product for the treatment of venous stasis ulcers, and the Lipstein Option shall no longer be exercisable after the end of such 30-day period. The Lipstein Option may be exercised by the holder thereof, in whole or in part, by notice of exercise to the Company in writing in the manner for notice provided in Section 12 of this Agreement, accompanied by payment to the Company of the exercise price which is $100 for each share of Series A Convertible Preferred Stock, plus Series A, M and M-1 warrants to purchase one-twelfth of the number of shares of Common Stock which could be purchased by exercise of all the warrants in that series which Lipstein would acquire upon the exercise of the Lipstein Option.

6. Registration Rights.


	(a)	The Registrable Warrant Shares will not be included among the shares of Common Stock registered in the Initial Registration Statement. However, the Company will include the Registrable Warrant Shares in any registration statement filed by it under the Act after the Initial Registration Statement.

	(b)	In addition to the piggyback registration rights set forth in Section 6(a) immediately above, beginning on the earlier of (i) six months after the effective date of the Initial Registration Statement or (ii) nine months after the date of this Agreement, the Company shall, except as hereafter in this Section 6 provided, upon Lipstein’s written demand file a registration statement under the Act registering and qualifying the Registrable Warrant Shares for sale in the public securities markets. The Company agrees to have the registration statement it files in response to Lipstein’s written demand declared effective no later than 120 days after the date of Lipstein’s written demand.

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	(c)	The Company shall file post-effective amendments to such registration statement which registers the Registrable Warrant Shares or additional registration statements, so that the Registrable Warrant Shares shall continue to be registered under the Act and therefore qualified for sale in the public securities markets. Provided, however, that anything in this Section 6 to the contrary notwithstanding the Company’s obligation to register any of the Registrable Warrant Shares and to continue to have such Registrable Warrant Shares registered so as to qualify them for sale in the public securities markets, shall terminate on the earlier of (x) the sale of all such Registrable Warrant Shares in the public securities market or (y) when all such Registrable Warrant Shares may be sold in the public securities markets by application of Rule 144-k promulgated under the Act.

	(d)	Further provided, however, that the Company’s obligation to register the Registrable Warrant Shares pursuant to the provisions of paragraphs (a) or (b) of this Section 6 shall be deferred but only for the number of Registrable Warrant Shares that the registration of such Registrable Warrant Shares would prevent shares of the Company’s common stock owned by, or that could be acquired by (i) Paul Capital as a result of Paul Capital’s conversion of the Company’s Series A-1 Convertible Preferred Stock owned by Paul Capital, or (ii) by the holders of the Company’s Series A Convertible Preferred Stock as a result of such holders conversion of their Series A Convertible Preferred Stock, or (iii) by the holders of the Company’s Series M Warrants as a result of such holders exercise of their Series M Warrants, which the Company is required to register under the Act pursuant to the terms of a Registration Rights Agreement entered into by the Company with Paul Capital and such holders of the Company’s Series A Convertible Preferred Stock and the holders of such Series M Warrants, dated on or about the date of this Agreement, being registered under the Act because of the Securities and Exchange Commission’s application of Rule 415 under the Act. In such

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		situation the Company’s obligation to register the Registrable Warrant Shares shall be deferred only until the time when the Company’s obligation to register shares of its common stock owned or that could be acquired by Paul Capital and by the holders of such Series A Convertible Preferred Stock and such Series M Warrants upon conversion or exercise of such Ortec securities, would no longer be affected by the registration of the Registrable Warrant Shares.

	(e)	Lipstein’s Warrants shall provide that the cashless exercise provisions of Lipstein’s Warrants may be exercised by the holder of Lipstein’s Warrants at any time beginning on the date which is the earlier of (i) one year from the date of this Agreement or (ii) if the registration statement demanded by Lipstein pursuant to paragraph (b) of this Section 6 is not declared effective within such 120-day period, immediately after the expiration of such 120-day period. Provided, however, that the right to exercise such cashless exercise provision will not preclude Lipstein from asserting and prosecuting any other claim he may have against the Company for the Company’s failure to have such registration statement declared effective in such 120-day period as required by such paragraph (b).

	(f)	The Company’s obligation to register the Registrable Option Shares shall be the same as the Company’s obligations to register the Common Stock issuable upon conversion of any other shares of Series A Convertible Preferred Stock or upon the exercise of any other Series M Warrants pursuant to the Registration Rights Agreement dated on or about the date of this Agreement among the Company and the holders of the Company’s Series A Convertible Stock sold in the Private Placement. Lipstein shall have all the rights of, and be entitled to all payments payable by the Company to, the holders of the Company’s Series A Convertible Preferred Stock who are parties to such Registration Rights Agreement as if Lipstein was a party thereto.

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7. Cancellation of the Termination of Employment Agreement. The Termination of Employment Agreement shall be cancelled and neither the Company nor Lipstein shall thereafter have any rights or obligations thereunder if and when the Company (i) makes the payments required to be made by it to Lipstein pursuant to clauses (c) and (d) of Section 3 and clause (a) in the first paragraph of Section 5 and (ii) issues the Warrants to Lipstein required to be issued to Lipstein on the date of the initial closing of the Private Placement pursuant to clause (e) of Section 3 and paragraph (a) of Section 4. Such cancellation of Lipstein’s Termination of Employment Agreement shall take effect when the conditions in the preceding sentence have been met even though the Company does not thereafter meet its other obligations hereunder, including, without limitation, the Company’s failure to make the payments required by clause (f) of Section 3, in which event Lipstein’s remedies against the Company for such breach of this Agreement shall be based solely on this Agreement.

8. Indemnification. The Company will, to the fullest extent permitted or required by Section 145 of the Delaware General Corporation Law, as from time to time amended and supplemented, indemnify Lipstein under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein will not be deemed exclusive of any other rights to which Lipstein may be entitled under any of the Company’s bylaws, agreements, vote of the stockholders or directors or otherwise, both as to action heretofore or hereafter taken by Lipstein as an officer and/or director of the Company, and will continue after Lipstein has ceased to be a director, officer, employee or agent of the Company and will inure to the benefit of Lipstein’s heirs, executors and administrators.

9. Directors and Officers Insurance. The Company shall for the period during which Lipstein renders consulting services for the Company have Lipstein insured under the Company’s Directors and Officers liability policy as if he were an officer of the Company.

10. Non-Disparagement. For a period of three years after the termination of Lipstein’s employment with the Company, none among the Company, its officers and directors will make any comment which disparages or defames Lipstein or places Lipstein in a negative light.

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11. Excise Tax. (a) If pursuant to any of the provisions of this Cancellation Agreement, if the aggregate amounts due Lipstein under this Cancellation Agreement and any other plan or program of the Company constitutes a “Parachute Payment”, as such term is defined in IRC Section 280(G), and as a result thereof there is an excise tax imposed on Lipstein pursuant to IRC Section 4999 on all or part of such “Parachute Payment” received by Lipstein from the Company, the Company shall reimburse Lipstein for (i) such excise tax payment required to be paid by Lipstein plus (ii) income taxes and additional excise taxes required to be paid by Lipstein because of any reimbursement of excise and income taxes required to be paid by Lipstein pursuant to clause (i) and this clause (ii) of this Section 11, all so that all excise taxes and income taxes on the amount of the reimbursement to Lipstein for such excise taxes and income taxes required to be paid by Lipstein on account of such “Parachute Payment” and such reimbursements shall be borne by the Company and not by Lipstein.

(b) Anything in this Cancellation Agreement to the contrary notwithstanding if the aggregate of the amounts due Lipstein under this Cancellation Agreement and any other plan or program of the Company constitutes a “Parachute Payment” then, at Lipstein’s option, the payments to be made to Lipstein under this Cancellation Agreement and under such other plan or program of the Company, shall be reduced to an amount which, when added to the aggregate of all other payments to Lipstein will not make the total amount of such payments a “Parachute Payment”. If payments to Lipstein included in determining whether Lipstein is receiving an IRC 280(G) “Parachute Payment” include the value of the Warrants and other obligations of the Company hereunder and Lipstein makes the election provided in this Section 11(b), then which items of payment are to be eliminated (cash, the Warrants or the Company’s other obligations hereunder or any combination thereof) shall be made by Lipstein.

12. Notice. Any Notice or demand required or permitted to be given or made hereunder shall be deemed to have been duly given or made for all purposes if (a) in writing and sent by (i) messenger or an overnight courier service against receipt, (ii) certified or registered mail, postage pre-paid, return receipt requested or (b) by telegram, telecopy, telex or similar electronic means, provided that a written copy thereof is sent on the same day by postage-paid first-class

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mail, to the following addresses or such other addresses and telecopy numbers as a party shall have notified the other party in the manner for notice in this Section 12 provided.


	If to the Company:

		Ortec International, Inc. 3960 Broadway New York, New York 10032 Attn: Chief Financial Officer Fax no.: (212) 740-2570

	If to Lipstein:

		585 Green Place Woodmere, New York 11598 Fax no.: (516) 569-5767

13. Exchange of General Releases. Simultaneously with the execution of this Agreement, Lipstein and the Company are exchanging general releases excepting from the operation thereof the obligations arising under the terms of this Agreement and in the case of the general release being given by Lipstein to the Company, also excepting from the operation thereof all indemnifications of Lipstein from the claims of third parties based on his actions as an officer, director and/or employee of the Company and either of its subsidiaries to the extent such indemnification is provided by the Delaware General Corporation Law, the Company’s certificate of incorporation or its by-laws, and/or to the extent the Company and/or Lipstein are insured against such claims by the Company’s officers and directors liability policies.

14. 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,

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complaint, notice or other process relating to such proceeding may be effected in the manner for notice provided by Section 12 above. In the event of any litigation between Lipstein and the Company arising out of or in connection with this Agreement, the losing party shall pay all fees and expenses, including, without limitation, legal fees and disbursement, incurred by the prevailing party in such litigation.

15. 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.

16. 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.

17. 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.

18. 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.

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


Ortec International, Inc.

By:	/s/ Alan W. Schoenbart

	Print Name:		Alan W. Schoenbart
	Title:	Chief Financial Officer

/s/ Ron Lipstein

Ron Lipstein

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EX-10.7 12 c49144_ex10-7.htm

EXHIBIT 10.7

CANCELLATION AGREEMENT

Cancellation Agreement entered into on the 18^th day of June, 2007, between Ortec International, Inc. (the “Company”) and Steven Katz (“Katz”).

RECITALS

A. The Company and Katz are parties to the Termination of Employment Agreement (hereafter defined).

B. The Company and Katz have reached understandings for the cancellation of the Termination of Employment Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows:

1. Definitions. As used in this Agreement the following terms shall have the following meanings ascribed thereto.


	“Act” means the Securities Act of 1933, as amended.

	“Common Stock” means the Company’s common stock par value $0.001 per share.

	“Common Stock Equivalents” means securities which are convertible to or exercisable for Common Stock.

	“Common Stock Equivalent Consideration” means the consideration received by the Company for issuing any Common Stock Equivalent, divided by the number of shares of Common Stock issuable upon the conversion or exercise of such Common Stock Equivalent, plus the additional consideration, if any, payable to


	the Company upon the exercise of the right to convert or exercise such Common Stock Equivalent for one share of Common Stock.

	“Company” means Ortec International, Inc., a corporation created under the laws of Delaware and having an office at 3960 Broadway, New York, New York 10032.

	“Event” shall have the meaning ascribed thereto in Section 3.

	“Excess Shares” shall have the meaning ascribed thereto in Section 4(a).

	“Exchange Agreement” means the Amended and Restated Exchange Agreement dated in June 2007, between the Company and Paul Capital.

	“Extended Financing Period” means the period beginning the date of this Agreement and ending 30 days after the Company’s public announcement of its receipt of written notice from the FDA granting the Company the right to commercialize and market (i.e. formal approval of the Company’s pre-market application for) its OrCel product for the treatment of venous leg ulcers.

	“FDA” means the United States Food and Drug Administration.

	“FDA’s 100 Day Letter” means the letter usually sent by the FDA to a sponsor of a clinical trial within 100 days after the sponsor’s filing of a pre-market application for commercial sales of a drug or device, such letter from the FDA in this instance being in response to the Company’s pre-market application for its OrCel product for the treatment of venous leg ulcers.

	“Financing” means the sales by the Company of its equity securities other than

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	(a)	the sale after the first closing of the Private Placement, but no later than July 31, 2007, of the Company’s securities sold in the Private Placement which, together with the proceeds received by the Company in the first closing of the Private Placement (inclusive of the principal amount of the bridge notes issued by the Company between October 2006 and the initial closing of the Private Placement, which are exchanged in the private Placement for the Company’s securities sold in the Private Placement) does not exceed $12,000,000 in aggregate, and

	(b)	as a result of the exercise by the holders thereof of the Company’s Series M Warrants,


	and from the sale of its debt securities, and/or receipt of payments in entering into a licensing or distribution agreement, in any or all of which the Company receives cash proceeds.

	“Initial Registration Statement” means the registration statement under the Act which the Company is required to file registering and qualifying for sale in the public securities markets shares of Common Stock issuable upon conversion of the Company’s Series A Convertible Preferred Stock acquired or to be acquired by the investors in the Private Placement.

	“IRC” means the United States Internal Revenue Code.

	“Katz” means Steven Katz, having an address at 655 Rutland Avenue, Teaneck, New Jersey 07666.

	“Katz Option” shall have the meaning ascribed thereto in Section 5.

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	“Katz Option Securities” shall have the meaning ascribed thereto in Section 5.

	“Katz’ Warrants” means the Warrants to be issued to Katz pursuant to the provisions of Sections 3(d) and 4.

	“New Funding Amount” means not less than $8,000,000 (inclusive of the principal amount of up to $2,800,000 in bridge notes issued by the Company between October 2006 and May 2007, which are exchanged in the Private Placement) for the Company’s Series A Convertible Preferred Stock and Series A Warrants sold in the Private Placement.

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

	“Private Placement” means the sale of the Company’s Series A Convertible Preferred Stock, Series A Warrants, Series M Warrants and Series M-1 Warrants, the first closing of which is to take place on or about the date of this Agreement and when the Company will receive the New Funding Amount.

	“Registrable Option Shares” means all the shares of Common Stock issued or issuable upon the conversion of all the shares of Series A Convertible Preferred Stock, and upon exercise of all the Series M Warrants, which the holder of the Katz Option could acquire upon exercise of the Katz Option in full.

	“Registrable Warrant Shares” means all of the shares of the Common Stock issued or issuable upon exercise of Katz’ Warrants.

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	“Revenue Interests” means the interest in the Company’s future revenues owned by Paul Capital pursuant to agreements between the Company and Paul Capital, and all other securities, interests and rights granted by the Company to Paul Capital, which, together with such revenue interest, Paul Capital is exchanging for the Company’s Series A-1 and Series A-2 Convertible Preferred Stock.

	“Termination of Employment Agreement” means that agreement dated December 5, 2002 between the Company and Katz.

	“Warrants” means five-year warrants to be issued to Katz as in Sections 3(d) and 4 provided, to purchase shares of Common Stock, exercisable at $0.55 per share, in the form annexed hereto which form contains the same provisions as those contained in the Company’s Series A Warrant to be issued to the investors in the Private Placement except for specific provisions applied only to Katz. The five-year term of each such Warrant shall commence on the date of the issuance thereof.

2. Termination of Employment. Upon


	(a)	the Company securing the New Funding Amount,

	(b)	Paul Capital having exchanged its Revenue Interests for shares of the Company’s Series A-1 and A-2 Preferred Stock, and

	(c)	Katz receiving (i) the $40,000 cash payment referred to in clause (c) of Section 3 below, (ii) the $25,000 cash payment referred to in Section 4 and (iii) the Warrant referred to in clause (d) of Section 3 below,
then

	(d)	Katz’ employment by the Company shall be terminated,

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	(e)	Katz shall resign as Chairman and a member of the Company’s board of directors and all positions he holds as an officer, director or manager of any of the Company’s subsidiaries. Katz has delivered a written resignation letter to the Company to such effect, conditioned upon events set forth in clauses (a), (b) and (c) above having occurred and effective after the Company has filed its annual report on Form 10-KSB for the year ended December 31, 2006, with the United States Securities and Exchange Commission,

	(f)	Katz shall use his best efforts to have the Company’s board of directors elect Costa Papastephanou as a director to fill a vacancy created by the resignation of Ron Lipstein and as chief executive officer of the Company, and

	(g)	Katz shall surrender (i) all warrants and options heretofore issued to him to purchase shares of Common Stock or other securities of the Company, which options and warrants will then be cancelled and (ii) all rights he may have to acquire other options or warrants to purchase shares of Common Stock other than the Warrants he is to receive pursuant to the terms of this Agreement.

3. The Company’s Obligations to Katz. Upon


	(a)	the initial closing of the Private Placement and

	(b)	Paul Capital having exchanged its Revenue Interests for shares of the Company’s Series A-1 and A-2 Convertible Preferred Stock, as provided in the Exchange Agreement,

the Company, in consideration of Katz entering into this Cancellation Agreement, shall simultaneously with the initial closing of the Private Placement (except as provided below)


	(c)	pay $40,000 to Katz for entering into this Cancellation Agreement,

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	(d)	issue to Katz the Warrants as provided in Section 4(a) of this Agreement, and

	(e)	no later than 30 days after the date of the FDA’s 100 Day Letter, pay Katz an additional $45,000 and no later than seven months after the date of the FDA’s 100 Day Letter, pay Katz a final payment of $75,000, both such payments being further consideration for entering into this Cancellation Agreement.

Provided, however, that if at the time the Company is required to pay Katz the $45,000 referred to in clause (e) of this Section 3 the Company (i) has not received an aggregate of at least $1,000,000 from a Financing or Financings and/or from the exercise of the Company’s Series M Warrants and (ii) does not have $500,000 in funds available to it, the payment of such $45,000 to Katz may be deferred until the earliest of the times when (iii) the Company receives an aggregate of not less than such $1,000,000 from a Financing or Financings and/or from the exercise of the Company’s Series M Warrants, (iv) the Company has $500,000 of funds available to it or (v) the date the $75,000 payment also referred to in clause (e) of this Section 3 is required to be paid to Katz.

In the event that the Company receives funds from a Financing or Financings and/or from the exercise of the Company’s Series M Warrants, which aggregate not less than $1,000,000, or in the event of the merger or consolidation of the Company into or with another entity (whether or not the Company is the surviving entity in such merger), or the sale by the Company of all or substantially all of its assets (each an “Event”) prior to the time $45,000 referred to in clause (e) of this Section 3 is required to be paid, the Company shall accelerate payment of the $45,000 referred to in such clause (e) of this Section 3 to no later than 10 days after the occurrence of such Event.

4. The Warrants.


	(a)	The Warrants which the Company is to deliver to Katz pursuant to the provisions of clause (d) of Section 3 above shall entitle Katz to purchase

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		2,045,979 shares of Common Stock. Provided, however, that if the total number of shares of Common Stock which the Company is required to issue upon conversion of its Series A Convertible Preferred Stock and upon exercise of its Series A Warrants (both sold by the Company in the Private Placement) exceeds an aggregate of 27,692,278 shares of Common Stock (the “Excess Shares”), then the Warrants which the Company is to deliver to Katz pursuant to the provision of clause (d) of Section 3 shall entitle Katz to purchase so many shares of Common Stock as shall equal the total of 2,045,979 shares plus 3½% of the Excess Shares.

	(b)	Within 15 days after the end of each 60-day period in which the Company’s Series M Warrants continue to be exercisable the Company shall issue to Katz an additional Warrant entitling Katz to purchase so many shares of Common Stock as shall equal 3-1/2% of the aggregate of


(i)	the number of shares of Common Stock

	(x)	issued or required to be issued by the Company to the providers of such Financing or Financings, whether as a result of the exercise of the Series M Warrants (but not upon exercise of the Company’s Series M-1 Warrants) or otherwise, and

	(y)	issuable by the Company to the providers of such Financing or Financings upon the conversion or exercise of Common Stock Equivalents issued or granted by the Company,

	in such 60-day period, as consideration for the first cash proceeds received by the Company prior to the end of the Extended Financing Period, for such Common

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		Stock or such Common Stock Equivalents aggregating not more than $6,300,000 (including proceeds received by the Company for the shares of Common Stock the Company issues upon exercise of the Company’s Series M Warrants), plus

	(ii)	the number of shares of Common Stock issued by the Company during such 60-day period to its suppliers of goods and services and its other creditors in satisfaction of obligations, which exceed the number of shares of Common Stock issued by the Company during the Extended Financing Period in satisfaction of an aggregate of $3,000,000 owed by the Company to its creditors.


(c)	If during the Extended Financing Period

		(i)	the exercise price of the Series M Warrants is reduced to less than $0.50 per share of Common Stock and Series M Warrants are exercised at such lower exercise price, or

		(ii)	the Company sells Common Stock for less than $0.50 per share, or

		(iii)	the Company sells Common Stock Equivalents for Common Stock Equivalent Consideration of less than $0.50 per share of Common Stock,

	then the exercise price of the Warrants issued pursuant to Sections 3(d), 4(a) and 4(b) above shall be reduced to an amount equal to $0.05 more than such lower exercise price of the Series M Warrants, or $0.05 more than the Company receives for the per share sales price of its Common Stock, or $0.05 more than the Company receives as the Common Stock Equivalent

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		Consideration for one share of Common Stock issuable upon exercise or conversion of such Common Stock Equivalent.

5. Satisfaction of Deferred Compensation Obligation.

The Company owes Katz deferred compensation in the amount of $366,221. In satisfaction of such obligation and all other obligations owed by the Company to Katz other than (x) obligations owed pursuant to the terms of this Agreement and (y) payment of Katz’s current salary until the time his employment by the Company is terminated, as provided in clause (d) of Section 2 of this Agreement, the Company (a) shall pay Katz $25,000 (which is in addition to the payments to be made to Katz as provided in Section 3 of this Agreement) and (b) grants Katz an option (the “Katz Option”) to purchase the following preferred shares and warrants identical to those which are being sold to investors in the Private Placement (together the “Katz Option Securities”):


	(i)	8 shares of the Company’s Series A Convertible Preferred Stock having a stated value/liquidation preference of $10,000 per share with each such preferred share convertible into 20,000 shares of Common Stock;

	(ii)	the Company’s five year Series A Warrants to purchase an aggregate of 80,000 shares of Common Stock at an exercise price of $1.00 per common share;

	(iii)	the Company’s Series M warrants to purchase an additional 80,000 shares of Common Stock at an exercise price of $0.50 per common share, and

	(iv)	the Company’s Series M-1 warrants to purchase one half of the number of shares of Common Stock that Katz acquires as the result of Katz’s exercise of the Series M Warrants which Katz acquires upon the exercise of the Katz Option.

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The Katz Option may be exercised by Katz or by his successors or assigns at any time up to 30 days after the Company files a report on Form 8-K with the United States Securities and Exchange Commission announcing FDA clearance for the commercial sale of the Company’s OrCel product for the treatment of venous stasis ulcers, and the Katz Option shall no longer be exercisable after the end of such 30-day period. The Katz Option may be exercised by the holder thereof, in whole or in part, by notice of exercise to the Company in writing in the manner for notice provided in Section 11 of this Agreement, accompanied by payment to the Company of the exercise price which is $100 for each share of Series A Convertible Preferred Stock, plus Series A, M and M-1 warrants to purchase one-eighth of the number of shares of Common Stock which could be purchased by exercise of all the warrants in that series which Katz would acquire upon the exercise of the Katz Option.

6. Registration Rights.


	(a)	The Registrable Warrant Shares will not be included among the shares of Common Stock registered in the Initial Registration Statement. However, the Company will include the Registrable Warrant Shares in any registration statement filed by it under the Act after the Initial Registration Statement.

	(b)	In addition to the piggyback registration rights set forth in Section 6(a) immediately above, beginning on the earlier of (i) six months after the effective date of the Initial Registration Statement or (ii) nine months after the date of this Agreement, the Company shall, except as hereafter in this Section 6 provided, upon Katz’s written demand file a registration statement under the Act registering and qualifying the Registrable Warrant Shares for sale in the public securities markets. The Company agrees to have the

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		registration statement it files in response to Katz’s written demand declared effective no later than 120 days after the date of Katz’s written demand.

	(c)	The Company shall file post-effective amendments to such registration statement which registers the Registrable Warrant Shares or additional registration statements, so that the Registrable Warrant Shares shall continue to be registered under the Act and therefore qualified for sale in the public securities markets. Provided, however, that anything in this Section 6 to the contrary notwithstanding the Company’s obligation to register any of the Registrable Warrant Shares and to continue to have such Registrable Warrant Shares registered so as to qualify them for sale in the public securities markets, shall terminate on the earlier of (x) the sale of all such Registrable Warrant Shares in the public securities market or (y) when all such Registrable Warrant Shares may be sold in the public securities markets by application of Rule 144-k promulgated under the Act.

	(d)	Further provided, however, that the Company’s obligation to register the Registrable Warrant Shares pursuant to the provisions of paragraphs (a) or (b) of this Section 6 shall be deferred but only for the number of Registrable Warrant Shares that the registration of such Registrable Warrant Shares would prevent shares of the Company’s common stock owned by, or that could be acquired by (i) Paul Capital as a result of Paul Capital’s conversion of the Company’s Series A-1 Convertible Preferred Stock owned by Paul Capital, or (ii) by the holders of the Company’s Series A Convertible Preferred Stock as a result of such holders conversion of their Series A Convertible Preferred Stock, or (iii) by the holders of the Company’s Series M Warrants as a result of such holders exercise of their Series M Warrants, which the Company is required to register under the Act pursuant to the terms of a Registration Rights Agreement entered into by the Company with Paul Capital and such

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		holders of the Company’s Series A Convertible Preferred Stock and the holders of such Series M Warrants, dated on or about the date of this Agreement, being registered under the Act because of the Securities and Exchange Commission’s application of Rule 415 under the Act. In such situation the Company’s obligation to register the Registrable Warrant Shares shall be deferred only until the time when the Company’s obligation to register shares of its common stock owned or that could be acquired by Paul Capital and by the holders of such Series A Convertible Preferred Stock and such Series M Warrants upon conversion or exercise of such Ortec securities, would no longer be affected by the registration of the Registrable Warrant Shares.

	(e)	Katz’s Warrants shall provide that the cashless exercise provisions of Katz’s Warrants may be exercised by the holder of Katz’s Warrants at any time beginning on the date which is the earlier of (i) one year from the date of this Agreement or (ii) if the registration statement demanded by Katz pursuant to paragraph (b) of this Section 6 is not declared effective within such 120-day period, immediately after the expiration of such 120-day period. Provided, however, that the right to exercise such cashless exercise provision will not preclude Katz from asserting and prosecuting any other claim he may have against the Company for the Company’s failure to have such registration statement declared effective in such 120-day period as required by such paragraph (b).

	(f)	The Company’s obligation to register the Registrable Option Shares shall be the same as the Company’s obligations to register the Common Stock issuable upon conversion of any other shares of Series A Convertible Preferred Stock or upon the exercise of any other Series M Warrants pursuant to the Registration Rights Agreement dated on or about the date of this Agreement

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		among the Company and the holders of the Company’s Series A Convertible Stock sold in the Private Placement. Katz shall have all the rights of, and be entitled to all payments payable by the Company to, the holders of the Company’s Series A Convertible Preferred Stock who are parties to such Registration Rights Agreement as if Katz was a party thereto.

7. Cancellation of the Termination of Employment Agreement. The Termination of Employment Agreement shall be cancelled and neither the Company nor Katz shall thereafter have any rights or obligations thereunder if and when the Company (i) makes the payments required to be made by it to Katz pursuant to clause (c) of Section 3 and clause (a) in the first paragraph of Section 5 and (ii) issues the Warrants to Katz required to be issued to Katz on the date of the initial closing of the Private Placement pursuant to clause (d) of Section 3 and paragraph (a) of Section 4. Such cancellation of Katz’s Termination of Employment Agreement shall take effect when the conditions in the preceding sentence have been met even though the Company does not thereafter meet its other obligations hereunder, including, without limitation, the Company’s failure to make the payments required by clause (e) of Section 3, in which event Katz’s remedies against the Company for such breach of this Agreement shall be based solely on this Agreement.

8. Indemnification. The Company will, to the fullest extent permitted or required by Section 145 of the Delaware General Corporation Law, as from time to time amended and supplemented, indemnify Katz under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein will not be deemed exclusive of any other rights to which Katz may be entitled under any of the Company’s bylaws, agreements, vote of the stockholders or directors or otherwise, both as to action heretofore or hereafter taken by Katz as an officer and/or director of the Company, and will continue after Katz has ceased to be a director, officer, employee or agent of the Company and will inure to the benefit of Katz’ heirs, executors and administrators.

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9. Non-Disparagement. For a period of three years after the termination of Katz’ employment with the Company, none among the Company, its officers and directors will make any comment which disparages or defames Katz or places Katz in a negative light.

10. Excise Tax. (a) If pursuant to any of the provisions of this Cancellation Agreement, if the aggregate amounts due Katz under this Cancellation Agreement and any other plan or program of the Company constitutes a “Parachute Payment”, as such term is defined in IRC Section 280(G), and as a result thereof there is an excise tax imposed on Katz pursuant to IRC Section 4999 on all or part of such “Parachute Payment” received by Katz from the Company, the Company shall reimburse Katz for (i) such excise tax payment required to be paid by Katz plus (ii) income taxes and additional excise taxes required to be paid by Katz because of any reimbursement of excise and income taxes required to be paid by Katz pursuant to clause (i) and this clause (ii) of this Section 10, all so that all excise taxes and income taxes on the amount of the reimbursement to Katz for such excise taxes and income taxes required to be paid by Katz on account of such “Parachute Payment” and such reimbursements shall be borne by the Company and not by Katz.

(b) Anything in this Cancellation Agreement to the contrary notwithstanding if the aggregate of the amounts due Katz under this Cancellation Agreement and any other plan or program of the Company constitutes a “Parachute Payment” then, at Katz’ option, the payments to be made to Katz under this Cancellation Agreement and under such other plan or program of the Company, shall be reduced to an amount which, when added to the aggregate of all other payments to Katz will not make the total amount of such payments a “Parachute Payment”. If payments to Katz included in determining whether Katz is receiving an IRC 280(G) “Parachute Payment” include the value of the Warrants and other obligations of the Company hereunder and Katz makes the election provided in this Section 11(b),then which items of payment are to be eliminated (cash, the Warrants or the Company’s other obligations hereunder or any combination thereof) shall be made by Katz.

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11. Notice. Any Notice or demand required or permitted to be given or made hereunder shall be deemed to have been duly given or made for all purposes if (a) in writing and sent by (i) messenger or an overnight courier service against receipt, (ii) certified or registered mail, postage pre-paid, return receipt requested or (b) by telegram, telecopy, telex or similar electronic means, provided that a written copy thereof is sent on the same day by postage-paid first-class mail, to the following addresses or such other addresses and telecopy numbers as a party shall have notified the other party in the manner for notice in this Section 11 provided.


	If to the Company:

		Ortec International, Inc.
		3960 Broadway
		New York, New York 10032
		Attn: Chief Financial Officer
		Fax no.: (212) 740-2570

	If to Katz:

		655 Rutland Avenue
		Teaneck, New Jersey 07666
		Fax no.: (201) 692-0796

12. Exchange of General Releases. Simultaneously with the execution of this Agreement, Katz and the Company are exchanging general releases excepting from the operation thereof the obligations arising under the terms of this Agreement and in the case of the general release being given by Katz to the Company, also excepting from the operation thereof all indemnifications of Katz from the claims of third parties based on his actions as an officer, director and/or employee of the Company and either of its subsidiaries to the extent such indemnification is provided by the Delaware General Corporation Law, the Company’s certificate of incorporation or its by-laws, and/or to the extent the Company and/or Katz are insured against such claims by the Company’s officers and directors liability policies.

13. 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

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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 11 above. In the event of any litigation between Katz and the Company arising out of or in connection with this Agreement, the losing party shall pay all fees and expenses, including, without limitation, legal fees and disbursement, incurred by the prevailing party in such litigation.

14. 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.

15. 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.

16. 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.

17. 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.

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


Ortec International, Inc.

By:	/s/	Alan W. Schoenbart

	Print Name:			Alan W. Schoenbart
	Title:		Chief Financial Officer

/s/	Steven Katz

	Steven Katz

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EX-10.8 13 c49144_ex10-8.htm

EXHIBIT 10.8

WARRANT TO PURCHASE

SHARES OF COMMON STOCK

ORTEC INTERNATIONAL, INC.


No.: W-RL1 Date of Issuance: June 18, 2007	Number of Shares: 2,105,819

FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the undersigned, Ortec International, Inc., a Delaware corporation (together with its successors and assigns, the “Issuer”), hereby certifies that Ron Lipstein or his registered assigns is entitled to subscribe for and purchase, during the period specified in this Warrant, up to two million one hundred five thousand eight hundred nineteen (2,105,819) shares (subject to adjustment as hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect, subject, however, to the provisions and upon the terms and conditions hereinafter set forth. Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective meanings specified in Section 9 hereof.

1. Term. The right to subscribe for and purchase shares of Warrant Stock represented hereby shall commence on June 18, 2007 and shall expire at 5:00 p.m., eastern time, on June 17, 2012 (such period being the “Term”).

2. Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.

(a) Time of Exercise. The purchase rights represented by this Warrant may be exercised in whole or in part at any time and from time to time during the Term.

therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at such Holder’s election (i) by certified or official bank check or by wire transfer to an account designated by the Issuer, (ii) by “cashless exercise” in accordance with the provisions of subsection (c) of this Section 2, but only when a registration statement under the Securities Act providing for resale of all of the Warrant Stock is not then in effect and in any event not earlier than after the earlier date of (A) June 18, 2008 or (B) 120 days after the Holder’s written demand upon the Issuer to file a registration statement under the Securities Act registering and qualifying the Warrant Stock for sale in the public securities markets, which written demand the Holder may not make until the earlier of (a) March 18, 2008 or (b) six months after the effective date of the Initial Registration Statement, or (iii) by a combination of the foregoing methods of payment selected by the Holder of this Warrant.

(c) Cashless Exercise. Notwithstanding any provisions herein to the contrary but only during the period provided in clause (ii) of Section 2(b) hereof, if (i) the Per Share Market Value of one share of Common Stock is greater than the Warrant Price (at the date of calculation as set forth below) and (ii) a registration statement under the Securities Act providing for the resale of all of the Warrant Stock is not then in effect, in lieu of exercising this Warrant by payment of cash, the Holder may exercise this Warrant by a cashless exercise and shall receive the number of shares of Common Stock equal to an amount (as determined below) by surrender of this Warrant at the principal office of the Issuer together with the properly endorsed Notice of Exercise in which event the Issuer shall issue to the Holder a number of shares of Common Stock computed using the following formula:


	X = Y -	(A)(Y)

		B


Where	X =	the number of shares of Common Stock to be issued to the Holder.

	Y =	the number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised.

	A =	the Warrant Price.

	B =	the Per Share Market Value of one share of Common Stock.

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the shares of Warrant Stock so purchased as of the date of such exercise and (ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant shall not then have been exercised (less any amount thereof which shall have been canceled in payment or partial payment of the Warrant Price as hereinabove provided) shall also be issued to the Holder hereof at the Issuer’s expense within such time.

(g) Compliance with Securities Laws.


	(i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws.

	(ii) Except as provided in paragraph (iii) below, this Warrant and all certificates representing shares of Warrant Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form:

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE

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SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

(h) Buy In.

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obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.

3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

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provision of the Certificate of Incorporation or by-laws of the Issuer in any manner that would adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may be reasonably necessary in order that the Issuer may validly and legally issue fully paid and nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its obligations under this Warrant.

4. Adjustment of Warrant Price and Warrant Share Number. The number of shares of Common Stock for which this Warrant is exercisable, and the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Issuer shall give the Holder notice of any event described below which requires an adjustment pursuant to this Section 4 in accordance with Section 5. Notwithstanding any adjustment hereunder, at no time shall the Warrant Price be greater than $0.55 per share except if it is adjusted pursuant to Section 4(b).

(a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.

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	thereto (including the right to elect the type of consideration, if applicable), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 4. In the event that the surviving entity in any such Triggering Event is not a public company under the Securities Exchange Act of 1934, the common equity securities of which are traded or quoted on a national securities exchange or the OTC Bulletin Board (a “Qualifying Entity”), then the Holder, at its option, shall be permitted to require that the Company pay to the Holder an amount equal to the Black-Scholes value of this Warrant.

	(ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity is a Qualifying Entity, the Issuer will not be deemed to have effected any Triggering Event if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to the Holder of this Warrant and reasonably satisfactory to the Holder, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such shares of Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto.

(b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:


	(i) set a record date or take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock,

	(ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or

	(iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock,

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shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment.


	(i) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Issuer),

	(ii) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances), or

	(iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances),

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(d) Issuance of Additional Shares of Common Stock.


	(A) the numerator of which shall be equal to the sum of (x) the number of shares of Outstanding Common Stock immediately prior to the issuance of such Additional Shares of Common Stock plus (y) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the Warrant Price then in effect, and

	(B) the denominator of which shall be equal to the number of shares of Outstanding Common Stock immediately after the issuance of such Additional Shares of Common Stock.

(ii) No adjustment of the Warrant Price shall be made under paragraph (i) of Section 4(d) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise or conversion of any Common Stock Equivalents if any such adjustment shall previously have been made upon the issuance of such Common Stock Equivalents, or upon the issuance of any warrant or other rights therefor pursuant to Sections 4(e) or 4(f), or in connection with any Permitted Issuances. The term “Release Event” means, with respect to the holder’s Warrant Stock, the date on which the Company has received U.S. Food and Drug Administration approval of the Company’s Pre-Market Application for its OrCel product for the treatment of venous leg ulcers.

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be adjusted to the price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction: (1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance or sale of such warrants or options plus (B) the number of shares of Common Stock (rounded to the nearest whole share) which the Warrant Consideration multiplied by the number of shares of Common Stock issuable upon the exercise or conversion of all such warrants or options, would purchase at a price per share equal to the Warrant Price then in effect, and (2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such warrants and options. No adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock or of such Common Stock Equivalents upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(e) in connection with any Permitted Issuances.

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other rights pursuant to Section 4(e). No further adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(f) in connection with any Permitted Issuances.

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redemption or acquisition of a Common Stock Equivalent shall be deemed to be a purchase of the underlying Common Stock, and the computation herein required shall be made on the basis of the full exercise, conversion or exchange of such Common Stock Equivalent on the date as of which such computation is required hereby to be made, whether or not such Common Stock Equivalent is actually exercisable, convertible or exchangeable on such date.

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	(ii) No Adjustments of Number of Shares. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made because of any adjustments of the Warrant Price pursuant to Sections (d), (e), (f), (g) and (h) of this Section 4.

	(iii) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one one-hundredth (1/100^th) of a share.

	(iv) When Adjustment Not Required. If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

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matters to the Issuer and such Holder within thirty (30) days after submission to it of such dispute. Such opinion shall be final and binding on the parties hereto.

7. Intentionally Omitted.

9. Definitions. For the purposes of this Warrant, the following terms have the following meanings:


	“Additional Shares of Common Stock” means all shares of Common Stock issued by the Issuer after the Original Issue Date, and all shares of Other Common, if any, issued by the Issuer after the Original Issue Date, except for Permitted Issuances.

	“Board” shall mean the Board of Directors of the Issuer.

	“Capital Stock” means and includes (i) any and all shares, interests, participations or other equivalents of or interests in (however designated) corporate stock, including, without limitation, shares of preferred or preference stock, (ii) all partnership interests (whether general or limited) in any Person which is a partnership, (iii) all membership interests or limited liability company interests in any limited liability company, and (iv) all equity or ownership interests in any Person of any other type.

	“Certificate of Incorporation” means the Certificate of Incorporation of the Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended,

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	modified, supplemented or restated in accordance with the terms hereof and thereof and pursuant to applicable law.

	“Common Stock” means the Common Stock, par value $.001 per share, of the Issuer and any other Capital Stock into which such stock may hereafter be changed.

	“Common Stock Equivalent” means any Convertible Security or warrant, option or other right to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Security.

	“Common Stock Equivalent Consideration” has the meaning specified in Section 4 (i) (i) hereof.

	“Convertible Securities” means evidences of Indebtedness, shares of Capital Stock or other Securities which are or may be at any time convertible into or exchangeable for Additional Shares of Common Stock. The term “Convertible Security” means one of the Convertible Securities.

	“Governmental Authority” means any governmental, regulatory or self-regulatory entity, department, body, official, authority, commission, board, agency or instrumentality, whether federal, state or local, and whether domestic or foreign.

	“Holders” mean the Persons who shall from time to time own any Warrant. The term “Holder” means one of the Holders.

	“Independent Appraiser” means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant.

	“Initial Registration Statement” means the registration statement under the Securities Act which the Issuer is required to file registering and qualifying for sale in the public securities markets shares of Common Stock issuable upon conversion of the Issuer’s Series A Convertible Preferred Stock.

	“Issuer” means Ortec International, Inc., a Delaware corporation, and its successors.

	“Majority Holders” means at any time the Holders of the Issuer’s Series A, Series M-1, Series RL and Series SK Warrants exercisable for a majority of all the shares of the Issuer’s common stock issuable upon exercise of all such warrants then outstanding.

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	“Original Issue Date” means June 18, 2007.

	“OTC Bulletin Board” means the over-the-counter electronic bulletin board.

	“Other Common” means any other Capital Stock of the Issuer of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Issuer without limitation as to amount.

	“Outstanding Common Stock” means, at any given time, the aggregate amount of outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as applicable) of all options, warrants and other Securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that are outstanding at such time.

	“Permitted Issuances” means (i) the issuance of the Warrant Stock; (ii) issuances in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital; (iii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the


	(A)	issuances and/or

	(B)	grant of stock options or warrants to purchase shares of Common Stock, whether the grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award or any stock award and incentive plan, as they now exist, or hereafter adopted or otherwise so long as such issuances in the aggregate do not exceed ten percent (10)% of the issued and outstanding shares of Common Stock as of the Original Issue Date,

to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company; (vi) securities issued upon the exercise, conversion or exchange of any Common Stock Equivalents outstanding on the Original Issue Date at the conversion price set forth therein as of the Original Issue Date; (vii) issuance of Series A Preferred Stock pursuant to the Purchase Agreement, or Common Stock issued upon conversion thereof; (viii) issuance of Series A-1 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date and Series A-2 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, or Common Stock issued upon the conversion of such Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock; (ix) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc., or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-

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	dilution provisions in effect on the Original Issue Date, and the shares of Common Stock issued upon exercise thereof; (x) warrants issued to Ron Lipstein and Steven Katz in connection with the agreements terminating their employment with the Company at the price set forth therein on the Issuance Date; (xi) issuance of Series D-2 Convertible Preferred Stock, or Common Stock issued upon the conversion of such Series D-2 Convertible Preferred Stock; or (xii) the exchange of warrants outstanding prior to the Original Issue Date for shares of Common Stock or the Company’s other equity securities.

	“Person” means an individual, corporation, limited liability company, partnership, joint stock company, trust, unincorporated organization, joint venture, Governmental Authority or other entity of whatever nature.

	“Per Share Market Value” means on any particular date (a) the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (b) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the Common Stock on such date, or (c) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock on such date as determined by the Board in good faith; provided, however, that the Majority Holders, after receipt of the determination by the Board, shall have the right to select, jointly with the Issuer, an Independent Appraiser, in which case, the fair market value shall be the determination by such Independent Appraiser; and provided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during the period between the date as of which such market value was required to be determined and the date it is finally determined. The determination of fair market value shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall be final and binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, or to the existence or absence of, or any limitations on, voting rights.

	“Securities” means any debt or equity securities of the Issuer, whether now or hereafter authorized, any instrument convertible into or exchangeable for Securities or a Security, and any option, warrant or other right to purchase or acquire any Security. “Security” means one of the Securities.

	“Securities Act” means the Securities Act of 1933, as amended, or any similar federal statute then in effect.

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	“Subsidiary” means any corporation at least 50% of whose outstanding Voting Stock, and a limited liability company at least 50% of whose membership interests, shall at the time be owned directly or indirectly by the Issuer or by one or more of its Subsidiaries.

	“Term” has the meaning specified in Section 1 hereof.

	“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

	“Voting Stock” means, as applied to the Capital Stock of any corporation, Capital Stock of any class or classes (however designated) having ordinary voting power for the election of a majority of the members of the Board of Directors (or other governing body) of such corporation, other than Capital Stock having such power only by reason of the happening of a contingency.

	“Warrant Consideration” has the meaning specified in Section 4(i)(i) hereof.

	“Warrant Price” initially means U.S. $0.55, as such price may be adjusted from time to time as shall result from the adjustments specified in this Warrant, including Section 4 hereof.

	“Warrant Share Number” means at any time the aggregate number of shares of Warrant Stock which may at such time be purchased upon exercise of this Warrant, after giving effect to all prior adjustments and increases to such number made or required to be made under the terms hereof.

	“Warrant Stock” means Common Stock issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any Warrant or Warrants.


	10. Other Notices. In case at any time:


	(A)	the Issuer shall make any distributions to the holders of Common Stock; or

	(B)	the Issuer shall authorize the granting to all holders of its Common Stock of rights to subscribe for or purchase any

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		shares of Capital Stock of any class or of any Common Stock Equivalents or other rights; or

	(C)	there shall be any reclassification of the Capital Stock of the Issuer; or

	(D)	there shall be any capital reorganization by the Issuer; or

	(E)	there shall be any (i) consolidation or merger involving the Issuer or (ii) sale, transfer or other disposition of all or substantially all of the Issuer’s property, assets or business (except a merger or other reorganization in which the Issuer shall be the surviving corporation and its shares of Capital Stock shall continue to be outstanding and unchanged and except a consolidation, merger, sale, transfer or other disposition involving a wholly-owned Subsidiary); or

	(F)	there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Issuer or any partial liquidation of the Issuer or distribution to holders of Common Stock;

11. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), only by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that such amendment or waiver shall (a) not reduce the Warrant Share Number, increase the Warrant Price, shorten the period during which this Warrant may be exercised or modify any provision of

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this Section 11 without the consent of the Holder of this Warrant or (b) apply equally to all of the Issuer’s Series A, Series M-1, Series RL and Series SK Warrants then outstanding.

12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.


	Ortec International, Inc.
	3960 Broadway
	New York, NY 10032
	Attention: Chief Financial Officer
	Tel. No.: (212) 740-6999
	Fax No.: (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.
	Tel. No.: (212) 888-8200
	Fax No.: (212) 888-7776

Any party hereto may from time to time change its address for notices by giving at least ten (10) days written notice of such changed address to the other party hereto.

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issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

18. Headings. The headings of the Sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year first above written.


	ORTEC INTERNATIONAL, INC.

	By:	/s/ Alan Schoenbart

		Name: Alan W. Schoenbart
		Title: Chief Financial Officer

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WARRANT
EXERCISE FORM

ORTEC INTERNATIONAL, INC.

The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of Ortec International, Inc. covered by the within Warrant.


Dated:		Signature

		Address

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the date of Exercise: _________________________

The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.

The undersigned intends that payment of the Warrant Price shall be made as (check one):


	Cash Exercise_______

	Cashless Exercise_______


	X = Y - (A)(Y)

		B

Where:

The number of shares of Common Stock to be issued to the Holder __________________(“X”).

The Warrant Price ______________ (“A”).

The Per Share Market Value of one share of Common Stock _______________________ (“B”).

ASSIGNMENT

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Dated:		Signature

		Address

PARTIAL ASSIGNMENT


Dated:		Signature

		Address

FOR USE BY THE ISSUER ONLY:

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EX-10.9 14 c49144_ex10-9.htm

EXHIBIT 10.9

WARRANT TO PURCHASE

SHARES OF COMMON STOCK

ORTEC INTERNATIONAL, INC.


No.: W-SK1		Number of Shares: 2,051,798
Date of Issuance: June 18, 2007

FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the undersigned, Ortec International, Inc., a Delaware corporation (together with its successors and assigns, the “Issuer”), hereby certifies that Steven Katz or his registered assigns is entitled to subscribe for and purchase, during the period specified in this Warrant, up to two million fifty one thousand seven hundred ninety eight (2,051,798) shares (subject to adjustment as hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect, subject, however, to the provisions and upon the terms and conditions hereinafter set forth. Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective meanings specified in Section 9 hereof.

2. Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.

(a) Time of Exercise. The purchase rights represented by this Warrant may be exercised in whole or in part at any time and from time to time during the Term.


	X = Y -	(A)(Y)

		B


Where	X =	the number of shares of Common Stock to be issued to the Holder.

	Y =	the number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised.

	A =	the Warrant Price.

	B =	the Per Share Market Value of one share of Common Stock.

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after such exercise, and the Holder hereof shall be deemed for all purposes to be the Holder of the shares of Warrant Stock so purchased as of the date of such exercise and (ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant shall not then have been exercised (less any amount thereof which shall have been canceled in payment or partial payment of the Warrant Price as hereinabove provided) shall also be issued to the Holder hereof at the Issuer’s expense within such time.

(g) Compliance with Securities Laws.


	(i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws.

	(ii) Except as provided in paragraph (iii) below, this Warrant and all certificates representing shares of Warrant Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form:


	THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN

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	REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR ORTEC INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

(h) Buy In.

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exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.

3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

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4. Adjustment of Warrant Price and Warrant Share Number. The number of shares of Common Stock for which this Warrant is exercisable, and the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Issuer shall give the Holder notice of any event described below which requires an adjustment pursuant to this Section 4 in accordance with Section 5. Notwithstanding any adjustment hereunder, at no time shall the Warrant Price be greater than $0.55 per share except if it is adjusted pursuant to Section 4(b).

(a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.

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	receive at the Warrant Price in effect at the time immediately prior to the consummation of such Triggering Event in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such Triggering Event, the Securities, cash and property to which such Holder would have been entitled upon the consummation of such Triggering Event if such Holder had exercised the rights represented by this Warrant immediately prior thereto (including the right to elect the type of consideration, if applicable), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 4. In the event that the surviving entity in any such Triggering Event is not a public company under the Securities Exchange Act of 1934, the common equity securities of which are traded or quoted on a national securities exchange or the OTC Bulletin Board (a “Qualifying Entity”), then the Holder, at its option, shall be permitted to require that the Company pay to the Holder an amount equal to the Black-Scholes value of this Warrant.

	(ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity is a Qualifying Entity, the Issuer will not be deemed to have effected any Triggering Event if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to the Holder of this Warrant and reasonably satisfactory to the Holder, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such shares of Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto.

	(b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:

	(i) set a record date or take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock,

	(ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or

	(iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock,

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	(i) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Issuer),

	(ii) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances), or

	(iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents, Additional Shares of Common Stock or Permitted Issuances),

-8-

changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4(b).

(d) Issuance of Additional Shares of Common Stock.


	(i) In the event the Issuer shall at any time following the Original Issue Date and prior to a Release Event (as defined below) issue any Additional Shares of Common Stock (otherwise than as provided in the foregoing subsections (a) through (c) of this Section 4), at a price per share less than the Warrant Price then in effect or without consideration, then the Warrant Price upon each such issuance shall be adjusted to the price equal to the consideration per share paid for such Additional Shares of Common Stock. Upon and after a Release Event, the price shall be adjusted to the price (rounded to the nearest cent) determined by multiplying the Warrant Price by a fraction:

		(A) the numerator of which shall be equal to the sum of (x) the number of shares of Outstanding Common Stock immediately prior to the issuance of such Additional Shares of Common Stock plus (y) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the Warrant Price then in effect, and

		(B) the denominator of which shall be equal to the number of shares of Outstanding Common Stock immediately after the issuance of such Additional Shares of Common Stock.

	(ii) No adjustment of the Warrant Price shall be made under paragraph (i) of Section 4(d) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise or conversion of any Common Stock Equivalents if any such adjustment shall previously have been made upon the issuance of such Common Stock Equivalents, or upon the issuance of any warrant or other rights therefor pursuant to Sections 4(e) or 4(f), or in connection with any Permitted Issuances. The term “Release Event” means, with respect to the holder’s Warrant Stock, the date on which the Company has received U.S. Food and Drug Administration approval of the Company’s Pre-Market Application for its OrCel product for the treatment of venous leg ulcers.

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Price then in effect, and (2) the denominator of which shall be equal to the number of shares of Common Stock that would be outstanding assuming the exercise or conversion of all such Common Stock Equivalents. No further adjustment of the Warrant Price then in effect shall be made under this Section 4(f) upon the issuance of any Common Stock Equivalents which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 4(e). No further adjustments of the Warrant Price then in effect shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Common Stock Equivalents. No adjustments of the Warrant Price shall be made under this Section 4(f) in connection with any Permitted Issuances.

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Common Stock so purchased, redeemed or acquired would purchase at the Per Share Market Value; and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such purchase, redemption or acquisition. For the purposes of this subsection (h), the date as of which the Per Share Market Price shall be computed shall be the earlier of (x) the date on which the Issuer shall enter into a firm contract for the purchase, redemption or acquisition of such Common Stock, or (y) the date of actual purchase, redemption or acquisition of such Common Stock. For the purposes of this subsection (h), a purchase, redemption or acquisition of a Common Stock Equivalent shall be deemed to be a purchase of the underlying Common Stock, and the computation herein required shall be made on the basis of the full exercise, conversion or exchange of such Common Stock Equivalent on the date as of which such computation is required hereby to be made, whether or not such Common Stock Equivalent is actually exercisable, convertible or exchangeable on such date.

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	Equivalent for one share of Common Stock (together the “Common Stock Equivalent Consideration”). In case of the issuance at any time of any Additional Shares of Common Stock or Common Stock Equivalents in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Issuer shall be deemed to have received for such Additional Shares of Common Stock or Common Stock Equivalents a consideration equal to the amount of such dividend so paid or satisfied.

	(ii) No Adjustments of Number of Shares. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made because of any adjustments of the Warrant Price pursuant to Sections (d), (e), (f), (g) and (h) of this Section 4.

	(iii) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one one-hundredth (1/100^th) of a share.

	(iv) When Adjustment Not Required. If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

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certificate to be delivered to the Holder of this Warrant promptly after each adjustment. Any dispute between the Issuer and the Holder of this Warrant with respect to the matters set forth in such certificate may at the option of the Holder of this Warrant be submitted to one of the national accounting firms currently known as the “big five” selected by the Holder, provided that the Issuer shall have ten (10) days after receipt of notice from such Holder of its selection of such firm to object thereto, in which case such Holder shall select another such firm and the Issuer shall have no such right of objection. The firm selected by the Holder of this Warrant as provided in the preceding sentence shall be instructed to deliver a written opinion as to such matters to the Issuer and such Holder within thirty (30) days after submission to it of such dispute. Such opinion shall be final and binding on the parties hereto.

7. Intentionally Omitted.

9. Definitions. For the purposes of this Warrant, the following terms have the following meanings:


	“Additional Shares of Common Stock” means all shares of Common Stock issued by the Issuer after the Original Issue Date, and all shares of Other Common, if any, issued by the Issuer after the Original Issue Date, except for Permitted Issuances.

	“Board” shall mean the Board of Directors of the Issuer.

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	“Capital Stock” means and includes (i) any and all shares, interests, participations or other equivalents of or interests in (however designated) corporate stock, including, without limitation, shares of preferred or preference stock, (ii) all partnership interests (whether general or limited) in any Person which is a partnership, (iii) all membership interests or limited liability company interests in any limited liability company, and (iv) all equity or ownership interests in any Person of any other type.

	“Certificate of Incorporation” means the Certificate of Incorporation of the Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended, modified, supplemented or restated in accordance with the terms hereof and thereof and pursuant to applicable law.

	“Common Stock” means the Common Stock, par value $.001 per share, of the Issuer and any other Capital Stock into which such stock may hereafter be changed.

	“Common Stock Equivalent” means any Convertible Security or warrant, option or other right to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Security.

	“Common Stock Equivalent Consideration” has the meaning specified in Section 4 (i) (i) hereof.

	“Convertible Securities” means evidences of Indebtedness, shares of Capital Stock or other Securities which are or may be at any time convertible into or exchangeable for Additional Shares of Common Stock. The term “Convertible Security” means one of the Convertible Securities.

	“Governmental Authority” means any governmental, regulatory or self-regulatory entity, department, body, official, authority, commission, board, agency or instrumentality, whether federal, state or local, and whether domestic or foreign.

	“Holders” mean the Persons who shall from time to time own any Warrant. The term “Holder” means one of the Holders.

	“Independent Appraiser” means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant.

	“Initial Registration Statement” means the registration statement under the Securities Act which the Issuer is required to file registering and qualifying for sale in the

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	public securities markets shares of Common Stock issuable upon conversion of the Issuer’s Series A Convertible Preferred Stock.

	“Issuer” means Ortec International, Inc., a Delaware corporation, and its successors.

	“Majority Holders” means at any time the Holders of the Issuer’s Series A, Series M-1, Series RL and Series SK Warrants exercisable for a majority of all the shares of the Issuer’s common stock issuable upon exercise of all such warrants then outstanding.

	“Original Issue Date” means June 18, 2007.

	“OTC Bulletin Board” means the over-the-counter electronic bulletin board.

	“Other Common” means any other Capital Stock of the Issuer of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Issuer without limitation as to amount.

	“Outstanding Common Stock” means, at any given time, the aggregate amount of outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as applicable) of all options, warrants and other Securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that are outstanding at such time.

	“Permitted Issuances” means (i) the issuance of the Warrant Stock; (ii) issuances in connection with strategic license agreements so long as such issuances are not for the purpose of raising capital; (iii) when approved by the Company’s Board of Directors or by a committee of the Board of Directors the majority of whom are independent directors, the


	(A)	issuances and/or

	(B)	grant of stock options or warrants to purchase shares of Common Stock, whether the grants of such options or warrants are made under the Company’s Employee Stock Option Plan or its 2006 Stock Award or any stock award and incentive plan, as they now exist, or hereafter adopted or otherwise so long as such issuances in the aggregate do not exceed ten percent (10)% of the issued and outstanding shares of Common Stock as of the Original Issue Date,


	to the Company’s officers, directors, employees and consultants and to suppliers of goods and/or services to the Company; (vi) securities issued upon the exercise, conversion or

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	exchange of any Common Stock Equivalents outstanding on the Original Issue Date at the conversion price set forth therein as of the Original Issue Date; (vii) issuance of Series A Preferred Stock pursuant to the Purchase Agreement, or Common Stock issued upon conversion thereof; (viii) issuance of Series A-1 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date and Series A-2 Convertible Preferred Stock at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, or Common Stock issued upon the conversion of such Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock; (ix) any warrants issued to Burnham Hill Partners, a division of Pali Capital Inc., or any other person or entity for services in connection with the transactions contemplated by the Purchase Agreement at the conversion price set forth therein as of the Original Issue Date, as adjusted by the anti-dilution provisions in effect on the Original Issue Date, and the shares of Common Stock issued upon exercise thereof; (x) warrants issued to Ron Lipstein and Steven Katz in connection with the agreements terminating their employment with the Company at the price set forth therein on the Issuance Date; (xi) issuance of Series D-2 Convertible Preferred Stock, or Common Stock issued upon the conversion of such Series D-2 Convertible Preferred Stock; or (xii) the exchange of warrants outstanding prior to the Original Issue Date for shares of Common Stock or the Company’s other equity securities.

	“Person” means an individual, corporation, limited liability company, partnership, joint stock company, trust, unincorporated organization, joint venture, Governmental Authority or other entity of whatever nature.

	“Per Share Market Value” means on any particular date (a) the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (b) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the Common Stock on such date, or (c) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock on such date as determined by the Board in good faith; provided, however, that the Majority Holders, after receipt of the determination by the Board, shall have the right to select, jointly with the Issuer, an Independent Appraiser, in which case, the fair market value shall be the determination by such Independent Appraiser; and provided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during the period between the date as of which such market value was required to be determined and the date it is finally determined. The determination of fair market value shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall be final and

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	binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, or to the existence or absence of, or any limitations on, voting rights.

	“Securities” means any debt or equity securities of the Issuer, whether now or hereafter authorized, any instrument convertible into or exchangeable for Securities or a Security, and any option, warrant or other right to purchase or acquire any Security. “Security” means one of the Securities.

	“Securities Act” means the Securities Act of 1933, as amended, or any similar federal statute then in effect.

	“Subsidiary” means any corporation at least 50% of whose outstanding Voting Stock, and a limited liability company at least 50% of whose membership interests, shall at the time be owned directly or indirectly by the Issuer or by one or more of its Subsidiaries.

	“Term” has the meaning specified in Section 1 hereof.

	“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

	“Voting Stock” means, as applied to the Capital Stock of any corporation, Capital Stock of any class or classes (however designated) having ordinary voting power for the election of a majority of the members of the Board of Directors (or other governing body) of such corporation, other than Capital Stock having such power only by reason of the happening of a contingency.

	“Warrant Consideration” has the meaning specified in Section 4(i)(i) hereof.

	“Warrant Price” initially means U.S. $0.55, as such price may be adjusted from time to time as shall result from the adjustments specified in this Warrant, including Section 4 hereof.

	“Warrant Share Number” means at any time the aggregate number of shares of Warrant Stock which may at such time be purchased upon exercise of this Warrant, after

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	giving effect to all prior adjustments and increases to such number made or required to be made under the terms hereof.

	“Warrant Stock” means Common Stock issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any Warrant or Warrants.

10. Other Notices. In case at any time:


	(A)	the Issuer shall make any distributions to the holders of Common Stock; or

	(B)	the Issuer shall authorize the granting to all holders of its Common Stock of rights to subscribe for or purchase any shares of Capital Stock of any class or of any Common Stock Equivalents or other rights; or

	(C)	there shall be any reclassification of the Capital Stock of the Issuer; or

	(D)	there shall be any capital reorganization by the Issuer; or

	(E)	there shall be any (i) consolidation or merger involving the Issuer or (ii) sale, transfer or other disposition of all or substantially all of the Issuer’s property, assets or business (except a merger or other reorganization in which the Issuer shall be the surviving corporation and its shares of Capital Stock shall continue to be outstanding and unchanged and except a consolidation, merger, sale, transfer or other disposition involving a wholly-owned Subsidiary); or

	(F)	there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Issuer or any partial liquidation of the Issuer or distribution to holders of Common Stock;

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action in question and not less than twenty (20) days prior to the record date or the date on which the Issuer’s transfer books are closed in respect thereto. The Holder shall have the right to send two (2) representatives selected by it to each meeting, who shall be permitted to attend, but not vote at, such meeting and any adjournments thereof. This Warrant entitles the Holder to receive copies of all financial and other information distributed or required to be distributed to the holders of the Common Stock.

11. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), only by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that such amendment or waiver shall (a) not reduce the Warrant Share Number, increase the Warrant Price, shorten the period during which this Warrant may be exercised or modify any provision of this Section 11 without the consent of the Holder of this Warrant or (b) apply equally to all of the Issuer’s Series A, Series M-1, Series RL and Series SK Warrants then outstanding.

12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.


	Ortec International, Inc. 3960 Broadway New York, NY 10032 Attention: Chief Financial Officer Tel. No.: (212) 740-6999 Fax No.: (212) 740-2570

	with a copy to:

	Feder Kaszovitz Isaacson Weber Skala Bass & Rhine, LLP

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	750 Lexington Avenue New York, New York 10022 Attention: Gabriel Kaszovitz, Esq. Tel. No.: (212) 888-8200 Fax No.: (212) 888-7776

Any party hereto may from time to time change its address for notices by giving at least ten (10) days written notice of such changed address to the other party hereto.

18. Headings. The headings of the Sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year first above written.

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	ORTEC INTERNATIONAL, INC.

	By:	/s/ Alan Schoenbart

		Name: Alan W. Schoenbart
		Title: Chief Financial Officer

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WARRANT
EXERCISE FORM

ORTEC INTERNATIONAL, INC.

The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of Ortec International, Inc. covered by the within Warrant.


Dated:		Signature

		Address

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the date of Exercise: _________________________

The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.

The undersigned intends that payment of the Warrant Price shall be made as (check one):

Cash Exercise_______

Cashless Exercise_______

X = Y - (A)(Y)
B

Where:

The number of shares of Common Stock to be issued to the Holder __________________(“X”).

The Warrant Price ______________ (“A”).

The Per Share Market Value of one share of Common Stock _______________________ (“B”).

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ASSIGNMENT


Dated:		Signature

		Address

PARTIAL ASSIGNMENT


Dated:		Signature

		Address

FOR USE BY THE ISSUER ONLY:

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