ORTEC INTERNATIONAL INC, 424B3, 1997-07-25

ORTEC INTERNATIONAL INC
424B3, 1997-07-25
MEDICAL LABORATORIES

Previous: CAPMAC HOLDINGS INC, SC 13D/A, 1997-07-25

Next: FIRST USA CREDIT CARD MASTER TRUST, 424B5, 1997-07-25

<PAGE> 1
File Pursuant to Rule 424(b)(3).
Registration No. 333-30141.

ORTEC INTERNATIONAL, INC.

1,323,856 SHARES OF COMMON STOCK

This Prospectus covers 1,323,856 shares of Common Stock, par value $.001
per share (the "Common Stock"), of ORTEC INTERNATIONAL, INC., a Delaware
corporation (the "Company"), held by shareholders of the Company, including
364,750 shares issuable by the Company upon the exercise of certain options (the
"Options") and warrants (the "Warrants") granted by the Company, (collectively,
the "Options and Warrants"). See "Description of Securities." Other than the
proceeds received by the Company from the exercise of the Options and/or
Warrants, the Company will not receive any of the proceeds from the sale of the
shares offered hereby. The holders of the 1,323,856 shares covered by this
Prospectus intend to sell the shares offered hereby from time to time for their
own respective accounts in the open market at the prices prevailing therein or
in individually negotiated transactions at such prices as may be agreed upon.
Each such holder will bear all expenses with respect to the offering of shares
by it, him or her, except the costs associated with preparing and printing this
Prospectus. The Common Stock of the Company is traded on the NASDAQ SmallCap
Market System under the symbol "ORTC." On July 15, 1997, the last reported sale
price of the Common Stock was $9.00.

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

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

The Date of this Prospectus is July 15, 1997
<PAGE> 2

PROSPECTUS SUMMARY

All of the information in this summary is qualified in its entirety by the
more detailed information and financial data appearing elsewhere in this
Prospectus, including information under "Risk Factors." For definition of
certain terms and abbreviations used in this Prospectus, see the "Glossary" at
page 33

THE COMPANY

ORTEC INTERNATIONAL, INC. (the "Company") has developed a proprietary
technology which consists of a biologically active dressing to stimulate the
repair and regeneration of human skin. The Company's product is intended to be
utilized for the treatment of severe burn patients as well as for other types of
wound healing and for reconstructive and cosmetic surgery. The Company believes
that the successful regeneration of human skin creates the potential for wide
commercial application.

The Company is a development stage company and to date has not sold any
products. Its activities have been limited to human clinical tests of its
product and research and development under an exclusive license relating to the
Company's biological dressing. From March 12, 1991 (inception) to March 31,
1997, the Company has spent an aggregate of $3,627,109 for research and
development, of which $964,864, $573,392 and $272,693 were spent during the
fiscal years ended December 31, 1996 and 1995 and during the first three months
of 1997, respectively.

In order to create a clinically useful biological dressing, the Company has
duplicated the two major layers that form the human skin, the epidermis and the
dermis. Dr. Mark Eisenberg, of Sydney, Australia, an officer and director of the
Company and its largest shareholder, has been involved in biochemical and
clinical research at the University of New South Wales in Australia for over
twenty years, focusing primarily in treating the symptoms of a unique disease
called Epidermolysis Bullosa ("EB"). The wounds resulting from EB are very
similar to those caused by burns and require similar treatment. In 1987, through
his work on EB, Dr. Eisenberg first succeeded in growing epidermal layers of
human skin, which were successfully applied as an allograft on an EB patient.
Dr. Eisenberg has since developed a biologically active dressing known as
"Composite Cultured Skin", consisting of both the dermal and epidermal layers.

In March 1994, the Company commenced human clinical trials on burn patients
under protocols approved by the Food and Drug Administration ("FDA"), which
require testing of 120 patients. As of July 15, 1997, eight patients have been
treated under this program. More trials will be necessary to test the safety and
efficacy of the Company's product. From 1988 to 1996, the Company's product was
used in skin replacement operations on 29 patients (of which 5 operations were
skin replacement for burn patients) in Sydney, Australia. None of the Australian
procedures were performed in accordance with the FDA approved protocols.

In 1996, the FDA approved the protocols of Rockefeller University Hospital
in New York City for the use of the Company's Composite Cultured Skin for the
treatment of non-healing skin ulcers of patients with EB. Under this FDA
approved clinical trial protocol, ten to fifteen patients are required to be
treated under this program. Rockefeller University is, as of the date of this
Prospectus, conducting the human clinical trials on EB patients under this
program.

The Company's executive offices are located at 3960 Broadway, New York, New
York, and its telephone number is (212) 740-6999.

2
<PAGE> 3

THE OFFERING

<TABLE>
<S> <C>
Securities Offered................. 1,323,856 shares of Common Stock
Common Stock to be outstanding
after the Offering (1)........... 4,644,510 shares
Use of Proceeds.................... Other than the proceeds from the exercise of the Options
and Warrants, the Company will not receive any proceeds
from the sale of the shares being registered for the
selling shareholders hereby.
Risk Factors....................... An investment in the shares involves a high degree of
risk. See "Risk Factors."
NASDAQ SmallCap System and Proposed
National Market System Trading
Symbol........................... "ORTC"
</TABLE>

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

(1) Unless otherwise indicated, no effect is given in this Prospectus to (i)
303,573 shares reserved for issuance upon exercise of warrants expiring
January 19, 2000 exercisable at $1.00 per share (See "Certain Relationships
and Related Transactions"); (ii) 1,200,000 shares reserved for issuance
upon exercise of 1,200,000 publicly traded Class A Warrants at $10.00 per
share and expiring November 3, 1997; (iii) 1,200,000 shares reserved for
issuance upon the exercise of 1,200,000 publicly traded Class B Warrants at
$15 per share and expiring January 19, 1999; (iv) 360,000 shares reserved
for issuance upon the exercise of the options granted to the underwriter in
the Company's initial public offering, and the warrants included therein,
exercisable at per share prices of $8.75 for 120,000 shares expiring
December 15, 2000, $16.50 for another 120,000 shares expiring July 19, 1997
and $24.75 for the remaining 120,000 shares expiring on January 19, 1999;
(v) 350,000 shares reserved for issuance upon the exercise of stock options
included in the Company's 1996 Stock Option Plan, of which options to
purchase 161,000 shares at prices ranging from $6.00 to $8.50 have already
been granted; and (vi) 241,601 shares reserved for issuance upon the
exercise of other outstanding warrants at prices ranging from $6 to $12 and
expiring at various times from July 1997 to 2001.

SUMMARY FINANCIAL INFORMATION

The following summary financial information for each of the three years
ended December 31, 1996, which are derived from the Company's audited financial
statements for such periods, and for the three months ended March 31, 1997 and
1996, which are derived from the Company's unaudited financial statements for
such periods, include, in the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
financial position of the Company as of such periods and such summary financial
information is qualified in its entirety by reference to such audited and
unaudited financial statements. The following summary financial information
should be read in conjunction with the financial statements and related notes
thereto beginning at page F-1 of this Prospectus.

SUMMARY FINANCIAL DATA

3
<PAGE> 4

RISK FACTORS

The purchase of the shares offered hereby involves a high degree of risk,
including, but not necessarily limited to, the risks described below. Before
subscribing for the shares, each prospective investor should consider carefully
the general investment risks enumerated elsewhere in this Prospectus and the
following risk factors, as well as the other information contained in this
Prospectus.

NEED FOR FUTURE FINANCING. The Company anticipates that its cash on hand
is sufficient to meet its cash requirements through approximately February 1999.
However, there can be no assurance that unexpected costs will not be incurred.
At the end of that period the Company may be required to raise additional funds
to complete its human clinical trials (if not completed by then) and produce and
market its Composite Cultured Skin. The Company may then seek additional funds
through sale of its securities to the public and through private markets, debt
financing or short term loans. There can be no assurance that the Company will
be able to obtain additional financing on terms acceptable to it, if at all. The
failure of the Company to obtain acceptable additional financing would have a
material adverse effect on the operations of the Company. The Company has no
current plans, understandings or commitments to raise any additional financing.
Additional financing may result in dilution for then current shareholders. See
"Plan of Operations" and "Forward Looking Information May Prove Inaccurate."

DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY. The Company is a
development stage company organized in March 1991. It has no products approved
for commercial sale and has not realized any operating revenues. The Company is
likely to continue to encounter difficulties which are common to development
stage companies, including unanticipated costs relating to development, delays
in the testing of products, regulatory approval and compliance and competition.
The Company will not, in all likelihood, generate any revenues until it obtains
FDA approval to sell its skin replacement product in commercial quantities for
human application. There can be no assurance that such approval will be
obtained, or if obtained, that sales of the Company's product can be made on a
profitable basis.

UNCERTAINTY OF CLINICAL TRIALS; NEED TO OBTAIN FDA PREMARKETING APPROVAL;
GOVERNMENT REGULATION. Pursuant to the Federal Food Drug and Cosmetic Act and
regulations promulgated thereunder, the FDA regulates the manufacture,
distribution and promotion of medical devices in the United States. The
Company's Composite Cultured Skin is subject to regulation as a medical device.
Prior to commercial release of the Company's product, premarket approval ("PMA")
by the FDA will be required. PMA entails proof of nontoxicity, safety and
efficacy in human clinical trials. Premarket approval is a lengthy and expensive
process and there can be no assurance that FDA approval will be obtained. In
February 1994, the Company received FDA approval to commence human clinical
trials. The human clinical trials and the PMA are lengthy and costly processes,
the successful completion of which cannot be assured. Moreover, even if the
Company obtains FDA approval, the Composite Cultured Skin and any manufacturing
facilities used to manufacture it will continue to be subject to review,
periodic inspections and specific recordkeeping, reporting, product testing,
design, safety and labeling requirements. Accordingly, the Company's business,
financial condition and emergence from the development stage are dependent on
timely FDA approval for its product. See "Business -- Government Regulations."

UNCERTAINTY OF MARKET ACCEPTANCE; RELIANCE ON ONE PRODUCT. Acceptance of
the Company's product is difficult to predict and will require substantial
marketing efforts and the expenditure of significant funds. There can be no
assurance that the Company's product will be successful in providing viable skin
replacement on a commercial basis or that it will be accepted by the medical
community. In addition, the Company's only product is its Composite Cultured
Skin. The Company does not expect its product to be available for commercial
sale for at least three years. The Company expects that its Composite Cultured
Skin will likely be, if and when commercially available, its sole product for an
indefinite period of time. Failure of the Company's product to achieve market
acceptance will have a material adverse impact on the Company's financial
condition. See "Business -- Potential Applications of Technology and Markets."

TECHNOLOGICAL CHANGE; HIGHLY COMPETITIVE INDUSTRY. The biomedical field is
undergoing rapid and significant technological change. The Company's success
will depend on its ability to establish and maintain a competitive position in
this marketplace. Many companies and academic institutions have developed, or
are

4
<PAGE> 5

capable of developing products based on other technologies that are or may be
competitive with the Company's product. The Company's competitors include
Organogenesis, Inc., Genzyme Tissue Repair, Inc., Advanced Tissue Sciences,
Inc., Life Cell Corporation and Integra Life Sciences. Many of those and other
potential competitors are well established, are much larger than the Company and
have substantially greater financial and other resources than the Company and
have established reputations for success in the development, sale and service of
their products. Such companies and academic institutions may succeed in
developing products that are more effective than the Company's Composite
Cultured Skin or that will receive FDA approval more quickly than the Company's
product. See "Business -- Competition."

ANTICIPATED DEPENDENCE ON THIRD PARTIES FOR MARKETING; LIMITED MARKETING
EXPERIENCE. The Company intends to sell its product primarily through its own
efforts and may use third party distributors on a limited basis. The Company has
no marketing experience and has limited financial and other resources to
undertake extensive independent marketing activities. There can be no assurance
that the Company will be able to market its Composite Cultured Skin successfully
or enter into agreements with third parties on acceptable terms for such
services.

LIMITED SUPPLIES OF MATERIALS. The Company is currently purchasing bovine
collagen sponges, a key component of its product, from one supplier who produces
the sponges to the Company's specifications. The Company has no written
agreement with that supplier obligating the supplier to supply sponges to the
Company. If the Company were required to secure another source for its bovine
collagen sponges, the Company would encounter considerable additional delay and
expense in continuing its human clinical trials and, consequently, in marketing
its Composite Cultured Skin.

The Company will continue to rely on a limited number of outside suppliers
to supply other materials that it uses in producing and testing its Composite
Cultured Skin. No assurance can be given that the Company or its suppliers will
continue to have access to a sufficient supply of these materials.

LIMITATIONS OF PATENT PROTECTION. The Company has been granted, and relies
on, an exclusive license from Dr. Mark Eisenberg, a major shareholder, officer
and director of the Company, who developed the Company's Composite Cultured
Skin, for worldwide rights to market the technology and any products developed
from it.

Dr. Eisenberg has been granted patents for the Company's Composite Cultured
Skin in the United States and in several foreign countries and is prosecuting
patent claims for it in others. The United States Patent was initially granted
to Dr. Eisenberg on February 1, 1994 and bears U.S. Patent 5,282,589. On
December 10, 1996, after an unsuccessful challenge by a competitor of the
Company, the U.S. Patent Office re-issued the Company's Composite Cultured Skin
patent (No. RE-35399).

There can be no assurance that the United States patent will not be
successfully challenged in court proceedings. Nor can there be any assurance
that any United States or foreign patents will provide any commercial benefits
to the Company. See "Business -- Patents and Proprietary Rights".

Several of the Company's competitors, including Organogenesis, Inc.,
Advanced Tissue Sciences, Inc., Genzyme Tissue Repair Inc., Integra Life
Sciences and LifeCell Corporation have been granted patents relating to their
particular artificial skin technologies.

PRODUCT LIABILITY. The Company is exposed to the risk of product liability
claims in the event that its product causes injury or otherwise results in
adverse effects. Although the Company has obtained product liability insurance
coverage in the amount of $1,000,000, there can be no assurance that such
insurance coverage will be adequate to protect the Company against future
product liability claims or that product liability insurance will be available
to the Company in the future on terms acceptable to the Company, if at all.

DEPENDENCE ON KEY PERSONNEL. The Company is dependent on Dr. Steven Katz,
the Company's President, for managing the affairs of the Company. The loss of
Dr. Katz' services could adversely affect the Company.

FUTURE SALE OF UNREGISTERED SECURITIES; REGISTRATION RIGHTS. 1,541,156
shares of the Company's presently outstanding shares of Common Stock are
"restricted securities," as that term is defined under

5
<PAGE> 6

Rule 144 ("Rule 144") promulgated under the Act. In general, under Rule 144 a
person who owns any restricted shares of Common Stock for at least one year may
sell in the public securities markets, within any three month period, such
number of those restricted shares that does not exceed the greater of one
percent of the total number of outstanding shares of the same class or the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who owns shares of Common Stock that have
been held for a period of at least two years is entitled to sell such shares
under Rule 144 without regard to any volume limitations. Drs. Eisenberg and Katz
and Messrs. Lipstein and Klapholz and members of their families have agreed with
the underwriter of the initial public offering of Ortec's securities not to sell
shares owned by them (1,493,720 shares, all except 22,000 of which are
restricted shares), prior to January 19, 1998 without the underwriter's written
consent. If the underwriter consents to release all the 1,493,720 locked up
shares, they would be eligible for immediate sale (subject to the volume
limitations of Rule 144). Additional shares that are issuable upon exercise of
outstanding warrants and options which will be eligible for immediate sale into
the public securities markets after such warrants and options are exercised as
follows: 1,200,000 shares for which the exercise price is $10; 1,200,000 shares
for which the exercise price is $15; 120,000 shares for which the exercise price
is $8.25; 120,000 shares for which the exercise price is $16.50 and 120,000
shares for which the exercise price is $24.75. These are shares issuable upon
exercise of the Class A and Class B Warrants and options granted to the
underwriter in connection with the Company's initial public offering of its
securities. In addition, 706,179 shares that are issuable upon exercise of other
outstanding warrants and options exercisable at prices ranging from $1.00 (for
303,578 shares) to $12.00, are eligible for sale in the public securities
markets one or two years after such warrants and options are exercised.

Up to 350,000 shares issuable upon exercise of stock options granted
(161,000) and that may be granted (189,000) under the Company's 1996 Stock
Option Plan may be registered under the Securities Act.

No prediction can be made as to the effect, if any, that sales of those
shares of Common Stock, or the availability of those shares for sale, will have
on the market prices of the Common Stock prevailing from time to time.

EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Sales of the Company's Common
Stock upon exercise of options and warrants may have a depressive effect on the
market price of the Common Stock, and issuance of additional shares of Common
Stock upon the exercise of options and warrants may also dilute the
proportionate ownership of the then current stockholders of the Company.

POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the
Company's Common Stock may be highly volatile, as has been the case with the
securities of other development stage biotechnology companies. Factors such as
announcements by the Company or its competitors concerning technological
innovations, new commercial products or procedures, proposed government
regulations and developments or disputes relating to patents or proprietary
rights may have a significant impact on the market price of the Company's Common
Stock.

STATE BLUE SKY REGISTRATIONS. The shares offered hereby may be sold in
certain states and the purchaser of such shares may then resell such shares in
the public securities markets (or otherwise) in such states only if such Common
Stock is then qualified for sale or exempt from qualification under applicable
state securities laws of the jurisdictions in which such purchasers reside.
Although the Company's Common Stock is qualified for sale or exempt from
qualification in a number of states, there can be no assurance that the shares
purchased in this Offering can be sold in every state. The failure of the
Company to meet the state securities law requirements of a state in which a
purchaser in this Offering seeks to resell the shares purchased in this
Offering, will cause the resale or disposition of the Common Stock purchased in
this Offering to become unlawful in that state.

NO DIVIDENDS. The Company has not paid any dividends on its shares and
does not intend to do so in the foreseeable future. It is the present intention
of the Company's Board of Directors to retain all earnings, if any, for use in
the Company's business operations.

6
<PAGE> 7

CONCENTRATION OF OWNERSHIP; DELAWARE CORPORATE LAW PROVISIONS. The
Company's officers, directors, founders and affiliated persons beneficially own
1,856,350 shares of the Common Stock representing approximately 40% of the total
outstanding shares before the exercise of any outstanding warrants and options.
Accordingly, such persons will be able to exercise substantial control in the
election of the directors of the Company, increases in the authorized capital or
the dissolution, merger, or sale of the assets of the Company and otherwise
influence the control of the Company's affairs. Such substantial control of the
Company by these persons could serve to impede or prevent a change of control of
the Company. As a result, potential purchasers may not seek to acquire control
of the Company through the purchase of Common Stock which may tend to reduce the
market price of the Common Stock. In addition, the Company is subject to
provisions of the General Corporation Law of the State of Delaware respecting
business combinations which could, under certain circumstances, also hinder or
delay a change in control. See "Principal and Selling Shareholders" and
"Description of Securities -- Common Stock."

USE OF PROCEEDS

Other than the proceeds received by the Company from the exercise of the
Options and Warrants, the Company will not receive any proceeds from the sale of
shares covered by this Prospectus.

Any proceeds received by the Company from the exercise of any or all of the
Options and Warrants may be used for general working capital purposes,
acquisitions, research and development and/or human clinical trials. The Company
has not specifically allocated the proceeds among these uses, and actual
expenditures will depend on a number of factors. The use of any proceeds from
the exercise of the Options and Warrants, of which there is no assurance, and
the timing of such use, will depend on the availability of cash from other
sources. Proceeds not immediately required for the purposes described above will
be invested principally in United States government securities, short term
certificates of deposit, money market funds or other short term, interest
bearing investments.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1997:

<TABLE>
<S> <C>
Shareholders' equity:
Common Stock, $.001 par value, 10,000,000 shares authorized;
4,606,040 shares issued and outstanding (1).............. $ 4,606
Additional paid-in capital.................................. 15,577,256
Deficit accumulated during the development stage............ (8,739,668)
----------
Total capitalization.......................................... $ 6,842,194
==========
</TABLE>

- ---------------
(1) Unless otherwise indicated, no effect is given in this Prospectus to (i)
303,578 shares reserved for issuance upon exercise of warrants expiring
January 19, 2000 exercisable at $1.00 per share; (ii) 1,200,000 shares
reserved for issuance upon exercise of 1,200,000 publicly traded Class A
Warrants at $10.00 per share and expiring November 3, 1997; (iii) 1,200,000
shares reserved for issuance upon the exercise of 1,200,000 publicly traded
Class B Warrants at $15 per share and expiring January 19, 1999; (iv)
360,000 shares reserved for issuance upon the exercise of the options
granted to the underwriter in the Company's initial public offering and the
warrants included therein, exercisable at per share prices of $8.75 for
120,000 shares expiring December 15, 2000, $16.50 for another 120,000
shares expiring July 19, 1997 and $24.75 for the remaining 120,000 shares
expiring on January 19, 1999; (v) 350,000 shares reserved for issuance upon
the exercise of stock options included in the Company's 1996 Stock Option
Plan, of which options to purchase 161,000 shares at prices ranging from
$6.00 to $8.50 have already been granted; and (vi) 241,601 shares reserved
for issuance upon the exercise of other outstanding warrants at prices
ranging from $6 to $12 and expiring at various times from July 1997 to
2001.

7
<PAGE> 8

SELECTED FINANCIAL DATA

The following table summarizes selected financial data for each of the
three years ended December 31, 1996, as derived from the Company's audited
financial statements. The financial data for the three months ended March 31,
1996 and 1997 are derived from the Company's unaudited condensed financial
statements and include all adjustments, consisting of normal recurring
adjustments, which in the opinion of management are necessary for a fair
presentation of the Company's financial position and the results of its
operations for these periods. Operating results for the three months ended March
31, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. This data should be read in conjunction with
the financial statements of the Company, related notes, and other financial
information.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues...................... $ 28,874 $ 2,685 $ 171,057 $ 34,471 $ 83,861
----------- ----------- ----------- ---------- -----------
Expenses
Research and Development.... 796,547 573,392 964,864 221,455 272,693
Rent........................ 21,732 21,732 85,076 6,443 51,365
Consulting.................. 141,973 34,606 261,633 40,933 62,143
Personnel................... 333,224 229,183 730,357 140,016 293,451
General and
Administrative........... 317,666 161,686 727,192 126,844 270,910
Other expense, net.......... 92,819 4,809 51,703 1,027 12,180
----------- ----------- ----------- ---------- -----------
1,703,961 1,025,408 2,820,825 536,718 962,742
----------- ----------- ----------- ---------- -----------
Net loss.................... $(1,675,087) $(1,022,723) $(2,649,768) $ (502,247) $ (878,881)
=========== =========== =========== ========== ===========
Net loss per share.......... $(.63) $(.38) $(.60) $(.14) $(.18)
=========== =========== =========== ========== ===========
Weighted average common and
common equivalent shares
outstanding................. 2,675,483 2,270,208 4,421,637 3,670,195 4,915,774
=========== =========== =========== ========== ===========
BALANCE SHEET DATA
Working Capital............... $ 82,431 $(1,303,948) $ 6,848,650 $3,173,366 $5,886,050
Total Assets.................. 845,843 848,470 8,791,925 4,421,578 7,949,510
Long-term Debt................ 9,592 1,327 460,774 -- 467,789
Stockholders' Equity
(Deficit)................... 522,757 (459,226) 7,716,998 3,910,599 6,842,194
</TABLE>

8
<PAGE> 9

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

MARKET INFORMATION

From January 20, 1996 to May 28, 1996, the Company's publicly-traded
securities were traded as units, each unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant (the "Units"), and were
listed on the NASDAQ SmallCap Market under the symbol "ORTCU". On May 17, 1996,
the components of the Units each became separately tradeable securities. The
Common Stock of the Company is currently trading on the NASDAQ SmallCap Market
under the symbol "ORTC". The following table sets forth the high and low sales
prices of the Common Stock as reported by NASDAQ for each full quarterly period
since January 1996 (and for any subsequent interim period for which financial
statements are included herein).

<TABLE>
<CAPTION>
HIGH LOW
----- ----
<S> <C> <C>
1996
Units
First Quarter (from date of inception, January 19, 1996)................. $7 1/2 $5 3/4
Second Quarter (to May 28, 1996)......................................... 7 1/4 6 6/8
Common Stock
Second Quarter (from May 17, 1996)....................................... 6 5/8 4 3/4
Third Quarter............................................................ 7 9/16 5 7/8
Fourth Quarter........................................................... 10 1/2 7 1/2

1997
Common Stock
First Quarter............................................................ 10 3/8 6 3/4
Second Quarter........................................................... 9 3/8 6 3/4
Third Quarter (to July 15, 1997)......................................... 9 8 3/8
</TABLE>

SECURITY HOLDERS

To the best knowledge of the Company, at June 24, 1997, there were 123
record holders of the Company's Common Stock. The Company believes there are
approximately 1,100 beneficial owners of the Company's Common Stock, most of
whose shares are held in "street name."

DIVIDENDS

The Company has not paid, and has no current plans to pay, dividends on its
Common Stock.

PLAN OF OPERATION

OPERATIONS FOR THE NEXT TWELVE MONTHS

For the next twelve months the Company will continue to conduct human
clinical trials. To that end, the Company has recruited and intends to continue
to recruit hospital burn centers which will provide the necessary patients. In
addition, human clinical trials are presently being conducted at Rockefeller
University Hospital in New York City for the application of the Company's
Composite Cultured Skin in treating the symptoms of EB. The wounds resulting
from EB are very similar to those caused by burns and require similar treatment.
See "Forward Looking Information May Prove Inaccurate."

The Company estimates that the cost to it of each human clinical trial for
burn patients and EB patients will be approximately $8,000. Such amounts include
testing for pathogens and payments to the hospital, but do not include any
allocation to the cost of such trials of salaries, rent or other overhead
expenses of the Company. See "Forward Looking Information May Prove Inaccurate."

9
<PAGE> 10

CASH REQUIREMENTS

The Company estimates that it has sufficient funds necessary to operate
through approximately February 1999. The Company may have to secure additional
funds prior thereto or thereafter to complete its human clinical trials, if not
then already completed, to secure FDA pre-market approval for commercial sales
and thereafter to produce and market its Composite Cultured Skin in commercial
quantities. See "Forward Looking Information May Prove Inaccurate."

CLINICAL TRIALS AND PRODUCT RESEARCH AND DEVELOPMENT

The Company has spent an aggregate of approximately $3,627,109 from its
inception through March 31, 1997 for the human clinical trials and for research
and development. That amount includes the salaries of its employees involved in
producing the Composite Cultured Skin, performing quality control, securing
hospital burn centers to participate in the human clinical trials, monitoring
the progress of the patients thereafter and to prepare reports to be filed with
the FDA. The Company anticipates that it will be required to continue to spend
additional funds for such purposes in the next twelve months in order to
continue its human clinical trials, secure FDA pre-market approval for
commercial sales and thereafter to produce and market its Composite Cultured
Skin in commercial quantities. See "Forward Looking Information May Prove
Inaccurate."

BUSINESS

INTRODUCTION

The Company has developed a proprietary technology which consists of a
biologically active dressing to stimulate the repair and regeneration of human
skin. The Company's product is intended to be utilized for the treatment of
severe burn patients as well as for other types of wound healing and for
reconstructive and cosmetic surgery. The Company believes that the successful
regeneration of human skin creates the potential for wide commercial
application.

The Company is a development stage company and to date has not sold any
products. Its activities have been limited to human clinical tests of its
product and research and development under an exclusive license relating to the
Company's biological dressing. From March 12, 1991 (inception) to March 31,
1997, the Company has spent an aggregate of $3,627,109 for research and
development, of which $964,864, $573,392 and $272,693 were spent in 1996, 1995
and in the first three months of 1997, respectively.

In March 1994, the Company commenced human clinical trials on burn patients
under protocols approved by the FDA, which require testing of 120 patients. As
of July 15, 1997, eight patients have been treated under this program. More
trials will be necessary to test the safety and efficacy of the Company's
product. From 1988 to 1996, the Company's product was used in skin replacement
operations on 29 patients (of which 5 operations were skin replacement for burn
patients) in Sydney, Australia. None of the Australian procedures were performed
in accordance with the FDA approved protocols.

The Company and The Skin Group, Ltd. (a predecessor of the Company) were
organized in 1991 for the purpose of acquiring the Company's skin product from
Dr. Mark Eisenberg and to develop, test and market such product. In 1992, The
Skin Group, Ltd. was merged into the Company. The Company declared a
twenty-for-one stock split in January 1993. All information contained in this
Prospectus, unless otherwise noted, gives effect to that merger and stock split.

BACKGROUND

Physicians have for years been using skin transplanted from one site of a
patient's body onto a wound site that no longer has the capacity to heal
spontaneously. This procedure is called an autograft transplant. Burn wound
clinicians have sought to replace autograft transplants with substitute
synthetic or natural materials ("allografts") which would eliminate the
medically undesirable problems that accompany autograft transplants, such as
creation of additional wound sites at the areas of the body from which the
healthy skin is taken.

10
<PAGE> 11

Scientists have tried to replicate human skin in a laboratory setting in
order to create an artificial skin that can be transplanted onto diseased or
injured patients. Major problems encountered by scientists include failure of
the artificial skin to heal and significant contraction of the transplant after
healing, causing cosmetically undesirable scarring.

TECHNOLOGY

DESCRIPTION OF THE PROCESS

Specialized cells that are the primary components of human skin are derived
from infant foreskins obtained during routine circumcisions. The epidermis is
separated from the dermis and each of these layers is treated to release
individual cells. These cells in turn are separately cultured to reproduce a
large number of identical cells. The dermal fibroblast cells derived from the
dermis are applied to a cross linked bovine collagen sponge to form the dermal
layer matrix. The epidermal cells are grown on another layer of collagen, which,
together with the dermal layer, constitute the Composite Cultured Skin. The
Company's Composite Cultured Skin requires neither the patient's own cells nor
cadaver skin and is available for allograft replacement of damaged human skin.
All tissue obtained by the Company for producing the Company's Composite
Cultured Skin is extensively screened and tested by independent laboratories for
the presence of potential pathogens and transmittable diseases.

Although there can be no assurance that the Company's Composite Cultured
Skin will become successful, or reach the commercial stage, the Company believes
that its skin regeneration technology is superior to autograft transplants
because, based on the limited number of medical procedures using the Company's
Composite Cultured Skin conducted to date, the Company's Composite Cultured Skin
appears to avoid creating additional wound sites, to produce a smoother skin
surface resulting in less scarring, postoperative pain and contraction, and is
available in case of extensive burns on a patient's body, where no or limited
healthy skin is available for an autograft transplant. The Company's management
believes that use of its Composite Cultured Skin may shorten the period of
required hospitalization, reduce the number of additional reconstructive
surgeries and limit the need for both physical and psychological rehabilitation.
See "Forward Looking Information May Prove Inaccurate."

CLINICAL TESTS

In March 1994, the Company commenced human clinical trials in the United
States, under protocols approved by the FDA, to evaluate the effectiveness of
the Company's Composite Cultured Skin on burn patients. Since then eight
patients were treated as part of such human clinical trials, one at Cornell
Medical Center in New York City and the other seven at the Westchester Medical
Center in Valhalla, New York. It is too early to draw conclusions about the
safety and efficacy of the Company's product because of the limited number of
such operations to date and because more time is needed, under the clinical
trial protocol filed with the FDA, to assess the results of these and future
operations.

From 1988 through July 15, 1997, 29 operations were conducted in Sydney,
Australia, using the Company's Composite Cultured Skin. Five of those operations
were performed on burn patients. Four operations were performed to remove
tattoos. The remaining operations were conducted for treating the symptoms of
EB. None of the operations in Australia were performed in accordance with the
FDA approved

11
<PAGE> 12

protocols. The Company does not intend to use the results of any of its
Australian operations as part of the 120 FDA required human clinical trials.

Under the FDA approved clinical trial protocol, 120 patients are required
to be enrolled in at least five clinical sites located in various burn centers
in the United States. Each patient's progress must be followed for one year
following the procedure. The patients for the FDA mandated human clinical trials
are persons treated at the hospitals at which such clinical trials are
performed.

The Company has been relying almost exclusively on the burn unit in
Westchester Medical Center for patients for its FDA mandated human clinical
trials. Since its protocols filed with the FDA limit the burn patients that can
be treated in the human clinical trials (based on age, the parts of the body to
be treated, the patient's other medical problems and the availability of skin
for simultaneous autograft transplants for comparison purposes), as well as by
the requirement for informed consent, the Company believes that it must
establish working relationships with burn units in other hospitals to increase
the number of patients available for its clinical trials. Jacobi Hospital in New
York City has agreed to use the Company's Composite Cultured Skin at that
hospital's burn center as part of the Company's human clinical trials. To date,
Jacobi Hospital has not conducted any human clinical trials.

In 1996, the FDA approved the protocols of Rockefeller University Hospital
in New York City for the use of the Company's Composite Cultured Skin for the
treatment of non-healing skin ulcers of patients with EB. Under this FDA
approved clinical trial protocol, ten to fifteen patients are required to be
enrolled at a clinical site. Human clinical trials are presently being conducted
at Rockefeller University Hospital for treatment of ulcers in EB patients.

POTENTIAL APPLICATIONS OF TECHNOLOGY AND MARKETS

The Company believes that its Composite Cultured Skin, if successfully
developed, will have wide commercial application for treatment of severe burn
patients, patients who suffer severe ulcerations and various skin diseases (such
as EB), as well as for reconstructive and cosmetic surgery. There can be no
assurance that the Company's Composite Cultured Skin will be successfully tested
in future human clinical trials or that it can be marketed profitably. See
"Forward Looking Information May Prove Inaccurate."

PRODUCTION AND SUPPLY

In March 1996, the Company entered into a five-year lease with Columbia
University ("Columbia") for the Company's new laboratory and offices in
Columbia's new Audubon Biomedical Science and Technology Park in New York City
("Audubon"). Construction of the new laboratory and office facility was
completed in July 1996 and became fully operational in November 1996. As of May
31, 1997, Columbia provided a $400,000 grant and has loaned and advanced to the
Company approximately $619,000 for the Company's construction and architectural
and engineering costs in building its new laboratory and office, and for
equipment installed in the new laboratory. The Company has spent approximately
$226,500 of its own funds, in addition to the grant and the loan from Columbia.

The Company uses its new laboratory to produce its Composite Cultured Skin
for use in the remaining FDA approved human clinical trials and for further
research to develop the Company's proprietary technology for treatment of other
wounds. The new Audubon facility is a dedicated biomedical research facility and
the Company, as a tenant, is entitled to utilize the resources of Columbia's
Health Sciences Research facility at the Audubon facility as well as those at
Columbia University-Presbyterian Medical Center across the street from the
facility.

The Company also has its own laboratory facility in Sydney, Australia,
where it conducts additional research and produces its Composite Cultured Skin
used for operations in Australia.

If the Company is successful in securing FDA approval to market and sell
its Composite Cultured Skin, the Company's ability to operate profitably will
depend on its ability to produce, or have produced for it by third party
producers, its Composite Cultured Skin in large quantities at a competitive
cost. There can be no assurance that the Company will be able to construct and
equip a volume production facility to produce its

12
<PAGE> 13

Composite Cultured Skin at a commercially viable cost, or that the Company will
be able to enter into an agreement with a third party to produce such product on
terms acceptable to the Company, if at all. Any manufacturing, whether by the
Company or a third party manufacturer, for any future commercial scale
production of the Company's Composite Cultured Skin, will have to be in
compliance with the Good Manufacturing Practices, as mandated by the FDA.

RESEARCH

Most of the research and development for the Company's proprietary
technology is done at the Company's laboratory at the Audubon facility and its
laboratory in Sydney, Australia. In January 1997, the Company entered into an
agreement with the New Jersey Center for Biomaterials and Medical Devices (the
"New Jersey Center"), whereby the Company and the New Jersey Center collaborate
on research focusing on the development of collagen-based biomaterials for soft
tissue repair, specifically targeting the development of a second generation
collagen matrix to be used for the production of the Company's Composite
Cultured Skin. The New Jersey Center is a cooperative research initiative
sponsored by the University of Medicine and Dentistry of New Jersey, Rutgers
University and the New Jersey Institute of Technology, and receives financial
support from the New Jersey Commission of Science and Technology. The Company
has agreed to contribute $40,000 of the $100,000 cost of such research. The
Company will pay such $40,000 in quarterly payments of $10,000 each. $10,000 for
payment of the first quarter has already been paid by the Company.

FDA CONSULTANT

The Company retains Oxford Research International Corp. ("Oxford") to
assist it in the FDA approval process, including the preparation of applications
and related documentation and monitoring all phases of the clinical trials. The
agreement has a term of one year and is automatically renewable for additional
one year periods subject to termination at will. Fees payable to Oxford are
based on Oxford's per diem charges. The amount of fees for Oxford's services for
the fiscal year ended December 31, 1996 and the three months ended March 31,
1997 aggregated $61,430 and $20,919, respectively.

PATENTS AND PROPRIETARY RIGHTS

The Company has an exclusive worldwide license to use the proprietary
technology on which its Composite Cultured Skin is based and to market any
products developed from it, except for the treatment of EB patients in
Australia.

Eisenberg License Agreement

Pursuant to a license agreement (the "License Agreement") dated June 7,
1991, by and between the Company and Dr. Eisenberg, as modified in August, 1995,
Dr. Eisenberg has granted the Company an exclusive worldwide license to use the
technology subject to certain limitations. The agreement has a term of ten
years, which may be automatically renewed by the Company for two additional ten
year periods.

Dr. Eisenberg has retained the exclusive right to use the technology in
Australia solely for nonprofit applications that are not competitive with the
Company's business. The Company has agreed to make its Composite Cultured Skin
available for treatment of EB patients in Australia on a cost basis.

Upon the expiration or earlier termination of the License Agreement, Dr.
Eisenberg will be entitled to the exclusive rights to the technology licensed
under the License Agreement. However, the Company will retain the exclusive
rights to all improvements to the technology developed during the license
period. If the License Agreement is terminated due to a breach by the Company,
Dr. Eisenberg will also be entitled to the rights to such improvements.

13
<PAGE> 14

Patents

There can be no assurance that such patent may not be successfully
challenged in court proceedings. Nor can there be any assurance that any United
States or foreign patents will provide any commercial benefits to the Company.

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

GOVERNMENT REGULATION

The Company is subject to extensive government regulations. Products for
human treatment are subject to rigorous preclinical and clinical testing
procedures as a condition for approval by the FDA and by similar authorities in
foreign countries prior to commercial sale.

Pursuant to the Federal Food Drug and Cosmetic Act and regulations
promulgated thereunder, the FDA regulates the manufacture, distribution and
promotion of medical devices in the United States. The Company's Composite
Cultured Skin is subject to regulation as a medical device. Prior to commercial
release of the Company's product, premarket approval ("PMA") by the FDA will be
required. PMA entails proof of nontoxicity, safety and efficacy in human
clinical trials. Premarket approval is a lengthy and expensive process and there
can be no assurance that FDA approval will be obtained.

To obtain premarket approval, the Company must submit a PMA application,
supported by extensive data, including human clinical trial data, and
documentation to prove the safety and efficacy of the device. Pursuant to
applicable regulations, the FDA has 180 days to review a PMA application during
which time an advisory committee usually evaluates the application and makes
recommendations to the FDA. While the FDA has responded to PMA applications
within that time period, reviews usually occur over a significantly protracted
period of twelve to twenty-four months. A number of devices are never cleared
for marketing.

If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an Investigative Device Exemption ("IDE") application with the FDA
prior to commencing such trials. The IDE application must be supported by data,
including the results of animal and other testing. If the IDE application is
approved, human clinical trials may begin. In February 1994, the FDA approved
the Company's IDE application for clinical investigation of its product for burn
injuries, allowing the Company to commence human clinical trials on a total of
120 burn patients. As a result of such approval by the FDA, in March 1994 the
Company commenced human clinical trials. In January 1997, the FDA approved a
physician submitted IDE application for clinical investigation of the Company's
product for the treatment of the symptoms of EB, submitted by Rockefeller
University Hospital in New York City, allowing for the commencement of human
clinical trials on ten to fifteen EB patients. Human clinical trials are
presently being conducted at Rockefeller University Hospital for the treatment
of the symptoms of EB.

Reports containing results from the human clinical trials will be submitted
to the FDA in support of any PMA application. At this stage, it is not possible
to determine whether the results achieved from the clinical trials will be
sufficient to obtain FDA approval.

Any manufacturing, whether by the Company or by a third party manufacturer,
for any future commercial scale production of the Company's Composite Cultured
Skin, will have to be in compliance with the Good Manufacturing Practices, as
mandated by the FDA.

14
<PAGE> 15

COMPETITION

The Company is aware of several companies engaged in the research and
development of replacement skin products, including Organogenesis, Inc. and
Genzyme Tissue Repair, Inc., both of Cambridge, Massachusetts, Advanced Tissue
Sciences, Inc. of La Jolla, California, LifeCell Corporation of Woodland, Texas,
and Integra Life Sciences of Plainsboro, New Jersey.

Organogenesis, like the Company, has developed a product that is composed
of donor epidermal cells, fibroblast cells and a bovine collagen matrix. The
Company's Composite Cultured Skin differs from Organogenesis' product in its
collagen matrices and the methods used to culture the cells on to the collagen
matrices. In 1995, Organogenesis filed for pre-market approval by the FDA for
use of its cultured skin product for treatment of venous stasis ulcers.

Advanced Tissue Sciences has initiated several clinical trials to test a
"dermal equivalent" composed of bio-absorbable material in which donor
fibroblast cells have been seeded to secrete a dermal-like protein matrix. In
the latter part of 1996, Advanced Tissue Sciences filed for pre-market approval
by the FDA for use of its "dermal equivalent" in the treatment of diabetic skin
ulcers.

Advanced Tissue Sciences has also conducted clinical trials to test a
non-absorbable biosynthetic matrix, seeded with dermal fibroblast cells to act
as a temporary wound covering for severe burns before skin from an autograft
procedure becomes available. This product was approved for marketing by the FDA
on March 18, 1997.

Genzyme Tissue Repair has developed a product that consists of culturing
epidermal cells obtained from the patient through a biopsy to recreate an
epidermis like layer. This product is not regulated by the FDA and is available
commercially. The Company believes that its uses are limited due to the two to
three weeks delay in supplying the product to the patient.

LifeCell Corporation has developed a method to freeze-dry cadaver skin to
be used as an artificial dermis, which must then be covered with an autograft or
cultured epidermal cells. This product does not require FDA approval and has
been sold commercially since 1993.

In 1991, Integra Life Sciences developed a product that consists of a
bovine collagen matrix covered with a layer of silicone. This product is
intended to act as an artificial dermis and requires an autograft several days
after treatment. In March 1996, the FDA approved for marketing INTEGRATM
Artificial Skin, Dermal Regeneration TemplateTM.

All of these companies have greater financial and other resources than the
Company and most of them have conducted and continue to conduct human clinical
trials, many of which are at more advanced stages than the Company's human
clinical trials.

Except as set forth above, the Company is not aware of any skin replacement
product that has received PMA approval from the FDA.

In the area of chronic wound healing, many well known biotechnology
companies are developing products to treat wounds. These forms of therapies are
classified as biologics and therefore must meet more extensive regulatory
requirements than skin grafts, which are classified as devices. To date, and to
the best of the Company's management's knowledge, none of the trials performed
to treat chronic wounds has had any significant success. The Company feels that
part of the efficacy of its technology is based on its ability to deliver to the
wound site a complete skin system that includes epidermal cells and dermal
cells. These delivered cells may produce and deliver a myriad of growth factors
that may be secreted in the proper concentrations and could act as the growth
factor delivery system needed to treat chronic wounds as well as wounds from
burns.

No assurance can be given that other companies having greater financial
resources than the Company will not develop other skin regeneration or wound
healing technology that may be more effective than the Company's Composite
Cultured Skin, or that may make the Company's Composite Cultured Skin obsolete.

15
<PAGE> 16

EMPLOYEES

The Company presently employs seventeen people in the United States,
including three executive officers. Only one executive officer is employed on a
full time basis. The Company employs four persons, two part-time, including Dr.
Eisenberg, to work in its laboratory in Sydney, Australia. The Company's United
States and Australian staffs include seven employees possessing either Ph.D. or
M.D. degrees. The Company anticipates that it will employ additional persons in
1997 other than those referred to above, as its needs require.

PROPERTIES

In March 1996, the Company entered into a five-year lease with Columbia
University ("Columbia") for 5,765 square feet of space at 3960 Broadway, New
York City, New York, in Columbia's new Audubon Biomedical Science and Technology
Park ("Audubon"). The Company relocated its executive offices to its new
laboratory facility in July 1996 and commenced operation of its laboratory in
such facility in November 1996.

The Company pays rent of $10,809 per month, with increases in the fourth
and fifth years of the lease. The Company also granted Columbia a warrant
expiring March 10, 2001 to purchase 5,000 shares of Common Stock at an exercise
price of $10 per share. The Company has the option to renew the lease for an
additional five year term at a modest increase in base rent.

Pursuant to rights granted to it in such lease, the Company elected in
April 1997 to lease from Columbia an additional 3,650 square feet of space
adjacent to its office and laboratory which, after construction for use of such
space is completed, the Company intends to sublease approximately 3,000 square
feet for a six month period, making the space available for the Company's use
thereafter.

The Company leases approximately 5,000 square feet of space at 147-155
Queen Street, Beaconsfield, Sydney, Australia, in which the Company operates a
research laboratory to conduct its research and development activities in
Australia and to produce the Composite Cultured Skin used in the operations
conducted in Australia. The Company's lease expires in 2000. The Company pays
rent in Australian dollars, which at the current rate of exchange, amounts to
approximately US$33,000 per year. This space is rented from Dr. Mark Eisenberg's
father on terms that the Company believes are not less favorable to it than for
rental of similar space in Sydney, Australia, from non-related third parties.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Dr. Steven Katz............... 52 President, Chief Executive Officer and
Chairman of the Board of Directors
Dr. Mark Eisenberg............ 59 Senior Vice President, Research and Development and
Director
Ron Lipstein.................. 41 Secretary, Treasurer, Chief Financial Officer and
Director
Alain M. Klapholz............. 40 Vice President, Operations and Director
Mr. Joseph Stechler........... 45 Director
</TABLE>

Dr. Steven Katz, a founder of the Company, has been a director of the
Company since its inception in 1991 and was elected chairman of its Board of
Directors in September, 1994. He has been employed part time by the Company and
a predecessor since 1991. Dr. Katz has also been a professor of Economics and
Finance at Bernard Baruch College in New York City since 1972. Dr. Katz devotes
approximately 75% of his time to the Company. He has a Ph.D. in Finance and
Statistics as well as an MBA and MS in Operations Research, both from New York
University.

16
<PAGE> 17

Dr. Mark Eisenberg, a founder of the Company, has been a director and
senior vice president of the Company since 1991. Dr. Eisenberg has also been a
consultant to the Company since June 1991. See "Eisenberg Consulting Agreement".
He has been a physician in private practice in Sydney, Australia, since 1967. He
is a member and co-founder of the Dystrophic Epidermolysis Bullosa clinic at the
Prince of Wales Hospital for children in Sydney, Australia. He has done
extensive research on EB disease and has published widely on this subject in
medical journals.

Ron Lipstein, a founder of the Company, has been the secretary and
treasurer and a director of the Company since 1991. He has been employed part
time by the Company and a predecessor since 1991. Mr. Lipstein has been
president and chief executive officer of Dollspart Supply Co., Inc., a mail
order supply company, since 1987. He devotes approximately 75% of his time to
the Company. Mr. Lipstein, who is a certified public accountant, was employed as
an accountant by Touche Ross & Company, a national public accounting firm, from
1979 to 1987.

Alain M. Klapholz, a founder of the Company, has been a vice president and
a director of the Company since 1991. He has been employed full time by the
Company since September, 1991. From 1989 to 1990, Mr. Klapholz was the president
of Klapholz & Associates, a consulting firm that serviced and assisted medical
device and biotechnology firms in developing business plans and raising capital.
In 1990, and until August 1991, he was chief financial officer of Applied DNA
Systems, a publicly held biotechnology company. Mr. Klapholz has an M.B.A. from
New York University. Until December 14, 1998, Patterson Travis, Inc. ("Patterson
Travis"), the underwriter of the initial public offering of the Company's
securities, has the right to designate a director who will replace Mr. Klapholz.
Patterson Travis has not yet made such designation.

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

If the number of directors is increased to more than five, any person
selected to fill any such additionally created position in the period ending
December 14, 1997 is subject to the prior written approval of Patterson Travis
to serve in such position, which approval may not be unreasonably withheld. The
Company's management has no present intention to increase the number of
directors to more than five.

SIGNIFICANT EMPLOYEES

Dr. Melvin Silberklang supervises the Company's laboratory facility at the
Audubon Biomedical Service and Technology Park. From 1993 to 1995, Dr.
Silberklang was employed by Enzon, Inc. of Piscataway, New Jersey, as Senior
Director of Process Research and Development, supervising a multi-disciplinary
staff of 18 persons. From 1981 to 1993, Dr. Silberklang was employed by Merck
Research Laboratories of Rahway, New Jersey, where from 1988 to 1993 he was
Associate Director of Cellular and Molecular Biology. In that capacity, Dr.
Silberklang directed research and development for five major protein products
and managed transfers of research results to large scale production. From 1985
to 1988, Dr. Silberklang was a research fellow in Merck's Department of Cellular
and Molecular Biology where he developed and executed a capital expenditure plan
to fully equip both molecular biology and production facility laboratories.

Dr. Suzanne Schwartz has been employed full-time by the Company since July
1, 1996, as its medical director. She is responsible for the Company's
relationships with hospitals at which operations using the Company's Composite
Cultured Skin as part of the human clinical tests have been and are to be
performed, with respect to such operations and other matters and securing
additional hospitals to perform such operations. She also participates in
directing the Company's research and development for possible use of its
technology for other medical applications. Dr. Schwartz received her M.D. degree
from Albert Einstein College of Medicine in New York City in 1988 and trained as
a resident in general surgery at Montefiore Hospital and Medical Center in New
York City from July 1988 to June 1991. From July 1991 to June 1996, she held
various positions for advanced study at the Cornell University Medical College,
including a fellowship in its Burn Center, advanced study in the Wound Healing
Laboratory in the Department of Surgery, and in the Graduate Program in Cell
Biology and Genetics.

17
<PAGE> 18

CONSULTANTS

The Company retains Dr. Richard L. Kronenthal, the Chairman of its
Scientific Advisory Board, as a consultant at a minimum annual fee of $36,000.
As part of his consulting services, Dr. Kronenthal has taken the major
responsibility in directing the Company's research and development efforts.
Prior to 1989, Dr. Kronenthal was employed by Ethicon, Inc. ("Ethicon"), a
division of Johnson and Johnson, for more than 30 years, the last four years as
Ethicon's director of research and development. Prior to his retirement in 1989,
Dr. Kronenthal was responsible for Ethicon's development of a variety of
successful surgical products. During his more than thirty years with Ethicon,
Dr. Kronenthal held increasingly responsible positions involving the worldwide
commercialization of products derived from collagen, as well as synthetic
absorbable and other materials. Since 1989, Dr. Kronenthal has been president of
Kronenthal Associates, Inc., which provides technical and business consulting
services for investors and companies in the health care field.

The Company also retains Dr. Lisa Staiano-Coico, Associate Dean of Cornell
University Medical School, as a consultant, to assist and advise in the further
development and production of the Company's Composite Cultured Skin. In addition
to the compensation of $4,166 per month paid by the Company to Dr. Staiano-
Coico, the Company has granted to Dr. Staiano-Coico warrants to purchase up to
6,700 shares of the Company's Common Stock, at an exercise price of $12 per
share. The warrants granted Dr. Staiano-Coico expire May 31, 1998.

EISENBERG CONSULTING AGREEMENT

Pursuant to a consulting agreement (the "Consulting Agreement") dated June
7, 1991, as amended on September 1, 1992, between the Company and Dr. Eisenberg,
the Company has retained the services of Dr. Eisenberg as a consultant until
August 31, 2005.

Under the Consulting Agreement, Dr. Eisenberg devotes 20 hours per week to
the Company. The Company pays Dr. Eisenberg an annual fee at the rate of $73,000
and $58 per hour for each hour in excess of twenty hours per week spent by Dr.
Eisenberg on the Company's affairs. Dr. Eisenberg's fee is subject to annual
increases based on certain formulas.

In addition, Dr. Eisenberg will receive a bonus in the event that the
Company files for the registration of any patent based on a significant advance
that has been developed under his supervision or direction and which the
Company's Board of Directors determines to have significant commercial
application. The amount of any such bonus shall be determined by the Board of
Directors of the Company, but shall not be less than $30,000 per patent
registration, provided that bonuses may not aggregate more than $60,000 during
any twelve-month period.

Dr. Eisenberg has agreed not to compete with the Company until one year
after termination of the Consulting Agreement.

SCIENTIFIC ADVISORY BOARD

The Company has secured medical doctors expert in dermatology and surgery
and an expert in the field of development of biomedical and other health care
products, to serve on the Company's Scientific Advisory Board to advise the
Company in the further development of its technology and to provide guidance for
the Company's research strategy. The following persons are serving on the
Company's Scientific Advisory Board:

Dr. Richard L. Kronenthal -- Chairman of the Company's Scientific Advisory
Board. See "Consultants".

Dr. Eugene Bauer -- Chairman of Dermatology at, and Dean of the Stanford
University School of Medicine.

Dr. Joseph McGuire -- Professor of Dermatology and Pediatrics at Stanford
University School of Medicine.

Dr. Andrew Salzberg -- of the Westchester Medical Center and Co-Director of
its burn unit. Dr. Salzberg is a plastic surgeon with extensive experience
in skin grafts.

The Company compensates the members of its Scientific Advisory Board other
than Dr. Kronenthal for their time and expenses only, with minimum payments of
$5,000 per year to each member. The Company has granted to the following members
of its Scientific Advisory Board warrants to purchase shares of the

18
<PAGE> 19

Company's Common Stock at exercise prices ranging from $9.425 to $10 per share:
(i) to Dr. Salzberg, warrants expiring in August 1997 to purchase 2,660 shares,
(ii) to Dr. Bauer, warrants expiring in September 1997 to purchase 2,000 shares,
(iii) to Dr. McGuire, warrants expiring in April 1998 to purchase 2,000 shares
and (iv) to Dr. Kronenthal, warrants expiring in March 2000 to purchase 2,000
shares. The Company intends to extend the expiration dates of such warrants held
by Drs. Salzberg, Bauer and McGuire by two years beyond such expiration dates.
The Company also has agreed to grant to an academic, charitable, or research
institution designated by a former Scientific Advisory Board member warrants
which expire in April 1998 to purchase 2,000 shares of Common Stock at $9.425
per share. In addition, on April 1, 1996, the Company granted non-incentive
stock options to Dr. Salzberg to purchase 10,000 shares, and to Dr. Kronenthal
to purchase 7,500 shares, at an exercise price of $6.00 per share. Such options
expire on April 1, 2001 and were granted for consulting services rendered by
Drs. Salzberg and Kronenthal to the Company.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES

The Company's Certificate of Incorporation provides that the personal
liability of the directors of the Company shall be limited to the fullest extent
permitted by the provisions of Section 102(b)(7) of the General Corporation Law
of the State of Delaware (the "DGCL"). Section 102(b)(7) of the DGCL generally
provides that no director shall be liable personally to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that the Certificate of Incorporation does not eliminate the liability
of a director for (i) any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (iii) acts or
omissions in respect of certain unlawful dividend payments or stock redemptions
or repurchases; or (iv) any transaction from which such director derives
improper personal benefit. The effect of this provision is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of her or his fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The limitations
summarized above, however, do not affect the ability of the Company or its
stockholders to seek nonmonetary remedies, such as an injunction or rescission,
against a director for breach of her or his fiduciary duty. Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"), may be permitted to directors, officers, or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission (the "Commission"), such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

In addition, the Certificate of Incorporation provides that the Company
shall, to the fullest extent permitted by Section 145 of the DGCL, indemnify all
persons whom it may indemnify pursuant to Section 145 of the DGCL. Section 145
of the DGCL permits a company to indemnify an officer or director who was or is
a party or is threatened to be made a party to any proceeding because of his or
her position, if the officer or director acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.

The Company maintains a directors' and officers' liability insurance policy
covering certain liabilities that may be incurred by directors and officers in
connection with the performance of their duties. The entire premium for such
insurance is paid by the Company.

19
<PAGE> 20

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 24, 1997 by (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the outstanding shares of its Common Stock, (ii) each director
of the Company, (iii) all executive officers and directors of the Company as a
group and (iv) each Selling Shareholder. Except as indicated in the footnotes to
this table, the persons named in this table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them.

<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF SHARES SHARES
BENEFICIAL OUTSTANDING REGISTERED BENEFICIALLY OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP** SHARES OWNED FOR SALE AFTER SALE***
- ------------------------------------ ----------- ------------ ---------- ------------------
<S> <C> <C> <C> <C>
Steven Katz* 298,507(1) 6.2% -- --
Mark Eisenberg* 598,000 12.9% -- --
Ron Lipstein* 323,606(2) 6.9% -- --
Alain Klapholz* 308,607(3) 6.6% -- --
Joseph Stechler 684,166(4) 13.9% --
15 Engle Street
Englewood, NJ 07631
Home Insurance Company 298,818(5) 6.3% -- --
59 Maiden Lane
New York, NY 10038
Strong Capital Management, Inc., 305,000(6) 6.6% 305,000 --
One Hundred Heritage Reserve
P.O. Box 2936
Milwaukee, WI 53201
Dawson-Samberg Capital 342,679(7) 7.4% 311,526 31,153
Management, Inc.
354 Pequot Avenue
Southport, CT 06490
The Travelers Indemnity Company 307,692(8) 6.6% 307,692 --
One Tower Square
Hartford, CT 06183
Judah Wernick 372,500(9) 7.4% 360,000 12,500
Patterson Travis, Inc.
One Battery Park Plaza
New York, NY 10004
Daniel E. Strauss 37,788(10) **** 7,788 30,000
411 Hackensack Avenue
Hackensack, NJ 07601
Morris and Lynda Feldman 48,600(10) 1.0% 18,600 30,000
138-33 78th Road
Flushing, NY 11367
Menachem Genack 55,099(11) 1.2% 8,500 46,599
129 Meadowbrook Road
Englewood, NJ 07631
R.A.S. Securities Corp. 4,750(12) **** 4,750 --
2 Broadway
New York, NY 10004
All officers and directors as a
group (five persons) 2,212,886(1,2,3,4) 44.3%
</TABLE>

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

** The number of Shares of Common Stock beneficially owned by each person or
entity is determined under rules promulgated by the Commission. Under such
rules, beneficial ownership includes any shares as to which the person or
entity has sole or shared voting power or investment power. Included among

20
<PAGE> 21

the shares owned by such person are any shares which such person or entity
has the right to acquire within 60 days after July 15, 1997. Unless
otherwise indicated, each person or entity referred to above has sole
voting and investment power with respect to the shares listed. The
inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of such shares.

*** None of the Selling Shareholders will own 1% or more of the Company's
outstanding shares if they sell all of their shares registered for sale,
except Menachem Genack, who will own 1%.

**** Less than 1%.

(1) Does not include 50,000 shares owned by Dr. Katz's children, their spouses
and his grandchildren. Dr. Katz disclaims any beneficial interest in such
50,000 shares. Includes 50,000 shares issuable to Dr. Katz upon his
exercise of outstanding options.

(2) Includes 30,000 shares owned by Mr. Lipstein's minor children. Mr. Lipstein
disclaims any beneficial interest in such 30,000 shares. Also includes
25,000 shares issuable to Mr. Lipstein upon his exercise of outstanding
options.

(3) Includes 36,000 shares owned by Mr. Klapholz' minor children. Mr. Klapholz
disclaims any beneficial interest in such 36,000 shares. Also includes
10,000 shares issuable to Mr. Klapholz upon his exercise of outstanding
options.

(4) Includes shares owned by Stechler & Company. Also includes 269,536 shares
to be issued by the Company to Mr. Stechler or Stechler & Company upon
their exercise of outstanding warrants, 79,206 of which are exercisable at
$1.00 per share and expire January 19, 2000, 86,930 of which are
exercisable at $9.425 per share and expire on December 31, 1997, 36,450 of
which are the publicly held Class A Warrants exercisable at $10.00 per
share and expire November 3, 1997, 36,450 of which are the publicly held
Class B Warrants exercisable at $15.00 per share and expire January 19,
1999, and 30,500 of which are exercisable at $7.87 per share and expire on
October 17, 2001.

(5) Includes 137,707 shares to be issued by the Company to Home Insurance
Company upon Home Insurance Company's exercise of outstanding warrants,
127,707 of which are exercisable at $1.00 per share and expire January 19,
2000, and 10,000 of which are exercisable at $12.00 per share and expire
July 21, 1997.

(6) Shares held by four investment funds. The Company believes that Strong
Capital Management, Inc. has sole or shared investment and/or voting power
for these shares.

(7) Shares held by two investment funds. The Company believes that
Dawson-Samberg Capital Management, Inc. has sole or shared investment
and/or voting power for these shares. Includes 31,153 shares issuable upon
exercise of outstanding warrants which are not included among the shares
registered for sale.

(8) Does not include 53 shares of Common Stock held in the trading account of a
stock brokerage house which is an affiliate of Travelers Insurance Company.

(9) Shares beneficially owned and registered include shares issuable upon
exercise of the following options at the following prices: 120,000 shares
at $8.25 per share, expiring December 15, 2005; 120,000 shares at $16.25
per share, expiring July 19, 1997; 120,000 shares at $24.75 per share,
expiring January 19, 1999. Shares beneficially owned but not registered
include 12,500 shares issuable upon exercise of a warrant at $6.00 per
share, expiring June 20, 1999. Does not include approximately 5,000 shares
of Common Stock held in the trading account of Patterson Travis, Inc., with
whom Mr. Wernick is affiliated. Mr. Wernick disclaims any beneficial
interest in such shares.

(10) Includes 10,000 shares of Common Stock issuable upon exercise of Class A
Warrants and 10,000 shares issuable upon exercise of Class B Warrants, none
of which are included among the shares registered for sale hereby.

(11) Includes 2,639 shares issuable upon exercise of warrants at $7.73 and $7.70
per share, expiring October 17 and November 11, 2001 and 8,000 shares
issuable upon exercise of Class A Warrants, none of which are included
among the shares registered for sale hereby.

21
<PAGE> 22

(12) Consists of shares issuable upon exercise of warrants at $12.00 per share,
expiring in March and April 1998.

EXECUTIVE COMPENSATION

The following table sets forth the Company's executive compensation paid
during the three fiscal years ended December 31, 1996, 1995 and 1994 for the
Chief Executive Officer and the Company's most highly compensated executive
officers of the Company (other than the Chief Executive Officer) whose cash
compensation exceeded $100,000 (the "Named Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------
AWARDS
ANNUAL COMPENSATION ---------- PAYOUTS
----------------------------------------- -----------------------
(E) (F) (I)
OTHER RESTRICTED (H) ALL
(A) (C) (D) ANNUAL STOCK (G) PLAN OTHER
NAME AND PRINCIPAL (B) SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ---- -------- ------ ------------ ---------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Steven Katz 1996 $162,451(1) $8,100* 50,000
Chief Executive 1995 74,000(2) 6,000* --
Officer and President 1994 75,980 6,000* --
Ron Lipstein 1996 $135,861(1) $8,100* 25,000
Secretary, Treasurer 1995 53,848(2) 6,000* --
and CFO 1994 71,684(3) 6,000* --
Alain Klapholz 1996 $112,249(1) $3,500* 10,000
Vice President 1995 86,871(2) 6,000* --
and Director 1994 56,959(3) 8,500* --
</TABLE>

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

(1) Includes $37,986, $26,923 and $16,265, paid to Dr. Katz and Messrs. Lipstein
and Klapholz, respectively, in 1996 for compensation payable to such
persons in 1995, but deferred for lack of funds at the Company's disposal
at such time.

(2) Includes amounts for compensation payable to such persons in 1995, but
deferred to 1996 for lack of funds at the Company's disposal at such time.
See Note (1), above. Also includes $16,154 and $3,113, paid to Messrs.
Lipstein and Klapholz, respectively, in 1995 for compensation payable to
such persons in 1994, but deferred for lack of funds at the Company's
disposal at such time.

(3) Includes amounts for compensation payable to such persons in 1994, but
deferred to 1995 for lack of funds at the Company's disposal at such time.
See Note (2), above.

BOARD COMPENSATION

Although Mr. Klapholz is employed on a full-time basis by the Company, and
Dr. Eisenberg and Mr. Lipstein on a part-time basis, in 1996, no compensation
was paid by the Company to any director for services rendered by him as a
director or for committee participation or for special assignments as a
director.

22
<PAGE> 23

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 by the Company to the
Named Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------
PERCENT OF
TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEES EXERCISE OR
NAME GRANTED IN FISCAL YEAR BASE PRICE EXPIRATION DATE
- ----------------------------------------- ------- -------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Dr. Steven Katz.......................... 30,000 30.4% $8.50 11/21/2001
20,000 20.3% $7.00 04/01/2001
Ron Lipstein............................. 10,000 10.1% $8.50 11/21/2001
15,000 15.2% $7.00 04/01/2001
Alain Klapholz........................... 10,000 10.1% $8.50 11/21/2001
</TABLE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PLACEMENT AGENTS

In November 1996, the Company completed a private placement of its
securities (the "1996 Private Placement"). The offer and sale of the shares in
the 1996 Private Placement was made by the Company, acting through its officers
and directors, and certain placement agents, one of which was Joseph Stechler.
Mr. Stechler is a director of the Company. The Company paid each placement
agent, including Mr. Stechler, cash commissions of 7% of the purchase price for
each share sold in the 1996 Private Placement by such person and, in addition to
such cash commissions, granted five-year warrants to such placement agent to
purchase such number of shares of Common Stock equal to 10% of the number of
shares of Common Stock sold by such Placement Agent, exercisable at prices equal
to 120% of the prices paid for such shares (the "1996 Private Placement
Warrants"). As compensation for his services as a placement agent in connection
with the 1996 Private Placement, Mr. Stechler received approximately $140,000 as
cash compensation and 30,500 1996 Private Placement Warrants. None of the
Company's other directors received any compensation in connection with the 1996
Private Placement.

LICENSE AND CONSULTING AGREEMENTS

See "Business -- Patents and Proprietary Rights" for a description of the
license agreement between Dr. Mark Eisenberg and the Company for use of the
technology used to produce the Company's Composite Cultured Skin. See also
"Eisenberg Consulting Agreement."

LOAN REPAYMENTS

In January 1996, from the net proceeds received by the Company from the
initial public offering of its securities, $319,500 was used to repay
non-interest bearing loans made to the Company from June through November 1,
1995 by Dr. Steven Katz ($196,500), by Dollspart Supply Co., Inc., which is
wholly owned by Mr. Ron Lipstein ($50,000), and by Mr. Judah Wernick ($73,000),
who is affiliated with the underwriter of such initial public offering. Mr.
Wernick was paid interest at the rate of 12% per annum on his loan. The loans
from Dr. Katz and Dollspart Supply were non interest bearing.

EXTENSION OF EXPIRATION DATE OF CLASS A WARRANTS

On July 1, 1997, the Company's Board of Directors extended the expiration
date of the Company's publicly traded Class A Warrants from July 19, 1997 to
November 3, 1997. Mr. Joseph Stechler, a director of the Company, is the owner
of 36,450 Class A Warrants.

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.001 per share, of which 4,641,510 shares are currently issued and
outstanding.

23
<PAGE> 24

The holders of Common Stock are entitled to one vote per share for the
election of directors and with respect to all other matters to be voted on by
shareholders. Shares of Common Stock do not have cumulative voting rights.
Therefore, the holders of more than 50% of such shares voting for the election
of directors can elect all of the directors if they choose to do so and, in that
event, the holders of the remaining shares will not be able to elect any
directors. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of legally available funds. See
"Price Range of Common Stock and Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, pre-emptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock.

GENERAL CORPORATION LAW PROVISIONS

A Delaware statute prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's voting stock) from engaging in
a "business combination" with the Delaware corporation for three years following
the date the person became an interested stockholder unless generally speaking,
the transaction is approved by the Company's Board of Directors and the vote of
two thirds of the outstanding shares not owned by such interested stockholder.
This statute could have the effect of discouraging, delaying or preventing
hostile takeovers, including those that might result in the payment of a premium
over market price or changes in control or management of the Company.

TRANSFER AND WARRANT AGENT

The transfer agent for the Common Stock and the warrant agent for the
Company's publicly traded Class A and Class B Warrants is Jersey Transfer and
Trust Co., whose address is 201 Bloomfield Avenue, P.O. Box 36, Verona, New
Jersey 07044.

PLAN OF DISTRIBUTION

All of the shares of Common Stock offered pursuant to this Prospectus are
being offered by the holders thereof (collectively, the "Holders"), and,
therefore, the Company will not receive any proceeds resulting from the sale of
any of such shares, except for any proceeds from the exercise, if any, of the
Options and Warrants.

The shares of Common Stock included herein may be sold from time to time to
purchasers directly by the Holder thereof. Alternatively, the Holders of any
such shares may from time to time offer the shares of Common Stock through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Holders and any
underwriters, dealers or agents who participate in the distribution of such
shares may be deemed to be "underwriters" under the Securities Act, and any
discounts, commissions or concessions received by any such persons might be
deemed to be underwriting discounts and commissions under the Securities Act.

SHARES ELIGIBLE FOR FUTURE SALE

FUTURE SALE OF UNREGISTERED SECURITIES; REGISTRATION RIGHTS

1,541,156 shares of the Company's presently outstanding shares of Common
Stock are "restricted securities," as that term is defined under Rule 144 ("Rule
144") promulgated under the Act. In general, under Rule 144 a person who owns
any restricted shares of Common Stock for at least one year may sell in the
public securities markets, within any three month period, such number of those
restricted shares that does not exceed the greater of one percent of the total
number of outstanding shares of the same class or the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least three months immediately preceding
the sale and who owns shares of Common Stock that have been held for a period of
at least two years is entitled to sell such shares under Rule 144 without regard
to any volume limitations. Drs. Eisenberg and Katz and Messrs. Lipstein and
Klapholz and members of their families have agreed with the underwriter of the
initial public offering of

24
<PAGE> 25

Ortec's securities not to sell shares owned by them (1,493,720 shares, all but
22,000 of which are restricted shares), prior to January 19, 1998 without the
underwriter's written consent. If the underwriter consents to release all the
1,493,720 locked up shares, they would be eligible for immediate sale (subject
to the volume limitations of Rule 144).

Additional shares that are issuable upon exercise of outstanding warrants
and options which will be eligible for immediate sale into the public securities
markets after such warrants and options are exercised are as follows: 1,200,000
shares for which the exercise price is $10; 1,200,000 shares for which the
exercise price is $15; 120,000 shares for which the exercise price is $8.25;
120,000 shares for which the exercise price is $16.50 and 120,000 shares for
which the exercise price is $24.75. These are shares issuable upon exercise of
the Class A and Class B Warrants and options granted to the Underwriter in
connection with the Company's initial public offering of its securities. In
addition, 706,179 shares that are issuable upon exercise of other outstanding
warrants and options exercisable at prices ranging from $1.00 (for 303,578
shares) to $12.00, are eligible for sale in the public securities markets one or
two years after such warrants and options are exercised.

Up to 350,000 shares issuable upon exercise of stock options granted
(161,000) and that may be granted (189,000) under the Company's 1996 Stock
Option Plan may be registered under the Securities Act.

LEGAL MATTERS

The legality of the Common Stock included in this Prospectus has been
passed upon for the Company by Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP, New York, New York. Gabriel Kaszovitz, a member of the firm of Feder,
Kaszovitz, Isaacson, Weber, Skala & Bass, LLP, and members of his family, own an
aggregate of 12,540 shares of the Company's Common Stock. Mr. Kaszovitz has been
granted a warrant expiring April 1, 2000 for the purchase of 10,000 shares of
Common Stock at $6.00 per share.

EXPERTS

The financial statements of the Company included in this prospectus at
December 31, 1996 and for each of the two years then ended and the period from
March 12, 1991 inception through December 31, 1996 have been audited by Grant
Thornton LLP, Independent Certified Public Accountants, as set forth in their
report appearing elsewhere herein and are included in reliance upon such report,
given on the authority of the firm as experts in accounting and auditing.

FORWARD LOOKING INFORMATION MAY PROVE INACCURATE

This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of Management, as well as
assumptions made by and information currently available to the Company. When
used in this document, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions, as they relate to the Company, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including those described in this Prospectus.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect,

25
<PAGE> 26

actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.

AVAILABLE INFORMATION

Since January 20, 1996, the Company has been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In accordance with the Exchange Act, the Company has and will continue to
file reports, proxy statements and other information with the Commission.
Reports and other information filed by the Company may be inspected and copied
at the public reference facilities of the Commission in Washington, D.C. Copies
of such materials can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The Company's Common Stock is
listed on the NASDAQ SmallCap Market and reports and information concerning the
Company can also be inspected through such exchange. The Company intends to
furnish its shareholders with annual reports containing audited financial
statements and such other periodic reports as the Company deems appropriate or
as may be required by law.

The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference. Such requests should be directed by mail
to Mr. Ron Lipstein, Secretary, Ortec International, Inc., 3960 Broadway, New
York, NY 10032, or by telephone at (212) 740-6999.

The Company has filed with the Commission a Registration Statement on Form
SB-2 and all schedules and exhibits thereto under the Securities Act with
respect to the Common Stock offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and this
Offering, reference is made to such Registration Statement, including the
exhibits filed therewith, which may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at its
principal office upon payment of prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed as
an exhibit to the Registration Statement, each such statement is qualified in
all respects by reference to the applicable document filed with the Commission.

26
<PAGE> 27

GLOSSARY

The following Glossary defines certain technical terms and abbreviations
used in this Prospectus.

ALLOGRAFT -- replacement of damaged skin with materials, synthetic or
natural, other than a patient's own skin.

AUTOGRAFT -- transplant of skin from one site of a patient's body onto a
wound site that no longer has the capacity to heal spontaneously.

COLLAGEN -- an insoluble fibrous protein that occurs in vertebrates as the
chief constituent of connective tissue fibrils and in bones.

COMPOSITE CULTURED SKIN -- The Company's product. Produced from cells
derived from human infant foreskins obtained during routine infant circumcisions
which are separated into dermal and epidermal cells, reproduced and the dermal
cells are then grown onto a cross linked bovine collagen sponge and the
epidermal cells are grown on top of that sponge to form the Composite Cultured
Skin.

DERMIS -- The lower layer of human skin, beneath the epidermis. A thick
fibroelastic layer that consists of cells that generate such fibroelastic
material and provide a framework for the support of blood vessels that flow
through such layer.

EB -- EPIDERMOLYSIS BULLOSA -- A congenitally inherited disorder
characterized by fragile skin that breaks down easily, leading to infections,
ulcerations and contracture that cause deformities of the limbs.

EPIDERMIS -- The upper layer of human skin. A thin multi-layered cellular
sheet of cells approximately 0.5 mm in thickness that is constantly being
regenerated through cell division.

FIBROELASTIC -- Composed of collagen and elastic fibers.

GOOD MANUFACTURING PRACTICES -- Set of documentation and procedural
standards required by the FDA to insure that medical devices are produced
according to their specifications.

IDE APPLICATION -- Investigational Device Exemption Application -- an
application to the FDA for permission to use a medical device in human clinical
tests.

PATHOGEN -- Any virus, microorganism, or other substance causing disease.

PMA APPLICATION -- Premarket approval application submitted to the FDA for
the sale of a new proposed medical device that is not substantially equivalent
to an already cleared device.

A-1
<PAGE> 28

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Financial Statements.................................................................. --
Balance Sheets as of December 31, 1996 and March 31, 1997 (Unaudited)............... F-3
Statements of Operations for the years ended December 31, 1995 and 1996, for the
three months ended March 31, 1996 and 1997 (Unaudited), for the cumulative period
from March 12, 1991 (inception) to December 31, 1996 and for the cumulative
period from March 12, 1991 (inception) to March 31, 1997 (Unaudited)............. F-4
Statement of Shareholders' Equity for the cumulative period from March 12, 1991
(inception) to March 31, 1997 (Unaudited)........................................ F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996, for the
three months ended March 31, 1996 and 1997 (Unaudited), for the cumulative period
from March 12, 1991 (inception) to December 31, 1996 and for the cumulative
period from March 12, 1991 (inception) to March 31, 1997 (Unaudited)............. F-6
Notes to Financial Statements....................................................... F-7
</TABLE>

F-1
<PAGE> 29

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Ortec International, Inc.

We have audited the accompanying balance sheet of Ortec International, Inc.
(a development stage enterprise) (the "Company") as of December 31, 1996, and
the related statements of operations, shareholders' equity and cash flows for
each of the two years then ended and for the period from March 12, 1991
(inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ortec International, Inc. at
December 31, 1996, and the results of its operations and its cash flows for each
of the two years then ended and for the period from March 12, 1991 (inception)
to December 31, 1996, in conformity with generally accepted accounting
principles.

GRANT THORNTON LLP

New York, New York
March 18, 1997

F-2
<PAGE> 30

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................ $7,453,229 $5,486,889
Marketable securities............................................ 1,032,979
Prepaid expenses................................................. 7,616 3,750
Other current assets............................................. 1,958 1,959
---------- ----------
Total current assets..................................... 7,462,803 6,525,577
Property and Equipment, at Cost
Laboratory equipment............................................. 578,530 581,796
Office furniture and equipment................................... 170,830 212,381
Leasehold improvements........................................... 462,995 573,723
---------- ----------
1,212,355 1,367,900
Less accumulated depreciation and amortization................... (321,646) (386,436)
---------- ----------
890,709 981,464
Other Assets
Patent application costs, net of accumulated amortization of
$1,210 in 1996 and $8,547 in 1997............................. 409,147 411,596
Deposits......................................................... 29,266 30,873
---------- ----------
$8,791,925 $7,949,510
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................. $ 466,077 $ 449,100
Accrued compensation............................................. 39,658 41,094
Accrued professional fees........................................ 64,662 99,741
Capital lease obligations -- current............................. 5,738 13,674
Loan payable -- current.......................................... 38,018 35,918
---------- ----------
Total current liabilities................................ 614,153 639,527
Long-Term Liabilities
Capital lease obligations -- noncurrent.......................... 9,846 26,110
Loan payable -- noncurrent....................................... 450,928 441,679
---------- ----------
Total long-term liabilities.............................. 460,774 467,789
Commitments and Contingencies
Shareholders' Equity
Common stock, $.001 par value; authorized, 10,000,000 shares;
issued and outstanding, 4,601,963 shares at December 31, 1996
and 4,606,040 shares at March 31, 1997........................ 4,602 4,606
Additional paid-in capital....................................... 15,573,183 15,577,256
Deficit accumulated during the development stage................. (7,860,787) (8,739,668)
---------- ----------
7,716,998 6,842,194
---------- ----------
$8,791,925 $7,949,510
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 31

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH CUMULATIVE FROM CUMULATIVE FROM
YEAR ENDED DECEMBER 31, 31, MARCH 12, 1991 MARCH 12, 1991
------------------------- ------------------------- (INCEPTION) TO (INCEPTION) TO
1995 1996 1996 1997 DECEMBER 31, 1996 MARCH 31, 1997
----------- ----------- ----------- ----------- ----------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Interest income............ $ 2,685 $ 171,057 $ 34,471 $ 83,861 $ 238,215 $ 322,076
----------- ----------- --------- --------- ----------- -----------
Expenses
Research and development... 573,392 964,864 221,455 272,693 3,354,416 3,627,109
Rent....................... 21,732 85,076 6,443 51,365 162,949 214,314
Consulting................. 34,606 261,633 40,933 62,143 757,396 819,539
Personnel.................. 229,183 730,357 140,016 293,451 1,875,398 2,168,849
General and
administrative.......... 161,686 727,192 126,844 270,910 1,834,372 2,105,282
Other expense, net......... 4,809 51,703 1,027 12,180 114,471 126,651
----------- ----------- --------- --------- ----------- -----------
1,025,408 2,820,825 536,718 962,742 8,099,002 9,061,744
----------- ----------- --------- --------- ----------- -----------
Net loss........... $(1,022,723) $(2,649,768) $ (502,247) $ (878,881) $(7,860,787) $(8,739,668)
=========== =========== ========= ========= =========== ===========
Net loss per
share............ $ (.38) $ (.60) $ (.14) $ (.18) $ (2.77) $ (2.99)
=========== =========== ========= ========= =========== ===========
Weighted average common and
common equivalent shares
outstanding................ 2,720,208 4,421,637 3,670,195 4,915,774 2,838,265 2,923,615
=========== =========== ========= ========= =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 32

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
-------------------- PAID-IN DURING THE SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEVELOPMENT STAGE EQUITY
--------- ------ ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
March 12, 1991 (inception) to December 31, 1991
Issuance of stock
Founders..................................... 1,553,820 $1,554 $ (684) $ 870
First private placement ($.30 cash per
share)..................................... 217,440 217 64,783 65,000
The Director ($1.15 and $5.30 cash per
share)..................................... 149,020 149 249,851 250,000
Second private placement ($9.425 cash per
share)..................................... 53,020 53 499,947 500,000
Share issuance expenses...................... (21,118) (21,118)
Net loss..................................... $ (281,644) (281,644)
---------- ------ ---------- --------
Balance at December 31, 1991................... 1,973,300 1,973 792,779 (281,644) 513,108
Issuance of stock
Second private placement ($9.425 cash per
share)..................................... 49,320 49 465,424 465,473
Stock purchase agreement with the Director
($9.425 cash per share).................... 31,820 32 299,966 299,998
Share issuance expenses...................... (35,477) (35,477)
Net loss..................................... (785,941) (785,941)
---------- ------ ---------- --------
Balance at December 31, 1992................... 2,054,440 2,054 1,522,692 (1,067,585) 457,161
Issuance of stock
Third private placement($10.00 cash per
share)..................................... 132,150 132 1,321,368 1,321,500
Stock purchase agreement with Home Insurance
Company ($9.00 cash per share)............. 111,111 111 999,888 999,999
Stock purchase agreement with the Director
($9.425 cash per share).................... 21,220 21 199,979 200,000
Shares issued in exchange for commission
($10.00 value per share)................... 600 1 5,999 6,000
Share issuance expenses...................... (230,207) (230,207)
Net loss..................................... (1,445,624) (1,445,624)
---------- ------ ---------- --------
Balance at December 31, 1993................... 2,319,521 2,319 3,819,719 (2,513,209) 1,308,829
Issuance of stock
Fourth private placement ($10.00 cash per
share)..................................... 39,451 40 397,672 397,712
Stock purchase agreement with Home Insurance
Company ($10.00 cash per share)............ 50,000 50 499,950 500,000
Share issuance expenses...................... (8,697) (8,697)
Net loss..................................... (1,675,087) (1,675,087)
---------- ------ ---------- --------
Balance at December 31, 1994................... 2,408,972 2,409 4,708,644 (4,188,296) 522,757
Rent forgiveness............................... 40,740 40,740
Net loss....................................... (1,022,723) (1,022,723)
---------- ------ ---------- --------
Balance at December 31, 1995................... 2,408,972 2,409 4,749,384 (5,211,019) (459,226)
Issuance of stock
Initial public offering...................... 1,200,000 1,200 5,998,800 6,000,000
Exercise of warrants......................... 33,885 34 33,851 33,885
Fifth private placement ($6.49 cash per
share)..................................... 959,106 959 6,219,838 6,220,797
Share issuance costs......................... (1,580,690) (1,580,690)
Non-cash stock compensation and interest..... 152,000 152,000
Net loss..................................... (2,649,768) (2,649,768)
---------- ------ ---------- --------
Balance at December 31, 1996................... 4,601,963 4,602 15,573,183 (7,860,787) 7,716,998
Issuance of stock
Exercise of warrants (Unaudited)............. 4,077 4 4,073 4,077
Net loss(Unaudited).......................... (878,881) (878,881)
---------- ------ ---------- --------
Balance at March 31, 1997 (unaudited).......... 4,606,040 $4,606 $15,577,256 $(8,739,668) $ 6,842,194
========== ====== ========== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE> 33

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED CUMULATIVE FROM CUMULATIVE FROM
YEAR ENDED DECEMBER 31, MARCH 31, MARCH 12, 1991 MARCH 12, 1991
-------------------------- -------------------------- (INCEPTION) TO (INCEPTION) TO
1995 1996 1996 1997 DECEMBER 31, 1996 MARCH 31, 1997
----------- ----------- ----------- ----------- ----------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net loss....................... $(1,022,723) $(2,649,768) $ (502,247) $ (878,881) $(7,860,787) $(8,739,668)
Adjustments to reconcile net
loss to net cash used in
operating activities
Deferred occupancy costs..... (8,265) (1,327) (1,327)
Depreciation and
amortization............... 57,731 152,290 14,679 72,127 333,094 405,221
Unrealized loss on marketable
securities................. 67,204 67,204
Realized loss on marketable
securities................. 5,250 5,250 5,250
Non-cash stock compensation
and interest............... 152,000 152,000 152,000
(Increase) decrease in assets
Prepaid expenses........... (7,616) 3,866 (7,616) (3,750)
Other current assets....... 11,301 (1,901) (1,958) (1,958)
Increase (decrease) in
liabilities
Accounts payable and accrued
liabilities................ 203,418 133,715 (279,904) 19,539 650,626 670,165
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities................. (753,288) (2,222,607) (768,799) (783,349) (6,662,187) (7,445,536)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities
Purchases of property and
equipment.................... (49,847) (884,093) (216,449) (130,215) (1,212,355) (1,342,570)
Payments for patent
applications................. (90,365) (40,757) (3,780) (9,786) (410,357) (420,143)
Organization costs............. (10,238) (10,238)
Deposits....................... 1,047 (25,210) (331) (1,607) (29,266) (30,873)
Purchases of marketable
securities................... (1,032,979) (594,986) (1,627,965)
Sale of marketable
securities................... 153,163 522,532 522,532
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) investing activities... 13,998 (950,060) (220,560) (1,174,587) (1,734,670) (2,909,257)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities
Proceeds from issuance of notes
payable...................... $ 515,500 $ 515,500 $ 515,500
Proceeds from issuance of
common stock................. $12,254,682 $6,012,866 $ 4,077 17,255,235 17,259,312
Share issuance expenses........ (1,580,690) (826,097) (1,870,189) (1,870,189)
Proceeds from loan payable..... 500,000 500,000 500,000
Repayment of capital lease
obligations.................. (4,554) (1,131) (4,554) (5,685)
Repayment of loan payable...... (30,406) (11,350) (30,406) (41,756)
Repayment of notes payable..... (515,500) (515,500) (515,500) (515,500)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities... 515,500 10,623,532 4,671,269 (8,404) 15,850,086 15,841,682
----------- ----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH
EQUIVALENTS................ (223,790) 7,450,865 3,681,910 (1,966,340) 7,453,229 5,486,889
Cash and cash equivalents at
beginning of period............ 226,154 2,364 2,364 7,453,229
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period...................... $ 2,364 $ 7,453,229 $3,684,274 $5,486,889 $ 7,453,229 $ 5,486,889
=========== =========== =========== =========== =========== ===========
Supplemental disclosures of cash
flow information:
Noncash financing activities
Deferred offering costs
included in accrued
professional fees.......... $ 314,697 $ 314,697 $ 314,697
Forgiveness of rent
payable.................... 40,740 40,740 40,740
Cash paid for interest......... $ 14,792 $ 13,440 14,792 28,232
Cash paid for income taxes..... 1,120 12,390 13,510
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 34

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

NOTE A -- FORMATION OF THE COMPANY AND BASIS OF PRESENTATION

Formation of the Company

Ortec International, Inc. ("Ortec" or the "Company") was incorporated in
March 1991 as a Delaware corporation to secure and provide funds for the further
development of the technology developed by Dr. Mark Eisenberg of Sydney,
Australia, to replicate in the laboratory, composite cultured skin for use in
skin transplant procedures (the "Technology"). Pursuant to a license agreement
dated June 7, 1991, Dr. Eisenberg has granted Ortec a license for a term of ten
years, which may be automatically renewed by Ortec for two additional ten-year
periods, to commercially use and exploit the Technology for the development of
products, subject to certain limitations. At the expiration or earlier
termination of the agreement, Dr. Eisenberg is entitled to the exclusive rights
in the Technology, and Ortec is entitled to the exclusive rights to all
improvements to the Technology developed during the license period.

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

Basis of Presentation

The Company is a development stage enterprise, and has neither realized any
operating revenue nor has any assurance of realizing any future operating
revenue. Successful future operations depend upon the successful development and
marketing of the Composite Cultured Skin to be used in skin replacement
procedures.

Initial Public Offering

On January 19, 1996, the Company completed an initial public offering
("IPO") of 1,200,000 units. Each unit consists of one share of the Company's
common stock, one Class A warrant to purchase one share of common stock at $10,
expiring July 1997 and one Class B warrant to purchase one share of common stock
at $15, expiring January 1999. The Class A and B warrants will be redeemable by
the Company at $.01 per warrant, if the market price of the Company's common
stock equals or exceeds $10 for 10 consecutive trading days during a specified
period, as defined.

The IPO raised gross proceeds of approximately $6,000,000, of which
$800,000, $537,500 and approximately $315,000 were used to pay underwriting
commissions, notes payable and deferred offering costs, respectively, thereby
providing the Company with net proceeds of approximately $4,347,500. The Company
intends to use the proceeds for continued research and development of composite
cultured skin transplants, performing human clinical trials and general
corporate purposes.

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Research and Development Costs

All research and development costs, including payments related to licensing
agreements on products under development and research consulting agreements are
expensed when incurred.

F-7
<PAGE> 35

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

2. Depreciation and Amortization

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

Office furniture and equipment and laboratory equipment are depreciated on
the straight-line basis over the estimated lives of the assets (5 years).
Leasehold improvements are amortized over the shorter of the term of the related
lease or life of the asset.

3. Patent Application Costs

Patent application costs relate primarily to the Company's U.S. patent
application and consist of legal fees and other direct fees incurred therefor.
The recoverability of the patent application costs is dependent upon, among
other matters, obtaining FDA approval for use on the underlying technology as a
medical device, and such approval is both costly and lengthy. On December 10,
1996, the U.S. Patent Office reissued the Company's composite cultured skin
patent.

4. Foreign Currency Translation

The Company conducts research and development at its laboratory in Sydney,
Australia. However, because all Australian expenditures are funded from the
United States, the Company has determined that the functional currency of its
Australian office is the U.S. dollar. Accordingly, current assets and current
liabilities are translated using the exchange rate in effect at the balance
sheet date, and income and expense accounts are translated at the average rate
in effect during the year. Unrealized gains and losses arising from the
translation of foreign currency are included in the results of operations for
all periods presented. Noncurrent assets and liabilities are translated at
historical rates, because the effect is not material to the financial
statements.

5. Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

6. Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

F-8
<PAGE> 36

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

7. Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents. Cash equivalents consist principally of
money market funds and short-term notes and bonds. The market value of the cash
equivalents approximates cost.

8. Certain Reclassifications

Certain reclassifications have been made to conform to the March 31, 1997
presentation.

9. Net Loss Per Share

Net loss per common share is based on the weighted average number of common
shares outstanding during the periods. The Company granted, on the closing date
of its initial public offering, four-year warrants to purchase an aggregate of
389,045 shares at $1.00 per share to certain shareholders who participated in
previous private placements of the Company's common stock. Such warrants have
been granted to existing stockholders who purchased their shares at prices of
$9.00 or more per share in such private placements and who had entered into
lock-up agreements agreeing not to sell or otherwise transfer their shares
without the underwriter's written consent for a period of one year after the
closing date. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, such warrants to be granted by the Company (using the treasury
stock method and the initial public offering price of $5.00 per share) have been
included in the calculation of common and common equivalent shares outstanding
as if they were outstanding for all periods presented. All other options and
warrants granted by the Company have not been included in the calculation of
common and common equivalent shares outstanding because such options and
warrants were antidilutive. Earnings per share are computed by dividing net
income by the weighted average number of common shares outstanding.

10. Impairment of Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has determined that no provision is necessary for the
impairment of long-lived assets at March 31, 1997.

11. Marketable Securities

The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), on January 1, 1994. Investments pursuant to SFAS No. 115 are classified
in three categories. Those securities classified as "trading" or "available for
sale" are reported at fair value. Debt securities classified as "held to
maturity" are reported at amortized cost. Marketable securities consist
principally of investments in United States Treasury Bills which mature in
January 1998, and are classified as "held to maturity."

12. Interim Financial Information

The financial information presented as of March 31, 1997, for the three
months ended March 31, 1996 and 1997, and for the period from inception (March
12, 1991) to March 31, 1997 and events subsequent to March 31, 1997 disclosed in
the notes to the financial statements are unaudited. In the opinion of

F-9
<PAGE> 37

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

management, this unaudited financial information contains all adjustments (which
consist of normal recurring accrual adjustments) necessary for a fair
presentation for the interim periods presented. The results for the interim
periods are not necessarily indicative of results expected for the full year.

NOTE C -- CONCENTRATION OF CREDIT RISK

The Company maintains cash and cash equivalents at two financial
institutions located in New York City. Accounts at each institution are insured
by the Securities Investors Protection Corporation up to $500,000. Uninsured
balances aggregate to approximately $6,500,000 at December 31, 1996 and
$5,000,000 at March 31, 1997. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.

NOTE D -- PATENTS

The patent is stated at cost less amortization computed by the
straight-line method principally over 14 years. Accumulated amortization related
to the patent was approximately $1,200 at December 31, 1996 and $8,500 at March
31, 1997.

There can be no assurance that such patent reissued may not be successfully
challenged in court proceedings. Nor can there be any assurance that any patent
will provide commercial benefits to the Company.

NOTE E -- CAPITAL LEASE OBLIGATIONS

During 1996, the Company entered into a three-year capital lease agreement
for the phone system at its New York City location. The lease calls for payments
to be made monthly at an effective interest rate of 15.88%.

During March 1997, the Company entered into two three-year capital lease
agreements to acquire certain lab equipment. The leases call for payments to be
made monthly at effective rates of 14.87% and 15.48%.

The future minimum lease payments and the present value of the net minimum
lease payments as of March 31, 1997 are as follows:

<TABLE>
<S> <C>
Year ending March 31,
1998............................................................. $19,014
1999............................................................. 18,363
2000............................................................. 11,482
-------
Total minimum lease payments....................................... 48,859
Less amount representing interest.................................. 9,075
-------
Present value of net minimum lease payments........................ $39,784
=======
Current portion.................................................... $13,674
Noncurrent portion................................................. 26,110
-------
$39,784
=======
</TABLE>

The Company has recorded $3,604 and $5,447 in accumulated amortization on
the property purchased under the capital lease as of December 31, 1996 and March
31, 1997, respectively.

F-10
<PAGE> 38

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

NOTE F -- LOAN PAYABLE

During 1996, the Company obtained a loan from the landlord of its new
laboratory for the construction of, and equipment for, the leased facility. The
loan is payable in monthly installments of $6,000 through July 1, 2006, with
interest payable monthly at the effective rate of 7.98%.

Minimum payments to be made under the terms of the loan for the five years
following March 31, 1997 are as follows:

<TABLE>
<S> <C>
Year ending March 31,
1998............................................................ $ 72,733
1999............................................................ 72,733
2000............................................................ 72,733
2001............................................................ 72,733
2002............................................................ 72,733
2003 and thereafter............................................. 315,177
-------
678,842
Less amount representing interest................................. 201,245
-------
Net present value of future loan payments at 7.98%................ $477,597
=======
</TABLE>

NOTE G -- EQUITY TRANSACTIONS

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

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

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

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

Pursuant to a stock purchase agreement entered into with the Director in
June 1992, 53,040 shares of Ortec were sold to the Director for a total purchase
price of $499,998. In addition, the Director was granted warrants to purchase
79,570 shares at an exercise price of $9.425 per share. The purchase price was
payable in

F-11
<PAGE> 39

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

installments and shares and warrants were issued in installments pro rata with
the payment of the purchase price. During the years ended December 31, 1993 and
1992, the Director paid $200,000 and $299,998, respectively, and was issued
21,220 and 31,820 shares, respectively. The agreement also provided that, if at
any time within two years of the agreement, the Director introduced other
persons or entities who purchased shares in the Company in a private placement,
he was entitled to receive warrants to purchase ten percent of the number of
shares purchased by such persons or entities, at an exercise price equal to the
price paid by such persons or entities. No such warrants have been issued to the
Director.

Further, in connection with the Director's purchase of the 53,040 shares,
in 1993, the Other Founders granted to the Director options to purchase from
them an aggregate of 74,000 Ortec shares, at a price of $5 per share. In 1993,
the Director has exercised such option in part, and purchased 49,000 shares from
the Other Founders at the option price of $5 per share. The remaining balance of
such options expired April 15, 1994. Since the Director provides no services to
the Company, the fair value ascribed to such options, approximately $327,000, is
not reflected as a transaction in the accompanying financial statements.

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

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

In addition, in 1993, the Company issued 600 shares to an individual as
compensation for commissions in connection with the sale of the Company's
shares. Such commissions are included in share issuance expenses. The stock
issued was valued at $10 per share.

In August 1993, the Director entered into a stock option agreement with Dr.
Eisenberg and the Other Founders, pursuant to which he received the right to
purchase an aggregate of 100,000 shares owned by such persons in various amounts
and at various times, at a purchase price of $10 per share. As of December 31,
1993, the Director has exercised options and purchased 5,000 shares under such
agreement at $10 per share. As of March 31, 1997, options expiring July 15, 1997
to purchase 27,000 shares remain outstanding under this agreement.

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

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

On January 19, 1996, the Company completed an initial public offering
("IPO") of 1,200,000 units for aggregate proceeds of $6,000,000. Each unit
consists of one share of the Company's common stock, one Class A warrant to
purchase one share of common stock at $10, expiring July 1997, and one Class B
warrant to purchase one share of common stock at $15, expiring January 1999. The
Class A and B warrants will be

F-12
<PAGE> 40

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

redeemable by the Company at $.01 per warrant, if the market price of the
Company's common stock equals or exceeds $10 for 10 consecutive trading days
during a specified period, as defined.

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

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

On January 20, 1996, the Company granted "lock-up warrants" entitling
shareholders to purchase an aggregate of 389,045 shares of the Company's common
stock at a price of $1.00 per share. All such warrants expire on January 18,
2000. At different times during 1996, seven persons exercised such warrants and
purchased 33,885 shares of common stock at the $1.00 per share exercise price.
During the three months ended March 31, 1997 approximately 4,077 warrants were
exercised. The issuance of such lock-up warrants was in consideration for such
shareholders signing lock-up agreements agreeing not to sell or transfer shares
of the Company's common stock purchased at prices of $9.00 or more per share
until January 20, 1997.

Outstanding warrants granted as of March 31, 1997 are summarized as
follows:

<TABLE>
<CAPTION>
PRICE
RANGE SHARES
----------------- -------
<S> <C> <C> <C> <C>
March 12, 1991 (inception) to December 31, 1991
The Director............................................ $ 9.425 7,360
------ -------
Balance, December 31, 1991................................ 9.425 7,360
Scientific Advisory Board............................... 9.425 4,660
Second private placement................................ 9.425 2,680
The Director............................................ 9.425 47,740
------ -------
Balance, December 31, 1992................................ 9.425 62,440
The Director............................................ 9.425 31,830
Third private placement................................. 12.00 14,400
Scientific Advisory Board............................... 9.425 2,000
------ -------
Balance, December 31, 1993................................ 9.425 - 12.00 110,670
Home Insurance Company.................................. 12.00 10,000
------ -------
Balance, December 31, 1994................................ 9.425 - 12.00 120,670
Scientific Advisory Board............................... 10.00 4,000
Expired................................................. 9.425 (2,680)
------ -------
</TABLE>

F-13
<PAGE> 41

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

<TABLE>
<CAPTION>
PRICE
RANGE SHARES
------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................................ 9.425 - 12.00 121,990
Columbia University..................................... 10.00 5,000
The Director............................................ 7.87 30,500
Fifth Private Placement................................. 6.00 - 8.00 87,061
Lock-up warrants........................................ 1.00 389,045
Exercised............................................... 1.00 (33,885)
Expired................................................. 12.00 (2,450)
------ -------
Balance, December 31, 1996................................ 1.00 - 12.00 597,261
Exercised............................................... 1.00 (4,077)
------ -------
BALANCE, MARCH 31, 1997 (UNAUDITED)....................... $ 1.00 - 12.00 593,184
====== = ===== =======
</TABLE>

NOTE H -- STOCK OPTIONS AND STOCK PURCHASE WARRANTS
In April 1996, the Board of Directors and stockholders approved the
adoption of a stock option plan (the "Plan"). The Plan provides for the grant of
options to purchase up to 350,000 shares of the Company's common stock. These
options may be granted to employees, officers of the Company, nonemployee
directors of the Company and consultants to the Company. The Plan provides for
granting of options to purchase the Company's common stock at not less than the
fair value of such shares on the date of the grant.

The following table summarizes option activity for the year ended December
31, 1996 and the three months ended, March 31, 1997 and the three months ended
March 31, 1997:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
------- ----------------
<S> <C> <C>
Granted............................................ 156,000 $ 7.08
Exercised.......................................... -- --
Forfeited, expired................................. -- --
</TABLE>

As of December 31, 1996, options outstanding for 156,000 shares were
exercisable at prices ranging from $6.00 to $8.50, and the weighted remaining
contractual life was 2.5 years. The exercise price for all stock options awarded
has been determined by the Board of Directors of the Company. All options
awarded in 1996 become exercisable on the grant date. No options were issued
during the three months ended March 31, 1997. In April 1997, the Company awarded
an employee of the Company a five-year incentive stock option to purchase up to
5,000 shares of the Company's common stock at an exercise price of $7.00.

The following table summarizes option data as of December 31, 1996:

<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AS OF REMAINING WEIGHTED AVERAGE EXERCISABLE AS OF WEIGHTED AVERAGE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ------------------ ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$6.00 to $8.50.... 156,000 2.5 years $ 7.08 156,000 $ 7.08
</TABLE>

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123
established financial accounting and reporting standards for stock-based
employee compensation plans. The financial accounting standards of SFAS No. 123
permit companies to either continue accounting for stock-based compensation
under existing rules or adopt SFAS No. 123 and begin reflecting the fair value
of stock options and other forms of stock-

F-14
<PAGE> 42

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

based compensation in the results of operations as additional expense. The
disclosure requirements of SFAS No. 123 require companies which elect not to
record the fair value in the statement of operations to provide pro forma
disclosures of net income and earnings per share in the notes to the financial
statements as if the fair value of stock-based compensation has been recorded.

The Company will continue to follow Accounting Principles Board Opinion No.
25 and its related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized in the
statement of operations for its employee stock option plan.

The Company utilized the Black-Scholes option-pricing model to quantify the
pro forma effects on net income and earnings per common share of the fair value
of the options granted during 1996. The following assumptions were made in
estimating fair value.

<TABLE>
<S> <C>
Dividend yield.................................................... 0.00%
Risk-free interest rate........................................... 5.64%
Expected option life
Directors and officers.......................................... 2.5 years
Others.......................................................... 2.5 years
Expected volatility............................................... 27.62%
</TABLE>

Had compensation cost been determined under SFAS No. 123 for the year ended
December 31, 1996, net loss and loss per share would have been increased as
follows:

<TABLE>
<S> <C>
Net earnings (loss)
As reported................................................... $(2,649,768)
Pro forma for stock options................................... (2,831,413)
Pro forma earnings (loss) per share
As reported................................................... $ (.60)
Pro forma for stock options................................... (.64)
</TABLE>

During the initial phase-in period of SFAS No. 123, such compensation
expense may not be representative of the future effect of applying this
statement.

NOTE I -- COMMITMENTS AND CONTINGENCIES

Agreement With Dr. Eisenberg

Pursuant to an amended agreement, the Company has engaged the services of
Dr. Eisenberg as a consultant through August 31, 2005. The consulting agreement
may be renewed for an additional two years unless terminated by either party
prior to such renewal period. Under the agreement, Dr. Eisenberg is obligated to
devote twenty hours per week to Company business and is entitled to an annual
compensation for such services with annual increases, as defined, of not less
than $3,000. In addition, Dr. Eisenberg is paid $58 per hour for services in
excess of twenty hours per week. The agreement also provides for a bonus in the
event the Company files for the registration of any patent. The bonus, which
shall be determined by the Board of Directors of the Company, shall not be less
than $30,000 per patent registration, but may not aggregate more than $60,000
during any twelve-month period. To date, no bonuses have been earned by Dr.
Eisenberg. For each of the years ended December 31, 1996 and 1995, Dr. Eisenberg
earned approximately $73,000 for consulting services and approximately $381,000
for the period from inception to December 31, 1996, which is included in
research and development expense. For the three months ended March 31, 1997 and
1996,

F-15
<PAGE> 43

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

Dr. Eisenberg earned approximately $18,250 and $12,200, respectively, for
consulting services and approximately $399,000 for the period from inception to
March 31, 1997, which is included in research and development expense. Included
in accrued professional fees at March 31, 1997 and December 31, 1996 are $45,328
representing unpaid consulting fees to Dr. Eisenberg.

Manufacturing Agreements

In October 1991, the Company entered into an agreement with Cornell
University Medical College ("Cornell"), a medical institution in New York City,
for Cornell to produce and supply the Company, on an exclusive basis and using
Dr. Eisenberg's technology, all of the cultured skin equivalent necessary for
the Company's use in human clinical tests in the United States. For each of the
years ended December 31, 1996 and 1995, fees earned by Cornell amounted to
approximately $258,000 and approximately $1,145,000 for the period from
inception to December 31, 1996. The Cornell arrangement was terminated by
December 31, 1996.

The cultured skin equivalent to be used in human clinical tests in
Australia is produced in the Company's laboratory in Sydney, Australia.

The Company recently entered into an agreement with the New Jersey Center
for Biomaterials and Medical Devices (the "New Jersey Center"), whereby the
Company and the New Jersey Center will collaborate on research focusing on the
development of collagen-based biomaterials for soft tissue repair, specifically
targeting the development of a second generation collagen matrix to be used for
the production of the Company's Composite Cultured Skin. The New Jersey Center
is a cooperative research initiative sponsored by the University of Medicine and
Dentistry of New Jersey, Rutgers University and the New Jersey Institute of
Technology, and receives financial support from the New Jersey Commission of
Science and Technology. The Company has agreed to contribute $40,000 of the
$100,000 cost of such research. The Company will pay such $40,000 in quarterly
payments of $10,000 each. The $10,000 payment for the first quarter has already
been paid by the Company.

FDA Consultant

The Company retains Oxford Research International Corp. ("Oxford") to
assist it in the FDA approval process, including the preparation of applications
and related documentation and monitoring of all phases of the clinical trials.
The agreement has a term of one year and is automatically renewable for
additional one-year periods subject to termination at will. Fees payable to
Oxford are based on Oxford's per diem charge. For the year ended December 31,
1996, the Company has paid Oxford $61,000. For the three months ended March 31,
1997 and 1996, the Company has paid Oxford approximately $20,900 and $7,300,
respectively, and $82,000 for the period from inception to March 31, 1997.

Occupancy Arrangements

In May 1992, the Company entered into a noncancellable operating lease for
its research laboratory in Sydney, Australia with Dr. Eisenberg's father. The
lease may be renewed for an additional three years after May 1997 at the then
prevailing market rent for similar properties. Rental expense is recognized on a
straight-line basis, rather than in accordance with base payment schedules for
purposes of recognizing a constant annual rental expense. In addition, the lease
provides for the review of the rental commitment with provision to increase the
rent by a percentage fixed by the agreement. Also, the Company is liable for
operating expenses as defined. The future minimum rental commitments under this
lease are as follows:

F-16
<PAGE> 44

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

<TABLE>
<S> <C>
Year ending December 31, 1997.............................. $ 12,667
=======
</TABLE>

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

In March 1996, the Company entered into a five-year lease with Columbia
University for the Company's new laboratory and offices in Columbia's new
Audubon Biomedical Science and Technology Park in New York City. Construction of
the new laboratory and office facility was completed in July 1996 and became
fully operational in November 1996. In addition, Columbia has agreed to provide
the Company with a grant of $400,000 and a ten-year self-amortizing loan with
interest at the rate charged by Columbia's bank for up to an additional
$600,000, to build and equip the Company's laboratory. Annual aggregate lease
payments will approximate $130,000. The Company also granted Columbia a warrant
expiring March 2001 to purchase 5,000 shares of common stock at an exercise
price of $10 per share. The Company will use its new laboratory to produce its
Composite Cultured Skin for use in the remaining FDA-approved human clinical
trials and for further research to develop the Company's proprietary technology
for treatment of other wounds. The Company expects at a later date to further
equip its new laboratory for use as a pilot production facility for its
Composite Cultured Skin.

The Company conducts a major portion of its operations at a leased facility
in New York, New York. The lease term is five years, expiring in June 2001. The
minimum rental payments due over the term of the lease at March 31, 1997 are as
follows:

<TABLE>
<S> <C>
Year ending March 31,
1998............................................................ $ 129,713
1999............................................................ 129,713
2000............................................................ 134,877
2001............................................................ 141,305
2002............................................................ 35,752
--------
$ 571,360
========
</TABLE>

Total rent expense under the lease for the year ended December 31, 1996,
and the three months ended March 31, 1997 amounted to approximately $70,300 and
$32,400, respectively, and $102,700 for the period from inception to March 31,
1997.

Contingencies

A competitor has advised the Company of a potential patent infringement on
at least one of its United States patents. Management believes, based on the
advice of patent counsel, the Company has not infringed such patents.

Approximately two years ago, the University of Minnesota advised the
Company that it has a claim against the Company for $82,970 allegedly owed
pursuant to a contract requiring the University of Minnesota to perform research
for cryopreservation of the Company's product. The Company has denied any
liability and, accordingly, no amounts relating to this matter have been
provided for by the Company.

Management does not believe that the resolution of the above matters will
have a material adverse effect on the financial condition or results of
operations of the Company.

F-17
<PAGE> 45

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

Government Regulation

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

NOTE J -- RELATED PARTY TRANSACTIONS

The "Other Founders" were paid fees for services rendered of approximately
$378,000 and $207,000 for the years ended December 31, 1996 and 1995,
respectively (in the aggregate, approximately $1,358,000 for the period from
inception to December 31, 1996). In addition, $140,000 was paid to a director as
cash compensation for services as placement agent in connection with the
November 1996 private placement. Also, the director received 30,500 warrants
(see Note G).

Also, the Company paid approximately $25,000, $15,000, $9,300 and $7,200
for the years ended December 31, 1996 and 1995, and the three months ended March
31, 1997 and 1996, respectively, as fees for accounting services, to a
stockholder (approximately $65,000 and $74,300 for the period from inception to
December 31, 1996 and March 31, 1997, respectively). Also during the year ended
December 31, 1996, the Company repaid loans of approximately $247,000 from the
net proceeds of the "IPO" to officers.

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

NOTE K -- INCOME TAXES

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

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $2,932,000 for income tax purposes expiring through 2011. Due to
the merger of Skin Group with and into Ortec in July 1992, the net operating
losses and other built-in deductions existing at that time are subject to annual
limitations pursuant to Internal Revenue Code Section 382. The Company's ability
to utilize net operating losses and other built-in deductions generated after
that date may be limited in the future due to additional issuances of the
Company's common stock or other changes in control, as defined in the Internal
Revenue Code and related regulations.

For financial statement purposes, a valuation allowance of approximately
$3,623,000 and $2,473,000 at December 31, 1996 and 1995, respectively, has been
recognized to offset entirely the deferred tax assets related to the Company's
operating loss carryforwards and other temporary differences related to the
deferral of start-up expenses for tax purposes, as the realization of such
deferred tax assets is uncertain.

F-18
<PAGE> 46

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net operating loss carryforwards............ $ 955,000 $ 1,378,000 $ 1,483,000
Deferral of start-up costs.................. 1,518,000 2,245,000 2,554,000
---------- ---------- ----------
2,473,000 3,623,000 4,037,000
Valuation allowance......................... (2,473,000) (3,623,000) (4,037,000)
---------- ---------- ----------
Net deferred tax asset...................... $ -- $ -- $ --
========== ========== ==========
</TABLE>

NOTE L -- FOREIGN OPERATIONS

The Company has a laboratory in Sydney, Australia. Summary financial
information for assets, liabilities and expenses are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
--------------------- -------------------
1995 1996 1996 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Assets.................................... $ 95,000 $ 53,000 $10,000 $11,500
Liabilities............................... 22,000 3,000 300 9,000
Expenses.................................. 115,000 180,000 33,000 58,000
</TABLE>

Expenses are net of foreign exchange losses of approximately $2,050,
$2,590, $ 0 and $1,800 for the years ended December 31, 1996 and 1995, and the
three months ended March 31, 1997 and 1996, respectively.

NOTE M -- FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 1996, the Company recorded certain equity
transactions that resulted in consulting ($125,000) and interest ($27,000)
expenses being recorded in the amount of $152,000. These adjustments, or $.03
per share, related to previously issued quarterly data for the second quarter of
1996, which the Company has restated on Form 10-Q/A.

NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Cash and Cash Equivalents

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

Marketable Securities

Marketable securities consist principally of investments in United States
Treasury Bills which mature in January 1998. The carrying value of these
securities approximates fair value.

F-19
<PAGE> 47

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997, FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997, AND FOR THE PERIOD FROM MARCH 12, 1991 (INCEPTION)
TO MARCH 31, 1997 IS UNAUDITED)

Loan Payable

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

NOTE O -- NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. Basic earnings per share
exclude dilution and are computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted earnings per share reflect the weighted-average common shares
outstanding plus the potential dilutive effect of securities or contracts which
are convertible to common shares, such as options, warrants, and convertible
preferred stock. The effect of adopting this new standard has not been
determined.

F-20
<PAGE> 48

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

------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
I,2 ------------------------------------------------------

NO DEALER, SALESPERSON OR ANY
OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE
RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO SELL OR
A SOLICITATION OF
ORTEC
AN OFFER TO BUY ANY SECURITY OTHER
THAN THE COMMON
INTERNATIONAL, INC.
STOCK OFFERED BY THIS PROSPECTUS, OR
AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY, BY
ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE
INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.

- --------------------------------------------------------------
1,323,856 SHARES
OF COMMON STOCK

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary..................... 2
Risk Factors........................... 5
Use of Proceeds........................ 9
Capitalization......................... 9
Selected Financial Data................ 10
Price Range of Common Stock and
</TABLE>

-----------------------------------------------------------------------
<TABLE>
<S> <C>
Dividend Policy...................... 11
Plan of Operation...................... 12
</TABLE>

PROSPECTUS
<TABLE>
<S> <C>
Business............................... 12
</TABLE>

-----------------------------------------------------------------------
<TABLE>
<S> <C>
Management............................. 20
Principal and Selling Shareholders..... 25
Executive Compensation................. 27
Certain Relationships and Related
Transactions......................... 28
Description of Securities.............. 29
Plan of Distribution................... 30
Shares Eligible for Future Sale........ 30
Legal Matters.......................... 31
Experts................................ 31
Forward Looking Information May Prove
Inaccurate........................... 31
Available Information.................. 32
Glossary............................... 33
Index to Financial Statements.......... F-1
</TABLE>

July 15, 1997