**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-QSB/A**





(Mark
      One)





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





For
      the
      quarterly period ended March 31, 2007





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF
                1934





For
      the
      transition period from ___________________ to ____________________





Commission
      file number 0-19724





PROTEIN
      POLYMER TECHNOLOGIES, INC.


(Exact
      name of small business issuer as specified in its charter)





Delaware
            33-0311631(State
                or other jurisdiction of
            (IRS
                Employer Identification No.)incorporation
                or organization)





10655
      Sorrento Valley Road, San Diego, CA 92121


(Address
      of principal executive offices)





(858)
      558-6064


(Issuer's
      telephone number)





(former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o
      No x





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: As of May 4, 2007, 67,809,204 shares of
      common stock were outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes o No x


EXPLANATORY
        NOTE
  The
        purpose of this Form 10-QSB/A is to amend the Quarterly Report on Form 10-QSB
        of
        Protein Polymer Technologies, Inc. (the “Company”) for its quarterly period
        ended March 31, 2007, as filed with the Securities and Exchange Commission
        on
        May 15, 2007 (the “Form 10-QSB”) and amended on August 20 ,
        2007 to
        reflect errors in the adjusting entries made in the accounting for certain
        business activities in connection with the conversion of our accounting
        information system during the first quarter of 2007 and to record a cash
        settlement with a certain creditor.  The effects of this adjustment are
        disclosed in footnote 11 to the financial statements. Additionally, related
        adjustments have been made in the Management Discussion and Analysis section,
        and Item 3, Controls and Procedures, has been amended. Except as otherwise
        expressly stated for the items amended in this Form 10-QSB/A, this Amendment
        continues to speak as of the date of the filing of the Quarterly Report on
        Form
        10-QSB, and we have not updated the disclosure contained herein to reflect
        events that have occurred since the date of that filing. This is necessary
        to
        preserve the nature and character of the information set forth in the items
        of
        the Quarterly Report as originally filed. Accordingly, this Amendment should
        be
        read in conjunction with the Quarterly Report on Form 10-QSB.










PROTEIN
      POLYMER TECHNOLOGIES, INC.





FORM
      10-QSB/A





INDEX




Page
                No.PART
                I. FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)Balance
                SheetsMarch
                31, 2007 (Restated) and December 31, 2006
            
            3Statements
                of OperationsFor
                three months ended March 31, 2007 (Restated) and 2006
            
            4Statements
                of Cash FlowsFor
                the three months ended March 31, 2007 (Restated) and 2006.
            
            5Notes
                to Financial Statements
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            12Item
                3. Controls and Procedures
            
            18PART
                II. OTHER INFORMATIONItem
                6. Exhibits
            
            19Signatures
            
            21





2





PART
      I.
      FINANCIAL INFORMATION




Item
      1.
      Financial Statements


Protein
                  Polymer Technologies, Inc.Balance
                  Sheets(unaudited)
  March
                  31,
              
              December
                  31,2007
              
              2006Assets
              
              (Restated)Current
                  assets:Cash
                  and cash equivalents
              
              $
              87,812
              
              $
              73,495Contract
                  receivable
              
              
              20,818
              
              
              21,068Current
                  portion of rent receivable
              
              
              24,527
              
              
              39,527Prepaid
                  expenses and other current assets
              
              
              76,378
              
              
              49,940Total
                  current assets
              
              
              209,535
              
              
              184,030Deposits
              
              
              30,479
              
              
              29,679Equipment
                  and leasehold improvements, net
              
              
              203,171
              
              
              228,475Investment,
                  at cost
              
              
              520,000
              
              
              520,000Total
                  assets
              
              $
              963,185
              
              $
              962,184Liabilities
                  and stockholders' (deficit) equityCurrent
                  liabilities:Accounts
                  payable
              
              $
              415,478
              
              
              1,098,820Accrued
                  liabilities
              
              
              461,718
              
              
              422,730Secured
                  note payable - related party
              
              
              4,683,416
              
              
              3,461,516Current
                  maturities of notes payable
              
              
              161,697
              
              
              146,697Total
                  current liabilities
              
              
              5,722,309
              
              
              5,129,763Notes
                  payable, net of current maturities
              
              
              357,374
              
              
              372,374Deferred
                  rent
              
              
              13,269
              
              
              13,269Total
                  liabilities
              
              
              6,092,952
              
              
              5,515,406Commitments
                  and contingenciesStockholders'
                  deficit:Convertible
                  preferred stock, $0.01 par value; 5,000,000 shares authorized;
                  65,645
                  shares issued and outstanding at March 31, 2007 and December 31,
                  2006,
                  respectively - liquidation preference of $6,564,500 at March 31,
                  2006 and
                  December 31, 2005, respectively
              
              
              6,019,917
              
              
              6,019,917Common
                  stock, $0.01 par value; 120,000,000 shares authorized; 67,809,204
                  and
                  67,409,204 shares issued and outstanding at March 31, 2007 and
                  December
                  31, 2006, respectively
              
              
              678,092
              
              
              674,092Additional
                  paid-in capital
              
              
              55,906,894
              
              
              55,760,511Accumulated
                  deficit
              
              
              (67,734,670
              )
              
              (67,007,742
              )Total
                  stockholders' deficit
              
              
              (5,129,767
              )
              
              (4,553,222
              )Total
                  liabilities and stockholders' deficit
              
              $
              963,185
              
              $
              962,184


See
        accompanying notes.




3


Protein
                  Polymer Technologies, Inc.Statements
                  of Operations(unaudited)
  Three
                  months endedMarch
                  31,2007
              
              2006Revenues:
              
              (Restated)Contract
                  and licensing revenue
              
              $
              136,088
              
              $
              220,919Product
                  and other income
              
              
              —
              
              
              18,558Total
                  revenues
              
              
              136,088
              
              
              239,477Operating
                  expenses:Cost
                  of sales
              
              
              —
              
              
              803Research
                  and development
              
              
              628,131
              
              
              1,036,440Selling,
                  general and administrative
              
              
              319,703
              
              
              1,887,311Total
                  expenses
              
              
              964,724
              
              
              2,924,554Net
                  loss from operations
              
              
              (828,636
              )
              
              (2,685,077
              )Other
                  income (expense):Interest
                  income
              
              
              —
              
              
              2,524Interest
                  expense
              
              
              (94,292
              )
              
              (10,900
              )Gain
                  on derivative liability
              
              
              10,408
              
              
              —Gain
                  onsettlement
              
              
              193,917
              
              
              —Total
                  other income (expense)
              
              
              (110,033
              )
              
              (8,376
              )Net
                  loss
              
              
              (718,603
              )
              
              (2,693,453
              )Undeclared,
                  imputed and/or paid dividends on preferred stock
              
              
              76,784
              
              
              157,409Net
                  loss applicable to common shareholders
              
              $
              (795,387
              )
              $
              (2,850,862
              )Basic
                  and diluted net loss per common share
              
              $
              (0.01
              )
              $
              (0.04
              )Shares
                  used in computing basic and diluted net loss per common
                  share
              
              
              67,520,315
              
              
              67,311,606


See
        accompanying notes.
  4


Protein
                  Polymer Technologies, Inc.Statements
                  of Cash Flows(unaudited)
  Three
                  months endedMarch
                  31,2007
              
              2006**Operating
                  activities**
              
              (Restated)Net
                  loss
              
              $
              (718,603
              )
              $
              (2,693,453
              )**Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:**Depreciation
                  and amortization
              
              
              25,304
              
              
              40,344Share
                  based compensation expense
              
              
              80,991
              
              
              1,038,395Gain
                  on warrant derivative liability
              
              
              10,408
              
              
              –**Changes
                  in operating assets and liabilities:**Deposits
              
              
              (800
              )
              
              (800
              )Prepaid
                  expenses
              
              
              (26,438
              )
              
              2,053Rent
                  receivable
              
              
              15,000
              
              
              35,000Contracts
                  receivable
              
              
              250
              
              
              (107,127
              )Accounts
                  payable
              
              
              (683,342
              )
              
              561,108Accrued
                  expenses
              
              
              89,647
              
              
              (5,807
              )Deferred
                  rent
              
              
              –
              
              
              3,307**Net
                  cash used in operating activities**
              
              
              (1,207,583
              )
              
              (1,126,980
              )**Investing
                  activities**Purchase
                  of equipment and improvements
              
              
              –
              
              
              (35,641
              )Issuance
                  of notes receivable
              
              
              –
              
              
              (3,518
              )**Net
                  cash used in investing activities**
              
              
              –
              
              
              (39,159
              )**Financing
                  activities**Net
                  proceeds from exercise of options and warrantsand
                  sale of common stock
              
              
              –
              
              
              3,177Proceeds
                  from issuance of debt - related party
              
              
              1,221,900
              
              
              –**Net
                  cash provided by financing activities**
              
              
              1,221,900
              
              
              3,177**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              14,317
              
              
              (1,162,962
              )Cash
                  and cash equivalents at beginning of the period
              
              
              73,495
              
              
              1,211,748**Cash
                  and cash equivalents at end of the period**
              
              $
              87,812
              
              $
              48,786**Supplemental
                  disclosures of cash flow information**Interest
                  paid
              
              $
              2,398
              
              $
              2,090**Non
                  cash investing and financing activity**Imputed
                  dividend on extension of warrants
              
              $
              8,325
              
              $
              88,950Issuance
                  of common stock in settlement of indemnification
                  obligation
              
              $
              61,067
              
              $
              –
  See
                  accompanying notes.




5





**PROTEIN
      POLYMER TECHNOLOGIES, INC.**


Notes
      to
      Unaudited Financial Statements





**1.**
            **Basis
                of Presentation and Significant Accounting
                Policies**




**Interim
      Financial Statements**





The
      financial statements of Protein Polymer Technologies, Inc. (the "Company")
      for
      the three months ended March 31, 2007 are unaudited. These financial statements
      reflect all adjustments of a normal recurring nature which are, in the opinion
      of management, necessary to present fairly, in all material respects, the
      financial position, results of operations and cash flows for the interim period
      presented. The balance sheet as of December 31, 2006 was derived from the
      Company's audited financial statements. The results of operations for the three
      months ended March 31, 2007 are not necessarily indicative of the results to
      be
      expected for the year ending December 31, 2007. These financial statements
      and
      the notes thereto should be read in conjunction with the audited financial
      statements included in our Annual Report on Form 10-KSB for the year ended
      December 31, 2006, filed with the Securities and Exchange
      Commission.




As
        stated
        in Note 11, to the unaudited financial statements, the Company has restated
        its
        March 31, 2007 financial statements to account for the following
        transactions:
 
 ·
              To
                  correct an error in the adjusting entries made during the conversion
                  of
                  its basic accounting systems during the first quarter of 2007
                  and·
              To
                  accrue a gain on a settlement with a creditor
 
 The
        net
        effect of these adjustments on the previously issued March 31, 2007 financial
        statements was as follows:
 
 ·
              A
                  decrease in the net loss for the three months ended March 31, 2007
                  of
                  $362,681 from ($1,081,284) to a net loss of ($718,603);
  ·
              A
                  decrease in the accumulated deficit of $362,681 from ($68,097,351)
                  to
                  ($67,734,670) at March 31, 2007;
 
 ·
              A
                  decrease in accounts payable of $362,681 from $778,159 to $415,478
                  at
                  March 31, 2007.





**Going
      Concern and Liquidity**





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. For the three months ended March 31, 2007,
      the
      Company incurred a net loss of approximately $719,000 and had a working capital
      deficit of approximately $5,513,000 at March 31, 2007. Our cash and cash
      equivalents of approximately $88,000 in combination with anticipated additional
      contract and license payments are insufficient to meet our anticipated capital
      requirements.





Prior
      to
      the commercialization of its products, substantial additional capital resources
      will be required to fund continuing operations related to the Company’s
      research, development, manufacturing, clinical testing, and business development
      activities. The Company believes there may be a number of alternatives available
      to meet the continuing capital requirements of its operations, such as
      collaborative agreements and public or private financings. Further, the Company
      is currently in discussions with a potential financing source and collaborative
      partners and funding in the form of equity investments, debt instruments,
      license fees, milestone payments or research and development payments could
      be
      generated. There can be no assurance that any of these potential sources of
      funds will be realized in the time frames needed for continuing operations
      or on
      terms favorable to the Company, if at all. If adequate funds in the future
      are
      not available, the Company will be required to significantly curtail its
      operating plans and may have to sell or license out significant portions of
      the
      Company’s technology or potential products, or obtain a secured private
      financing or possibly cease operations. These factors raise substantial doubt
      about the Company’s ability to continue as a going concern. The accompanying
      financial statements do not include any adjustments that might be necessary
      if
      the Company is unable to continue as a going concern


**Use
        of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements, and the amount of revenue and expense reported during
      the period. Actual results could differ from those estimates.





**Net
      Loss per Common Share**





Basic
      earnings per share is calculated using the weighted-average number of
      outstanding common shares during the period. Diluted earnings per share is
      calculated using the weighted-average number of outstanding common shares and
      dilutive common equivalent shares outstanding during the period, using either
      the as-converted method for convertible notes and convertible preferred stock
      or
      the treasury stock method for options and warrants.




Excluded
      from diluted loss per common share as of March 31, 2007 and 2006 were 26,341,157
      and 19,810,678 shares, respectively, issuable upon conversion of convertible
      preferred stock, and options and warrants to purchase 29,098,074 and 28,968,076
      shares of common stock, respectively, because the effect would be
      anti-dilutive.  For purposes of this calculation, net loss in 2006 and 2005
      has been adjusted for imputed, accumulated and/or paid dividends on the
      preferred stock.




6





**Reclassification**





Certain
      account reclassifications have been made to the financial statements of the
      prior year in order to conform to classifications used in the current year.




**Recently** I **ssued
      Accounting Pronouncements**





In
      February 2006, the Financial Accounting Standards Board (“FASB”) released
      Statement of Financial Accounting Standard (“SFAS”) No.  155, *Accounting
      for Certain Hybrid Financial Instruments,* ("SFAS No. 155"). SFAS No. 155 is an amendment of SFAS No.  133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and
      SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* .
      SFAS No. 155 establishes, among other items, the accounting for certain
      derivative instruments embedded within other types of financial instruments;
      and, eliminates a restriction on the passive derivative instruments that a
      qualifying special-purpose entity may hold. The adoption of SFAS No. 155
      beginning January 1, 2007 did not have any impact on the Company's
      financial position, results of operations or cash flows.





In
      March 2006, the FASB released SFAS No. 156, *Accounting
      for Servicing of Financial Assets, an amendment of SFAS Statement
      No. 140,* ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require
      that all separately recognized servicing assets and liabilities in accordance
      with SFAS No. 140 be initially measured at fair value, if practicable.
      Furthermore, this standard permits, but does not require, fair value measurement
      for separately recognized servicing assets and liabilities in subsequent
      reporting periods. SFAS No. 156 was effective for the Company beginning
      January 1, 2007. The adoption of this standard did not have any impact on
      the Company's financial position, results of operations or cash flows.





In
      June
      2006, the FASB issued Interpretation No. 48, *"Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109,"* (FIN
      48). FIN 48 clarifies the accounting for uncertainty in tax positions and
      requires that a Company recognize in its financial statements the impact of
      a
      tax position, if that position is more likely than not of being sustained on
      audit, based on the technical merits of the position. The provisions of FIN
      48
      are effective for fiscal years beginning after December 15, 2006. The adoption
      of this standard, effective January 1, 2007, did not have any impact on the
      Company's financial position, results of operation or cash flows.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“ SFAS No.
      157”). FAS No.
      157
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. This Statement focuses on
      creating consistency and comparability in fair value measurements. SFAS No.
      157
      is effective for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years.  We are currently evaluating the
      impact of adopting SFAS 157 on our financial statements.





In
      February 2007, the FASB issued SFAS No. 159 *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115* (“SFAS
      No. 159”), which permits entities to choose to measure many financial
      instruments and certain other items at fair value. The fair value option
      established by this Statement permits all entities to choose to measure eligible
      items at fair value at specified election dates. A business entity shall report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings at each subsequent reporting date. Adoption is required
      for
      fiscal years beginning after November 15, 2007. Early adoption is permitted
      as of the beginning of a fiscal year that begins on or before November 15,
      2007, provided the entity also elects to apply the provisions of SFAS Statement
      No. 159.  The Company is currently evaluating the impact of adopting
      SFAS No. 159 on our financial statements.




**2.**
            **Technology
                License Agreement**




In
      March
      2007, the Company determined to discontinue its efforts to further develop
      and
      commercialize products licensed from Surgica Corporation (‘Surgica”) and the
      Company received notification from Surgica that Surgica was terminating the
      License Agreement due to alleged breaches of the agreement by the Company.
      Accordingly, the Company recorded an impairment charge of $1,046,503 at December
      31, 2006 to reduce the carrying value of the License Agreement to
      $0.




7




**3.**
            **Accrued
                Liabilities**




Accrued
      liabilities consist of the following:




**March
                31,**
              **2006**
            
            **December
                31,**
              **2006**Payroll
                and employee benefits
            
            $
            99,000
            
            $
            94,000Accounting
                and professional fees
            
            
            25,000
            
            
            25,000Accrued
                interest
            
            
            238,000
            
            
            147,000Property
                tax
            
            
            26,000
            
            
            21,000Insurance
                premium financing
            
            
            48,000
            
            
            39,000Indemnification
                obligation
            
            
            -
            
            
            61,000Warrant
                derivative liability
            
            
            26,000
            
            
            36,000$
            462,000
            
            $
            423,000





**4.**
            **Secured
                Notes Payable, Related
                Party**




On
      April
      13, 2006, an accredited investor loaned $1,000,000 (the “Loan”) to the Company
      ($500,000 in cash and an additional $500,000 deposited with an escrow agent
      as a
      line of credit) represented by a note (the “Note”) issued by the Company to the
      investor in the principal amount of $1,000,000 (the “Principal”). The Note was
      originally due on July 7, 2006 (the “Maturity Date”) and bears annual interest
      at the rate of 8% payable on the Maturity Date. It is secured, in accordance
      with the terms of a security agreement (the “Security Agreement”), by a
      continuing security interest in and a general lien upon (i) 1,000,000 shares
      of
      Spine Wave, Inc. common stock owned by the Company; (ii) a warrant to purchase
      1,000,000 shares of Spine Wave, Inc. common stock owned by the Company which
      has
      since been exercised; and (iii) all U.S. patents owned by the Company. The
      Note
      and the Security Agreement are both dated April 13, 2006. As consideration
      for
      the Loan the Company granted a warrant to the investor to purchase an aggregate
      of 500,000 shares of the Company’s common stock at an exercise price of $0.30
      per share. The investor’s counsel acts as the escrow agent and now serves as our
      outside general counsel.





The
      Note
      has been amended five times so that Principal is now $4.8 Million and the
      Maturity Date is now August 10, 2007. The outstanding indebtedness subject
      to
      the Note and Security Agreement was $4,683,000 and accrued interest payable
      was
      $196,000 at March 31, 2007.





Pursuant
      to the terms of the Security Agreement, the Company entered into a patent
      security agreement, an escrow agreement, patent assignment, and a registration
      rights agreement, each dated as of April 13, 2006. According to the terms of
      the
      Security Agreement, the Company entered into the Escrow Agreement with an escrow
      agent for the investor. The Escrow Agreement provides for the disbursement
      of
      the funds held in escrow for application to Company expenses at the sole
      discretion of the investor’s designee. The Escrow Agreement terminates upon the
      event that the amount borrowed is paid in full and no event of default has
      occurred.





**5.**
            **Notes
                Payable**




On
      December 19, 2005, in connection with the Surgica License Agreement, the Company
      assumed several notes payable agreements. The notes bear interest at rates
      ranging from 6% to 10%, and mature at various dates through January 2009. As
      of
      March 31, 2007 the current and long term note balances were $162,000 and
      $357,000, respectively.




8





Based
      on
      the termination of the Surgica License Agreement in March 2007 the Company
      believes that it will be relieved of its liability for the assumed notes
      payable. However, until a final settlement agreement is reached between
      the Company and Surgica with respect to the disposition of the notes, the
      Company will continue to carry the notes on its balance sheet.




**6.**
            **Issuance
                of Common Stock**





During
      the quarter ended March 31, 2007 the Company issued 400,000 shares of common
      stock in connection with the settlement of an indemnification obligation
      agreement accrued by the Company at December 31, 2006.





**7.**
            **Stock
                Options**




On
      January 1, 2006 the Company adopted SFAS No.123 (Revised 2004), "Share Based
      Payment," ("SFAS 123R"), using the modified prospective method. In accordance
      with SFAS No. 123R, the Company measures the cost of employee services received
      in exchange for an award of equity instruments based on the grant-date fair
      value of the award. That cost is recognized over the period during which an
      employee is required to provide service in exchange for the award - the
      requisite service period. The Company determines the grant-date fair value
      of
      employee share options using the Black-Scholes option-pricing
      model.


Under
        the
        modified prospective approach, SFAS No. 123R applies to new awards and to
        awards
        that were outstanding on January 1, 2006 that are subsequently modified,
        repurchased or cancelled. Under the modified prospective approach, compensation
        cost recognized for the first quarter of fiscal 2006 includes compensation
        cost
        for all share-based payments granted prior to, but not yet vested on, January
        1,
        2006, based on the grant-date fair value estimated in accordance with the
        pro
        forma provisions of SFAS No. 123R, and compensation cost for all share-based
        payments granted subsequent to January 1, 2006, based on the grant-date fair
        value estimated in accordance with the provisions of SFAS No. 123R. Prior
        periods were not restated to reflect the impact of adopting the new standard.
        During the three month periods ended March 31, 2007 and 2006, the Company
        recorded $81,000 and $1,038,000, respectively in non-cash charges for the
        implementation of SFAS No. 123R. As of March 31, 2007, there was approximately
        $113,000 of total unrecognized compensation costs related to unvested
        options.
  The
        Company did not grant options during the 1 st quarter
        of 2007. The fair value of stock options granted in 2006 were estimated using
        the Black-Scholes model. Expected volatility is based on the historical
        volatilities of the Company's common stock. The expected life of employee
        stock
        options is determined using historical data of employee exercises and represents
        the period of time that stock options are expected to be outstanding. The
        risk
        free interest rate is based on U.S. Treasury constant maturity for the expected
        life of the stock option. The following assumptions were used in the
        Black-Scholes model:


9




**2006**Expected
                volatility
            
            
            90
            %Weighted-average
                volatility
            
            
            90
            %Expected
                dividends
            
            $
            0.00Expected
                term (in years)
            
            
            3.6Risk-free
                interest rate
            
            
            5.1
            %





Stock
      option activity for the three months ended March 31, 2007 is as follows:





Options
              Outstanding
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted
                Average Remaining
              Contractual
                Term (Years)
            
            Aggregate
              Intrinsic
                ValueOutstanding
                at December 31, 2006
            
            
            12,454,582
            
            $
            0.66
            
            
            
            
            $
            —Issued
            
            
            —
            
            
            —
            
            
            
            
            
            —Cancelled
            
            
            (25,000
            )
            
            (3.00
            )
            
            
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            
            
            
            —Outstanding
                at March 31, 2007
            
            
            12,429,582
            
            $
            0.66
            
            
            6.3
            
            
            —Exercisable
                at March 31, 2007
            
            
            12,151,782
            
            $
            0.66
            
            
            6.3
            
            $
            —




**8.**
            **Warrants
                to Purchase Common Stock**





Prior
      to
      their expiration date of January 31, 2007, the Board of Directors extended
      the
      expiration date of warrants to acquire 855,303 shares of the Company’s common
      stock from January 31, 2007 to January 31, 2008. The Company recorded an imputed
      dividend of approximately $8,000 during the quarter ended March 31, 2007 to
      reflect additional benefit created for the preferred stockholders in
      connection with the extension.





No
      warrants were exercised during the three months ended March 31,
      2007.




A
      summary
      of warrant activity for the three months ended March 31, 2007 is as
      follows:




Number
                of
              Warrants
              Outstanding
                and
              Exercisable
            
            Weighted-
              Average
              Exercise
              PriceOutstanding,
                December 31, 2006
            
            
            17,178,494
            
            $
            0.55Granted
            
            
            —
            
            $
            —Exercised
            
            
            —
            
            $
            —Expired
            
            
            (510,000
            )
            $
            0.93Outstanding,
                March 31, 2007
            
            
            16,668,494
            
            $
            0.52




10




At
      March
      31, 2007, the weighted-average remaining contractual life of the warrants was
      approximately 22 months.





**9.**
            **Warrant
                Derivative Liability**





In
      accordance with EITF 00-19, warrants classified as derivative liabilities
      are adjusted to estimated fair market value each reporting period with the
      corresponding non-cash gain or loss reflected in the current period. At March
      31, 2007 the estimated fair value of the warrant derivative liability was
      $25,600, and during the quarter ended March 31, 2007, the Company recorded
      a
      gain of $10,400 based on the change in the estimated fair value during the
      period.





**10.**
            **Commitments
                and Contingencies**




In
      March
      2007, the Company received notification from Surgica’s legal counsel alleging
      that the Company had breached the Technology License Agreement and the Supply
      Agreement, and based thereon, Surgica was terminating these agreements. In
      connection with its allegations, Surgica demanded that the Company reassign
      the
      510K Clearances, as defined in the Technology License Agreement, back to
      Surgica. The Company does not believe it has breached these agreements, nor
      that
      they are obligated to reassign the 510K Clearances back to Surgica.




The
      Company recorded impairment charges at December 31, 2006 related to the
      capitalized costs of the Technology License Agreement and notes receivable
      entered into in connection with the Surgica Agreements of $1,046,503 and
      $257,133, respectively, in order to reduce the carrying value of these assets
      to
      $-0-. Additional costs may be incurred by the Company in connection with the
      resolution this matter with Surgica, and there is a possibility that litigation
      between the two companies may occur. In the event that litigation in this matter
      does transpire, the Company intends to vigorously defend it position and to
      seek
      the recovery of costs and other amounts expended pursuant to the Surgica
      Agreements.




**11.**  **Restated
      Financial Statements**


As
        stated
        in Note 1, to the unaudited financial statements, the Company has restated
        its’
financial statements to account for the following transactions:
 
 ·
              To
                  correct an error in the adjusting entries made during the conversion
                  of
                  its basic accounting systems during the first quarter of 2007
                  and·
              To
                  accrue a gain on a settlement with a creditor
  The
        net
        effect of these adjustments on the previously issued March 31, 2007 condensed
        consolidated financial statements was as follows:
 
 ·
              A
                  decrease in the net loss for the three months ended March 31, 2007
                  of
                  $362,681 from ($1,081,284) to a net loss of ($718,603);
  ·
              A
                  decrease in the accumulated deficit of $362,681 from ($68,097,351)
                  to
                  ($67,734,670) at March 31, 2007;
 
 ·
              A
                  decrease in accounts payable of $362,681 from $778159 to $415,478
                  at March
                  31, 2007June 30, 2006.
 
 The
        following represents a summary of the corrections relating to the accounting
        error:
 **Summary
          of Restatement Items:**
  For
          the
          three months ended March 31, 2007:
 **As
                  Previously**
              
              **As****Reported**
              
              **Restated**
              
              **Change*****Balance
                  Sheet items:***Accounts
                  payable
              
              $
              778,159
              
              $
              415,478
              
              $
              362,478Accumulated
                  deficit
              
              
              (68,097,351
              )
              
              (67,734,670
              )
              
              (362,681
              )***Statement
                  of Operations items:***Operating
                  expenses
                Research
                  and development
              
              
              718,769
              
              
              645,021
              
              
              (73,748
              )Selling,
                  general and administrative
              
              
              414,719
              
              
              319,703
              
              
              (95,016
              )Gain
                  on settlement
              
              
              --
              
              
              193,917
              
              
              193,917Net
                  effect on net income (loss) and accumulated deficit
              
              
              --
              
              
              --
              
              
              (362,681
              )Net
                  effect on earnings (loss) per share
              
              $
              (0.02
              )
              $
              (0.01
              )
              $
              (0.01
              )
  Corresponding
        line items in the consolidated statements of cash flows for the three months
        ended March 31, 2007, to the changes noted above in the consolidated statements
        of operations for the three months ended March 31, 2007 have also been made.
        There was no change in the net decrease in cash and cash equivalents for
        the
        three months ended March 31, 2007.




11


**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





**Forward
      Looking Statements**





Certain
      statements contained or incorporated by reference in this Quarterly Report
      on
      Form 10-QSB constitute "forward-looking statements" within the meaning of the
      Private Securities Litigation Reform Act of 1995. Such forward-looking
      statements involve known and unknown risks, uncertainties and other factors
      that
      may cause actual results, performance or achievements of the company, or
      industry results, to be materially different from any future results,
      performance or achievements expressed or implied by forward-looking statements.
      Such risks and uncertainties include, among others, history of operating losses,
      raising adequate capital for continuing operations, early stage of product
      development, scientific and technical uncertainties, competitive products and
      approaches, reliance upon collaborative partnership agreements and funding,
      regulatory testing and approvals, patent protection uncertainties and
      manufacturing scale-up and required qualifications. While these statements
      represent management's current judgment and expectations for the company, such
      risks and uncertainties could cause actual results to differ materially from
      any
      future results suggested herein. We undertake no obligation to release publicly
      the results of any revisions to these forward-looking statements to reflect
      events or circumstances arising after the date hereof.





**General
      Overview**





Protein
      Polymer Technologies, Inc. is a biotechnology company engaged in the research,
      development, production and clinical testing of medical products based on
      materials created from our patented technology to produce proteins of unique
      design. Additionally, we are committed to the acquisition of faster-to-market
      medical products in certain complementary growth markets. Since 1992, we have
      focused primarily on developing technology and products to be used for soft
      tissue augmentation, tissue adhesives and sealants; wound healing support;
      and
      drug delivery devices. We have been unprofitable to date, and as of March 31,
      2007 had an accumulated deficit of approximately $68.1 million.





**Results
      of Operations**





**Operating
      Results for the Quarter Ended March 31, 2007 as compared to Quarter Ended March
      31, 2006**





*Contract
      and Licensing Revenue* .
      We
      earned $136,000 in contract and licensing revenue for the quarter ended March
      31, 2007 as compared to $221,000 for the quarter ended March 31, 2006. The
      revenue in the 2007 quarter resulted primarily from $100,000 in licensing fess
      from our contractual relationship with Genencor International. We do not
      anticipate any additional payments to be earned from Genencor in 2007. Contract
      revenue in 2006 was earned by primarily from providing for materials and
      services in the development of an adhesive product for the repair of spinal
      discs laboratory services for Spine Wave, Inc.





*Research
      and Development Expenses* .
      Research and development expenses for the three months ended March 31, 2007
      were
      $645,000, compared to $1,036,000 for the comparable period in 2006. The decline
      from 2006 resulted from significantly reduced activity levels in 2007 of
      clinical testing and regulatory consulting costs. Additionally, we only funded
      one month’s operating expenses for Surgica Corporation in 2007 as the result of
      our determination in March 2007 to discontinue our efforts to develop and
      commercialize the Surgica products. We expect our research and development
      expenses will increase in the future, to the extent additional capital is
      obtained, due to the expansion of product-directed development efforts including
      preclinical development of our surgical sealants. We do not anticipate that
      any
      additional operating expenses with respect to Surgica will be incurred in 2007.





*Selling,
      General and Administrative Expenses* .
      Selling, general and administrative expenses for the quarter ended March 31,
      2007 were $320,000, as compared to $1,887.000 for 2006. We made significant
      reductions in administration expenses in the second half of 2006. Several highly
      compensated positions were eliminated and all non-mission sensitive expenses
      were reviewed and either eliminated or reduced. Additionally, during the first
      quarter of 2006 we recognized non-cash charges aggregating $1,038,000 as the
      result of adopting SFAS No. 123 (revised 2004) “Share Based Payment” for stock
      options.





To
      the
      extent possible, we continue to concentrate on controlling costs reflected
      in
      reduced travel, office supplies, and non-regulatory consulting costs. We expect
      our selling, general and administrative expenses will increase in the future,
      to
      the extent additional capital is obtained, consistent with supporting our
      research and development efforts and as business development, patent, legal
      and
      investor relations activities require.




12





*Interest
      Income/(Expense)* .
      Interest expense increased significantly from $11,000 in the three months ended
      March 31, 2006 to $94,000 in the three months ended 2007. This increase
      resulted directly from incurring approximately $4,800,000 of secured financing
      from a stockholder to sustain our operations since April 2006 and the assumption
      of $519,000 of promissory notes in connection with the Surgica transaction
      during December 2005.


*Gain
        on Settlement Income* During
        the first quarter 2007 management negotiated a settlement agreement with
        a
        certain creditor, that among other factors, the Company was relieved from
        paying
        an accrued expense of approximately $269,000 in exchange for a cash payment
        of
        $75,000.




*Operating
      Losses* .
      For the
      three months ended March 31, 2007, we recorded a net loss applicable to common
      shareholders of $795,000 or $0.01 per share, as compared to $2,850,000 or $0.04
      per share in 2006. The difference in the net losses is as discussed in detail
      previously. The undeclared or imputed dividends in quarter ended March 31,
      2006
      was greater than the comparable period in 2007 as the result of a non-cash
      imputed dividend that resulted from repricing and extending the term of certain
      warrants in 2006.





**Inflation**





To
      date,
      we believe that inflation and changing prices have not had a material impact
      on
      our continuing operations. However, we have experienced increased general and
      product liability insurance costs over the past two years, and these increases
      are expected to continue for the foreseeable future as our products incur
      increased exposure in expanded clinical trials .





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2007, we had cash and cash equivalents totaling $88,000 and we had
      a
      working capital deficit of $5,513,000 as compared to $4,946,000 at December
      31,
      2006.





We
      do not
      have any off balance sheet financing activities and do not have any special
      purpose entities. We had no long-term capital lease obligations as of March
      31,
      2007 or December 31, 2006. For the quarter ended March 31, 2007, our cash
      expenditures for capital equipment and leasehold improvements were $0, as
      compared to $36,000 for the same period in the prior year. We do not anticipate
      any significant capital expenditures in 2007. We may enter into capital
      equipment lease arrangements in the future if available at appropriate rates
      and
      terms.





On
      April
      13, 2006, an accredited investor loaned us $1,000,000 (the “Loan”) ($500,000 in
      cash and an additional $500,000 deposited with an escrow agent as a line of
      credit) represented by a note (the “Note”) issued by us to the investor in the
      principal amount of $1,000,000 (the “Principal”). The Note was originally due on
      July 12, 2006 (the “Maturity Date”) and bears annual interest at the rate of 8%
      payable on the Maturity Date. It is secured, in accordance with the terms of
      a
      security agreement (the “Security Agreement”), by a continuing security interest
      in and a general lien upon (i) 1,000,000 shares of Spine Wave, Inc. common
      stock
      owned by us (ii) a warrant to purchase 1,000,000 shares of Spine Wave, Inc.
      common stock owned by us which has since been exercised; and (iii) all U.S.
      patents owned by us. The Note and the Security Agreement are both dated April
      13, 2006. As consideration for the Loan us granted a warrant to the investor
      to
      purchase an aggregate of 500,000 shares of our common stock at an exercise
      price of $0.30 per share. The investor’s counsel acts as the escrow agent and
      now serves as our outside general counsel.





The
      Note
      has subsequently been amended five times so that as of April 10, 2007 the
      principal balance is approximately $4.8 million and the maturity date is August
      10, 2007. At March 31, 2007, the outstanding indebtedness subject to the Note
      and Security Agreement was $4,773,000.





Pursuant
      to the terms of the Security Agreement, we entered into a patent security
      agreement, an escrow agreement, patent assignment, and a registration rights
      agreement, each dated as of April 13, 2006. According to the terms of the
      Security Agreement, we entered into the Escrow Agreement with an escrow
      agent for the investor. The Escrow Agreement provides for the disbursement
      of
      the funds held in escrow for application to Company expenses at the sole
      discretion of the investor’s designee. The Escrow Agreement terminates upon the
      event that the amount borrowed is paid in full and no event of default has
      occurred.





We
      believe our existing available cash and cash equivalents as of March 31, 2007,
      in combination with continuing contractual commitments will be sufficient to
      meet our anticipated capital requirements only through May 2007. Substantial
      additional capital resources will be required to fund continuing expenditures
      related to our research, development, manufacturing and business development
      activities. We are pursuing a number of alternatives available to meet the
      continuing capital requirements of our operations, such as collaborative
      agreements and public or private financings. We are currently in discussions
      with potential financing sources and collaborative partners, and additional
      funding in the form of equity investments, license fees, loans, milestone
      payments or research and development payments could be generated. There can
      be
      no assurance that any of these fundings will be consummated in the timeframes
      needed for continuing operations or on terms favorable to us, if at all. If
      adequate funds are not available, we will be required to significantly curtail
      our operating plans and would likely have to sell or license out significant
      portions of our technology, and possibly cease operations.




13




**Risk
      Factors**





Please
      read the following risk factors that can affect our business.





*If
      we
      continue to incur operating losses, we may be unable to continue our operations
      at planned levels and be forced to curtail or cease our
      operations.*





We
      have
      incurred operating losses since our inception in 1988, and will continue to
      do
      so for at least several more years. As of March 31, 2007, our accumulated
      deficit was approximately $67,735,000 and we have continued to incur losses
      since that date. The losses have resulted principally from expenses of research
      and development and to a lesser extent, from general and administrative
      expenses. If these losses continue, they could cause the value of our stock
      to
      decline.





We
      believe our existing available cash, cash equivalents and accounts receivable,
      in combination with anticipated contract research payments and revenues received
      from the transfer of clinical testing materials, will be sufficient to meet
      our
      anticipated capital requirements only through May 2007. Substantial additional
      capital resources will be required to fund continuing expenditures related
      to
      our research, development, manufacturing and business development activities.
      If
      we do not raise adequate funds, we will be required to significantly curtail
      or
      cease our operations, and may have to sell or license out significant portions
      of our technology or potential products.





We
      believe there may be a number of alternatives to meeting the continuing capital
      requirements of our operations, including additional collaborative agreements
      and public or private financings. However, these alternatives may not be
      consummated in the necessary time frames needed for continuing operations or
      on
      terms favorable to us. Since April, 2006, one of our stockholders has been
      providing financing to us to support our operations. As of the date hereof
      we
      have borrowed and aggregate of $4,800,000 from this stockholder. We cannot
      assure that this stockholder will continue to provide financing to us when
      needed. Our business and financial condition will be materially adversely
      affected in the event that he ceases to provide this financing if
      needed.




*If
      we
      fail to establish and manage strategic partnerships, we may be prevented from
      developing potential products or the time required for commercializing potential
      products may be increased.*





Our
      principal strategy is to enter into partnerships or licensing arrangements
      with
      medical or pharmaceutical companies with appropriate marketing and distribution
      capabilities to reduce the time and costs for developing and commercializing
      our
      potential products. We may not be able to establish additional strategic
      partnerships or licensing arrangements, or, if available, they may not be on
      terms and conditions favorable to our business. Additionally, these arrangements
      generally may be terminated under various circumstances, including termination
      at the discretion of the strategic partner without cause or without prior
      notice. Termination of the arrangements could seriously harm our business and
      financial condition. Furthermore, our strategy may lead to multiple alliances
      regarding different product opportunities that are active at the same time.
      We
      may not be able to successfully manage multiple arrangements in various stages
      of development.





We
      are
      discussing other potential collaboration agreements with prospective marketing
      partners. Furthermore, from time to time, we are party to certain materials
      evaluation agreements regarding biomedical applications of our products,
      polymers and technology, including applications in areas other than those
      identified as product candidates above. These agreements provide, or are
      intended to provide, for the evaluation of product feasibility. We may not
      be
      able to establish these agreements at all or do so in a timely manner and on
      reasonable terms. In addition, these agreements may not lead to successful
      product development and commercialization.




14





*We
      may not be able to produce commercially acceptable products because our
      technology is unproven. If we cannot prove our technology, we will not succeed
      in commercializing our products.*





Our
      technological strategy of designing and producing unique products based on
      genetically engineered proteins that do not have a harmful effect on biological
      systems, such as the human body, is commercially unproven. The process of
      developing products and achieving regulatory approvals is time consuming and
      prone to delays. We have completed only a few products that require
      collaboration and marketing partners, and have not generated any significant
      revenues from product sales.





The
      products we are currently pursuing will require substantial further development,
      testing and regulatory approvals. Our research and development activities may
      not be successful and as such, we may not be able to produce commercially
      acceptable products.





*We
      must prove our products' effectiveness in clinical trials. If we are unable
      to
      successfully complete clinical trials, we may not be able to produce marketable
      products.*





Before
      obtaining regulatory clearance for the commercial sale of any of our products,
      we must demonstrate through preclinical studies and clinical trials that the
      potential product is safe and effective for use in humans for each particular
      use. Due to the inherent difficulties associated with clinical trials, we cannot
      guarantee that:





·
            we
                will be able to complete the clinical trials successfully, if at
                all;





·
            we
                will be able to demonstrate the safety and efficacy necessary to
                obtain
                the requisite regulatory approvals of product candidates;
                or





·
            the
                product candidates will result in marketable
                products.





*The
      biomedical and surgical repair industry involves intense competition and rapid
      technological changes. Our business may suffer if our competitors develop
      superior technology.*





We
      operate in the biomedical and surgical repair markets that involve intense
      competition. Our competitors in those markets include major pharmaceutical,
      surgical product, chemical and specialized biopolymer companies, many of which
      have financial, technical, research and development and marketing resources
      significantly greater than ours. Our biomaterials are used primarily in the
      manufacture of end-use products for medical applications that compete with
      other
      products that rely on the use of alternative materials or components. As a
      result, we compete with diverse, complex and numerous rapidly changing
      technologies. We believe that our ability to compete will be enhanced by the
      breadth of our issued patent claims, our other pending patent applications
      and
      our experience in protein engineering. However, we currently do not have the
      resources to compete commercially without the use of collaborative agreements
      with third parties.





Our
      product technology competes for corporate development and marketing partnership
      opportunities with numerous other biotechnology companies, research institutes,
      academic institutions and established pharmaceutical companies. We also face
      competition from academic institutions and other public and private research
      organizations that are conducting research and seeking patent protection, and
      may commercialize products on their own or through joint ventures. Although
      most
      of our competitors depend on technology other than protein engineering for
      developing products, we believe that several university laboratories are
      currently conducting research into similar protein engineering technology.
      Our
      competitors may succeed in developing products based on our technology or other
      technologies that are more effective than the ones we are developing, or that
      would render our technology and products obsolete and non-competitive, which
      may
      harm our business.





*We
      have not developed a process to manufacture our products on a commercially
      viable scale. We will lose potential revenues if we cannot manufacture products
      on a commercial scale* .





To
      date,
      we have manufactured only limited amounts of our biomedical products for
      internal testing, initial human clinical testing and, in certain cases,
      evaluation and testing by corporate partners and other third parties. We will
      be
      required to upgrade our manufacturing facilities to obtain manufacturing
      approvals from the FDA for the development and commercialization of certain
      biomedical products.




15





We
      have
      not yet developed a process to manufacture our products on a commercial scale
      and may not be able to, or have another party on our behalf, develop a process
      at a cost or in quantities necessary to become commercially viable. We may
      need
      to evaluate alternative methods to produce commercial quantities of our
      products. We may not be able to successfully assess the ability of other
      production methods or establish contract-manufacturing arrangements to meet
      our
      commercial objectives.





*Our
      business is subject to substantial regulation and may be harmed if we are unable
      to comply with the applicable laws.*





Regulation
      by governmental authorities in the United States and other countries affects
      the
      success of products resulting from biotechnological research. Our current
      operations and products are, and anticipated products and operations will be,
      subject to substantial regulation by a variety of local, state, federal and
      foreign agencies, particularly those products and operations related to
      biomedical applications. A few examples of the laws that govern our products
      and
      operations are:





·
            Occupational
                Safety and Health Act;





·
            Food,
                Drug & Cosmetic Act, as
                amended;





·
            FDA's
                Good Laboratory Practices; and





·
            FDA
                Quality System Regulations.





Compliance
      with the applicable laws and regulations is a costly and time-consuming process.
      We believe we are currently in substantial compliance with the laws and
      regulations applicable to our current operations. Although we intend to use
      our
      best efforts to comply with all applicable laws and regulations in the future,
      we may not be able to fully comply with the laws and regulations and as such,
      our business operations would be seriously harmed.





*Our
      business may be harmed if we are not able to retain key
      employees.*





As
      of
      April 1, 2007, we had eighteen full-time employees, two of whom hold Ph.D.
      degrees. Our success will depend largely upon the efforts of our scientists
      and
      certain of our executive officers who have been employed by us since the early
      stages of our business and understand our technology and business objectives.
      The loss of the services of any one of these individuals would seriously harm
      our business opportunities and prospects. Our success also depends on the
      recruitment and retention of additional qualified management and scientific
      personnel. We may not be able to attract and retain required personnel on
      acceptable terms, due to the competition for experienced personnel from other
      biotechnology, pharmaceutical and chemical companies, universities and
      non-profit research institutions. We do not maintain "key-man" or similar life
      insurance policies with respect to these persons to compensate us in the event
      of their deaths, which may harm our business.





*We
      may be sued for product liability and may not have sufficient protection under
      our insurance policies.*





We
      may
      face product liability claims with respect to our technology or products either
      directly or through our strategic partners. We may also be exposed to potential
      product liability risks whenever human clinical testing is performed or upon
      the
      use of any commercially marketed medical product. We believe that our prior
      sales of SmartPlastic(R), ProNectin (R) F and ProNectin(R) L products do not
      pose any material product liability risk. To our knowledge no product liability
      claims have ever been made against us. Before initiating human clinical testing
      of our technology, we procured product liability insurance that is limited
      to
      coverage of $1,000,000 per occurrence and in the aggregate $5 million. If
      plaintiffs succeed in their claims against us, if any, and if the coverage
      under
      our insurance policies is insufficient, our business would be seriously
      harmed.





*If
      we
      are unable to protect our proprietary technology, we may not be able to compete
      as effectively.*




16





We
      have
      26 United States patents, 14 foreign patents, and five additional United States
      patent applications are pending. We have not yet marketed, sold or developed
      our
      products outside the United States, except for limited amounts of ProNectin(R)
      F, ProNectin(R) L and SmartPlastic(R) cell culture products. The patent position
      of biotechnology companies, such as ours, is highly uncertain and involves
      complex legal, scientific and factual questions. For example:




·
            patents
                issued to us may be challenged, invalidated or
                circumvented;





·
            patents
                may not issue from any of our pending patent applications or, if
                issued,
                may not be sufficiently broad to protect our technology and products
                or
                provide us with any proprietary protection or competitive
                advantage;





·
            our
                competitors may have filed patent applications or may have obtained
                patents and other proprietary rights relating to products or processes
                similar to and competitive with ours. The scope and validity of such
                patents may not be known or the extent to which we may be required
                to
                obtain licenses under these patents or other proprietary rights.
                If
                required, we may not be able to obtain any licenses on acceptable
                terms,
                if at all;





·
            certain
                foreign intellectual property laws may not be as protective as those
                of
                the United States; or




·
            we
                may enter into collaborative research and development arrangements
                with
                our strategic partners that may result in the development of new
                technologies or products, but may also get us involved in a dispute
                over
                the ownership of rights to any technology or products that may be
                so
                developed.





*If
      we
      are unable to obtain patent protection, enforce our patent rights or maintain
      trade secrets and other protection for our products and technology, our business
      may be seriously harmed.*





We
      also
      seek to protect our intellectual property in part by confidentiality agreements
      with our employees and consultants. These agreements may be breached or
      terminated. We may not have an adequate remedy for any breach, and our trade
      secrets may otherwise become known or independently discovered by competitors,
      which would harm our business.





*Our
      common stock was delisted from the Nasdaq and will be difficult to
      sell.*





Our
      common stock was delisted from the Nasdaq SmallCap Market on September 20,
      1999,
      and now trades on the National Association of Securities Dealers' Electronic
      Bulletin Board. As a consequence of the delisting, it is more difficult to
      dispose of, or to obtain accurate quotations as to the market value of, our
      common stock. In addition, the delisting made our common stock substantially
      less attractive as collateral for margin and purpose loans, for investment
      by
      financial institutions under their internal policies or state investment laws,
      or as consideration in future capital raising transactions.





Our
      common stock is also subject to regulation as a "penny stock." The Securities
      and Exchange Commission has adopted regulations that generally define "penny
      stock" to be any equity security that has a market price or exercise price
      less
      than $5.00 per share, subject to certain exceptions, including listing on the
      Nasdaq SmallCap Market. For transactions covered by the penny stock rules,
      the
      broker-dealer must consider the suitability of the purchaser, receive the
      purchaser's written consent before the purchase, deliver a risk disclosure
      document before the purchase and disclose the commission payable for the
      purchase. Additionally, if the broker-dealer is the sole market maker, the
      broker-dealer must disclose this fact and the broker-dealer's presumed control
      over the market. Finally, monthly statements must be sent disclosing recent
      price information for the penny stock held in the account and information on
      the
      limited market in penny stocks.





The
      requirements of the penny stock rules restrict the ability to sell our common
      stock in the secondary market and the price at which our common stock can be
      sold. Since our common stock was delisted from the Nasdaq SmallCap Market,
      we
      have seen a decline in our average daily trading volume, and as a result, the
      trading price of our common stock has experienced wide
      fluctuations.




17





**ITEM
      3. Controls and Procedures**




Disclosure
      Controls and Procedures


The
        Company, under the supervision and with the participation of its management,
        including its Chief Executive Officer (the principal executive officer) and
        the
        principal financial officer, evaluated the effectiveness of the design and
        operation of its disclosure controls and procedures as of the end of the
        period
        covered by this report. Based on that evaluation, and taking into consideration
        the material weaknesses identified in the letter from the Company’s auditor as
        discussed below, the Chief Executive Officer and the Principal Financial
        Officer
        concluded, based on the disclosures set forth below, that as of the end of
        the
        period covered by this report, the Company’s disclosure controls and procedures
        were not effective for the purposes of recording, processing, summarizing
        and timely reporting of material information relating to the Company required
        to
        be included in its periodic reports.
  We
        received a letter dated May 23, 2007 from Squar Milner, Peterson, Miranda
&
Williamson, LLP (“Squar Milner”), our auditors, addressed to the Chairman
        of the Audit Committee of our Board of Directors in connection with the audit
        of
        our financial statements as of December 31, 2006, which identified certain
        matters involving internal control and our operations that Squar Milner
        considered to be significant deficiencies or material weaknesses under the
        standards of the Public Company Accounting Oversight Board. These material
        weaknesses were:
 
 (1)
              lack
                  of fulltime staff dedicated to accounting and financial reporting;
 
 (2)
              insufficient
                  personnel resources and technical accounting expertise within the
                  accounting function to resolve non-routine or complex accounting
                  matters;
 
 (3)
              ineffective
                  controls over period end financial close and reporting processes;
 
 (4)
              inadequate
                  procedures for appropriately identifying, assessing and applying
                  accounting principles; and(5)
              Inadequate
                  documentation and support for certain
                  transactions.
  Our
        management and our Audit Committee discussed this letter among them and
        discussed it with Squar Milner.
 
 We
        have
        effected certain changes to improve our controls over all cash disbursements,
        including:
 
 1.
              Weekly
                  forecasting of cash receipts and disbursements reviewed and approved
                  by a
                  senior officer;
 
 2.
              Approval
                  by senior officers of all disbursements;
                  and
 
 3.
              Approval
                  by senior officers of all purchase orders and
                  invoices.
 .
 We
        have
        retained the services, on a third party basis, of a person experienced in
        financial supervision matters with sufficient experience to:
 
 1.
              Oversee
                  the daily accounting function, including cash receipts and disbursements,
                  billing, payroll and month end bookkeeping
                  processes;
  2.
              Identify
                  and resolve non-routine or complex accounting
                  matters;
  3.
              Control
                  period end financial closing and reporting processes;
                  and
 
 4.
              Identify,
                  assess and apply accounting principles.
 
 We
        will
        continue to monitor and evaluate the effectiveness of our disclosure controls
        and procedures and our internal controls over financial reporting on an ongoing
        basis and are committed to taking further action and implementing additional
        improvements, as necessary and as funds allow.
 
 We
        notified the members of our Audit Committee of the facts set forth in this
        report.
 
 Internal
        Control Over Financial Reporting
  Other
        than noted above, there have been no changes in our internal control over
        financial reporting identified in connection with the evaluation required
        by
        paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred
        during our last fiscal quarter that has materially affected, or is reasonably
        likely to materially affect our internal control over financial
        reporting.




18


**PART
      II.**





OTHER
      INFORMATION





**Item
      6. Exhibits**





31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Principal Financial Officer pursuant to Securities Exchange Act
                Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 2002





32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





32.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
                as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                2002.




19




SIGNATURES





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


PROTEIN
              POLYMER
              TECHNOLOGIES, INC.Date: August
              20, 2007
            By:
            /s/
              William N. Plamondon, IIIWilliam
              N. Plamondon, IIIChief
              Executive Officer


Date: August
              20, 2007
            By:
            /s/
              William N. Plamondon, IIIWilliam
              N. Plamondon, IIIPrincipal
              Financial Officer




20





**EXHIBIT
      INDEX**





31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Principal Financial Officer pursuant to Securities Exchange Act
                Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 2002





32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





32.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
                as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                2002.





21