**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





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





For
      the
      quarterly period ended June 30, 2007





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                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 July 27, 2007, 67,809,204 shares of
      common stock were outstanding.





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





PROTEIN
      POLYMER TECHNOLOGIES, INC.





FORM
      10-QSB





INDEX




PageNo.PART
                I. FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)Balance
                SheetsJune
                30, 2007 and December 31, 2006
            
            3Statements
                of OperationsFor
                three and six months ended June 30, 2007 and 2006
            
            4Statements
                of Cash FlowsFor
                the six months ended June 30, 2007 and 2006.
            
            5Notes
                to Financial Statements
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            11Item
                3. Controls and Procedures
            
            17PART
                II. OTHER INFORMATIONItem
                6. Exhibits
            
            18Signatures
            
            18




2




PART
      I.
      FINANCIAL INFORMATION




Item
      1.
      Financial Statements





Protein
      Polymer Technologies, Inc.


Balance
      Sheets


(unaudited)




June
                30,
            
            December
                31,2007
            
            2006AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            105,483
            
            $
            73,495Contract
                receivable
            
            
            95,547
            
            
            21,068Current
                portion of rent receivable
            
            
            9,527
            
            
            39,527Prepaid
                expenses and other current assets
            
            
            42,729
            
            
            49,940Total
                current assets
            
            
            253,286
            
            
            184,030Deposits
            
            
            31,279
            
            
            29,679Equipment
                and leasehold improvements, net
            
            
            177,866
            
            
            228,475Investment,
                at cost
            
            
            520,000
            
            
            520,000Total
                assets
            
            $
            982,431
            
            $
            962,184Liabilities
                and stockholders' deficit equityCurrent
                liabilities:Accounts
                payable
            
            $
            787,332
            
            $
            1,098,820Accrued
                liabilities
            
            
            567,020
            
            
            422,730Secured
                note payable - related party
            
            
            5,157,416
            
            
            3,461,516Current
                maturities of notes payable
            
            
            161,667
            
            
            146,697Total
                current liabilities
            
            
            6,673,435
            
            
            5,129,763Notes
                payable, net of current maturities
            
            
            357,404
            
            
            372,374Deferred
                rent
            
            
            13,269
            
            
            13,269Total
                liabilities
            
            
            7,044,108
            
            
            5,515,406Commitments
                and contingenciesStockholders'
                deficit:Convertible
                preferred stock, $.01 par value; 5,000,000 shares authorized; 65,645
                shares issued and outstanding at June 30, 2007 and December 31, 2006
                -
                liquidation preference of $6,564,500 at June 30, 2007 and December
                31,
                2006
            
            
            6,019,917
            
            
            6,019,917Common
                stock, $.01 par value; 120,000,000 shares authorized; 67,809,204
                and
                67,409,204 shares issued and outstanding at June 30, 2007 and December
                31,
                2006, respectively
            
            
            678,092
            
            
            674,092Additional
                paid-in capital
            
            
            55,934,985
            
            
            55,760,511Accumulated
                deficit
            
            
            (68,694,671
            )
            
            (67,007,742
            )Total
                stockholders' deficit
            
            
            (6,061,677
            )
            
            (4,553,222
            )Total
                liabilities and stockholders' deficit
            
            $
            982,431
            
            $
            962,184




See
        accompanying notes.
  3


Protein
        Polymer Technologies, Inc.
 Statements
          of Operations
 (unaudited)


Three
                months ended
            
            Six
                months endedJune
                30,
            
            June
                30,2007
            
            2006
            
            2007
            
            2006Revenues:Contract
                revenue
            
            $
            131,530
            
            $
            189,613
            
            $
            267,618
            
            $
            410,532Product
                and other income
            
            
            --
            
            
            18,616
            
            
            --
            
            
            37,174Total
                revenues
            
            
            131,530
            
            
            208,229
            
            
            267,618
            
            
            447,706Operating
                expenses:Cost
                of sales
            
            
            --
            
            
            838
            
            
            --
            
            
            1,640Research
                and development
            
            
            628,131
            
            
            1,148,418
            
            
            1,273,152
            
            
            2,184,858Selling,
                general and administrative
            
            
            351,596
            
            
            729,902
            
            
            671,299
            
            
            2,617,214Total
                expenses
            
            
            979,727
            
            
            1,879,158
            
            
            1,944,451
            
            
            4,803,712Net
                loss from operations
            
            
            (848,197
            )
            
            (1,670,929
            )
            
            (1,676,833
            )
            
            (4,356,006
            )Other
                income (expense):Interest
                income
            
            
            145
            
            
            56
            
            
            145
            
            
            2,580Interest
                expense
            
            
            (111,051
            )
            
            (90,941
            )
            
            (205,343
            )
            
            (101,842
            )Gain
                (loss) on derivative liability
            
            
            (898
            )
            
            --
            
            
            9,510
            
            
            --Gain
                on settlement
            
            
            -
            
            
            --
            
            
            193,917
            
            
            --Total
                other income (expense)
            
            
            (111,804
            )
            
            (90,885
            )
            
            (1,771
            )
            
            (99,262
            )Net
                loss
            
            
            (960,001
            )
            
            (1,761,841
            )
            
            (1,678,604
            )
            
            (4,455,268
            )Undeclared,
                imputed and/or paid dividends on preferred stock
            
            
            69,219
            
            
            69,220
            
            
            146,003
            
            
            226,628Net
                loss applicable to common shareholders
            
            $
            (1,029,220
            )
            $
            (1,831,034
            )
            $
            (1,824,607
            )
            $
            (4,681,896
            )Basic
                and diluted net loss per common share
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.07
            )Shares
                used in computing basic and diluted net loss per common
                share
            
            
            67,809,204
            
            
            67,350,633
            
            
            67,665,558
            
            
            67,331,227




See
        accompanying notes.




4




Protein
        Polymer Technologies, Inc.
 Statements
          of Cash Flows
 (unaudited)
  Six
                    months endedJune
                    302007
                
                2006**Operating
                    activities**Net
                    loss
                
                $
                (1,678,604
                )
                $
                (4,455,268
                )**Adjustments
                    to reconcile net loss to net cash used for operating
                    activities:**Depreciation
                    and amortization
                
                
                50,609
                
                
                80,960Share
                    based compensation expense
                
                
                109,082
                
                
                1,341,765Gain
                    on warrant derivative liability
                
                
                9,510
                
                
                --Amortization
                    of loan fees
                
                
                --
                
                
                69,608**Changes
                    in operating assets and liabilities:**Deposits
                
                
                (1,600
                )
                
                (800
                )Prepaid
                    expenses and other current assets
                
                
                7,211
                
                
                1,422Current
                    portions of rent receivable
                
                
                30,000
                
                
                58,428Contracts
                    receivable
                
                
                (74,479
                )
                
                (68,846
                )Accounts
                    payable
                
                
                (311,488
                )
                
                944,042Accrued
                    liabilities
                
                
                205,357
                
                
                (26,123
                )Deferred
                    rent
                
                
                --
                
                
                4,425**Net
                    cash used for operating activities**
                
                
                (1,663,912
                )
                
                (2,050,387
                )**Investing
                    activities**Purchase
                    of equipment and improvements
                
                
                --
                
                
                (35,641
                )Issuance
                    of notes receivable
                
                
                --
                
                
                (7,058
                )**Net
                    cash used for investing activities**
                
                
                --
                
                
                (42,699**Financing
                    activities**Net
                      proceeds from exercise of options and warrants and sale of
                      common
                      stock
                
                
                --
                
                
                3,177Net
                    proceeds from issuance of secured note payable - related
                    party
                
                
                1,695,900
                
                
                946,700**Net
                    cash provided by financing activities**
                
                
                1,695,900
                
                
                949,877**Net
                    increase (decrease) in cash and cash equivalents**
                
                
                31,988
                
                
                (1,143,209
                )Cash
                    and cash equivalents at beginning of the period
                
                
                73,495
                
                
                1,211,748**Cash
                    and cash equivalents at end of the period**
                
                $
                105,483
                
                $
                68,539**Supplemental
                    disclosures of cash flow information**Interest
                    paid
                
                $
                3,834
                
                $
                3,282**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
                
                $
                40,000Warrants
                    issued for loan fees
                
                $
                –
                
                $
                69,608
 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")
      as of
      June 30, 2007 and for the three and six months ended June 30, 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 and six months ended June
      30, 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.





**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 six months ended June 30, 2007, the
      Company incurred a net loss of approximately $1,679,000 and had a working
      capital deficit of approximately $6,420,000 at June 30, 2007. Our cash and
      cash
      equivalents of approximately $105,000 in combination with anticipated additional
      contract and license payments are insufficient to meet our anticipated capital
      requirements.





Since
      April 2006 the Company has relied primarily on borrowings pursuant to a note
      payable from a related party for capital needed to fund its operations and
      working capital requirements (see Note 4). 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 exploring other 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 additional funding from the related party
      note payable will be available or that any of these other 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.


**Investments**
 
 The
        Company determines the appropriate classification of its investments in equity
        securities at the time of acquisition and reevaluates such determinations
        at
        each balance-sheet date. Marketable equity securities not classified as trading,
        are classified as available-for-sale, and are carried at fair market value,
        with
        the unrealized gains and losses, net of tax, included in the determination
        of
        comprehensive income and reported in shareholders’ equity. Investments for which
        market prices are not available, are valued and reported at cost in periods
        subsequent to acquisition. No gains or losses are recognized until the
        securities are sold.
  **Warrant
        Derivative Liability**
 
 The
        Company accounts for warrants issued in accordance with EITF Issue No. 00-19,
        “Accounting for Derivative Financial Instruments Indexed to, and Potentially
        Settled in, a Company’s Own Stock) (“EITF 00-19”). Pursuant to EITF 00-19, an
        evaluation of specifically identified conditions is made to determine whether
        the fair value of warrants issued is required to be classified as a derivative
        liability. The fair value of warrants classified as derivative liabilities
        is
        adjusted for changes in fair value at each reporting period, and the
        corresponding non-cash gain or loss is recorded in current period earnings.




**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.





6




Excluded
      from diluted loss per common share for the six months ended June 30, 2007 and
      2006 were 26,341,157 and 19,730,678 shares, respectively, issuable upon
      conversion of convertible preferred stock, and options and warrants to purchase
      29,073,074 and 29,758,076 shares of common stock, respectively, because the
      effect would be anti-dilutive. For purposes of this calculation, net loss in
      2007 and 2006 has been adjusted for imputed, accumulated and/or paid dividends
      on the preferred stock.




**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. SFASNo.
      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.




7


**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.




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




Accrued
      liabilities consist of the following:




**June
                30,**
              **2007**
            
            **December
                31,**
              **2006**Payroll
                and employee benefits
            
            $
            117,000
            
            $
            94,000Accounting
                and professional fees
            
            
            25,000
            
            
            25,000Accrued
                interest
            
            
            349,000
            
            
            147,000Property
                tax
            
            
            30,000
            
            
            21,000Insurance
                premium financing
            
            
            20,000
            
            
            39,000Indemnification
                obligation
            
            
            -
            
            
            61,000Warrant
                derivative liability
            
            
            26,000
            
            
            36,000$
            567,000
            
            $
            423,000





**4.**
            **Secured
                Note 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.





On
      August
      9, 2007, the Note has been amended for the sixth time so that the
      Principal is now $5.7 Million and the Maturity Date is now November 10, 2007.
      The outstanding indebtedness subject to the Note and Security Agreement was
      $5,157,000 and accrued interest payable was $297,000 at June 30,
      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.




8




**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
      June 30, 2007, the current and long term note balances were $162,000 and
      $357,000, respectively.




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, valued at $61,000, 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 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 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 and six month periods ended June 30, 2007 the Company recorded
      $28,000 and $109,000, respectively, in non-cash compensation expense related
      to
      previously issued stock options. The charges in the comparable periods ended
      June 30, 2006 were $303,000 and $1,342,000, respectively. As of June 30, 2007,
      there was approximately $84,000 of total unrecognized compensation costs related
      to unvested options.




The
      Company did not grant options during the six months ended June 30, 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:




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





9




Stock
      option activity for the six months ended June 30, 2007 is as follows:





OptionsOutstanding
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              RemainingContractual
              Term
              (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at December 31, 2006
            
            
            12,454,582
            
            $
            0.66
            
            
            
            
            $
            —Issued
            
            
            —
            
            
            —
            
            
            
            
            
            —Cancelled
            
            
            (50,000
            )
            
            (2.58
            )
            
            
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            
            
            
            —Outstanding
                at June 30, 2007
            
            
            12,404,582
            
            $
            0.65
            
            
            6.01
            
            
            —Exercisable
                at June 30, 2007
            
            
            12,126,782
            
            $
            0.65
            
            
            6.01
            
            $
            —




**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 and six months ended June 30,
      2007.




A
      summary
      of warrant activity for the three months ended June 30, 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
            )
            $
            1.65Outstanding,
                June 30, 2007
            
            
            16,668,494
            
            $
            0.52




At
      June
      30, 2007, the weighted-average remaining contractual life of the warrants was
      approximately 19 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 June
      30,
      2007, the estimated fair value of the warrant derivative liability was $26,000,
      and during the six months ended June 30, 2007, the Company recorded a net gain
      of $10,000 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.




10




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.**
            **Subsequent
                Events**




The
      Company’s Board of Directors has tentatively scheduled a meeting of shareholders
      for September 20, 2007. In addition to electing members of the Board of
      Directors and ratifying the selection of our independent registered public
      accountants, the Board is seeking shareholder approval to increase the number
      of
      authorized shares of common stock from 120 million to 1 billion.





**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 June 30,
      2007 had an accumulated deficit of approximately $68.7 million.




**Results
      of Operations**





**Operating
      Results for the Three and Six Months Ended June 30, 2007 as compared to the
      Three and Six Months Ended June 30, 2006**





*Contract,
      Licensing and Product Revenue* .
      Our
      revenues were $268,000 in for the six months ended June 30, 2007 as compared
      to
      $448,000 in the comparable period of 2006. For the quarter ended June 30, 2007
      our revenues were $132,000 as compared to $208,000 the three months ended June
      30, 2006. In the second quarter of 2007, revenues were earned substantially
      from
      supplying products to potential partners in their evaluation of certain of
      our
      products. During the first quarter of 2007 revenues included $100,000 in
      licensing fess from our contractual relationship with Genencor International.
      Future payments arising from the Genencor agreement, if any, are subject to
      future commercialization of products. Contract revenue in 2006 was earned by
      primarily from providing materials and services in the development of an
      adhesive product for the repair of spinal discs laboratory services for Spine
      Wave, Inc.





11




*Research
      and Development Expenses* .
      Research and development expenses for the three months ended June 30, 2007
      were
      $628,000, compared to $1,148,000 for the comparable period in 2006. Research
      and
      development expenses for the six months ended June 30, 2007 were $1,273,000,
      compared to $2,185,000 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 June 30,
      2007
      were $352,000, as compared to $730,000 in 2006. For the six months ended June
      30, 2007 these expenses were $671,000 as compared to $2,617,000 in the
      comparable period of 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 three and six months ended
      June
      30, 2006, we recognized non-cash charges aggregating $1,038,000 and $1,342,000,
      respectively, as the result of adopting SFAS 123R for expenses related to stock
      options, compared to $28,000 and $109,000 for the respective three and six
      months ended June 30, 2007.





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.




*Interest
      Income and Expense* .
      Interest expense increased from $91,000 in the three months ended June 30,
      2006
      to $111,000 for the three months ended June 30, 2007. For the six month periods
      ended June 30, 2007 interest expense increased from $102,000 to $205,000. These
      increases resulted directly from incurring approximately $5,200,000 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. At June 30, 2007, the Company had accrued
      interest expense $349,000 in connection with these financings.





*Gain
      on Settlement* During
      the first quarter 2007, management negotiated a settlement agreement with a
      certain creditor that relieved the Company of the obligation to pay previously
      accrued expenses totalling approximately $269,000 in exchange for a cash payment
      of $75,000. The settlement resulted in a gain of $194,000 that is included
      in
      the accompanying statement of operations for the six months ended June 30,
      2007.





*Operating
      Losses* .
      For the
      three months ended June 30, 2007, we recorded a net loss applicable to common
      shareholders of $1,029,000 or $0.02 per share, as compared to $1,831,000 or
      $0.03 per share in 2006. For the six months ended June 30, 2007, we recorded
      a
      net loss applicable to common shareholders of $1,825,000 or $0.03 per share,
      as
      compared to $4,682,000 or $0.07 per share in 2006. The difference in the net
      losses is as discussed in detail previously. The undeclared or imputed dividends
      in the six months ended June 30, 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.





12




**Liquidity
      and Capital Resources**





As
      of
      June 30, 2007, we had cash and cash equivalents totaling $105,000 and we had
      a
      working capital deficit of $6,420,000 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 June
      30,
      2007 or December 31, 2006. For the six month period ended June 30, 2007, we
      had
      no cash expenditures for capital equipment and leasehold improvements, as
      compared to $36,000 for the comparable 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 we 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 six times so that as of August 9, 2007, the
      principal balance is approximately $5.7 million and the maturity date is
      November 10, 2007. At June 30, 2007, the outstanding indebtedness subject to
      the
      Note and Security Agreement was $5,157,000.





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 June 30, 2007,
      in
      combination with continuing contractual commitments, will be sufficient to
      meet
      our anticipated capital requirements only through August 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 other sources of funding 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.




**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 June 30, 2007, our accumulated deficit
      was approximately $68,700,000 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.





13




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 August 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 $5,700,000 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.





*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.*





14




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.





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:




15




·
            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
      August 1, 2007, we had fourteen 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.*





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;




16




·
            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.





**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.




17




**PART
      II.**





OTHER
      INFORMATION





**Item
      6. Exhibits**


10.6
              Amendment
                  No. 6 to Secured Promissory Note issued to Matthew J. Szulik dated,
                  August
                  9, 2007.


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.




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




18





**EXHIBIT
      INDEX**


10.6
              Amendment
                  No. 6 to Secured Promissory Note issued to Matthew J. Szulik dated,
                  August
                  9, 2007.


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.