<PAGE>
 
================================================================================

                                 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 March 31, 1999

[_]  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)

                                (619) 558-6064
                          (Issuer's telephone number)


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  [_]


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 11, 1999, 12,232,510
shares of common stock were outstanding.

Transitional Small Business Disclosure Format (check one):  Yes  [_]  No  [X]


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                                       1
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.

                                  FORM 10-QSB

                                     INDEX



                                                                        Page No.
                                                                        --------

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements (unaudited)
 
          Condensed Balance Sheets -
            March 31, 1999 and December 31, 1998..........................     3
 
          Condensed Statements of Operations -
            For the Three Months ended March 31, 1999 and 1998
              and the period July 6, 1988 (inception) to March 31, 1999...     4
 
          Condensed Statements of Cash Flows -
            For the Three Months ended March 31, 1999 and 1998
              and the period July 6, 1988 (inception) to March 31, 1999...     5
 
          Notes to Condensed Financial Statements.........................     7
 
Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations...................     8
 
PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K................................    13

          Signature.......................................................    14

                                       2

<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                         (A Development Stage Company)

                           Condensed Balance Sheets


<TABLE>
<CAPTION>
                                                                       MARCH 31,       DECEMBER 31,
                                                                         1999              1998
                                                                   --------------------------------
ASSETS                                                               (UNAUDITED)
<S>                                                                <C>                <C>
Current assets:
 Cash and cash equivalents                                         $    305,113       $  1,383,148
 Short-term investments                                                       -                  -
 Other current assets                                                    76,978             66,459
                                                                   ------------       ------------ 
Total current assets                                                    382,091          1,449,607
                                                                   
 Deposits                                                                36,977             36,177
 Notes receivable from officers                                         140,000            141,000
 Equipment and leasehold improvements, net                              536,137            598,447
                                                                   ------------       ------------ 
                                                                   $  1,095,205       $  2,225,231
                                                                   ============       ============
LIABILITIES AND STOCKHOLDERS' EQUITY                               
Current liabilities:                                               
 Accounts payable                                                  $    469,511       $    515,413
 Accrued employee benefits                                              178,881            167,849
 Other accrued expenses                                                  25,952             21,574
 Current portion capital lease obligations                               84,386             84,518
 Deferred rent                                                           60,668             60,668
                                                                   ------------       ------------ 
Total current liabilities                                               819,398            850,022
                                                                   
Long-term portion capital lease obligations                              85,476            105,548
                                                                   
Stockholders' equity:                                              
 Convertible Preferred Stock, $.01 par value, 153,917 shares      
  authorized, 77,202 and 79,202 shares issued and outstanding     
  at March 31, 1999 and December 31, 1998, respectively;          
  liquidation preference - $7,720,200                                 7,400,226          7,600,226
 Common stock, $.01 par value, 25,000,000 shares authorized,                                              
  11,012,434 and 10,827,240 shares issued and outstanding at         
  March 31, 1999 and December 31, 1998, respectively                    110,136            108,274 
 Additional paid-in capital                                          26,774,033         26,549,125
 Deficit accumulated during development stage                       (34,094,064)       (32,987,964)
                                                                   ------------       ------------ 
Total stockholders' equity                                              190,331          1,269,661
                                                                   ------------       ------------ 
                                                                   $  1,095,205       $  2,225,231
                                                                   ============       ============ 
</TABLE>

See accompanying notes.

                                       3
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                         (A Development Stage Company)

                      Condensed Statements of Operations
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                      FOR THE PERIOD
                                                                                       JULY 6, 1988
                                                        THREE MONTHS ENDED            (INCEPTION) TO
                                                             MARCH 31,                   MARCH 31,
                                                     1999                1998                1999
                                               -----------------------------------------------------
<S>                                            <C>                 <C>                <C>
Revenues:
  Contract revenue                             $         -         $    53,750        $  4,354,965
  Interest income                                   13,002               8,656           1,093,931
  Product and other income                          22,649              25,039             652,663
                                               -----------         -----------        ------------
Total revenues                                      35,651              87,445           6,101,559
                                                 
Expenses:
  Cost of sales                                       (195)              3,160             279,484
  Research and development                         708,077             853,224          22,093,331
  Selling, general and administrative              427,619             502,048          13,583,921
  Royalties                                          6,250               6,250             296,421
                                               -----------         -----------        ------------
Total expenses                                   1,141,751           1,364,682          36,253,157
                                               -----------         -----------        ------------
Net loss                                        (1,106,100)         (1,277,237)        (30,151,598)
 
Undeclared dividends on preferred stock             68,459              69,567           5,030,474
                                               -----------         -----------        ------------
Net loss applicable to common shareholders     $(1,174,559)        $(1,346,804)       $(35,182,072)
                                               ===========         ===========        ============
Net loss per common share - basic and diluted       $(0.11)             $(0.13)
                                               ===========         ===========       
Shares used in computing net loss per common
 share - basic and diluted                      10,940,748          10,429,094
                                                ==========         ===========
</TABLE>

See accompanying notes.

                                       4
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                         (A Development Stage Company)

                      Condensed Statements of Cash Flows
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                  FOR THE PERIOD
                                                                                   JULY 6, 1988
                                                      THREE MONTHS ENDED          (INCEPTION) TO
                                                           MARCH 31,                  MARCH 31,
                                                     1999            1998               1999
                                                 -----------    -----------       --------------
<S>                                              <C>            <C>                <C>
OPERATING ACTIVITIES                                            
Net loss                                         $(1,106,100)   $(1,277,237)        $(30,151,598)
Adjustments to reconcile net loss to net cash                                     
 used for operating activities:                                                   
  Stock issued for compensation and interest          18,000              -              122,895
  Depreciation and amortization                       84,592         88,842            1,712,888
  Write-off of purchased technology                        -              -              503,500
  Changes in assets and liabilities:                                              
   Deposits                                             (800)           440              (36,977)
   Notes receivable from officers                      1,000          3,000             (140,000)
   Other current assets                              (10,519)        44,048              (76,978)
   Accounts payable                                  (45,902)       122,015              469,511
   Accrued employee benefits                          11,032         33,019              178,881
   Other accrued expenses                              4,378        (18,355)              25,952
   Deferred revenue                                        -              -               60,668
                                                 -----------    -----------         ------------ 
Net cash used for operating activities            (1,044,319)    (1,004,228)         (27,331,258)
                                                                                  
INVESTING ACTIVITIES                                                              
Purchase of technology                                     -              -             (570,000)
Purchase of equipment and improvements               (22,282)       (21,226)          (1,806,996)
Purchases of short-term investments                        -              -          (16,161,667)
Sales of short-term investments                            -        974,817           16,161,667
                                                 -----------    -----------         ------------ 
Net cash provided by (used for) investing                                         
 activities                                      $   (22,282)   $   953,591         $ (2,376,996)
</TABLE>

                                       5
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                         (A Development Stage Company)

                 Condensed Statements of Cash Flows, continued
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                              FOR THE PERIOD
                                                                               JULY 6, 1988
                                                      THREE MONTHS ENDED      (INCEPTION) TO
                                                          MARCH 31,              MARCH 31,
                                                     1999           1998           1999
                                              -----------      ----------      ------------ 
<S>                                           <C>               <C>            <C>
FINANCING ACTIVITIES                                                          
Net proceeds from exercise of options and                                     
 warrants, and sale of common stock           $     8,770       $  11,565       $16,606,682
Net proceeds from issuance and conversion                                     
 of preferred stock                                                     -        12,215,565
Net proceeds from convertible notes and                                       
 detachable warrants                                    -               -         1,068,457
Payment on capital lease obligations              (20,204)        (17,957)         (118,910)
Payment on note payable                                 -               -           (92,750)
Proceeds from note payable                              -               -           334,323
                                              -----------       ---------       ----------- 
Net cash provided by (used for) financing                                     
 activities                                       (11,434)         (6,392)       30,013,367
                                              -----------       ---------       ----------- 
Net increase (decrease) in cash and cash                                      
 equivalents                                   (1,078,035)        (57,029)          305,113
Cash and cash equivalents at beginning of                                     
 period                                         1,383,148         325,021                 -
                                              -----------       ---------       ----------- 
Cash and cash equivalents at end of period    $   305,113        $267,992       $   305,113
                                              ===========       =========       =========== 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW                                         
 INFORMATION                                                                  
Equipment purchased by capital leases         $         -    $          -       $   288,772
Interest paid                                       5,270           7,495           103,198
Imputed dividend on Series E stock                      -               -         3,266,250  
Conversion of Series D preferred stock to
 common stock                                           -               -         2,142,332
Conversion of Series E preferred stock to                                     
 common stock                                     200,000                           500,000
Series D stock issued for Series C stock                -               -         2,073,925
Series C dividends paid with Series D stock             -               -           253,875
Series D dividends paid with common stock     $         -    $          -       $   422,341
</TABLE>

See accompanying notes.

                                       6
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                         (A Development Stage Company)

                    Notes to Condensed Financial Statements
                                  (unaudited)

                                March 31, 1999


1.  BASIS OF PRESENTATION

The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three months ended March 31, 1999 and 1998 are unaudited.
These financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary to
state fairly the financial position at March 31, 1999 and the results of
operations for the three months ended March 31, 1999 and 1998. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the year ended December 31, 1999.
For more complete financial information, these financial statements and the
notes thereto should be read in conjunction with the audited financial
statements included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.

2.  NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of common
shares outstanding during the period. The net loss figures used for this
calculation recognize accumulated dividends on the Company's Series D and Series
F Preferred Stock. Such dividends are payable when declared by the Board of
Directors in cash or common stock.

3.  BASIC AND DILUTED LOSS PER SHARE

As required, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share," ("FAS No. 128") for the year ended December 31,
1998. FAS No. 128 changes the method used to calculate earnings per share and
requires the restatement of all prior periods reported. Under FAS No. 128, the
Company is required to present basic and diluted earnings per share if
applicable. Basic and diluted earnings per share are determined based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share also includes potentially dilutive securities such as options
and warrants outstanding and securities convertible into common stock.

Both the basic and diluted loss per share for the three months ended March 31,
1999 and 1998 are based on the weighted average number of shares of common stock
outstanding during the periods. Since potentially dilutive securities have not
been included in the calculation of the diluted loss per share for both periods
as their affect is antidilutive, there is no difference between the basic and
diluted loss per share calculations.

4.  NOTE RECEIVABLE WITH OFFICER

A loan for $140,000, secured by a pledge of stock, was made to an officer of the
Company on April 16, 1997, solely to meet tax obligations arising from the
exercise of a stock option. Interest accrues at the annual rate of 8% on the
unpaid principal balance. In February 1999, the loan term was extended one year.
All remaining principal and accrued interest thereon is to be paid to the
Company in full by February 2000.

                                       7
<PAGE>
 
5.  SUBSEQUENT EVENTS

Exercise of Warrants

Between April 1 and April 15, 1999, the Company received approximately $506,000
from the exercise of redeemable, publicly traded warrants originally issued as
part of PPTI's Initial Public Offering. Following the close of business on April
15, the remaining unexercised redeemable, publicly traded, warrants expired. On
May 12, 1999, the company received approximately $416,000 from the exercise of
warrants issued in conjunction with the private placement of the Company's
Series E Convertible Preferred Stock.

6.  LIQUIDITY

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes its existing
available cash and cash equivalents as of March 31, 1999, plus amounts received
as of May 12, 1999 from the exercise of both public and private warrants is
sufficient to meet its anticipated capital requirements until July 1999.
Substantial additional capital resources will be required to fund continuing
expenditures related to the Company's research, development and product
marketing activities. If adequate funds 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.

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
which 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, compliance with NASDAQ listing requirements, 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. The Company undertakes 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. The reader is encouraged to refer
to the Company's Annual Report on Form 10-KSB for the year ended December 31,
1998, as well as other recent filings with the Securities and Exchange
Commission, to ascertain the risks associated with these statements.

GENERAL OVERVIEW

Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or "the
Company"), is a development-stage biotechnology company incorporated on July 6,
1988 and is engaged in the research, development and production of medical
products based on its proprietary protein-based 

                                       8
<PAGE>
 
biomaterials technology. The Company has been unprofitable to date, and has an
accumulated deficit of $34,094,000. Since 1992, the Company has primarily
focused on developing materials technology and products to be used in the
surgical repair of tissue: soft tissue augmentation; surgical adhesives and
sealants; wound healing and tissue engineering; drug delivery devices; and
surgical adhesion barriers. The Company has also developed coating technology
that can efficiently modify and improve the surface properties of more
traditional biomedical devices. A common goal is to develop materials that
beneficially interact with human cells, enabling cell growth and the
regeneration of tissues with improved outcomes as compared to current products
and practices.

In December 1998, the Company filed its first Investigational Device Exemption
("IDE") with the U.S. Food and Drug Administration ("FDA") to request approval
to begin human clinical testing of its urethral bulking agent for the treatment
of female stress urinary incontinence. The Company intends to submit an
additional IDE to the FDA in the third quarter of 1999 to request approval to
begin human clinical testing of its dermal bulking agent for use in cosmetic and
reconstructive surgery applications. PPTI began studies to identify its most
promising biomaterial formulations for use in these soft tissue augmentation
products in 1996 and has devoted increasing resources to this program area
through 1997 and 1998 in preparation for beginning human clinical testing.

Between 1994 and 1997, the Company's efforts were focused predominantly on the
development of its surgical adhesive and sealant technology. As part of this
effort, the Company targeted the establishment of a strategic alliance with a
market leader in the field of surgical wound closure products which lead to the
execution of comprehensive license, supply and development agreements in
September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). Ethicon elected to terminate these agreements in
December 1997.

The Company has demonstrated both the adhesive performance and the
biocompatibility of its product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. PPTI is committed to the commercial development of its adhesive and
sealant technology and during 1998 the Company worked to determine the specific
markets and products providing the most significant opportunities for its use.
In particular, the Company has identified and initiated preliminary research and
development on an injectable adhesive product aimed at the repair of spinal
discs for the treatment of lower back pain. PPTI is seeking to establish a
strategic alliance with a leader in the targeted orthopedic markets.
 
To the extent sufficient resources are available, the Company continues to
research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.

PPTI is aggressively pursuing domestic and international patent protection for
its technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA, methods for the production and purification of protein polymers, end-use
products incorporating such materials and methods for their use. To date, the
United States Patent and Trademark Office ("USPTO") has issued fourteen patents
to the Company, eight of which were issued in 1998. In addition, PPTI has filed
corresponding patent applications in most other relevant commercial
jurisdictions.

In 1992, the Company raised approximately $8.9 million through its initial
public offering of common stock and redeemable warrants. The Company used a
major portion of these proceeds to generate substantive in vitro laboratory
evidence and in vivo animal test data demonstrating the biocompatibility and
performance of its protein polymers and derived biomaterials, and to establish a
materials science group which has developed important materials modification and
fabrication technology.

                                       9
<PAGE>
 
In July 1994, the Company raised approximately $2.1 million from the sale of its
unregistered Series C Preferred Stock to private investors. In September 1995,
the Company raised approximately $2.4 million from the sale of its unregistered
Series D Preferred Stock to the same private investors. Also at this time these
investors exchanged all of their holdings of Series C Preferred Stock and
accumulated dividends into Series D Preferred Stock. In January 1997, the
Company raised approximately $4.6 million from a private placement of the
Company's common stock with a number of institutional and accredited investors.

In April and May of 1998, the Company raised approximately $5.4 million from the
sale of 54,437.5 shares of the Company's unregistered Series E Convertible
Preferred Stock ("Series E Stock") priced at $100 per share with warrants to
purchase an aggregate of 3,266,250 shares of common stock to a small group of
institutional and accredited investors. In connection with this transaction, the
Company issued 26,240 shares of Series F Convertible Preferred Stock in exchange
for the same number of shares of outstanding Series D Convertible Preferred
Stock.

The Company's cash balance as of March 31, 1999 was $305,000. The Company plans
to raise additional funds for continuing operations through private or public
offerings and collaborative agreements. On April 15, 1999 the Company received
approximately $506,000 from the exercise of redeemable, publicly traded,
warrants issued as part of the initial public offering. On May 12, 1999, the
Company received $416,000 from the exercise of warrants issued in conjunction
with the sale of its Series E Convertible Preferred Stock. On a pro forma basis
on March 31, 1999, the cash balance including the net amount raised with
existing cash would be $1,227,000. At planned spending levels this amount is
expected to meet the Company's anticipated capital requirements until July 1999.

The Company's strategy with most of its programs is to enter into collaborative
development agreements with major medical product marketing and distribution
companies. Although these relationships, to the extent any are consummated, may
provide significant near-term revenues through up front licensing fees, research
and development reimbursements and milestone payments, the Company expects to
continue incurring operating losses for several more years. In their report for
the year ended December 31, 1998, our independent auditors stated that without
additional financing, there is substantial doubt about our ability to continue
as a going concern. We believe there are a number of alternatives available to
meet our continuing capital requirements. See the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further discussion.

RESULTS OF OPERATIONS

The Company received no contract research revenue for the three months ended
March 31, 1999, compared to $54,000 in revenue for the same period in 1998. The
reduction in contract revenue primarily represents the termination of research
and development reimbursements from various operating entities of the Johnson &
Johnson Company, including Ethicon, Inc. No additional contract revenues will be
generated from the Ethicon agreements which were terminated in December 1997.

Interest income was $13,000 for the three months ended March 31, 1999, versus
$9,000 for the same period in 1998. The increase resulted from increased cash
available for investing.

For the three months ended March 31, 1999 and 1998, sales and license fees from
the Company's ProNectin(R) and SmartPlastic(R) products were $23,000 and
$25,000, respectively. The difference was due to fluctuations in reorders by
distributors.

The Company incurred no cost of sales for the three months ended March 31, 1999,
compared to $3,000 for the same period in 1998. The decrease in costs related
primarily to adjustments in 

                                       10
<PAGE>
 
inventory charges. Royalty expense was $6,000 for both the three month periods
ended March 31, 1999 and 1998.

Research and development expenses for the three months ended March 31, 1999 were
$708,000, compared to $853,000 for the same period in 1998, a 17% decrease. The
decrease was primarily attributable to completion of external contracts and
consulting services related to the Company's soft tissue augmentation program,
including preclinical testing and preparation of the Investigational Device
Exemption submitted to the Food and Drug Administration ("FDA") in December 1998
requesting permission to begin human clinical testing, and implementation of the
required Good Laboratory Practices ("GLP") manufacturing facilities and
monitoring systems. The Company expects, in general, that its research and
development expenses will continue to increase over time if its other products
in development and other contemplated projects successfully progress and
additional capital is obtained.

Selling, general and administrative expenses for the three months ended March
31, 1999 were $428,000, as compared to $502,000 for the same period in 1998, a
15% decrease. This decrease was due to a reduction in legal and other
professional services primarily related to Securities and Exchange Commission
filings and reduced investor relations expenses. The Company expects its
selling, general and administrative expenses to continue to decrease in the near
term, but will increase in the future as support for its research and
development efforts may require and to the extent additional capital is
obtained.

For the three months ended March 31, 1999, the Company recorded a net loss
applicable to common shareholders of $1,175,000, or $0.11 per share compared to
a loss of $1,347,000, or $0.13 per share for the same period in 1997, a 13%
decrease. Also included in each of the three month periods of 1999 and 1998 was
$68,000 and $70,000, respectively, for undeclared dividends related to the
Company's preferred stock.

The Company expects to incur similar or increasing operating losses in the
future (to the extent additional capital is obtained), due primarily to
increases in the Company's soft tissue augmentation program's development,
manufacturing and business development activities. The Company's results depend
on its ability to establish strategic alliances and generate contract revenues,
increased research, development and manufacturing efforts, preclinical and
clinical product testing and commercialization expenditures, expenses incurred
for regulatory compliance and patent prosecution, and other factors. The
Company's results will also fluctuate from period to period due to timing
differences.

To date the Company believes that inflation and changing prices have not had a 
material effect on its continuing operations.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 1999, the Company had cash, cash equivalents and short-term
investments of $305,000 as compared to $1,383,000 at December 31, 1998. As of
March 31, 1999, the Company had working capital of ($437,000) as compared to
$600,000 at December 31, 1998. In April and May 1999, the Company received
$922,000 from the exercise of redeemable, publicly traded, warrants issued in
conjunction with PPTI's Initial Public Offering and from the exercise of certain
warrants issued in conjunction with the private placement of the Company's
Series E Convertible Preferred Stock.

The Company had long-term debt obligations as of March 31, 1999 of $85,000 in
the form of capital lease obligations, versus $106,000 as of December 31, 1998.
For the three months ending March 31, 1999, the Company's expenditures for
capital equipment and leasehold improvements totaled $22,000, compared with
$21,000 for the same period last year. The Company is expecting to increase its
capital expenditures in the next few quarters (to the extent additional capital
is 

                                       11
<PAGE>
 
obtained), as the Company improves existing space to expand capacity to meet
materials manufacturing requirements for clinical testing. The Company may enter
into additional capital lease arrangements if available at appropriate rates and
terms.

The Company believes its existing available cash and short-term investments,
including the proceeds from the recent exercise of warrants, will be sufficient
to meet its anticipated capital requirements until July 1999. Substantial
additional capital resources will be required to fund continuing expenditures
related to the Company's research, development, manufacturing and business
development activities. The Company believes there may be a number of
alternatives to meeting the continuing capital requirements of its operations,
including additional collaborative agreements and public or private financings.
The Company is currently in discussions at various stages with several potential
collaborative partners that, based on the results of various in vitro and in
vivo product performance evaluations, could result in generating revenues in the
form of license fees, milestone payments or research and development
reimbursements. However, there can be no assurance that any of these fundings
will be consummated in the necessary time frames needed for continuing
operations or on terms favorable to the Company. If adequate funds 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.

YEAR 2000 COMPLIANCE

The Company continues to modify its information technology in recognition of the
year 2000 issue. The "Year 2000" issue concerns potential exposure related to
the interruption of business practice and financial misinformation resulting
from the application of computer programs which have been written using two
digits, rather than four, to define the applicable year of business
transactions.

The Company has undertaken initiatives to ensure that its computer systems are
Year 2000 compliant. To date, the Company has not incurred any material costs in
connection with its Year 2000 plan. Based on its assessments to date, the
Company does not expect to incur any further significant costs, or anticipate
any significant problems or uncertainties associated with becoming Year 2000
compliant.

The following is a breakdown by phase of the progress the Company has made to
date on its Year 2000 plan:

                      Phase                          Timeframe   % Complete
                      -----                          ---------   -----------
          Initial identification and assessment       Q-4 1998       95%
          Remediation                                 Q-4 1998       95%
          Testing                                     Q-2 1999       80%
          Contingency planning                        Q-2 1999       60%
 

The Company is reliant on its vendors and suppliers and may be reliant on
strategic partners to provide Year 2000 compliant systems prior to December 31,
1999. The Company is in the process of surveying all of its major vendors and
suppliers to determine whether their systems are Year 2000 compliant. At this
time, the impact on the Company of significant vendors and suppliers not being
in full compliance cannot be reasonably estimated. However, the Company believes
that any of its vendors and suppliers can be replaced with minimal cost impact.
The Company is developing a plan to mitigate the impact of vendors and suppliers
who are not in compliance with issues related to the Year 2000.

                                       12
<PAGE>
 
                          PART II.  OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.  Exhibits:

    Exhibit
    Number            Description
    ------            -----------

      27              Financial Data Schedule.


b.  Reports on Form 8-K

    None.

                                       13
<PAGE>
 
                                   SIGNATURE


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  May 14, 1999          By /s/ J. THOMAS PARMETER
      ------------              --------------------------------
                               J. Thomas Parmeter
                               Chairman of the Board, Chief
                               Executive Officer, President
 

Date  May 14, 1999          By  /s/ JANIS Y. NEVES
      ------------              -------------------------------
                                Janis Y. Neves
                                Director of Finance, Controller
                                and Assistant Secretary

                                       14
<PAGE>
 
                                 EXHIBIT INDEX

 

Exhibit                                                  Sequentially
Number     Description                                   Numbered Page
------     -----------                                   -------------

  27       Financial Data Schedule.

                                       15