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, 2006  [   ]
        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 lyear, 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.
YesXNo  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesNoX  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 16, 2006, 67,329,204 shares of common stock were outstanding.  Transitional Small Business Disclosure Format (check one):
        YesNoX   Protein Polymer Technologies, Inc.  1


FORM 10-QSB  INDEX  Page No. PART I.
        FINANCIAL INFORMATION  Item 1.
        Financial Statements  Balance Sheets March 31, 2006 and December 31, 2005 (unaudited)
        3  Statements of Operations For the three months ended March 31, 2006 and 2005 (unaudited)
        4  Statements of Cash Flows For the three months ended March 31, 2006 and 2005 (unaudited)
        5  Notes to Financial Statements
        6  Item 2.
        Management's Discussion and Analysis or Plan of Operation
        12  Item 3.
        Controls and Procedures
        18   PART II.
        OTHER INFORMATION  Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds
        19  Item 6.
        Exhibits
        19  Signatures
        20  2 .


PART I.FINANCIAL INFORMATION Item 1.
        Financial Statements  Protein Polymer Technologies, Inc. Balance Sheets (unaudited)  March 31,
        
        
        December 31,2006
        
        
        2005AssetsCurrent assets:Cash and cash equivalents
        $
        48,786
        
        $
        1,211,748Contract receivable
        
        220,919
        
        
        113,792Current portion of rent receivable
        
        79,527
        
        
        88,477Prepaid expenses and other assets
        
        30,388
        
        
        32,440Total current assets
        
        379,620
        
        
        1,446,457Deposits
        
        30,479
        
        
        29,679Notes receivable
        
        246,402
        
        
        242,884Rent receivable, net of current portion and reserve of $128,273 at March 31, 2006 and December 31, 2005
        
        
        
        
        26,050Technology license agreement
        
        1,092,604
        
        
        1,106,435Equipment and leasehold improvements, net
        
        301,905
        
        
        292,778Total assets
        $
        2,051,010
        
        $
        3,144,283Liabilities and stockholders' equityCurrent liabilities:Accounts payable
        $
        981,781
        
        
        420,672Accrued expenses
        
        375,332
        
        
        381,139Current maturities of notes payable
        
        82,100
        
        
        195,565Total current liabilities
        
        1,439,213
        
        
        997,376Notes payable, net of current maturities
        
        436,971
        
        
        323,506Deferred rent
        
        12,126
        
        
        8,820Total liabilities
        
        1,888,310
        
        
        1,329,702Stockholders' equity:Convertible preferred stock, $.01 par value; 5,000,000 shares authorized; 66,045
shares  issued  and  outstanding  at March  31,  2006  and  December  31,  2005,
respectively  -  liquidation  preference  of  $6,604,500  at March 31,  2006 and
December 31, 2005, respectively
        
        6,059,917
        
        
        6,059,917Common stock, $.01 par value;  120,000,000 shares  authorized; 67,311,408  shares
issued and outstanding at December 31, 2005 and 225,000,000  shares  authorized,
67,329,204 shares issued and outstanding at March 31, 2006
        
        673,304
        
        
        673,125Additional paid-in capital
        
        55,252,343
        
        
        54,122,000Accumulated deficit
        
        (61,822,864
        )
        
        (59,040,461
        )Total stockholders' equity
        
        162,700
        
        
        1,814,581Total liabilities and equity
        $
        2,051,010
        
        $
        3,144,283    See accompanying notes.  3 .


Protein Polymer Technologies, Inc.  Statements of Operations (unaudited) Three months ended
March 31,2006
        
        
        2005Revenues:Contract revenue
        $
        220,919
        
        $
        512,771Product and other income
        
        18,558
        
        
        670Total revenues
        
        239,477
        
        
        513,441Cost of sales
        
        803
        
        
        Gross profit
        
        238,674
        
        
        Operating expenses:Research and development
        
        1,036,440
        
        
        555,967Selling, general and administrative
        
        1,887,311
        
        
        393,293Total expenses
        
        2,923,751
        
        
        949,260Net loss from operations
        
        (2,685,077
        )
        
        (435,819
        )Other income (expense):Interest income
        
        2,524
        
        
        79Interest expense
        
        (10,900
        )
        
        (86,625
        )Total other expense
        
        (8,376
        )
        
        (86,546
        )Net loss
        
        (2,693,453
        )
        
        (522,365
        )Undeclared, imputed and/or paid dividends on preferred stock
        
        157,409
        
        
        550,041Net loss applicable to common shareholders
        $
        (2,850,862
        )
        $
        (1,072,406
        )Basic and diluted net loss per common share
        $
        (0.04
        )
        $
        (0.03
        )Shares used in computing basic and diluted net loss per common share
        
        67,311,606
        
        
        40,294,220     See accompanying notes.  4 .


See accompanying notes. Protein Polymer Technologies, Inc. Statements of Cash Flows (unaudited)  Three months endedMarch 31,2006
        
        
        2005Operating activitiesNet loss
        $
        (2,693,453
        )
        $
        (522,365
        )Adjustments to reconcile net loss to net cash used for operating activities:Depreciation and amortization
        
        40,344
        
        
        7,421Share based compensation expense
        
        1,038,395
        
        
        Amortization of discounts on notes payable
        
        
        
        
        56,493Changes in operating assets and liabilities:Deposits
        
        (800
        )
        
        (800
        )Prepaid expenses
        
        2,053
        
        
        (18,125
        )Rent receivable
        
        35,000
        
        
        15,000Contracts receivable
        
        (107,127
        )
        
        Accounts payable
        
        561,108
        
        
        17,758Deposits payable
        
        
        
        
        (33,000
        )Accrued expenses
        
        (5,807
        )
        
        37,160Deferred revenue
        
        
        
        
        (57,783
        )Deferred rent
        
        3,307
        
        
        Net cash used for operating activities
        
        (1,126,980
        )
        
        (498,241
        )Investing activitiesPurchase of equipment and improvements
        
        (35,641
        )
        
        Issuance of notes receivable
        
        (3,518
        )
        
        Net cash used for investing activities
        
        (39,159
        )
        
        Financing activitiesNet proceeds from exercise of options and warrantsand sale of common stock
        
        3,177
        
        
        346,392Net proceeds from issuance of debt - related party
        
        
        
        
        260,000Payments on notes payable - related party
        
        
        
        
        (150,000
        )Net cash provided by financing activities
        
        3,177
        
        
        456,392Net decrease in cash and cash equivalents
        
        (1,162,962
        )
        
        (41,849
        )Cash and cash equivalents at beginning of the period
        
        1,211,748
        
        
        82,222Cash and cash equivalents at end of the period
        $
        48,786
        
        $
        40,373Supplemental disclosures of cash flow informationInterest paid
        $
        2,090
        
        $
        86,625Non cash investing and financing activityImputed dividend on extension of warrants
        $
        88,950
        
        $
        Conversion of Series G preferred stock to common stock
        $
        
        
        $
        20,000Conversion of Series I preferred stock to common stock
        $
        
        
        $
        650,000Imputed dividend on warrant repricing
        $
        
        
        $
        481,582    See accompanying notes.  5 .


Protein Polymer Technologies, Inc. Notes to Financial Statements Note 1.
        Basis of Presentation The condensed financial statements of Protein Polymer Technologies, Inc. (the Company) for the three months ended March 31, 2006 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, results of operations and cash flows for the interim period presented. The balance sheet as of December 31, 2005 was derived from the Companys audited financial statements. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006. These financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10KSB and 10KSB/A for the year ended December 31, 2005, filed with the
Securities and Exchange Commission. Recent 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.   Effective   for  the  Company   beginning
January 1,  2007,  SFAS  No. 155 is not expected to 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
  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 is
also effective for the Company  beginning  January 1,  2007;  however,  the
standard is not expected to have an impact on the Company's  financial position,
results of operation or cash flows. In the first  quarter  of 2006,  the  Company  adopted  SFAS  No. 154,Accounting  for  Changes  and  Error  Correctionsa
replacement  of  Accounting Principles Board (APB)  Opinion  No.20 and SFAS  No. 3,  ("SFAS No.  154")  which  changed the
requirements  for the  accounting  for and  reporting  of a voluntary  change in
accounting   principle.   The  Company  also  adopted  Statement   No. 151,Inventory     Costsan    amendment    of    ARB
No.43,    Chapter   4("SFAS No.   151")  which,  among  other  changes,
requires  certain  abnormal  expenditures  to be  recognized  as expenses in the
current period versus  capitalized as a component of inventory.  The adoption of
SFAS No.  154 did not impact the  results  presented  and the impact on any
future  periods  will  depend  on the  nature  and  significance  of any  future
accounting  changes subject to the provisions of the statement.  The adoption of
SFAS No.  151 did not have any impact on the Company's  financial position,
results of operations or cash flows. 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 quarter ended March 31,
2006,  the Company  incurred a net loss of approximately $2,693,000.  As of March 31, 2006 we
have  accumulated  losses   aggregating   approximately $61,823,000. Our  cash  and  cash
equivalents of $49,000,  in combination  with a loan for $1,000,000  received in
April 2006 (see Note 12, Subsequent Events) and anticipated  additional contract
and  license  payments,  will be  sufficient  to meet  our  anticipated  capital
requirements only through the end of June 2006. Prior to the commercialization of its products, substantial additional capital resources will be required to fund continuing operations related to the Companys research, development, manufacturing, clinical testing, and business development activities. The Company believes there may be a number of alternatives available to meet the continuing capital requirements of its operations, such as collaborative agreements and public or private financings. Further, the Company is currently in discussions with several potential financing sources and collaborative partners and funding in the form of equity investments, debt instruments, license fees, milestone payments or research and development payments could be generated. There can be no assurance that any of these potential sources of funds will be realized in the time frames needed for continuing operations or on terms favorable to the Company. If adequate
funds in the future are not available, the Company will be required to  6


Protein Polymer Technologies, Inc. Notes to Financial Statements 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. Note 2.
        Accounting for Stock-Based Compensation On  January  1, 2006 the  Company  adopted  SFAS   No. 123   (Revised  2004),   Share   Based
Payment, (SFAS No. 123), using the modified prospective method. In
accordance with SFAS No. 123, the Company measures the cost of employee services
received in exchange for an award of equity  instruments based on the grant-date
fair value of the award. That cost is recognized over the period during which an
employee is required to provide  service in exchange  for the award    the
requisite  service period.  The Company  determines the grant-date fair value of
employee share options using the Black-Scholes option-pricing model. Under the modified prospective  approach,  SFAS No. 123 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. 123, 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. 123. Prior periods were not
restated to reflect the impact of adopting the new  standard.  During the period
ended March 31, 2006, the Company  recorded  $1,038,000 in non-cash  charges for
the  implementation  of SFAS No. 123. As of March 31, 2006, there was approximately
$1,665,000  of  total  unrecognized   compensation  costs  related  to  unvested
options.  The Company has not granted any options in 2006. The fair value of stock options granted in 2005 was estimated using the Black-Scholes model with the following assumptions: expected volatility of 210%, expected term of 3 years, risk-free interest rate of 3.50%, and expected dividend yield of 0%. 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.  In February 2006, the Company amended its 2002 Stock Option Plan to increase the number of options available for grant to 20,000,000. The options will expire ten years from their respective dates of grant. Options become exercisable ratably over periods of up to three years from the dates of grant. The purchase price of each option approximated the fair market value of the common stock on the date of grant.  The following table summarizes the stock option transactions during the three months ended March 31, 2006:  WeightedaverageWeighted
        
        remainingaverage
        
        contractualexercise
        
        lifeShares
        
        price
        
        (in years)Options outstanding at January 1, 2006
        
        12,638,082
        
        $0.72
        
        7.93Options granted
        
        -
        
        -
        
        -Options exercised
        
        -
        
        -
        
        -Options terminated
        
        348,500
        
        $1.37
        
        -Options outstanding at March 31, 2006
        
        12,289,582
        
        $0.70
        
        6.98Options exercisable at March 31, 2006
        
        10,786,614
        
        $0.72
        
        6.83   7 .


Protein Polymer Technologies, Inc. Notes to Financial Statements Prior to January 1, 2006,  the Company  accounted for  stock-based  compensation
using the  intrinsic  value method  prescribed in  APB No.  25,  Accounting  for Stock  Issued to  Employees,  and
related  interpretations.  Had  compensation  cost for the plan been  determined
based on the fair value of the  options at the grant dates  consistent  with the
method of SFAS No. 148,  Accounting  for Stock-Based  Compensation  
Transition  and  Disclosure    an  Amendment  of SFAS No.  123,  the
Companys net earnings and earnings per share would have been:  For the three monthsEnded March 31,2005Net loss as reported
        
        $(1,072,406)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
        
        (181,393)Pro forma net loss
        
        $(1,253,799)Basic and diluted loss per share
        
        $(0.03)Pro forma basic and diluted loss per share
        
        $(0.03)  The pro forma compensation costs presented above were determined using the weighted average fair values of options granted under the Companys stock option plans.  The fair value of the grants was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions. See the 2005 assumptions below:  Expected life
Risk-free interest rate
Dividend yield
Volatility
        33.50%-210%  Note 3.
        Revenue and Expense Recognition  Research and development contract revenues are recorded as earned in accordance with the terms and performance requirements of the contracts. If the research and development activities are not successful, we are not obligated to refund payments previously received. Fees from the sale or license of technology are recognized on a straight-line basis over the term required to complete the transfer of technology or the substantial satisfaction of any performance related responsibilities. License fee payments received in advance of amounts earned are recorded as deferred revenue. Milestone payments are recorded as revenue based upon the completion of certain contract specified events that measure progress toward completion under certain long-term contracts. Royalty revenue related to licensed technology is recorded when earned and in accordance with the terms of the license agreement. Research and development
costs are expensed as incurred. Revenue from product sales is recognized at the time product is shipped.  Note 4.
        Promissory Notes Receivable  On  July  12,  2005,   the   Companyentered   into  a  non-binding   letter  of  intent  to  acquire  Surgica
Corporation,  a medical device company that develops,  manufactures  and markets
embolization  products.  The letter of intent was  extended by mutual  agreement
until  December 12,  2005.  On December  19,  2005,  the Company  entered into a
technology license agreement with Surgica (see Note 9).  As specified in the Letter of Intent, the Company agreed to advance Surgica certain funds for on-going operations in return for Promissory Notes. As of March 31, 2006, the Company had loaned Surgica a total of $238,000. The Promissory Notes are due and payable on January 5, 2008. Interest on the unpaid balance of each Promissory Note accrues at the rate of 6.00% per annum, payable annually on the 5th day of January, from the date of issuance through the date that the principal of the Promissory Note is paid in full. As of March 31, 2006, Surgica had accrued $9,000 in interest payable.   8


Protein Polymer Technologies, Inc. Notes to Financial Statements Note 5.
        Rent Receivable The Company subleases 6,183 square feet of its office and research facilities under a month to month arrangement for $13,000 per month plus utilities. From December 2002 until July 2004, the sub-lessee was unable to make monthly rental payments due to a lack of funding. In August 2004 the sub-lessee resumed making rental payments and as of September 2004 an additional $5000 per month is being paid as credit against previous rental obligations. Obligations under the sublease are secured by certain listed property and equipment of the sub-lessee. At March 31, 2006 the current portion due from the sub-lessee was $80,000 and the long-term portion was $128,000, net of reserve of $128,000. Note 6.
        Equipment and Leasehold Improvements Equipment and leasehold improvements at March 31, 2006 are comprised of the following:  March 31,2006
        
        December 31,2005Laboratory equipment
        $
        1,376,000
        
        $
        1,375,000Office equipment
        
        221,000
        
        
        218,000Leasehold improvements
        
        361,000
        
        
        329,0001,958,000
        
        
        1,922,000Less accumulated depreciation and amortization
        
        (1,656,000
        )
        
        (1,629,000
        )$
        302,000
        
        $
        293,000  Depreciation expense was $27,000 for the quarter ending March 31, 2006 and $49,000 for the year ended December 31, 2005. Note 7.
        Exercise and Exchange of Warrants  In January 2004, certain holders of warrants issued in conjunction with the sale of the Company's Series G convertible preferred stock exercised their warrants to purchase 855,303 shares of the Company's common stock. These warrants were due to expire on January 31, 2005. The exercise price of such warrants was $0.55 per share. In order to induce the warrant holders to exercise their warrants prior to the expiration date, the Company offered to reduce the exercise price of the warrants from $0.55 to $0.33 per share and offered each warrant holder a new warrant, for the same number of shares of the Company's common stock, at an exercise price of $0.50 per share. As a result, the Company raised $282,000. The newly issued warrants were set to expire January 31, 2006. In connection with the repricing and issuance of additional warrants to the investors, the Company recorded an imputed dividend of $482,000
during the first quarter of 2005 to reflect the additional benefit created for such investors. The newly issued warrants expiration date was extended from January 31, 2006 to January 31, 2007. The Company recorded an imputed dividend of $89,000 in the quarter ending March 31, 2006 to reflect the additional benefit created for the investors.  Note 8.
        Notes Payable On December 19, 2005, in connection with the Surgica License Agreement, the Company assumed several notes payable agreements. The notes bear interest at rates ranging from 6% to 10%, and mature at various dates through January 2009. As of March 31, 2006 the current and long term note balances were $82,000 and $437,000, respectively. Quarter ending
        
        Notes payableMarch 31,
        
        maturities2006
        $
        82,0002007
        
        124,0002008
        
        213,0002009
        
        100,000Total maturities
        $
        519,000   9 .


Protein Polymer Technologies, Inc. Notes to Financial Statements Note 9.
        Technology License Agreement On December 19, 2005, the Company entered into a License Agreement with Surgica Corporation (Surgica), a medical device company that develops, manufactures and markets embolization products. Embolization is a minimally invasiveprocedure, generally performed by interventional radiologists, used to treat uterine fibroids, liver cancer and neurovascular malformations. Pursuant to the License Agreement, the Company acquired exclusive marketing and distribution rights to Surgicas three embolization products, one issued patent, and technical and market know-how. Concurrent with the signing of the License Agreement, the Company closed a previously entered into Asset Purchase Option Agreement (Option Agreement) and entered into a Supply and Services Agreement (Supply Agreement) with Surgica (See Note 11). The Company  capitalized a total of approximately $1,106,000 in connection with this agreement
based on cash  consideration  paid in the amount of $385,000,  the assumption of
certain   liabilities  of  Surgica  totaling  $521,000  and  indemnification  of
contingent  liabilities  up to a  maximum  of  $200,000.  Under the terms of the
License  Agreement,  the agreement will continue,  unless terminated  earlier in
accordance with its terms, for twenty (20) years. Furthermore, the agreement provides that the License Agreement shall automatically terminate and be effectively assigned to the Company if the Company exercises its option to purchase the assets of the Licensor under the Option Agreement, and that in the event the Company does not exercise this option, the parties shall negotiate in good faith for the reconveyance of the license to the Licensor. The total capitalized amount is being amortized on a straight line basis over the initial twenty (20) year term of the License Agreement, with amortization commencing on January 1, 2006. In addition to the cash payments and assumption of certain liabilities, the License Agreement provides for Surgica to receive a royalty of twenty-five percent (25%) of net profits, if any, on revenues generated by the sale by the Company of Surgica products. Technology license agreement consists of the following at March 31, 2006 (in thousands): Technology license agreement
        $
        1,106,000Less accumulated amortization
        
        (13,000)$
        1,093,000  Amortization expense was $13,000 for the quarter ended March 31, 2006.  Note 10.
        Contracts Receivable Under an existing Supply and Services agreement with Spine Wave Corporation, the
Company  provides  various  research  and  development  services  for Spine Wave
including the production of product used in Spine  Waves  clinical trials.
These  services  are billed  upon the  completion  of various  agreed  upon work
products.  On March 31, 2006, the Company had outstanding Spine Wave invoices in
the amount of approximately $221,000. Note 11.
        Commitments Indemnification Against Claims related to License Agreement In connection with the License Agreement (See Note 9), the Company agreed to indemnify Surgica for up to $200,000 in connection with claims by the Sapphire Group LLC for fees owed pursuant to an Engagement Letter entered into between Surgica and the Sapphire Group LLC, as a result of agreements entered into between Surgica and the Company. A former Director of the Company is a principal of the Sapphire Group LLC.  10 .


Protein Polymer Technologies, Inc. Notes to Financial Statements Asset Purchase Option Agreement On December 19, 2005 the Company closed the Option Agreement that had been entered into with Surgica on November 23, 2005. Under the terms of the Option Agreement, the Company has the right to acquire substantially all of the assets of Surgica for 2,000,000 shares of the Companys common stock and a potential future incentive issuance of additional shares of the Companys common stock ( Earn-out Shares), based on the future sales performance of Surgicas products during the first quarter of 2007. The additional shares of Earn-out common stock will be issued, if at all, only if the average sales per quarter from the operations to be transferred from Surgica to us for the first (1st) and second (2nd) quarters of 2007 are equal to or greater than a predetermined set amount. The Option Agreement is exercisable, at our sole discretion, for a term of up to two (2) years from December
19, 2005. Once Surgica is given notice of the Companys intent to exercise the option, if at all, the exercise of the option itself will be subject to approval by Surgicas stockholders. Supply and Services Agreement On December 19, 2005 the Company entered into a Supply Agreement with Surgica. Under the terms of the Supply Agreement, Surgica is obligated to provide product development and manufacturing services to the Company and the Company is obligated to fund monthly operating costs of Surgica up to amounts specified in Supply Agreement, and purchase products for sale and for clinical use at prices specified in the Supply Agreement. Pursuant to the terms of the Supply Agreement, the Company is obligated to fund annual operating costs of Surgica of up to approximately $800,000 during 2006. Thereafter, the Companys obligation to fund Surgicas operating costs is subject to a future determination to be made based on mutually agreed upon operating budgets. Note 12.
        Subsequent Events On April 21, 2006, the Company  entered into a Security  Agreement and a secured
promissory  note, each dated as of April 13, 2006,  with an accredited  investor
pursuant  to which  the  investor  loaned  the  Company  a total  of  $1,000,000
($500,000 in cash and an additional $500,000 deposited with an escrow agent as a
line of credit)  in  exchange  for (i) a warrant, expiring April 30, 2009, to  purchase  an  aggregate  of
500,000 shares of the Companys  common stock at an exercise price of $0.30
per share and (ii) a continuing security interest in and a general lien upon (A)
1,000,000 shares of Spine Wave, Inc. (SWI) common stock owned by the
Company;  (B) a warrant to purchase  1,000,000 shares of Spine Wave, Inc. common
stock owned by the Company  currently  set to expire June 30, 2006;  and (C) all
U.S. patents owned. The secured promissory note is due on July 12, 2006.  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.  11 .


Item 2.
        Managements Discussion and Analysis or Plan of Operation 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  recently  acquired an  exclusive  license to three
FDA-cleared arterial  embolization  products and related technology from Surgica
Corporation.  The  transaction  also  included  an  option  to  acquire  all  of
Surgicas  assets  (See  Recent  Events:  Surgica   Corporation
below).  We have been  unprofitable  to date,  and as of March  31,  2006 had an
accumulated deficit of approximately $61,823,000. Protein polymers are synthetic proteins created from scratch through chemical DNA (gene) synthesis, and produced in quantity by traditional large-scale microbial fermentation methods. As a result, protein polymers contain no human or animal components that could potentially transmit or cause disease. Due to their synthetic design, protein polymers are capable of combining the biological functionality of natural proteins with the chemical functionality and exceptional physical properties of synthetic polymers. Our primary goal is to develop medical products for use inside the body with significantly improved outcomes as compared to current products and practices. Our product candidates for surgical repair, augmentation and regeneration of human tissues are in various stages of research and development. The more advanced programs are bulking agents for soft tissue augmentation, particularly for use in urethral tissue for the treatment of female stress incontinence, tissue adhesive formulations for the repair of spinal discs damaged due to injury or aging, and preclinical development of a new surgical sealant designed to prevent air and fluid leaks following lung, gastrointestinal, and cardiovascular surgery. We currently are devoting the majority of our resources to the development and FDA approval of these products, and to the commercial launch of the three Surgica embolization products. Because of our technologys breadth of commercial opportunity, we are pursuing multiple routes for commercial development. Currently, we independently are developing the incontinence urethral bulking product and the surgical sealant. We have established a comprehensive license and development agreement with Genencor International for the use of our materials and technology to develop, manufacture and commercialize products for industrial markets. Genencor International is one of the worlds largest manufacturers of industrial enzymes and other biologically derived products. Through this arrangement, we could receive milestone payments, and eventually royalties on the sale of products, if any. For development and commercialization of our spinal disc repair product, we entered into agreements with Spine Wave, Inc., which we expect will provide us with both near term research and
development support and eventually royalties on the sale of licensed products, if any.  12


Recent Events:  Thuris Corporation On November 21, 2005, we entered into a non-binding, letter of intent with Thuris Corporation. Thuris is a privately held biopharmaceutical company focused on medical device solutions to aid in drug development and diagnosis of Central Nervous System (CNS) disorders including Mild Cognitive Impairment and Alzheimers Disease.  Thuris is also developing pharmaceuticals for select CNS orphan and niche indications including ischemia-related conditions, brain inflammation and Huntingtons disease. Under the terms of the letter of intent, a wholly-owned subsidiary formed by us would merge into Thuris which would thereafter be our wholly-owned subsidiary. The stockholders, option holders and warrant holders of Thuris would receive from us, in exchange for their holdings, a number of shares of our common stock, or common stock equivalents, equal to between 30% and 50% of our
outstanding capital stock, calculated on a fully diluted basis. Although the exclusivity period under the letter of intent with Thuris has expired and issues have arisen and continue to arise, we continue to negotiate with Thuris.  There can be no assurance that definitive agreements will be entered into or that any transaction with Thuris will be consummated, or, if consummated, that the transaction would be on the terms and conditions set forth in the letter of intent. Significant Collaborative Agreements Our collaborative development agreements generally contain provisions for specific payments for defined activities, services, royalties on the sales of developed products, and/or the accomplishment of performance benchmarks. These agreements also may provide for equity investments or other financial incentives. Technology license agreements are usually associated with collaborative development agreements, but occasionally we will agree to a license without an accompanying development agreement. Surgica Corporation On November 23, 2005, we entered into an Asset Purchase Option Agreement (Option Agreement), with Surgica Corporation (Surgica), a medical device company that develops, manufactures and markets embolization products. Embolization is a minimally invasive procedure, generally performed by interventional radiologists, used to treat uterine fibroids, liver cancer and neurovascular malformations. Pursuant to the Option Agreement we were granted a one-year option (which may be extended by one year at our discretion) to acquire substantially all of Surgicas assets in exchange for two million shares of our common stock and a potential future incentive issuance of additional common stock based on the future sales performance of Surgicas products during the first quarter of 2007. On December 19, 2005, we entered into a License Agreement and Supply and Services agreement with Surgica, pursuant to which we acquired exclusive rights to Surgicas technology and products. Upon execution and delivery of the License Agreement, Surgica transfered to us its PVA Plus, MaxiStat, and MicroStat 510(k) clearances from the FDA by delivering a duly executed bill of sale and assignment. Other agreements executed concurrently included: (i) the consent of AngioDynamics, Inc. for the assignment by Surgica to us of their distributor agreement, dated as of June 28, 2002; (ii) a voting agreement (and proxy) between us and Louis R. Matson; Surgicas President and Chief Executive Officer and majority shareholder; (iii) an employment agreement between Surgica and Louis R. Matson to expire no later than December 31, 2007; and (iv) a side letter agreement between
us and Louis R. Matson representing that, to his actual knowledge, each of the representations and warranties of Surgica set forth in the Option Agreement was true and correct at the date the Option Agreement was executed. The following is a brief summary of the transaction. Asset Purchase Option Agreement.  Under the terms of the Option Agreement, we have the option to acquire substantially all of the assets of Surgica for (i) 2 million shares of our common stock and (ii) a potential earnout payment of additional shares of our common stock based on the future sales performance of Surgicas products during the first quarter of 2007. The earnout payment of additional shares of our common stock, if any, will be determined in part on the price per share of our common stock based on the 90 day prior average price of our common stock as of April 1, 2007. The option is exercisable, at our sole discretion, for a term of up to two (2) years from December 19, 2005. Once Surgica is given notice of our intent to exercise the option, if at all, the exercise of the option itself will be subject to approval by Surgicas stockholders.
There would be no affect whatsoever if we decided not to exercise the asset purchase option. License Agreement and Supply and Services Agreement.  Under the terms of the License Agreement, we acquired exclusive rights to Surgicas three embolization products, one issued patent, and technical and market know-how in return for (i) the assumption of approximately $522,000 of certain Surgica liabilities, (ii) a cash payment to Surgica of approximately $385,000, and (iii) in connection with the license agreement, the company agreed to indemnify Surgica for up to $200,000 in connection with claims by a third party for fees owed pursuant to an engagement letter entered into between Surgica and the third party as a result of agreements entered into between Surgica and the Company. Under the terms of the Supply and  13


Services agreement and License Agreement, Surgica is obligated to provide its goods and services, including further product development, in exchange for (i) operating payments to Surgica and (ii) a royalty of twenty-five percent (25%) of net profits, if any, on revenues generated by the sale of Surgica products. Employment Agreement.  Under the terms of the Option Agreement, Louis R. Matson and Surgica entered into an employment agreement that provides, among other things, that Louis R. Matson (i) retain the title of President of Surgica; (ii) be paid a specified base salary; and (iii) be employed until December 31, 2007, unless terminated prior to such date. It is currently contemplated that this employment agreement will be assumed by us or a wholly-owned subsidiary of the Company if and when we exercise the option. Voting Agreement and Proxy.  As a condition of the Option Agreement, we entered into a voting agreement pursuant to which Louis R. Matson agreed to vote all shares of Surgica that he may own (i) in favor of the adoption of the Option Agreement; (ii) in favor of adoption of the Asset Purchase Agreement and approval of the acquisition contemplated thereby but only to the extent the option is exercised by the Company; (iii) against any proposal for any acquisition transaction, other than the acquisition, between Surgica and any person other than us and/or a wholly-owned subsidiary; and (iv) against any other action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Surgica under the Option Agreement or Asset Purchase Agreement or which would result in any of the conditions to the
consummation of the effectiveness of the option under the Option Agreement or the acquisition under the Asset Purchase Agreement not being fulfilled.  Concurrently with the execution of the voting agreement, and pursuant to the voting agreements terms, Louis R. Matson delivered to us an irrevocable proxy appointing the Company as the sole and exclusive attorney and proxy of Louis R. Matson, with full power of substitution and resubstitution, to vote and exercise all voting and related rights with respect to all shares of Surgica that he may own in accordance with (ii), (iii), and (iv) above. Asset Purchase Agreement.  Pursuant to the terms of the Option Agreement, we will have up to two years from December 19, 2005 to exercise an option to purchase substantially all of the assets of Surgica in exchange for 2 million shares of our common stock and a potential future incentive issuance of additional shares of the Companys common stock based on the future sales performance of Surgicas products during the first quarter of 2007 which will be subject to a number of conditions precedent, including approval by Surgicas stockholders. Pursuant to the terms of the Asset Purchase Agreement, the shares will constitute restricted securities as that term is defined in Section 144(a)(3) of the Securities Act of 1933, as amended, and will be restricted as to their resale for a period of at least one hundred eighty (180) days from the
date the Asset Purchase Agreement is executed. The additional shares of our common stock will be issued, if at all, only if the average sales per quarter from the operations to be transferred from Surgica to us for the first (1st) and second (2nd) quarters of 2007 are equal to or greater than a predetermined set amount. Each of the Option Agreement, license agreement, supply and services agreement and Asset Purchase Agreement contain representations and warranties by us and Surgica customary for transactions of this type. Spine Wave In April 2001, we entered into agreements with Spine Wave, Inc., to develop and commercialize an injectable protein-based formulation for the repair of spinal discs damaged either by injury or aging. As consideration for entering into an exclusive, worldwide license agreement with Spine Wave, we received one million shares of the founding common stock in Spine Wave, valued initially at $10,000. The shares of founding common stock were subject to a vesting schedule; however, Spine Waves right to repurchase unvested shares terminated in 2002 upon their merger with VERTx, Inc. Royalties from the sale or sublicensing of licensed products will be determined in the future based on the gross margin (sales revenue less the cost of goods) realized by Spine Wave from the sale of the products, if any. In connection with the license agreement, we entered into a separate supply and services agreement to provide Spine Wave with a variety of research and development services, and to supply materials to Spine Wave for pre-clinical and clinical testing. Spine Wave, in return, agreed to reimburse us for both our direct costs and the associated overhead costs for the services provided. In March 2002, we executed additional agreements with Spine Wave that expanded our contractual research and development relationship, and that offered us additional equity incentives in the form of Spine Wave common stock and warrants. Under the amended supply and services agreement, we, on behalf of Spine Wave, conducted pre-clinical safety and performance studies of a product for spinal disc repair to support Spine Waves regulatory filings both in the U.S. and abroad to obtain approval to initiate human clinical testing. Our continuing contractual responsibilities include the supply of product to be used in clinical testing. Research and development services performed for Spine Wave are reimbursed including both direct  14


costs and associated overhead costs. Spine Wave is responsible for clinical testing, regulatory approvals, and commercialization. For the quarter ended March 31, 2006 we received $221,000 in contract revenue from Spine Wave which represents the reimbursement of direct costs plus overhead costs allocated to the research and development resources used in performing the collaborative activities. Additional equity incentives offered in conjunction with the expanded supply and services agreement of March 17, 2002 consist of a four year warrant (the expiration was recently extended until June 21, 2006, and upon meeting certain conditions would be further extended to September 21, 2006) to purchase 1,000,000 shares of Spine Wave common stock at an exercise price of $0.50 per share (Spine Wave preferred stock issued during this time was priced at $0.55 per share), and 400,000 shares of common stock valued at $0.05 per share subject to repurchase at cost until each of three performance goals is achieved, or until the repurchase option expired. The performance goals consisted of: (i) completion of certain studies for filing an investigational device exemption application (100,000 shares); (ii) completion of additional studies for filing of the investigational device exemption and
provision of inventory for the pilot clinical study (150,000 shares); and (iii) completion of certain manufacturing arrangements, and production of certain quantities of product (150,000 shares). Spine Waves repurchase option expired on December 31, 2005. In October 2003, we executed a second amendment to the supply and services agreement with Spine Wave that further defined the cost basis for reimbursement of services provided by us to Spine Wave. Significant License Agreements Our license agreements usually include provision for up-front compensation and eventual royalties on the sale of licensed products. Terms of license agreements typically commence as of the date executed and continue for a period of the greater of twenty (20) years from execution date or the date upon which the last of the patented technology under license expires. Genencor International, Inc. In December 2000, we signed a broad-based, worldwide exclusive license agreement with Genencor International, Inc. (Genencor) enabling Genencor to potentially develop a wide variety of new products for industrial markets. In October 2002, the license agreement was amended to provide Genencor with an additional one-year option to initiate development of products in the field of non-medical personal care. In March 2005, the license was amended to fully incorporate the field of personal care products into the license. As a result of the agreements, Genencor may use our patented protein polymer design and production technology, in combination with Genencors extensive gene expression, protein design, and large-scale manufacturing technology, to design and develop new products with improved performance properties for defined industrial fields and the field of non-medical
personal care products. In return for the licensed rights, Genencor paid us an up-front license fee of $750,000, and will pay royalties on the sale of any products commercialized by Genencor under the agreement. The licensed technology was transferred to Genencor upon execution of the license agreement without any further product development obligation on our part. Future royalties on the net sales of products incorporating the technology under license and developed by Genencor will be calculated based on a royalty rate to be determined at a later date. In addition, we are entitled to receive up to $5 million in milestone payments associated with Genencors achievement of various product development milestones incorporating the licensed technology. In March 2005 we received a second license milestone payment of $250,000 from Genencor for Genencors initiation of a product development project based on
technology licensed from us. In connection with the license agreement, Genencor was issued two warrants, each convertible by formula into $500,000 of our common stock. Both warrants have subsequently expired. As a result of the collaboration, in 2000 we recognized $750,000 in license fee revenue (less the issuance of warrants to purchase $1 million of our common stock valued at $319,000). The agreement terminates on the date of expiration of the last remaining patent. Research and Development We currently maintain detailed project costs (direct costs plus allocated overhead) for contractual research and development services. However, we do not maintain cost breakdowns for our internal research and development projects due to the extensive degree of overlap between our projects such as common manufacturing, quality control, and developmental product testing. Our product for the treatment of female stress urinary incontinence is in pilot human clinical testing. Due to the rate of patient enrollment, we now project beginning pivotal clinical testing during 2006. We expect these trials, including patient  15


follow-up, will take approximately 24 months, and the subsequent FDA review of our pre-market approval submission may take an additional 12 months. Assuming this schedule is met and the product is approved, U.S. sales of the product are projected to begin in 2009. Commercial manufacturing process development and completion of the clinical trials are estimated to cost approximately $10 million. In 2004, we completed feasibility assessments of a surgical sealant formulation for cardiovascular, pulmonary (lung) and gastrointestinal procedures.  Preclinical studies are currently being completed to support regulatory approval to begin human clinical testing. The external cost of completing preclinical testing is estimated to be approximately $750,000. We expect to begin a clinical study for one of these indications before the end of 2006, to the extent resources are available. We are seeking to establish
additional partnerships to pursue the commercial development of such products. In these types of applications, the use of sutures and staples for closing the wound may permit leaks of air, in the case of pulmonary surgery, and fluids, particularly blood in any surgery, and also gastrointestinal (GI) fluids in the case of surgery on the colon (GI tract). In such surgeries, the use of an effective sealant  as an adjunct to sutures or staples  to prevent leaks could reduce hospitalization stays, reduce post-operative pain and complications, and lower associated mortality rates. We estimate that about 500,000 gastrointestinal, 300,000 lung, and over 1.5 million cardiovascular surgical procedures are performed each year worldwide where the use of a sealant has the opportunity to significantly reduce complications and costs. We currently do not have sufficient cash to complete the development of these products. We anticipate obtaining the necessary cash either by additional equity financings, or by sharing the cost of development with potential marketing partners, or a combination of both methods. If we are unable to obtain the necessary cash, it will have a material adverse effect on us. Our spinal disc repair product being developed for our licensee, Spine Wave, Inc., is in clinical testing. The timing of this project is under the control of Spine Wave. Under our contract with Spine Wave, we are responsible for development of the formulated product, its pilot manufacturing process, and product production for clinical trials. Spine Wave is responsible for funding all expenses associated with these activities. Contract revenue received from Spine Wave is approximately equal to our cost (direct project costs plus allocated laboratory and corporate overhead expenses) of the work performed. Total research and development costs for the quarter ended March 31, 2006 are approximately $1,036,000. To the extent sufficient capital resources are available, we continue to research the use of our patented technology to produce proteins of unique design for other tissue repair and medical device applications, principally for use in supporting the wound healing process, including devices based on tissue engineering, and in drug delivery devices. Our strategy for most of our programs is to enter into collaborative development agreements with 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 payments and milestone payments, we expect to continue incurring operating losses for the next several years. Results of Operations  Contract  and  Licensing  Revenue.We  received  approximately $221,000 in contract and licensing  revenue for the quarter
ended March 31, 2006 as  compared  to approximately $513,000  for the quarter  ended March 31,
2005.  Contract  revenues from Spine Wave for the period represent  approximately $221,000 for
materials and services  provided in the  development of an adhesive  product for
the repair of spinal  discs as  compared  to  approximately $263,000 in the same period a year
ago. Product revenue for the quarter ended March 31, 2006 was $15,000, which was
a payment  from Angio  Dynamics,  Inc.  for Surgica  embolization  products.  We
received no licensing  income for the period ended March 31, 2006 as compared to
$250,000  in  licensing  revenue  in the  quarter  ended  March  31,  2005 for a
milestone payment from Genencor International for Genencors  initiation of
a product development project based on technology licensed from us.  Interest Income.Interest income was $2,500 for the quarter ended March 31, 2006, as compared to $100 for the same period in 2005. The period-to-period variability results from the amount and timing of the receipt of equity capital and the amounts of excess cash available for investment.  Research  and  Development   Expenses.Research  and
development  expenses  for the quarter  ended  March 31,  2006 were  approximately $1,036,000,
compared to approximately $556,000  for the same period in 2005.  The increase in research and
development  expenses are primarily  due to costs  associated  with  preclinical
animal testing of our sealant product necessary to achieve  regulatory  approval
to begin human clnical trials later this year, as well as for on-going  clinical
testing,  regulatory  consulting costs, and costs associated with  manufacturing
product  for Spine Wave.  Other  related  expenses  include  those for  expanded
manufacturing capacity and manufacturing process development,  quality assurance
efforts,  and outside testing  services.  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
further  preclinical  development  of our  surgical  sealants,  increased  human  16


clinical testing, increased manufacturing requirements, increased use of outside testing services, and increased research and development services for Spine Wave.  Selling, General and Administrative Expenses.Selling,
general and  administrative  expenses for the quarter  ended March 31, 2006 were
approximately $1,887,000, as compared to approximately $393,000 for the same period in 2005. The increase in
selling, general and administrative expenses is primarily due to the recognition
of a non-cash expense associated with the reporting of compensation  expense for
stock options  issued by the Company under SFAS No. 123.  There were also increases
in legal,  consulting and other  professional  services related to due diligence
and other expenses  pertaining to the potential Thuris acquisition and remaining
costs of the completion of the agreements with Surgica. Other expenses have been
fairly  consistent  over the past three years.  We do anticipate  some increases
during 2006 in the areas of insurance  coverage and legal services,  although we
anticipate  that  these  increases  will be offset by  reductions  in  personnel
expense. To the extent possible, we continue to concentrate on controlling costs
reflected in reduced travel,  office  supplies,  and  non-regulatory  consulting
costs. Selling,  general and administrative expenses may 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.  Net Losses.For  the quarter ended March 31, 2006, our
net loss increased to approximately $2,693,000,  from approximately $522,000 for the quarter ended March 31,
2005.  The increased net loss in 2006 is due primarily to the  recognition  of a
non-cash expense associated with the reporting of compensation expense for stock
options issued by the Company under SFAS No. 123 and to the preclinical development
of our  surgical  sealant  product  and  related  research  in  preparation  for
anticipated human clinical trials  anticipated to begin later this year, and the
legal and related  acquisition costs we have incured during the 2006 period. Net
loss applicable to common  shareholders  during the quarter ended March 31, 2006
was  approximately $2,851,000  or $0.04 per share,  as  compared to  approximately $1,072,000,  or $0.03 per
share, for the same period in 2005.  We expect to incur increasing operating losses for the next several years, to the extent additional capital is obtained, based upon the continuation of the development and testing of our surgical sealant product, and our product for the treatment of female stress urinary incontinence, the associated FDA approval process, and further development of the tissue adhesives program, as well as expected increases in our other research and development, manufacturing and business development activities. Our results depend in part on our ability to establish strategic alliances and generate contract revenues, and upon increased research, development and manufacturing efforts, pre-clinical and clinical product testing and commercialization expenditures, and expenses incurred for regulatory compliance and patent prosecution. Our results will also fluctuate from period to period due to timing differences.  Inflation To date, we believe that inflation and changing prices have not had a material impact on our continuing operations. However, we have experienced increased general and product liability insurance costs over the past two years, and these increases are expected to continue for the foreseeable future as our products incur increased exposure in expanded clinical trials. Liquidity and Capital Resources We do not have any off balance sheet  financing  activities  and do not have any
special purpose  entities.  We had no long-term  capital lease obligations as of
March 31, 2006 or December 31, 2005.  For the quarter ended March 31, 2006,  our
cash  expenditures  for capital  equipment  and leasehold  improvements  totaled
approximately $36,000,  compared  with $0 for the same period in the prior year. To the extent
capital is available, we anticipate that these expenditures will be increased in
2006 for laboratory  renovations and additional  equipment  required to meet the
FDAs applicable Quality System regulation as we scale up our manufacturing
operations to meet product  requirements for expanded clinical  testing.  We may
enter into capital  equipment  lease  arrangements in the future if available at
appropriate rates and terms. We believe our existing  available  cash, cash  equivalents and  loan proceeds (See
Notes 1 and  12  to  the  Financial  Statements,  Subsequent  Events), as of April 30, 2006, in  combination  with  continuing  contractual
commitments  will be sufficient  to meet our  anticipated  capital  requirements
through the end of June 2006.  Substantial  additional capital resources will be
required to fund continuing  expenditures related to our research,  development,
manufacturing and business development activities. In addition 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. Further, we are continuing our reimbursed services to Spine Wave. 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  potential  sources of
funds will be realized in the timeframes needed for continuing  operations or on
terms favorable to us. If adequate funds are not available, we  17


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. Item 3.
        Controls and Procedures Disclosure Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer (the principal executive officer) and Director of Finance and Controller (the principal financial officer), of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, as required by paragraph (b) of rules 13a-15 and 15d-15, the Companys Chief Executive Officer and Director of Finance and Controller have concluded that such disclosure controls and procedures were effective in alerting them in a timely manner to material information relating to the Company required to be included in its periodic reports filed with the Securities and Exchange Commission. Internal Control Over Financial Reporting There were 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 Securities Exchange Act of 1934 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.  18


PART II. OTHER INFORMATION  Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds.  On April 21, 2006, the Company entered into a Security Agreement and a secured promissory note, each dated as of April 13, 2006, in favor of Matthew J. Szulik pursuant to which Mr. Szulik loaned the Company One Million ($1,000,000.00) Dollars in exchange for (i) a warrant to purchase an aggregate of 500,000 shares of the Companys common stock at an exercise price of $0.30 per share (the Warrant) and (ii) a continuing security interest in and a general lien upon (A) 1,000,000 shares of Spine Wave, Inc. common stock owned by the Company; (B) a warrant to purchase 1,000,000 shares of Spine Wave, Inc. common stock owned by the Company currently set to expire June 30, 2006; and (C) all U.S. patents owned by the Company.  Pursuant to the terms of the Security Agreement,  the Company issued the Warrant
to Mr. Szulik,  entitling him to purchase  500,000 shares of the  Companys
common stock at a purchase price per share equal to Thirty Cents ($0.30), as may
be adjusted pursuant to certain anti-dilution  provisions set forth therein. The
warrant provides for a cashless exercise  whereby Mr. Szulik has the
right to elect, upon exercise the Warrant, to receive the net number
of shares of Company common stock according to a  predetermined  formula in lieu
of making a cash payment  otherwise  contemplated to be made to the Company.  In
addition,  the Warrant provides for anti-dilution  rights with respect to future
subscriptions of the Companys securities at a price per share (or having a
conversion  price per share) less than the lower of the then  exercise  price of
the Warrant or the  then-current  market price per share based on a twenty- (20)
day trailing average of the market price of the Companys common stock. The
Warrant expires on April 30, 2009.  The sale of the Warrant to Mr. Szulik by the Company was exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The Company relied upon the representations made by Mr. Szulik in determining that such exemptions were available. No underwriting discounts or commissions were paid by the Company in connection with these transactions.   Item 6.
        Exhibits  10.1
        Secured Promissory Note issued to Matthew J. Szulik dated April 13, 2006. 10.2
        Common Stock Purchase Warrant issued to Hare & Co. dated April 13, 2006. 10.3
        Registration Rights Agreement, dated as of April 13, 2006, by and between the Company and Matthew J. Szulik. 10.4
        Escrow Agreement, dated as of April 13, 2006, by and among the Company, Taurus Advisory Group, LLC, James Tagliaferri and Barry
Feiner. 10.5
        Security Agreement, dated as of April 13, 2006, between the Company and Matthew J. Szulik. 10.6
        Patent Security Agreement, dated as of April 13, 2006, made by the Company in favor of Matthew J. Szulik. 10.7
        Patent Assignment, dated April 13, 2006, issued by the Company to Matthew J. Szulik. 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 Director of Finance (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 and Director of Finance (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   19


SIGNATURES   In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.   PROTEIN POLYMER TECHNOLOGIES, INC.    Date:
        May 22, 2005
        By/s/  William N. Plamondon, IIIWilliam N. Plamondon, IIIChief Executive Officer   Date:
        May 22, 2005
        By/s/  Janis Y. NevesJanis Y. NevesDirector of Finance, Controllerand Corporate Secretary   21


EXHIBIT INDEX  Exhibit Number
        Description  10.1
        Secured Promissory Note issued to Matthew J. Szulik dated April 13, 2006. 10.2
        Common Stock Purchase Warrant issued to Hare & Co. dated April 13, 2006. 10.3
        Registration Rights Agreement, dated as of April 13, 2006, by and between the Company and Matthew J. Szulik. 10.4
        Escrow Agreement, dated as of April 13, 2006, by and among the Company, Taurus Advisory Group, LLC, James Tagliaferri and Barry
Feiner. 10.5
        Security Agreement, dated as of April 13, 2006, between the Company and Matthew J. Szulik. 10.6
        Patent Security Agreement, dated as of April 13, 2006, made by the Company in favor of Matthew J. Szulik. 10.7
        Patent Assignment, dated April 13, 2006, issued by the Company to Matthew J. Szulik. 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 Director of Finance (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 and Director of Finance (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.