<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 June 30, 1998

[_]  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
incorporation or organization)                    Identification No.)


               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 August 13, 1998, 10,575,811
shares of common stock were outstanding.

Transitional Small Business Disclosure Format (check one):  Yes ___    No  X
                                                                          ---

================================================================================
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.

                                  FORM 10-QSB

                                     INDEX

<TABLE> 
<CAPTION> 
                                                                     Page No.
                                                                     ________
<S>                                                                  <C> 
PART I.   FINANCIAL INFORMATION

Item 1.      Financial Statements (Unaudited)

Condensed Balance Sheets -
 June 30, 1998 and December 31, 1997...............................       3

Condensed Statements of Operations -
 For the Three and Six Months Ended June 30, 1998 and 1997
  and the period July 6, 1988 (inception) to June 30, 1998.........       5

Condensed Statements of Cash Flows -
 For the Six Months Ended June 30, 1998 and 1997
  and the period July 6, 1988 (inception) to June 30, 1998.........       6

Notes to Condensed Financial Statements............................       8

Item 2.      Management's Discussion and Analysis of
              Financial Condition and Results of Operations........      10

PART II.  OTHER INFORMATION

Item 4.      Submission of Matters to a Vote of Security Holders...      13

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

             Signature.............................................      14
</TABLE> 

                                       2
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                         (A Development Stage Company)

                           Condensed Balance Sheets

<TABLE> 
<CAPTION> 
                                                 June 30,       December 31,
                                                   1998             1997
                                                 --------       ------------
                                                (unaudited)
<S>                                              <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                      $3,098,774     $  325,021
   Short-term investments                            893,180        974,817
   Other current assets                               38,696         88,868
                                                  ----------     ----------
Total current assets                               4,030,650      1,388,706
 
Deposits                                              36,977         36,617
Notes receivable from officers                       147,000        153,000
Equipment and leasehold improvements, net            689,812        769,564
                                                  ----------     ---------- 
                                                  $4,904,439     $2,347,887
                                                  ==========     ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                               $  360,513     $  423,594
   Accrued employee benefits                         156,589        151,831
   Other accrued expenses                             33,873         41,151
   Current portion capital lease obligations          79,674         75,110
                                                  ----------     ---------- 
Total current liabilities                            630,649        691,686
 
Long-term portion capital lease obligations          149,054        190,068
</TABLE>

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

                      Condensed Balance Sheets, continued

<TABLE> 
<CAPTION> 
                                                 June 30,       December 31,
                                                   1998             1997
                                                 _________      ____________
                                                (unaudited)
<S>                                              <C>            <C> 
LIABILITIES AND STOCKHOLDERS' EQUITY, continued

Stockholders' equity:
   Series D convertible preferred stock,
    $.01 par value, 71,600 shares authorized,
    1,794 and 28,214 shares issued and
    outstanding at June 30, 1998 and
    December 31, 1997, respectively -
    liquidation preference of $179,400                 169,608      2,667,403
   Series E convertible preferred stock,
    $.01 par value, 55,000 shares authorized,
    54,437.5 shares issued and
    outstanding at June 30, 1998 -
    liquidation preference of $5,437,500             5,277,813              -
   Series F convertible preferred stock,
    $.01 par value, 27,317 shares authorized,
    26,420 shares issued and outstanding
    at June 30, 1998 - liquidation
    preference of $2,642,000                         2,497,795              -

   Common stock, $.01 par value, 25,000,000
    shares authorized, 10,536,467 and
    10,420,722 shares issued and outstanding
    at June 30, 1998 and December 31,
    1997, respectively                                 105,131        104,208
   Additional paid-in capital                       26,151,604     22,778,033
   Deficit accumulated during development
    stage                                          (30,077,215)   (24,083,511)
                                                  ------------   ------------
Total stockholders' equity                           4,124,736      1,466,133
                                                  ------------   ------------ 
                                                  $  4,904,439   $  2,347,887
                                                  ============   ============
</TABLE>

See accompanying notes.

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

                      Condensed Statements of Operations
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                                     For the                
                                                                                                      period                
                                        Three Months                   Six Months                  July 6, 1988             
                                        Ended June 30,                Ended June 30,               (inception) to            
                                       1998           1997           1998           1997           June 30, 1998             
                                       ----           ----           ----           ----           ---------------           
<S>                                    <C>            <C>            <C>            <C>            <C>                       
Revenues:                                                                                                                    
  Contract revenue                      $         -    $    95,750    $    50,000    $   233,000    $  4,358,715              
  Interest income                            39,909         59,289         48,565        121,734         994,516              
  Product and other income                    5,506         15,300         34,295         33,904         589,713               
                                        -----------    -----------    -----------    -----------    ------------            
Total revenues                               45,415        170,339        132,860        388,638       5,942,944            
                                                                                                                            
Expenses:                                                                                                                   
  Cost of sales                               1,213          6,033          4,373         17,921         279,894            
  Research and development                1,064,159        777,296      1,917,383      1,416,225      19,164,651            
  Selling, general and administrative       424,010        561,326        926,058        989,914      12,355,477            
  Royalties                                   6,250          6,250         12,500         22,500         277,671             
                                        -----------    -----------    -----------    -----------    ------------              
Total expenses                            1,495,632      1,350,905      2,860,314      2,446,560      32,077,693            
                                        -----------    -----------    -----------    -----------    ------------            
                                                                                                                           
Net loss                                 (1,450,217)    (1,180,566)    (2,727,454)    (2,057,922)    (26,134,749)            
Undeclared, imputed and/or                                                                                                 
  paid dividends on                                                                                                        
  preferred stock                         3,335,936        122,630      3,405,503        243,912       4,823,195              
                                        -----------    -----------    -----------    -----------    ------------            
                                                                                                                           
Net loss applicable to                                                                                                     
  common shareholders                   $(4,786,153)   $(1,303,196)   $(6,132,957)   $(2,301,834)   $(30,957,944)           
                                        ===========    ===========    ===========    ===========    ============            

Basic and diluted net
  loss per common share                 $     (0.46)   $     (0.14)   $     (0.59)   $     (0.25)
                                        ===========    ===========    ===========    ===========                         
                                                                                                                         
Shares used in computing                                                                                                 
   basic and diluted net                                                                                                 
   loss per common share                 10,455,953      9,148,593     10,442,598      9,092,163                         
                                        ===========    ===========    ===========    ===========                          
</TABLE>

See accompanying notes.

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

                      Condensed Statements of Cash Flows
                                  (unaudited)

<TABLE>
<CAPTION>


                                                                                             For the period              
                                                                                              July 6, 1988              
                                                Six Months ended June 30,                    (inception) to              
                                                 1998                 1997                    June 30, 1998              
                                            ---------------       ---------------          ----------------------        
<S>                                         <C>                     <C>                   <C>                            
OPERATING ACTIVITIES                                                                                                    
Net loss                                    $ (2,727,454)        $ (2,057,922)               $(26,134,749)               
Adjustments to reconcile net loss to                                                                                    
 net cash used for operating activities:                                                                                
 Stock issued for compensation and interest            -                    -                      24,895                
 Depreciation and amortization                   179,002               76,572                   1,438,721                
 Write-off of purchased technology                     -                    -                     503,500                
 Changes in assets and liabilities: 
  Deferred offering costs                              -               17,356                           -                
  Deposits                                          (360)             (16,222)                    (36,977)               
  Notes receivable from officers                   6,000             (150,000)                   (147,000)               
  Other current assets                            50,172              (46,196)                    (38,696)               
  Accounts payable                               (63,081)             109,078                     360,513                
  Accrued employee benefits                        4,758               22,368                     156,589                
  Other accrued expenses                          (7,278)              28,672                      33,873                
                                            ------------         ------------                ------------                
Net cash used for operating activities        (2,558,241)          (2,016,294)                (23,839,331)               

INVESTING ACTIVITIES                                                                                                    
Purchase of technology                                 -                    -                    (570,000)               
Purchase of equipment and improvements           (99,250)            (198,744)                 (1,686,504)               
Purchases of short-term investments             (893,180)          (4,051,911)                (17,054,847)               
Sales of short-term investments                  974,817            1,886,510                  16,161,667                
                                            ------------         ------------                ------------                
Net cash used for investing activities           (17,613)          (2,364,145)                 (3,149,684)               
</TABLE>

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

                              Condensed Statements of Cash Flows, continued
                                               (unaudited)
 
<TABLE>
<CAPTION>


                                                                                                  For the period         
                                                                                                   July 6, 1988         
                                                     Six Months ended June 30,                    (inception) to         
                                                      1998                 1997                    June 30, 1998         
                                                ---------------       ---------------          ----------------------    
<S>                                             <C>                     <C>                   <C>                        
FINANCING ACTIVITIES                                                                                                    
Net proceeds from exercise of options and                                                                               
 warrants, and sale of common stock              $   108,244          $   4,638,637                $ 16,622,238          
Net proceeds from issuance and conversion                                                                               
 of preferred stock                                5,277,813                      -                  12,215,565          
Net proceeds from convertible notes and                                                                                 
 detachable warrants                                       -                      -                   1,068,457          
Payment on capital lease obligations                 (36,450)                (4,701)                    (60,044)         
Payment on notes payable                                   -                      -                     (92,750)         
Proceeds from note payable                                 -                      -                     334,323          
                                                 -----------            -----------                ------------          
Net cash provided by financing activities          5,349,607              4,633,936                  30,087,789          
                                                 -----------            -----------                ------------          
Net increase in cash and cash equivalents          2,773,753                253,497                   3,098,774          
Cash and cash equivalents at beginning                                                                                  
 of the period                                       325,021                267,357                           -          
                                                 -----------            -----------                ------------          
Cash and cash equivalents at end                                                                                        
 of the period                                  $  3,098,774           $    520,854                $  3,098,774          
                                                ============           ============                ============          

SUPPLEMENTAL DISCLOSURES OF CASH FLOW                                                                                   
 INFORMATION                                                                                                            
Equipment purchased by capital leases           $          -           $     38,595                $    288,772          
Interest paid                                         14,453                  1,824                      86,226          
Conversion of Series D Preferred Stock to                                                                               
 Series F Preferred Stock                          2,497,795                      -                   2,497,795          
Conversion of Series D Preferred Stock to                                                                               
 common stock                                              -                      -                   2,097,342          
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.

                                       7
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.

                    Notes to Condensed Financial Statements
                                  (Unaudited)


                              September 30, 1997

1.  Basis of Presentation

The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three and six months ended June 30, 1998 and 1997 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 June 30, 1998 and the
results of operations for the three and six months ended June 30, 1998 and 1997.

The results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the year ended
December 31, 1998. 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 and Form 10-KSB for
the year ended December 31, 1997, 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 imputed and accumulated dividends on the Company's
Preferred Stock.  The accumulated dividends are payable when declared by the
Board of Directors in cash or common stock.

During April and May 1998, the Company issued Series E Convertible Preferred
Stock whereby each share is at any time convertible into 80 shares of common
stock at $1.25 per common share at the option of the holder.  At each date of
issuance, the fair market value of the common stock was $2.00 per share.
Therefore, each investor received a beneficial conversion feature of $.75 per
common share.  The Company recorded this difference as an "imputed" dividend
totaling $3,266,250 during the three months ended June 30, 1998.  (See Note 5.
below regarding a second closing of Series E Convertible Preferred 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,
1997. 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 and six months ended
June 30, 1998 and 1997 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.

                                       8
<PAGE>
 
4.  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, cash equivalents and short-term investments as of June 30, 1998
is sufficient to meet its anticipated capital requirements until the second
quarter of 1999. Substantial additional capital resources will be required to
fund continuing expenditures related to the Company's research, development,
manufacturing and business development 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.

5.  Series E Convertible Preferred Stock

On April 24, 1998, the Company closed on a private placement with a small group
of institutional and accredited investors of 39,312.5 shares of the Company's
Series E Convertible Preferred Stock ("Series E Stock") priced at $100 per
share, with warrants to purchase an aggregate of 2,358,750 shares of common
stock. The Company received approximately $3.93 million, less approximately
$146,000 in estimated expenses.

On May 15, 1998, the Company closed on a subsequent private placement with a
small group of institutional and accredited investors of 15,125 shares of Series
E Stock, with warrants to purchase an aggregate of 907,500 shares of common
stock, on the same terms as the initial closing. The Company received
approximately $1.51 million, less expenses of approximately $20,000.

Each share of Series E Stock is convertible at any time at the election of the
holder into 80 shares of common stock at a conversion price of $1.25 per share,
subject to certain antidilution adjustments. No underwriters were engaged by the
Company in connection with such issuance and, accordingly, no underwriting
discounts were paid. The offering is exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), and met the
requirements of Rule 506 of Regulation D promulgated under the Securities Act.
The Company has agreed to register the shares of common stock underlying the
Series E Stock and the warrants with the Securities and Exchange Commission
within 90 to 120 days after the closing.

Each share of Series E Stock also received two common stock warrants. One
warrant is exercisable at any time for 40 shares of common stock at an exercise
price of $2.50 per share, and expires approximately 18 months after the close of
the offering; the other warrant is exercisable at any time for 20 shares of
common stock at an exercise price of $5.00 per share, and expires approximately
36 months after the close of the offering. In addition, an 18 month warrant to
acquire 200,000 common shares exercisable at $2.50 per share and a 36 month
warrant to acquire 100,000 common shares exercisable at $5.00 per share has been
issued as a finder and document review fee paid to a lead investor.

In connection with the above private placement, the Company issued 26,420 shares
of its Series F Convertible Preferred Stock in exchange for the same number of
shares of outstanding Series D Convertible Preferred Stock. The Company's Series
F Convertible Preferred Stock is equivalent to the Company's Series E Stock with
regard to liquidation preferences. All other terms of the Company's Series F
Convertible Preferred Stock remain the same as the Company's Series D
Convertible Preferred Stock.

                                       9
<PAGE>
 
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, CERTAIN STATEMENTS OR
REFERENCES 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. WHILE THESE STATEMENTS REPRESENT MANAGEMENT'S
CURRENT JUDGEMENT AND EXPECTATIONS FOR THE COMPANY, SUCH RISKS AND
UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE
RESULTS SUGGESTED HEREIN; FURTHER, THE COMPANY IS NOT OBLIGATED TO PUBLICLY
COMMENT SPECIFICALLY ON THOSE DIFFERENCES. RISKS ASSOCIATED WITH THE COMPANY'S
ACTIVITIES INCLUDE SCIENTIFIC AND PRODUCT DEVELOPMENT UNCERTAINTIES, COMPLIANCE
WITH NASDAQ LISTING REQUIREMENTS, COMPETITIVE PRODUCTS AND APPROACHES, ATTAINING
COLLABORATIVE PARTNERSHIP INTEREST AND FUNDING, PATENT PROTECTION UNCERTAINTIES,
REGULATORY TESTING AND APPROVALS, AND MANUFACTURING SCALE-UP AND REQUIRED
QUALIFICATIONS. THE READER IS ENCOURAGED TO REFER TO THE COMPANY'S 1997 ANNUAL
REPORT AND FORM 10-KSB, 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. develops high performance biomaterials
designed to improve medical and surgical outcomes. From its inception in 1988,
the Company has been a pioneer in protein design and synthesis, and as a result
has achieved an exceptional proprietary position in protein-based materials
technology. The Company's biocompatible polymers have been genetically
engineered to enable cell growth, promote the regeneration of tissue, bond to
natural and synthetic surfaces, and resorb into tissue at controlled rates.
Targeted applications include soft tissue augmentation, tissue adhesives and
sealants, tissue engineering and wound healing, and localized drug delivery. The
Company has also developed technology that can efficiently modify and improve
the surface properties of more traditional implantable materials used in a
variety of applications. The Company has been unprofitable to date, and has an
accumulated deficit of $30,077,215.

In September 1995, the Company entered into collaborative agreements with
Ethicon, Inc., a subsidiary of the Johnson & Johnson Company, related to the
Company's surgical adhesives and sealants program. Ethicon terminated the
relationship in December 1997, which adversely affected the Company. The Company
does not currently have any agreements under which it would receive continuing
contract research and milestone payments. 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 in the form of up-front licensing fees, research and development
reimbursements and milestone payments, the Company expects to continue incurring
operating losses for several more years.

In April and May 1998, the Company received approximately $5.3 million, net of
estimated expenses, from the sale of its Series E Convertible Preferred Stock to
a small group of accredited and institutional investors, consisting of 54,437.5
shares at $100 per share. Each share converts at any time at the holder's option
into 80 shares of common stock at $1.25 per common share. Accompanying the sale
of the Series E Convertible Preferred Stock was a warrant to purchase 40 shares
of common stock at $2.50 a share, expiring 18 months after the close of the
private placement, and a second warrant to purchase 20 shares of common stock at
$5.00 per share.


                                       10
<PAGE>
 
In early January 1997, the Company received $4.8 million, less expenses of
approximately $140,000, from a private placement of the Company's common stock
with a number of institutional and qualified individual investors, consisting of
1,904,000 shares at $2.50 per share. The Company agreed to register the shares
with the Securities and Exchange Commission promptly after the closing; the
registration was declared effective on January 24, 1997.

Results of Operations

The Company received no contract research revenue for the three months ended
June 30, 1998, compared to $96,000 revenue for the same period in 1997. For the
six month period ended June 30, 1998, these revenues were $50,000, compared to
$233,000 for the same period in 1997. The revenue primarily consisted of
contractual payments from Ethicon related to the Company's surgical adhesives
and sealants program, along with smaller payments from certain materials
evaluation agreements.

Interest income was $40,000 for the three months ended June 30, 1998, versus
$59,000 for the same period in 1997. For the six month period ended June 30,
1998, interest income was $49,000, compared to $122,000 for the same period in
1997. The decrease in income resulted from the differences in timing related to
the receipt of additional cash from the sale of stock in private placements
during April and May 1998 versus January 1997.

For the three months ended June 30, 1998 and 1997, sales from the Company's
ProNectin(R) F product line were $6,000 and $15,000, respectively. For the six
month periods ended June 30, 1998 and 1997, these product sales were consistent
at $34,000. The decreases were due to the elimination of promotional
expenditures and the cessation of direct marketing for the entire product line,
redirecting those resources into preclinical and regulatory efforts.

Cost of sales was $1,000 for the three months ended June 30, 1998, compared to
$6,000 for the same period in 1997. For the six month period ended June 30,
1998, this expense was $4,000, compared to $18,000 for the same period in 1997.
The decreases related to changes in the mix of product sold, and a reduction in
total revenues. Royalty expenses paid to Telios Pharmaceuticals, Inc. were
$6,000 for each of the three months ended June 30, 1998 and 1997, and $13,000
for each of the six month periods ended June 30, 1998 and 1997. A $10,000 annual
royalty was paid to Stanford University during the six month period ended June
30, 1997, but no such payment was made in the corresponding of 1998 because the
relevant patents had expired.

Research and development expenses for the three months ended June 30, 1998 were
$1,064,000, compared to $777,000 for the same period in 1997, a 37% increase.
For the six month period ended June 30, 1998, these expenses were $1,917,000,
compared to $1,416,000 for the same period in 1997, a 35% increase. These
increases were primarily attributable to expanded efforts related to the
Company's soft tissue augmentation programs, as well as preparation for clinical
Good Manufacturing Practices ("GMP") materials manufacturing and testing
capabilities, as required by the Food and Drug Administration for clinical
trials testing. The Company expects that its research and development expenses
will continue to increase over time to the extent its programs are successfully
progressing and additional capital is obtained.

Selling, general and administrative expenses for the three months ended June 30,
1998 were $424,000, as compared to $561,000 for the same period in 1997, a 24%
decrease. For the six month period ended June 30, 1998, these expenses were
$926,000, compared to $990,000 for the same period in 1997, a 6% decrease. These
decreases were primarily due to reduced legal and investor relations expenses.
The Company expects its selling, general and administrative expenses will
increase as support for its research and development efforts require and to the
extent additional capital is raised.

                                       11
<PAGE>
 
For the three months ended June 30, 1998, the Company recorded a net loss
applicable to common shareholders of $4,786,000, or $.46 per share, compared to
a loss of $1,303,000, or $.14 per share for the same period in 1997. For the six
month period ended June 30, 1998, the net loss applicable to common shareholders
was $6,133,000, or $.59 per share, compared to a loss of $2,302,000, or $.25 per
share for the same period in 1997. Included in the net loss figures for each of
the three and six month periods of 1998 and 1997 were undeclared, imputed and/or
paid dividends related to the Company's preferred stock. Imputed, non-cash
dividends of $3,266,000 were included in the three and six month periods ended
June 30, 1998, to record the difference between the conversion price of
preferred stock and the fair market value of the common stock on the preferred
stock issuance date. (See Note 2. of the financial statements, above.)

The Company expects to incur similar or increasing operating losses for the
immediate future (to the extent additional capital is obtained), due primarily
to increases in the Company's product development, manufacturing and business
development activities. The Company's results depend on its ability to generate
product and contract revenues, establish and maintain collaborative
partnerships, manage research and development, manufacturing, preclinical and
clinical product testing and commercialization expenditures, achieve regulatory
compliance and seek various regulatory approvals, complete 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 June 30, 1998, the Company had cash, cash equivalents and short-term
investments of $3,992,000 as compared to $1,300,000 at December 31, 1997. As of
June 30, 1998, the Company had working capital of $3,400,000, compared to
$697,000 at December 31, 1997. In April and May 1998, the Company received a
total of approximately $5.3 million from the private placement of its Series E
Convertible Preferred Stock.

The Company had long-term debt obligations as of June 30, 1998 of $149,000 in
the form of capital lease obligations, versus $190,000 as of December 31, 1997.
For the six months ending June 30, 1998, the Company's expenditures for capital
equipment and leasehold improvements totaled $99,000, compared with $237,000 for
the same period last year. The Company is expecting to increase its capital
expenditures in the next two quarters (to the extent additional capital is
obtained), as the Company improves existing manufacturing space to become
clinical GMP capable for human clinical testing and materials scale-up
requirements. The Company may enter into additional capital lease arrangements,
if available or under appropriate terms and timing. 

The Company believes its existing available cash, cash equivalents and short-
term investments as of June 30, 1998 will be sufficient to meet its anticipated
capital requirements until the second quarter of 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 meet
the continuing capital requirements of its operations. These include
collaborative agreements that could generate significant up-front licensing
fees, research and development reimbursements and milestone payments, as well as
public or private financings, such as the possible exercise of existing public
and private warrants for the Company's common stock. However, there can be no
assurance that the requisite 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.

                                       12
<PAGE>
 
            PART II.  OTHER INFORMATION


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


The Company's Annual Meeting of Stockholders was held on May 19, 1998.
Proposals voted upon and the results of voting were as follows:

(1)      Proposal to approve an amendment to the Company's 1992 Stock Option
         Plan to increase the number of shares reserved for issuance under the
         Plan by 500,000 shares.


         Votes for:                7,126,937
         Votes against:              105,950
         Abstentions:                 24,825

(2)      Proposal to approve ratification of Ernst & Young, LLP as independent
         auditors for the fiscal year ending December 31, 1998.


         Votes for:                7,231,262
         Votes against:                5,950
         Abstentions:                 20,500


Item 6.  EXHIBITS AND REPORTS ON FORM 8-K


a.       Exhibits:


Exhibit
Number   Description
_______  ___________

10.34    First Amendment to Stockholder Protection Agreement dated April 24,
         1998, between the Company and Continental Stock Transfer & Trust
         Company as rights agent.

27       Financial Data Schedule

b.       Reports on Form 8-K

On May 1, 1998, Protein Polymer Technologies, Inc. filed a Current Report on
Form 8-K with the Commission. In Item 5. of the Report the Company reported an
initial private placement on April 24, 1998 of 39,312.5 shares of the Company's
Series E Convertible Preferred Stock and warrants to purchase an aggregate of
2,358,750 shares of common stock. Included in Item 7. of the Report were
unaudited pro forma condensed balance sheets to give effect to the Series E
Convertible Preferred Stock private placement.

                                       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:   August 13, 1998               By: /s/  J. Thomas Parmeter
       _________________                  __________________________________

                                          J. Thomas Parmeter
                                          Chairman of the Board, Chief
                                          Executive Officer, President


Date:   August 13, 1998               By: /s/  Aron P. Stern
       _________________                  __________________________________

                                          Aron P. Stern
                                          Vice President, Finance and
                                          Administration and Chief Financial
                                          Officer

                                       14
<PAGE>
 
EXHIBIT INDEX



Exhibit                                                    Sequentially
Number      Description                                    Numbered Page
________    ___________________________________________    _____________

10.34       First Amendment to Stockholder Protection           16
            Agreement dated April 24, 1998, between
            the Company and Continental Stock Transfer
            & Trust Company as rights agent.

27          Financial Data Schedule                             19


                                       15