**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
 
 **FORM
        10-Q**
  (Mark
        One)
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the quarterly period ended June 30, 2008OR ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the transition period from ______________________________ to
                  _________________________
 
 Commission
        file number 0-19724
 
 **PROTEIN
        POLYMER**
 **TECHNOLOGIES,
        INC.**
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              33-0311631(State
                  or other jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer Identification No.)
 
 11494
        Sorrento Valley Road, San Diego, CA 92121
 (Address
        of principal executive offices) (Zip Code)
  (858)
        558-6064
 (Registrant’s
        telephone number, including area code)
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
        during the preceding 12 months (or for such shorter periods that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days. YES þ NO  ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large
                  accelerated filer ̈
              Accelerated
                  filer ̈
              Non-accelerated
                  filer ̈
                (Do
                  not check if a smaller reporting company)
              Smaller
                  reporting companyþ
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Exchange Act). YES  ̈  NO þ
 
 The
        number of shares of the registrant’s common stock issued and outstanding as of
        August 5, 2008 was 107,307,982.
  
  **PROTEIN
        POLYMER TECHNOLOGIES, INC.**
  **FORM
        10-Q — QUARTERLY REPORT**
 **FOR
        THE QUARTERLY PERIOD ENDED MARCH 31, 2008**
  **TABLE
        OF CONTENTS**
 
 **Page****PART
                  I. FINANCIAL INFORMATION**Item
                  1.
              Financial
                  Statements
              3Condensed
                  Balance Sheets as of June 30, 2008 (unaudited) and December 31,
                  2007
              3Condensed
                  Statements of Operations for the Three and Six Months Ended June
                  30, 2008
                  and 2007 (unaudited)
              4Condensed
                  Statements of Cash Flows for the Six Months ended June 30, 2008
                  and 2007
                  (unaudited)
              5Notes
                  to Condensed Financial Statements (unaudited)
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              15Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              19Item
                  4T.
              Controls
                  and Procedures
              19**PART
                  II****.
                  OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              21Item
                  1A.
              Risk
                  Factors
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item
                  3.
              Defaults
                  Upon Senior Securities
              21Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              21Item
                  5.
              Other
                  Information
              21Item
                  6.
              Exhibits
              22**SIGNATURES**
              23Exhibit
                  31.1Exhibit
                  31.2Exhibit
                  32.1Exhibit
                  32.2
  2
  **PART
        I — FINANCIAL INFORMATION**
  **Item 1.
        Financial Statements**
  **Protein
        Polymer Technologies, Inc.**
 **Condensed
        Balance Sheets**
 
 June 30
              
              December 312008 (unaudited)
              
              2007AssetsCurrent
                  assets:Cash
              
              $
              7,592
              
              $
              21,936Prepaid
                  expenses and other current assets
              
              
              43,715
              
              
              33,419Total
                  current assets
              
              
              51,307
              
              
              55,355Deposits
              
              
              29,679
              
              
              29,679Equipment
                  and leasehold improvements, net
              
              
              32,397
              
              
              128,100Investment
              
              
              520,000
              
              
              520,000Total
                  assets
              
              $
              633,383
              
              $
              733,134Liabilities
                  and stockholders' deficitCurrent
                  liabilities:Accounts
                  payable
              
              $
              1,126,476
              
              $
              827,626Accrued
                  liabilities
              
              
              510,462
              
              
              794,312Secured
                  note payable - related party, net of unamortized debt
                  discount
              
              
              6,369,366
              
              
              5,876,000Current
                  maturities of notes payable
              
              
              519,071
              
              
              419,071Total
                  current liabilities
              
              
              8,525,375
              
              
              7,917,009Notes
                  payable, net of current maturities
              
              
              —
              
              
              100,000Total
                  liabilities
              
              
              8,525,375
              
              
              8,017,009Commitments
                  and contingencies (Note 9)Stockholders'
                  deficit:Convertible
                  preferred stock, $0.01 par value; 5,000,000 shares authorized;
                  65,646
                  shares issued and outstanding at June 30, 2008 and December 31,
                  2007 -
                  liquidation preference of $9,607,426 and $9,464,500 at June 30,
                  2008 and
                  December 31, 2007, respectively.
              
              
              6,019,917
              
              
              6,019,917Common
                  stock, $0.01 par value; 1,000,000,000 shares authorized; 97,384,453
                  and
                  73,722,232 shares issued and outstanding at June 30, 2008
                  and December 31, 2007, respectively
              
              
              973,845
              
              
              737,222Additional
                  paid-in capital
              
              
              57,346,505
              
              
              56,227,221Accumulated
                  deficit
              
              
              (72,232,259
              )
              
              (70,268,235
              )Total
                  stockholders' deficit
              
              
              (7,891,992
              )
              
              (7,283,875
              )Total
                  liabilities and stockholders’ deficit
              
              $
              633,383
              
              $
              733,134
 
 *The
        accompanying notes are an integral part of these financial statements*
  3
  **Protein
        Polymer Technologies, Inc.**
 **Condensed
        Statements of Operations**
 **(unaudited)**
  Three months ended
              
              Six months endedJune 30,
              
              June 30,2008
              
              2007
              
              2008
              
              2007Revenues:Contract
                  revenue
              
              $
              —
              
              $
              131,530
              
              $
              —
              
              $
              267,618Product
                  and other income
              
              
              6,755
              
              
              —
              
              
              6,755
              
              
              —Total
                  revenues
              
              
              6,755
              
              
              131,530
              
              
              6,755
              
              
              267,618Operating
                  expenses:Research
                  and development
              
              
              573,516
              
              
              628,131
              
              
              1,125,490
              
              
              1,273,152Selling,
                  general and administrative
              
              
              302,181
              
              
              351,596
              
              
              511,492
              
              
              671,299Total
                  expenses
              
              
              875,697
              
              
              979,727
              
              
              1,636,982
              
              
              1,944,451Net
                  loss from operations
              
              
              (868,942
              )
              
              (848,197
              )
              
              (1,630,227
              )
              
              (1,676,833
              )Other
                  income (expense):Interest
                  and other income
              
              
              —
              
              
              145
              
              
              —
              
              
              9,655Interest
                  and other expense
              
              
              (208,314
              )
              
              (111,949
              )
              
              (378,242
              )
              
              (205,343
              )Gain
                  on sale of equipment
              
              
              40,646
              
              
              —
              
              
              40,646
              
              
              —Gain
                  on settlement
              
              
              —
              
              
              —
              
              
              —
              
              
              193,917Total
                  other income (expense)
              
              
              (167,668
              )
              
              (111,804
              )
              
              (337,596
              )
              
              (1,771
              )Net
                  loss
              
              
              (1,036,610
              )
              
              (960,001
              )
              
              (1,967,823
              )
              
              (1,678,604
              )Undeclared,
                  imputed and/or paid dividends on preferred stock
              
              
              69,030
              
              
              69,219
              
              
              138,060
              
              
              146,003Net
                  loss applicable to common shareholders
              
              $
              (1,105,640
              )
              $
              (1,029,220
              )
              $
              (2,105,883
              )
              $
              (1,824,607
              )Basic
                  and diluted net loss per common share
              
              $
              (0.01
              )
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.03
              )Weighted
                  average number of common shares outstanding – basic and
                  diluted
              
              
              94,582,408
              
              
              67,809,204
              
              
              87,380,889
              
              
              67,665,558
  *The
        accompanying notes are an integral part of these financial statements*
  4
  **Protein
        Polymer Technologies, Inc.**
 **Condensed
        Statements of Cash Flows**
 **(unaudited)**
 
 Six monthsEndedJune 30
              
              June
                  302008
              
              2007**Operating
                  activities**Net
                  loss
              
              $
              (1,967,823
              )
              $
              (1,678,604
              )**Adjustments
                  to reconcile net loss to net cash used for operating
                  activities:**Depreciation
              
              
              35,349
              
              
              50,609Share-based
                  compensation expense
              
              
              4,257
              
              
              109,082Debt
                  discount amortization
              
              
              89,978
              
              
              —Gain
                  on sale of fixed assets
              
              
              (40,646
              )
              
              —**Changes
                  in operating assets and liabilities:**Deposits
              
              
              —
              
              
              (1,600
              )Prepaid
                  expenses and other current assets
              
              
              (10,296
              )
              
              (67,268
              )Rent
                  receivable
              
              
              —
              
              
              30,000Accounts
                  payable
              
              
              298,850
              
              
              (311,488
              )Accrued
                  liabilities
              
              
              254,987
              
              
              205,357**Net
                  cash used for operating activities**
              
              
              (1,335,344
              )
              
              (1,663,912
              )**Investing
                  activities:**Proceeds
                  from sale of equipment
              
              
              101,000
              
              
              —**Net
                  cash provided by investing activities**
              
              
              101,000
              
              
              —**Financing
                  activities:**Net
                  proceeds from sale of common stock
              
              
              1,220,000
              
              
              —Proceeds
                  from issuance of debt - related party
              
              
              —
              
              
              1,695,900**Net
                  cash provided by financing activities**
              
              
              1,220,000
              
              
              1,695,900**Net
                  increase (decrease) in cash**
              
              
              (14,344
              )
              
              31,988Cash
                  at beginning of the period
              
              
              21,936
              
              
              73,495**Cash
                  at end of the period**
              
              $
              7,592
              
              $
              105,483**Supplemental
                  disclosures of cash flow information**Interest
                  paid
              
              $
              1,647
              
              $
              3,834**Non
                  cash investing and financing activity**Issuance
                  of common stock in settlement of indemnification
                  obligation
              
              $
              —
              
              $
              61,067Debt
                  discount recorded in connection with issuance/amendment of
                  warrants
              
              $
              135,449
              
              $
              —Secured
                  note payable-related party issued for payment of accrued
                  interest
              
              $
              538,837
              
              $
              —
  *The
        accompanying notes are an integral part of these financial statements*
  5
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 **Note
                  1.**
              **Basis
                  of Presentation and Summary of Significant Accounting
                  Policies**
 
 The
        accompanying unaudited condensed financial statements have been prepared
        in
        accordance with U.S. generally accepted accounting principles and the rules
        and
        regulations of the Securities and Exchange Commission (“SEC”) related to a
        quarterly report on Form 10-Q under the modified rules and regulations for
        “Smaller Reporting Companies”. Accordingly, they do not include all of the
        information and disclosures required by U.S. generally accepted accounting
        principles for complete financial statements. However, the Company believes
        that
        the condensed financial statements, including the disclosures herein, include
        all adjustments necessary in order to make the financial statements presented
        not misleading. The balance sheet as of December 31, 2007 was derived from
        the
        Company’s audited financial statements. The financial statements herein should
        be read in conjunction with our financial statements and notes thereto included
        in our Annual Report on Form 10-KSB for the year ended December 31, 2007,
        as
        filed with the U.S. Securities and Exchange Commission. The results of
        operations for the three and six months ended June 30, 2008 are not necessarily
        indicative of the results expected for the fiscal year ending December 31,
        2008.
  ***Going
        Concern and Liquidity***
 
 The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the satisfaction of liabilities
        in the normal course of business. For the six months ended June 30, 2008,
        the
        Company incurred a net loss of approximately $1,968,000 and at June 30, 2008,
        the Company had a working capital deficit of approximately $8,474,000. Our
        cash
        balance as of June 30, 2008 was approximately $8,000 and, in combination
        with
        anticipated additional contract and license payments, are insufficient to
        meet
        our ongoing capital requirements.
 
 From
        January 1, 2008 through June 30, 2008, required operating capital has been
        obtained through proceeds totaling $1,220,000 from equity purchases of common
        stock and warrants pursuant to a Stock Purchase Agreement entered into as
        of
        September 27, 2007. Between September 27, 2007 and August 5, 2008, the Company
        received proceeds of $2,145,000 for the purchase of 39,498,778 shares of
        common
        stock and 39,498,778 warrants pursuant to this Stock Purchase Agreement.
        In
        addition, effective January 9, 2008, the Company converted a related party
        Note
        Payable with an outstanding principal balance of $5,876,000 plus accrued
        interest totaling $539,000, to a new note payable agreement, with a scheduled
        maturity date of September 1, 2008, in the principal amount of
        $6,415,000.
 
 Management
        is currently in discussion with other potential financing sources and
        collaborative partners and is investigating other funding in the form of
        equity
        investments and license fees. If adequate funds are not available, the Company
        will be required to significantly curtail operations, sell or license out
        significant portions of its technology, or possibly cease operations. The
        financial statements do not include any adjustments that might result should
        the
        Company be unable to continue as a going concern.
 
 ***Use
        of Estimates***
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from these
        estimates.
  6
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 ***Investments***
 
 The
        Company determines the appropriate classification of its investments in equity
        securities at the time of acquisition and reevaluates such determinations
        at
        each balance-sheet date. Marketable equity securities not classified as trading,
        are classified as available-for-sale, and are carried at fair market value,
        with
        the unrealized gains and losses, net of tax, included in the determination
        of
        comprehensive income and reported in shareholders’ equity. Investments, for
        which market prices are not available, are valued and reported at cost in
        periods subsequent to acquisition. No gains or losses are recognized until
        the
        securities are sold.
  ***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, the Company is 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.
 
 ***Stock-Based
        Compensation***
 
 On
        January 1, 2006 the Company adopted Statements of Financial Accounting Standards
        (“SFAS”) No. 123 (Revised 2004), *Share-Based
        Payment,* (“SFAS
        No. 123R”), using the modified prospective method. In accordance with SFAS No.
        123R, the Company measures the cost of employee services received in exchange
        for an award of equity instruments based on the grant-date fair value of
        the
        award. That cost is recognized over the period during which an employee is
        required to provide service in exchange for the award - the requisite service
        period. The Company determines the grant-date fair value of employee share
        options using the Black-Scholes option-pricing model.
 
 Under
        the
        modified prospective approach, SFAS No. 123R applies to new awards and to
        awards
        that were outstanding on January 1, 2006 that are subsequently modified,
        repurchased or cancelled. Under the modified prospective approach, compensation
        cost recognized on an annual basis at year end during the years ended December
        31, 2007 and 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, *Share-Based
        Payment* (“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. 123R. Periods prior to January 1, 2006 were
        not
        restated to reflect the impact of adopting the new standard.
  7
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 ***Fair
        Value Measurement***
 
 The
        carrying value of the Company’s cash, accounts receivable, accounts payable and
        short-term debt are measured at cost and approximate their respective fair
        values because of the short maturities of these instruments. Notes payable
        are
        recorded at cost which approximates their fair value.
 
 ***Net
        Loss per Common Share***
 
 Basic
        earnings per share are calculated using the weighted-average number of
        outstanding common shares during the period. Diluted earnings per share is
        calculated using the weighted-average number of outstanding common shares
        and
        dilutive common equivalent shares outstanding during the period, using either
        the as-converted method for convertible notes and convertible preferred stock
        or
        the treasury stock method for options and warrants.
 
 Excluded
        from diluted loss per common share as of June 30, 2008 and 2007 were 52,782,
        938
        and 26,341,157 shares, respectively, issuable upon conversion of convertible
        preferred stock, and options and warrants to purchase 56,495,592 and 29,073,074
        shares of common stock, respectively, because the effect would be
        anti-dilutive.  For purposes of this calculation, net loss in 2008 and 2007
        has been adjusted for imputed, accumulated and/or paid dividends on the
        preferred stock.
 
 ***Income
        Taxes***
 
 The
        Company records income taxes using the asset and liability method. Deferred
        tax
        assets and liabilities are recognized for the estimated future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their future respective tax bases. Deferred
        tax assets and liabilities are measured using enacted tax rates in effect
        for
        the year in which those temporary differences are expected to be recorded
        or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment
        date.
 
 A
        valuation allowance is established to reduce the deferred tax asset if it
        is
        more likely that the related tax benefits will not be realized in the
        future.
 
 ***Reclassifications***
 
 Certain
        prior year amounts have been reclassified to conform to the 2008
        presentation.
 
 ***Recent
        Accounting Pronouncements***
  In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 157, *Fair
        Value Measurements* (“ SFAS No.
        157”). SFAS No.
        157
        defines fair value, establishes a framework for measuring fair value, and
        expands disclosures about fair value measurements. This Statement focuses
        on
        creating consistency and comparability in fair value measurements. SFAS No.
        157
        is effective with respect to financial assets and liabilities for fiscal
        years
        beginning after November 15, 2007, and interim periods within those fiscal
        years. 
        For non-financial assets and liabilities, the effective date of SFAS No.
        157 has
        been deferred until fiscal years beginning after November 15, 2008. Our adoption
        of SFAS No. 157 with respect to financial assets and liabilities on January
        1,
        2008 did not have a material affect on our financial statements. The Company
        is
        currently evaluating the impact of adopting SFAS No. 157 on our financial
        statements with respect to non-financial assets and
        liabilities.
  8
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 In
        February 2007, the FASB issued SFAS No. 159, *The
        Fair Value Option for Financial Assets and Financial Liabilities—including an
        amendment of FASB Statement No. 115* (“SFAS
        No. 159”), which permits entities to choose to measure many financial
        instruments and certain other items at fair value. The fair value option
        established by this Statement permits all entities to choose to measure eligible
        items at fair value at specified election dates. A business entity shall
        report
        unrealized gains and losses on items for which the fair value option has
        been
        elected in earnings at each subsequent reporting date. Adoption is required
        for
        fiscal years beginning after November 15, 2007. Our adoption of SFAS No.
        159 on January 1, 2008 did not have a material effect on our financial
        statements.
 
 In
        December 2007, the FASB issued SFAS No. 141 (revised), *Business
        Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) changes the accounting for business
        combinations including the measurement of acquirer shares issued in
        consideration for a business combination, the recognition of contingent
        consideration, the accounting for pre-acquisition gain and loss contingencies,
        the recognition of capitalized in-process research and development, the
        accounting for acquisition-related restructuring cost accruals, the treatment
        of
        acquisition related transaction costs and the recognition of changes in the
        acquirer’s income tax valuation allowance. The Company is required to adopt SFAS
        No. 141(R) no later than January 1, 2009. The Company has not yet determined
        the
        impact SFAS No. 141(R) may have on its financial position, results of operations
        or cash flows.
 
 In
        December 2007, the FASB issued SFAS No. 160, *Non-controlling
        Interests in Consolidated Financial Statements, an amendment of ARB
        No. 51* (“SFAS No. 160”). SFAS No. 160 changes the accounting for non-controlling
        (minority) interests in consolidated financial statements including the
        requirements to classify non-controlling interests as a component of
        consolidated stockholders’ equity, and the elimination of “minority interest”
accounting in results of operations with earnings attributable to
        non-controlling interests reported as part of consolidated earnings.
        Additionally, SFAS No. 160 revises the accounting for both increases and
        decreases in a parent’s controlling ownership interest. The Company must adopt
        SFAS No. 160 no later than January 1, 2009. The Company has not yet determined
        the impact SFAS No. 160 may have on its financial position, results of
        operations or cash flows.
 
 In
        March
        2008, the FASB issued SFAS No. 161, *Disclosures
        about Derivative Instruments and Hedging Activities - an amendment of FASB
        Statement No. 133* (“SFAS No. 161”), as amended and interpreted, which requires enhanced
        disclosures about an entity’s derivative and hedging activities and thereby
        improves the transparency of financial reporting. Disclosing the fair values
        of
        derivative instruments and their gains and losses in a tabular format provides
        a
        more complete picture of the location in an entity’s financial statements of
        both the derivative positions existing at period end and the effect of using
        derivatives during the reporting period. Entities are required to provide
        enhanced disclosures about (a) how and why an entity uses derivative
        instruments, (b) how derivative instruments and related hedged items are
        accounted for under Statement 133 and its related interpretations, and (c)
        how
        derivative instruments and related hedged items affect an entity’s financial
        position, financial performance, and cash flows. SFAS No. 161 is effective
        for
        financial statements issued for fiscal years and interim periods beginning
        after
        November 15, 2008. Early adoption is permitted. The Company does not expect
        SFAS
        No. 161 to have a material impact on its financial statements.
  9
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 In
        April
        2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, *Determination
        of Useful Life of Intangible Assets* (“FSP
        FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in
        developing the renewal or extension assumptions used to determine the useful
        life of a recognized intangible asset under FAS 142, “Goodwill and Other
        Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure related to
        the determination of intangible asset useful lives. FSP FAS 142-3 is effective
        for fiscal years beginning after December 15, 2008. Earlier adoption is not
        permitted. The Company does not expect FSP FAS 142-3 to have a material impact
        on its financial statements.
 
 In
        May
        2008, the FASB issued Statement of Financial Accounting Standards No. 162, *The
        Hierarchy of Generally Accepted Accounting Policies* (“SFAS
        162”), which reorganizes the GAAP hierarchy. The purpose of the new standard
        is
        to improve financial reporting by providing a consistent framework for
        determining what accounting principles should be used when preparing the
        U.S.
        GAAP financial statements. The standard is effective 60 days after the SEC’s
        approval of the PCAOB’s amendments to AU Section 411. The adoption of SFAS 162
        will not have an impact on the Company’s financial position or results of
        operations.
 
 In
        May
        2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No. 14-1, *Accounting
        for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
        (Including Partial Cash Settlement)* (“FSP
        APB 14-1”), which requires the issuer of certain convertible debt instruments
        that may be settled in cash (or other assets) on conversion to separately
        account for the liability (debt) and equity (conversion option) components
        of
        the instrument in a manner that reflects the issuer’s nonconvertible debt
        borrowing rate. FSP APB 14-1 will be effective for the Company on January
        1,
        2009 and will require retroactive disclosure. The Company is currently
        evaluating the impact of adopting FSP APB 14-1 on its consolidated financial
        position, cash flows, and results of operations.
 
 In
        June
        2008, the FASB issued FSP No. EITF 03-6-1, *Determining
        Whether Instruments Granted in Share-Based Payment Transactions Are
        Participating Securities* (“FSP
        EITF 03-6-1”), which requires entities to apply the two-class method of
        computing basic and diluted earnings per share for participating securities
        that
        include awards that accrue cash dividends (whether paid or unpaid) any time
        common shareholders receive dividends and those dividends do not need to
        be
        returned to the entity if the employee forfeits the award. FSP EITF 03-6-1
        will
        be effective for the Company on January 1, 2009 and will require retroactive
        disclosure. The Company is currently evaluating the impact of adopting FSP
        EITF
        03-6-1 on its consolidated financial position, cash flows, and results of
        operations.
 
 **Note
                  2.**
              **Equipment
                  and Leasehold Improvements**
 
 Equipment
        and leasehold improvements consist approximately of the following:
  **June 30,**
              
              **December 31,****2008**
              
              **2007**Laboratory
                  equipment
              
              $
              298,000
              
              $
              1,378,000Office
                  equipment
              
              
              60,000
              
              
              220,000Leasehold
                  improvements
              
              
              —
              
              
              360,000358,000
              
              
              1,958,000Less:
                  accumulated depreciation and amortization
              
              
              (326,000
              )
              
              (1,830,000
              )$
              32,000
              
              $
              128,000
  10
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 Depreciation
        and amortization expense was approximately $10,000 and $35,000 for the three
        and
        six months ended June 30, 2008 respectively, and approximately $25,000 and
        $51,000 for the three and six months ended June 30, 2007
        respectively.
 
 **Note
                  3.**
              **Accounts
                  Payable and Accrued
                  Liabilities**
 
 *Accounts
        Payable*
 
 During
        the quarter ended June 30, 2008, management identified invoices totaling
        $98,000
        which related to services that were performed for the Company in the first
        quarter of 2007 that had not been previously recorded. These invoices were
        recorded during the quarter ended June 30, 2008, and as such are included
        in
        R&D expense for three and six months ended June 30, 2008 and in accounts
        payable as of June 30, 2008. Management has concluded that based on certain
        quantitative and qualitative factors, the understatement of expense did not
        result in a material misstatement of the Company’s 2007 interim or annual
        financial statements .
 
 *Accrued
        Liabilities*
 
 Accrued
        liabilities consist approximately of the following:
 
 **June 30,**
              
              **December 31,****2008**
              
              **2007**Payroll
                  and employee benefits
              
              $
              49,000
              
              $
              82,000Accrued
                  interest
              
              
              332,000
              
              
              585,000Insurance
                  premium financing
              
              
              16,000
              
              
              22,000Directors
                  fees
              
              
              80,000
              
              
              60,000Other
              
              
              33,000
              
              
              45,000$
              510,000
              
              $
              794,000
 **Note
                  4.**
              **Secured
                  Notes Payable – Related
                  Party**
 
 On
        April
        13, 2006, a shareholder loaned $1,000,000 (the “Loan”) to the Company ($500,000
        in cash and an additional $500,000 deposited with an escrow agent as a line
        of
        credit) represented by a note (the “4/13/06 Note”) issued by the Company to the
        shareholder in the principal amount of $1,000,000 (the “Principal”). The Note
        was originally due on July 7, 2006 (the “Maturity Date”) and bore annual
        interest at the rate of 8% payable on the Maturity Date. It was secured,
        in
        accordance with the terms of a security agreement (the “Security Agreement”), by
        a continuing security interest in and a general lien upon (i) 2,000,000 shares
        of Spine Wave, Inc. common stock owned by the Company; and (ii) all U.S.
        patents
        owned by the Company. The Note and the Security Agreement were both dated
        April
        13, 2006.
 
 As
        consideration for the Loan, the Company granted a warrant (the “4/13/06
        Warrant”) to the shareholder to purchase an aggregate of 500,000 shares of the
        Company’s common stock at an exercise price of $0.30 per share. The
        shareholder’s counsel acts as the escrow agent and now serves as our outside
        general counsel. Through December 31, 2007, the 4/13/06 Note had been amended
        seven times so that as of December 31, 2007, the outstanding principal balance
        was $5,876,000, and had a scheduled maturity date of January 10,
        2008.
 
 Effective
        January 9, 2008, the Company replaced the 4/13/06 Note by issuing a new note
        (the “1/09/08 Note”) in the principal amount of $6,415,000. This amount included
        the then $5,876,000 outstanding balance plus the then outstanding $539,000
        of
        accrued interest on the 4/13/06 Note. The 1/09/08 Note bears annual interest
        at
        the rate 8%, the same as did the 4/13/06 Note, and matures on September 1,
        2008.
        The 1/09/08 Note is secured in the same manner as was the 4/13/06 Note. As
        consideration for the lender agreeing to accept the 1/09/08 Note as payment
        for
        the 4/13/06 Note, the Company i) issued the lender three-year warrants to
        purchase an aggregate of 2,438,000 shares of the Company’s common stock at
        $0.061 per share, ii) lowered the exercise price of the 4/13/06 Warrant from
        $0.30 per share to $0.061 per share, and iii) extended the term of the 4/13/06
        Warrant from April 30, 2009 to January 31, 2011.
  11
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 In
        accordance with Accounting Principals Board Opinion No. 14, *Accounting
        for Convertible Debt and Debt Issued with Stock Purchase Warrants,* the
        relative fair value of the warrants issued in connection with the 1/09/08
        Note,
        estimated to be approximately $117,000, was recorded as debt discount. In
        addition, the change in fair value of the 4/13/06 Warrant resulting from
        the
        modification of the terms, estimated at $18,000, was also recorded as debt
        discount. The total debt discount recorded will be amortized as interest
        expense
        over the term of the 1/09/08 Note using the effective interest method. During
        the six months ended June 30, 2008, the Company recorded approximately $90,000,
        based on the debt discount amortization during the period, and as of June
        30,
        2008, the unamortized debt discount balance was approximately
        $45,000.
 
 **Note
                  5.**
              **Notes
                  Payable**
 
 In
        December 2005, in connection with a license agreement with Surgica Corporation,
        the Company allegedly assumed several notes payable agreements. The notes
        bear
        interest at rates ranging from 6% to 10%, and mature at various dates through
        January 2009. As of June 30, 2008 the entire balance of the outstanding notes
        payable is reflected as a current liability, as all of the notes have maturity
        dates prior to June 30, 2009.
 
 **Year Ending**
                **December 31,**
              
              **Notes**
                **Payable**
                **Maturities**2008
              
              $
              419,0002009
              
              
              100,000Total
                  maturities
              
              $
              519,000
 
 Based
        on
        what the Company believes, among other things, to be a failure of consideration
        relating to the license agreement, the Company believes that it has no liability
        for these notes. An attorney representing the note holders has made a claim
        against the Company by letter. The Company has rejected this
        claim. Until a final determination is made with respect to the disposition
        of the notes, the Company will continue to carry them on its balance
        sheet.
 
 **Note
                  6.**
              **Common
                  Stock**
 
 The
        Company’s Board of Directors agreed to the terms of a Stock Purchase Agreement
        (“SPA”) and a Registration Rights Agreement (“RRA”), each dated as of September
        27, 2007, with TAG Virgin Islands, Inc. (“TAG”), as agent for certain purchasers
        of the Company’s common stock. TAG is a registered investment advisor and
        advises a number of our stockholders, including certain members of our Board
        of
        Directors, in investment decisions, including decisions about whether to
        invest
        in our stock. Based upon our stock records and data supplied to us by our
        stockholders, we believe that clients of TAG beneficially owned approximately
        55.1% of our common stock as of September 27, 2007, prior to the stock purchases
        subject to the SPA. The SPA essentially provides for the Company selling,
        from time to time, shares of its common stock, par value $0.01, to the
        purchasers at a purchase price determined as the closing price of the stock
        on
        sale date. As a component of the purchase of the common stock, the purchaser
        also will receive a warrant to purchase the same number of shares of common
        stock in the future. Each warrant expires in five years from the date of
        purchase and is exercisable at a per share price, subject to certain
        anti-dilution provisions, equal to 110% of the purchase price paid by the
        purchase.
  12
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 As
        of
        November 28, 2007, the SPA was amended so that on and after that date the
        warrants are exercisable at 100% of the price of the shares that are purchased.
        The SPA can be terminated at any time by TAG. The purchasers have certain
        registration rights, as provided by the RRA, to require the Company, at its
        cost, to file an effective registration statement with the Securities and
        Exchange Commission. The Company is not subject to liquidated damages or
        other
        penalties in the event that it fails to meet the registration obligations
        included in the RRA.
 
 For
        the
        six months ended June 30, 2008, the Company received aggregate proceeds of
        $1,220,000 for the purchase of 23,662,221 shares of common stock and 23,662,221
        warrants, subject to the terms of the SPA and RRA.
 
 **Note
                  7.**
              **Stock
                  Options**
 
 The
        Company did not grant options during the six months ended June 30, 2008.
        Stock
        option activity for the six months ended June 30, 2008 is as follows:
 
 Options
                Outstanding
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted Average
                Remaining
                Contractual Term
                (Years)Outstanding
                  at December 31, 2007
              
              
              11,497,486
              
              
              0.65
              
              
              5.3Issued
              
              
              -
              
              
              -Cancelled
              
              
              (74,339
              )
              
              (0.91
              )Exercised
              
              
              -
              
              
              -Outstanding
                  at June 30, 2008
              
              
              11,423,147
              
              $
              0.65
              
              
              4.9Exercisable
                  at June 30, 2008
              
              
              11,325,248
              
              $
              0.66
              
              
              4.8
 
 During
        the three and six month periods ended June 30, 2008, the Company recognized
        approximately $3,000 and $4,300, respectively, in stock-based compensation
        expense. The charges in the comparable periods ended June 30, 2007 were $28,000
        and $109,000, respectively. As of June 30, 2008, there was approximately
        $10,700
        of unrecognized compensation expense related to unvested shared-based
        compensation arrangements which is expected to be fully recognized by the
        end of
        2009.
 
 **Note
                  8.**
              **Warrants
                  to Purchase Common Stock**
 
 During
        the three and six months ended June 30, 2008, the Company granted warrants
        to
        purchase an aggregate of 9,201,813 and 23,662,221, respectively, of the
        Company’s common stock pursuant to the terms of a stock purchase agreement dated
        September 27, 2007 (See Note 6). Such warrants are exercisable at prices
        ranging
        from $0.04 to $0.07 per share and expire at various times through May
        2013.
 
 The
        Company also granted warrants to purchase an aggregate of 2,438,000 shares
        of
        the Company’s common stock pursuant to the terms of a note agreement dated
        January 9, 2008 (see Note 4). Such warrants are exercisable at a price of
        $0.061
        per share and expire in January 2011.
 
 In
        addition, the Company extended the expiration date of warrants to acquire
        500,000 shares of the Company’s common stock from April 2009 to January 2011,
        and reduced the exercise price from $0.30 per share to $0.061 per share (see
        Note 4).
  13
  **Protein
        Polymer Technologies, Inc.**
 **Notes
        to Condensed Financial Statements**
 **(unaudited)**
 
 No
        warrants were exercised during the three and six months ended June 30, 2008.
        A
        summary of warrant activity for the six months ended June 30, 2008 is as
        follows:
 
 Number of
                Warrants
                Outstanding
                and
                Exercisable
              
              Weighted-
                Average
                Exercise
                PriceOutstanding, December 31,
                  2007
              
              
              21,771,220
              
              $
              0.40Granted
              
              
              26,100,221
              
              $
              0.06Exercised
              
              
              —
              
              $
              —Expired
              
              
              (2,798,996
              )
              $
              (0.19
              )Outstanding,
                  June 30, 2008
              
              
              45,072,445
              
              $
              0.18
 
 At
        June
        30, 2008, the weighted-average remaining contractual life of the warrants
        was
        approximately 3.4 years.
 
 **Note
                  9.**
              **Commitments
                  and Contingencies**
 
 ***Facilities
        Lease Agreement***
 
 The
        Company leased its office and research facilities totaling 27,000 square
        feet
        under an operating lease which expired on April 30, 2008. The Company did
        not
        renew the facilities lease and has vacated the premises. As of June 30, 2008,
        the Company had accrued $14,000 in repair and maintenance costs related to
        the
        termination of this facilities lease. We are currently exploring arrangements
        to
        relocate our administrative offices and outsource our laboratory and production
        facilities.
  Through
        April 30, 2008, the Company subleased 6,183 square feet of its office and
        research facilities under a month-to-month arrangement for $13,000 per month
        plus utilities. As of June 30, 2008, our sub-lessee owed us approximately
        $200,000 for accrued unpaid rent. Due to the uncertainty regarding the
        collectibility of the amount owed, a reserve for the entire balance owed
        by the
        former sub-tenant has been recorded as of June 30, 2008.
 
 **Note
                  10.**
              **Subsequent
                  Events**
  Additional
        developments during the period July 1, 2008 through August 5, 2008 include
        the
        following:
 
 ·
              The
                  Company received proceeds of $355,000 for the purchase of 9,923,529
                  shares
                  of common stock and 9,923,529 warrants pursuant to the SPA dated
                  September
                  27, 2007.
  14
  **Item 2.
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 *The
        interim financial statements and this Management’s Discussion and Analysis of
        Financial Condition and Results of Operations should be read in conjunction
        with
        the financial statements and notes thereto for the year ended December 31,
        2007, and the related Management’s Discussion and Analysis of Financial
        Condition and Results of Operations, both of which are contained in our Annual
        Report on Form 10-KSB for the year ended December 31, 2007. In addition to
        historical information, this discussion and analysis contains forward-looking
        statements that involve risks, uncertainties, and assumptions. When used
        herein,
        the words “believe,” “anticipate,” “expect,” “estimate” and similar expressions
        are intended to identify such forward-looking statements. Our actual results
        may
        differ materially from those anticipated in these forward-looking statements
        as
        a result of certain factors, including but not limited to those set forth
        under
        the caption “Risk Factors” in the Form 10-KSB for the year ended
        December 31, 2007 and the caption “Risk Factors” in this Form 10-Q for the
        quarter ended June 30, 2008. We undertake no obligation to update any of
        the
        forward-looking statements contained herein to reflect any future events
        or
        developments.*
 
 **Company
        and Technology Background**
 
 Protein
        Polymer Technologies, Inc. (hereafter the “Company” or “we”), a Delaware
        corporation, is a biotechnology company incorporated on July 6, 1988. We
        are
        engaged in the research, development, and production of bio-active devices
        to
        improve medical and surgical outcomes. Through our patented technology to
        produce proteins of unique design, biological and physical product components
        are integrated to provide for optimized clinical performance.
  We
        are
        focused on developing products to improve medical and surgical outcomes,
        based
        on an extensive portfolio of proprietary biomaterials. Biomaterials are
        materials that are used to direct, supplement, or replace the functions of
        living systems. The interaction between materials and living systems is dynamic.
        It involves the response of the living system to the materials (e.g.,
        biocompatibility) and the response of the materials to the living system
        (e.g.,
        remodeling). The requirements for performance within this demanding biological
        environment have been a critical factor in limiting the possible metal, polymer,
        and ceramic compositions to a relatively small number that to date have been
        proven useful in medical devices implanted within the body.
  The
        goal
        of biomaterials development historically has been to produce inert materials,
        i.e., materials that elicit little or no response from the living system.
        However, we believe that such conventional biomaterials are constrained by
        their
        inability to convey appropriate messages to the cells that surround them,
        the
        same messages that are conveyed by proteins in normal human
        tissues.
  The
        products we have targeted for development are based on a new generation of
        biomaterials which have been designed to be recognized and accepted by human
        cells to aid in the natural process of bodily repair, (including the healing
        of
        tissue and the restoration or augmentation of its form and function) and,
        ultimately, to promote the regeneration of tissues. We believe that the
        successful realization of these properties will substantially expand the
        role
        that artificial devices can play in the prevention and treatment of human
        disability and disease, and enable the culture of native tissues for successful
        reimplantation.
 
 Through
        our proprietary core technology, we produce high molecular weight polymers
        that
        can be processed into a variety of material forms such as gels, sponges,
        films,
        and fibers, with their physical strength and rate of resorption tailored
        to each
        potential product application. These polymers are constructed of the same
        amino
        acids as natural proteins found in the body. We have demonstrated that our
        polymers can mimic the biological and chemical functions of natural proteins
        and
        peptides, such as the attachment of cells through specific membrane receptors
        and the ability to participate in enzymatic reactions, thus overcoming a
        critical limitation of conventional biomaterials. In addition, materials
        made
        from our polymers have demonstrated excellent biocompatibility in a variety
        of
        preclinical safety studies.
  15
  Our
        patented core technology enables messages that direct activities of cells
        to be
        precisely formulated and presented in a structured environment similar to
        what
        nature has demonstrated to be essential in creating, maintaining and restoring
        the body’s functions. Our protein polymers are made by combining the techniques
        of modern biotechnology and traditional polymer science. The techniques of
        biotechnology are used to create synthetic genes that direct the biological
        synthesis of protein polymers in recombinant microorganisms. The methods
        of
        traditional polymer science are used to design novel materials for specific
        product applications by combining the properties of individual “building block”
components in polymer form.
 
 In
        contrast to natural proteins, either isolated from natural sources or produced
        using traditional genetic engineering techniques, our technology results
        in the
        creation of new proteins with unique properties. We have demonstrated an
        ability
        to create materials that:
 
 ·
              combine
                  properties of different proteins found in
                  nature;
 ·
              reproduce
                  and amplify selected activities of natural
                  proteins;
 ·
              eliminate
                  undesired properties of natural proteins;
                  and
 ·
              incorporate
                  synthetic properties via chemical
                  modifications
  This
        ability is fundamental to our current primary product research and development
        focus — tissue repair and regeneration. Tissues are highly organized structures
        made up of specific cells arranged in relation to an extra-cellular matrix
        (“ECM”), which is principally composed of proteins. The behavior of cells is
        determined largely by their interactions with the ECM. Thus, the ability
        to
        structure the cells’ ECM environment allows the protein messages they receive —
and their activity — to be controlled.
  **Results
        of Operations**
  ***Contract
        and Licensing Revenue*** **.** Revenues
        from product sales for the three and six months ended June 30, 2008 were
        $7,000,
        compared to $132,000 and $268,000 respectively for contract and licensing
        revenue for the comparable periods in 2007. Future revenues are subject to
        future collaborative development and licensing agreements.
 
 We
        cannot
        forecast with any degree of certainty which potential product lines will
        be
        subject to future collaborations or other strategic transactions, when such
        arrangements will be secured, if at all, and to what degree such arrangements
        would affect our development plans and capital requirements. As a result,
        we
        cannot be certain when and to what extent we will receive cash inflows from
        the
        commercialization of product candidates or collaboration agreements, if at
        all.
 
 ***Research
        and Development Expenses*** **.** Research
        and development expenses for the three and six months ended June 30, 2008
        were
        $574,000 and $1,125,000 respectively, compared to $628,000 and $1,273,000,
        respectively, for the comparable periods in 2007. We expect further decline
        from
        2007 as a result of significantly reduced activity levels of clinical testing
        and regulatory consulting costs in 2008. We expect our research and development
        expenses will increase in the future only to the extent that additional capital
        is obtained or future collaborative development and licensing agreements
        are
        secured.
 
 ***Selling,
        General and Administrative Expenses*** **.** Selling,
        general and administrative expenses for the three and six months ended June
        30,
        2008 were $302,000 and $511,000, respectively, as compared to $352,000 and
        $671,000, respectively, for the comparable periods in 2007. We made significant
        reductions in administration expenses in the first two quarters of 2008.
        Several
        highly compensated positions were eliminated and all non-mission sensitive
        expenses were reviewed and either eliminated or reduced, including the cost
        of
        facilities. To the extent possible, we continue to concentrate on controlling
        costs in this area. We expect our selling, general and administrative expenses
        will increase in the future only to the extent that additional capital is
        obtained or future collaborative development and licensing agreements are
        secured.
  16
  ***Operating
        Losses*** .
        For the
        three months ended June 30, 2008, we recorded a net loss applicable to common
        shareholders of $1,106,000 or $0.01 per share, as compared to a loss of
        $1,029,000 or $0.02 per share for the comparable period in 2007. For the
        six
        months ended June 30, 2008, we recorded a net loss applicable to common
        shareholders of $2,106,000 or $0.02 per share, as compared to a loss of
        $1,825,000 or $0.03 per share for the comparable period in 2007. The undeclared
        or imputed dividends in the six months ended June 30, 2008 was greater than
        the
        comparable period in 2007 as the result of a non-cash imputed dividend that
        resulted from repricing and extending the term of certain warrants in January
        2008.
 
 **Inflation**
 
 To
        date,
        we believe that inflation and changing prices have not had a material impact
        on
        our continuing operations.
  **Liquidity
        and Capital Resources**
 
 As
        of
        June 30, 2008, we had cash totaling $8,000, as compared to $22,000 at December
        31, 2007. As of June 30, 2008, we had a working capital deficit of $8,474,000
        compared to working capital of $7,862,000 at December 31, 2007.
 
 We
        do not
        have any off balance sheet financing activities and do not have any special
        purpose entities. We had no long-term capital lease obligations as of June
        30,
        2008. During the six months ended June 30, 2008, we did not purchase any
        capital
        equipment or leasehold improvements and do not anticipate that expenditures
        for
        these items will be increased significantly in 2008.
 
 Our
        existing available cash as of June 30, 2008, and continuing contractual
        commitments, are insufficient to meet our anticipated funding requirements.
        Substantial additional capital resources are required to fund continuing
        expenditures related to our operating, research, development, manufacturing
        and
        business development activities. As discussed in Note 6 to the financial
        statements, the Company entered into a common stock purchase agreement
        (hereafter “SPA”) in September 2007 and has raised $1,790,000 as of June 30,
        2008, as a result of that SPA.  Pursuant to the SPA, which has been our
        only source of external financing since September 2007, the investors purchase
        shares of our common stock at the closing price of the stock on the day the
        investment is made. In addition, we issued a five-year warrant to each investor
        to purchase the same number of shares as those purchased by such investor
        at
        110% of the price at which the shares are purchased. As of November 28, 2007,
        the SPA was amended so that warrants issued on and after that date are
        exercisable at 100% of the price at which the shares are purchased. We have
        also
        granted the investors demand and piggy-back registration rights covering
        the
        shares purchased and the sharers issuable upon exercise of the warrants.
        Prior
        to the SPA, required funding was provided to us through a note payable agreement
        (known as the Szulik Loan) by Matthew Szulik, one of our stockholders. This
        loan
        was outlined in previous filings and is further described in Note 4 to the
        financial statements. As with the Escrow Agreement relating to the Szulik
        Loan,
        the Stock Purchase Agreement provides that TAG
        Virgin Island s,
        Inc.
        (hereafter “TAG”), as agent for the equity investors, will advise the Board as
        to which of the Company’s expenses will be paid with the funds invested by these
        investors.
 
 As
        of
        January 9, 2008, we replaced the Szulik Loan by issuing to Mr. Szulik a new
        note
        in the principal amount of $6,415,000. This amount included the then $5,876,000
        outstanding principal balance plus the then outstanding $539,000 in accrued
        interest on the old note. The new note bears annual interest at the rate
        8%, the
        same as did the old note, matures on September 1, 2008 and is secured in
        the
        same manner as was the old note. As consideration for Mr. Szulik agreeing
        to
        accept the new note, we issued him three-year warrants to purchase an aggregate
        of 2,438,000 shares of our common stock at $0.061 per share and lowered the
        exercise price of warrants to purchase 500,000 shares of our common stock
        that
        we had previously issued to him from $0.30 per share to $0.061 per share.
  17
  This
        funding was arranged by TAG, a registered investment advisor which advises
        a
        number of our stockholders in investment decisions, including decisions about
        whether to invest in our stock. These clients include Richard Adelson, Alan
        Farber and Kerry Kuhn, who are members of our Board of Directors, and Mr.
        Szulik
        and Redec & Associates, LLC, another of our principal stockholders. Based
        upon our stock records and data supplied to us by our stockholders, we believe
        that clients of TAG beneficially owned approximately 55.1% of our common
        stock
        as of September 27, 2007, prior to the stock purchases subject to the SPA
        of
        September 27, 2007. TAG has discretionary authority to vote or dispose of
        the
        shares of our common stock held in its client accounts and, therefore, may
        be
        deemed to be the beneficial owner of such shares in accordance with the
        Commission's Rules. TAG has informed us that James Tagliaferri is the natural
        person at TAG with such discretionary authority. TAG expressly disclaims
        beneficial ownership of any shares owned by its clients.
  As
        noted
        above, we believe our existing available cash as of June 30, 2008 will not
        be
        sufficient to meet our anticipated capital requirements during 2008. We are
        unable to pay certain vendors in a timely manner and remain over 90 days
        past
        due with certain critical vendors, such as outside laboratories and law firms.
        We currently owe our former chief executive officer's firm, R. I. Heller
&
Co., LLC, $175,000 for his services. Additionally, we are currently outsourcing
        administrative and accounting functions as a result of cutbacks necessitated
        by
        insufficient monetary resources. We are attempting to remedy this problem.
        Our
        ability to continue operating is dependent on the receipt of additional funding
        and substantial additional capital resources will be required to fund continuing
        expenditures related to our research, development, manufacturing and business
        development activities. If adequate funds are not available, we will be required
        to significantly curtail our operating plans and most likely cease operations.
        We are still in discussions with other potential financing sources and
        collaborative partners, and are seeking additional funding in the form of
        equity
        investments, license fees, loans, milestone payments or research and development
        payments. We cannot assure that any of these other sources of funding will
        be
        consummated in the timeframes needed for continuing operations or on terms
        favorable to us, if at all.
 
 **Caution
        on Forward-Looking Statements**
 
 Any
        statements in this report about our expectations, beliefs, plans, objectives,
        assumptions or future events or performance are not historical facts and
        are
        forward-looking statements. You can identify these forward-looking statements
        by
        the use of words or phrases such as “believe,” “may,” “could,” “will,”
“estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,”
“should” or “would.” Among the factors that could cause actual results to differ
        materially from those indicated in the forward-looking statements are risks
        and
        uncertainties inherent in our business including, without limitation: the
        potential for the FDA to impose non-clinical, clinical or other requirements
        to
        be completed before or after use of any of our intellectual property or
        methodology; our ability to demonstrate to the satisfaction of potential
        collaborative development partners of the feasibility of utilizing our
        intellectual property or methodology; the failure to generate the potential
        to
        enter into and the terms of any strategic transaction relating to our
        intellectual property or methodology; the scope, validity and duration of
        patent
        protection and other intellectual property rights for our intellectual property
        or methodology ; estimates of the potential markets for our intellectual
        property or methodology and our ability to compete in these markets; our
        products, our expected future revenues, operations and expenditures and
        projected cash needs; our ability to raise sufficient capital and other risks
        detailed in this report. Although we believe that the expectations reflected
        in
        our forward-looking statements are reasonable, we cannot guarantee future
        results, events, levels of activity, performance or achievement. We undertake
        no
        obligation to publicly update or revise any forward-looking statements, whether
        as a result of new information, future events or otherwise, unless required
        by
        law. This caution is made under the safe harbor provisions of the Private
        Securities Litigation Reform Act of 1995.
  18
  **Item 3.
        Quantitative and Qualitative Disclosures about Market Risk**
  As
        a
        Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and
        in
        item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
        obligations and therefore are not required to provide the information requested
        by this Item.
 
 **Item 4T.
        Controls and Procedures**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed by the Company in the reports we file
        or
        submit under the Securities Exchange Act of 1934, is recorded, processed,
        summarized and reported within the time periods specified in the Securities
        and
        Exchange Commission’s rules and forms, and that such information is accumulated
        and communicated to our management, including our Interim Chief Executive
        Officer and Interim Principal Financial Officer, who is the same person,
        to
        allow timely decisions regarding required disclosure. As reported in our
        Annual
        Report on Form 10-KSB for the year ended December 31, 2007 (filed on May
        12,
        2008), Company management identified material weaknesses in our internal
        accounting control over financial reporting as of December 31, 2007,
        including:
 
 ·
              Pervasive,
                  entity-level control deficiencies across key COSO components in
                  the
                  Company’s control environment, including:
 
 o
              Controls
                  over the period-end financial closing and reporting
                  processes;
 o
              Controls
                  over managerial override;
 o
              Controls
                  to prevent or reduce the risk of fraudulent
                  activity;
 o
              Controls
                  to monitor other controls, including the role of the Board of Directors;
                  and
 o
              Controls
                  related to risk assessment.
 
 ·
              An
                  absence of independence and financial expertise on the Board of
                  Directors,
                  limiting its ability to provide effective
                  oversight.
 ·
              An
                  absence of a formalized process to manage the Company’s internal controls
                  over financial reporting and become compliant with Section 404
                  of the
                  Sarbanes-Oxley Act.
 ·
              Inadequate
                  controls over the period-end financial close and reporting
                  processes;
 ·
              Insufficient
                  personnel resources and technical accounting expertise within the
                  accounting function to provide for adequate segregation of duties
                  and
                  resolve non-routine or complex accounting matters;
                  and
 ·
              Inadequate
                  documentation of policies, procedures, and controls related to
                  finance and
                  accounting, including inadequate procedures for appropriately identifying,
                  assessing, and applying accounting
                  principles.
  19
  As
        a
        result of these material weaknesses, management concluded that the Company’s
        internal control over financial reporting was not effective as of December
        31,
        2007. During the six months ended June 30, 2008, and through the date of
        this
        Quarterly Report on Form 10-Q, we have begun to implement additional controls
        and procedures, as outlined in “Management’s Report on Internal Controls Over
        Financial Reporting” in our 2007 Annual Report on Form 10-KSB, intended to
        remediate the material weaknesses discussed above and are continuing to assess
        additional controls that may be required to remediate these
        weaknesses.
 
 As
        of
        June 30, 2008, our management, including our Interim Chief Executive Officer
        and
        Interim Principal Financial Officer, who is the same person, evaluated the
        effectiveness of our disclosure controls and procedures (as defined in Rules
        13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). As
        part
        of its evaluation, management evaluated whether the previously reported material
        weaknesses in internal control over financial reporting continue to exist.
        Although the Company has begun to address its material weaknesses in internal
        control over financial reporting, we have not completed the implementation
        and
        testing of the changes in controls and procedures which we believe are necessary
        to conclude that the material weaknesses have been remediated. Accordingly,
        Company management has determined that it cannot assert that the reported
        material weaknesses have been effectively remediated as of June 30, 2008.
        Accordingly, Company management, including our Interim Chief Executive Officer
        and Interim Principal Financial Officer, who is the same person, has concluded
        that Company’s disclosure controls and procedures were not effective as of June
        30, 2008.
 
 Notwithstanding
        the identified material weaknesses, Company management has concluded that
        the
        financial statements included in this Quarterly Report present fairly, in
        all
        material respects, the Company’s financial position, results of operations and
        cash flows for the periods presented in conformity with accounting principles
        generally accepted in the United States.
 
 Other
        than the changes described above, there have been no changes in our internal
        control over financial reporting that occurred during the quarter ended June
        30,
        2008 that have materially affected, or are reasonably likely to materially
        affect, our internal control over financial reporting.
  20
  **PART
        II — OTHER INFORMATION**
  **Item 1.
        Legal Proceedings**
 
 From
        time
        to time, we are involved in litigation and proceedings in the ordinary course
        of
        our business. We are not currently involved in any legal proceeding that
        we
        believe would have a material adverse effect on our business or financial
        condition.
  **Item 1A.
        Risk Factors**
 
 Investing
        in our common stock involves a high degree of risk. You should consider
        carefully the risks and uncertainties described under Item 1A – “Risk
        Factors” of Part 1 of our Annual Report on Form 10-KSB for the year ended
        December 31, 2007, which is incorporated by reference into this report. The
        risks described in our Annual Report have not materially changed.
 
 You
        should carefully consider the risk factors discussed in our Annual Report
        on
        Form 10-KSB as well as the other information in this report before deciding
        whether to invest in shares of our common stock. The occurrence of any of
        the
        risks discussed in the Annual Report on Form 10-KSB or this report could
        harm
        our business, financial condition, results of operations or growth prospects.
        In
        that case, the trading price of our common stock could decline, and you may
        lose
        all or part of your investment.
 
 **Item 2.
        Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
 During
        the six months ended June 30, 2008, we received an aggregate of $1,220,000
        for
        the purchase of 23,662,221 common shares. In addition, between July 1, 2008
        and
        August 5, 2008, we further received an aggregate of $355,000 for the purchase
        of
        9,923,529 common shares. Reference is made to Liquidity and Capital resources
        under Management’s Discussion and Analysis of Financial Condition and Results of
        Operations or information relating to these sales. The sales were made pursuant
        to the exemption from the registration provisions of the Securities Act of
        1933
        provided by Section 4 (2) thereof.
 
 As
        of
        August 5, 2008, we had used substantially all of the net proceeds which were
        generated from the sale of our securities pursuant to the SPA to fund ongoing
        operations. We have no remaining proceeds from these sales and will require
        further sales or other financing transactions or collaborative development
        agreements to maintain ongoing operations.
  **Item 3.
        Defaults upon Senior Securities**
 
 Not
        applicable.
 
 **Item 4.
        Submission of Matters to a Vote of Security Holders**
  Not
        applicable.
 
 **Item 5.
        Other Information**
 
 Not
        applicable.
  21
  **Item 6.
        Exhibits**
 
 The
        following documents are included or incorporated by reference:
 
 Exhibit Number
              
              Description10.6.1*
              
              Secured
                  Promissory Note Replacement Agreement, dated as of January 9, 2008,
                  between the Company and Matthew J. Szulik.10.6.2*
              
              Secured
                  Promissory Note issued to Matthew J. Szulik, dated as of January
                  9,
                  2008.10.6.3*
              
              Form
                  of Warrant to Purchase Shares of Common Stock of the Company in
                  connection
                  with the Secured Promissory Note issued to Matthew J. Szulik, dated
                  as of
                  January 9. 2008.31.1
              
              Certification
                  of Interim 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 Interim 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 Interim Chief Executive Officer pursuant to 18 U.S.C. Section
                  1350, as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              
              Certification
                  of Interim Principal Financial Officer pursuant to 18 U.S.C. Section
                  1350
                  as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                  2002.
  
 
 *
              Incorporated
                  by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                  ended December 31, 2007, SEC File No. 000-19724, as filed with
                  the
                  Commission on May 12, 2008.
  22
  **SIGNATURES**
 
 In
        accordance with the requirements of the Securities Exchange Act of 1934,
        the
        registrant caused this report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
  PROTEIN
                  POLYMER TECHNOLOGIES, INC.Date:
                  August 19, 2008
              By:
              /s/
                  James B. McCarthyJames
                  B. McCarthyInterim
                  Chief Executive OfficerDate:
                  August 19, 2008
              By:
              /s/
                  James B. McCarthyJames
                  B. McCarthyInterim
                  Principal Financial Officer
  23