**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 September 30, 2007





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





For
      the
      transition period from ___________________ to ____________________





Commission
      file number 0-19724





PROTEIN
      POLYMER TECHNOLOGIES, INC.


(Exact
      name of small business issuer as specified in its charter)





Delaware
            
            33-0311631(State
                or other jurisdiction of
            
            (IRS
                Employer Identification No.)incorporation
                or organization)





10655
      Sorrento Valley Road, San Diego, CA 92121


(Address
      of principal executive offices)





(858)
      558-6064


(Issuer's
      telephone number)





(former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o





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


Yes o No x





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: As of November 2, 2007, 67,809,204 shares
      of
      common stock were outstanding.





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









PROTEIN
      POLYMER TECHNOLOGIES, INC.





FORM
      10-QSB





INDEX




Page
              No.PART
                I. FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)Balance
                Sheets September
                30, 2007 and December 31, 2006
            
            3Statements
                of Operations For
                three and nine months ended September 30, 2007 and
                2006
            
            4Statements
                of Cash Flows For
                the nine months ended September 30, 2007 and 2006
            
            5Notes
                to Financial Statements
            
            6ItIItem
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            12Item
                3. Controls and Procedures
            
            19PART
                II. OTHER INFORMATIONItem
                2. Unregistered Sales of Equity Securities and Use of
                Preceeds
            
            20Item
                4. Submission of Matters to a Vote of Security Holders
            
            20Item
                6. Exhibits
            
            21Signatures
            
            22


2




PART
      I.
      FINANCIAL INFORMATION




Item
      1.
      Financial Statements


Protein
                    Polymer Technologies, Inc.Balance
                    Sheets(unaudited)September
                    30,
                
                December
                    31,2007
                
                2006AssetsCurrent
                    assets:Cash
                    and cash equivalents
                
                $
                58,566
                
                $
                73,495Contract
                    receivable
                
                
                —
                
                
                21,068Current
                    portion of rent receivable
                
                
                —
                
                
                39,527Prepaid
                    expenses and other current assets
                
                
                25,475
                
                
                49,940Total
                    current assets
                
                
                84,041
                
                
                184,030Deposits
                
                
                31,279
                
                
                29,679Equipment
                    and leasehold improvements, net
                
                
                152,561
                
                
                228,475Investment,
                    at cost
                
                
                520,000
                
                
                520,000Total
                    assets
                
                $
                787,881
                
                $
                962,184Liabilities
                    and stockholders' (deficit) equityCurrent
                    liabilities:Accounts
                    payable
                
                $
                703,651
                
                $
                1,098,820Accrued
                    liabilities
                
                
                716,911
                
                
                422,730Secured
                    note payable - related party
                
                
                5,876,000
                
                
                3,461,516Current
                    maturities of notes payable
                
                
                261,667
                
                
                146,697Total
                    current liabilities
                
                
                7,558,229
                
                
                5,129,763Notes
                    payable, net of current maturities
                
                
                257,404
                
                
                372,374Deferred
                    rent
                
                
                13,269
                
                
                13,269Total
                    liabilities
                
                
                7,828,902
                
                
                5,515,406Commitments
                    and contingenciesStockholders'
                    deficit:Convertible
                    preferred stock, $.01 par value; 5,000,000 shares authorized;
                    65,645
                    shares issued and outstanding at September 30, 2007 and December
                    31, 2006
                    - liquidation preference of $6,564,500 at September 30, 2007
                    and December
                    31, 2006
                
                
                6,019,917
                
                
                6,019,917Common
                    stock, $.01 par value; 1,000,000,000 and 120,000,000 shares authorized
                    at
                    September 30, 2007 and December 31, 2006, repectively; 67,809,204
                    and
                    67,409,204 shares issued and outstanding at September 30, 2007
                    and
                    December 31, 2006, respectively
                
                
                678,092
                
                
                674,092Additional
                    paid-in capital
                
                
                55,959,108
                
                
                55,760,511Accumulated
                    deficit
                
                
                (69,698,138
                )
                
                (67,007,742
                )Total
                    stockholders' deficit
                
                
                (7,041,021
                )
                
                (4,553,222
                )Total
                    liabilities and stockholders' deficit
                
                $
                787,881
                
                $
                962,184See
                    accompanying notes.
  3
 Protein
                    Polymer Technologies, Inc.Statements
                    of Operations(unaudited)Three
                    months ended
                
                Nine
                    months endedSeptember
                    30,
                
                September
                    30,2007
                
                2006
                
                2007
                
                2006Revenues:Contract
                    revenue
                
                $
                14,500
                
                $
                —
                
                $
                282,118
                
                $
                410,532Product
                    and other income
                
                
                
                
                
                10,568
                
                
                
                
                
                40,684Total
                    revenues
                
                
                14,500
                
                
                10,568
                
                
                282,118
                
                
                451,216Operating
                    expenses:Cost
                    of sales
                
                
                —
                
                
                —
                
                
                —
                
                
                1,640Research
                    and development
                
                
                438,858
                
                
                767,024
                
                
                1,712,011
                
                
                2,951,882Selling,
                    general and administrative
                
                
                452,996
                
                
                448,772
                
                
                1,124,294
                
                
                3,065,986Total
                    expenses
                
                
                891,854
                
                
                1,215,796
                
                
                2,836,305
                
                
                6,019,508Net
                    loss from operations
                
                
                (877,354
                )
                
                (1,205,228
                )
                
                (2,554,187
                )
                
                (5,568,292
                )Other
                    income (expense):Interest
                    income
                
                
                —
                
                
                3,656
                
                
                145
                
                
                13,293Interest
                    expense
                
                
                (126,113
                )
                
                (28,643
                )
                
                (331,456
                )
                
                (130,485
                )Gain
                    (loss) on derivative liability
                
                
                —
                
                
                —
                
                
                9,510
                
                
                —Gain
                    on settlement
                
                
                —
                
                
                —
                
                
                193,917
                
                
                —Total
                    other expense
                
                
                (126,113
                )
                
                (24,987
                )
                
                (127,884
                )
                
                (117,192
                )Net
                    loss
                
                
                (1,003,467
                )
                
                (1,230,215
                )
                
                (2,682,071
                )
                
                (5,685,484
                )Undeclared,
                    imputed and/or paid dividends on preferred stock
                
                
                69,980
                
                
                69,980
                
                
                215,983
                
                
                296,609Net
                    loss applicable to common shareholders
                
                $
                (1,073,447
                )
                $
                (1,300,195
                )
                $
                (2,898,054
                )
                $
                (5,982,093
                )Basic
                    and diluted net loss per common share
                
                $
                (0.02
                )
                $
                (0.02
                )
                $
                (0.04
                )
                $
                (0.09
                )Shares
                    used in computing basic and diluted net loss per common
                    share
                
                
                67,809,204
                
                
                67,409,204
                
                
                68,113,966
                
                
                67,357,505See
                    accompanying notes.
  4
 Protein
                    Polymer Technologies, Inc.Statements
                    of Cash Flows(unaudited)Nine
                    months endedSeptember
                    30,2007
                
                2006**Operating
                    activities**Net
                    loss
                
                $
                (2,682,071
                )
                $
                (5,685,484
                )**Adjustments
                    to reconcile net loss to net cash used for operating
                    activities:**Depreciation
                    and amortization
                
                
                75,914
                
                
                119,017Share
                    based compensation expense
                
                
                133,205
                
                
                1,424,889Gain
                    on warrant derivative liability
                
                
                9,510
                
                
                69,608**Changes
                    in operating assets and liabilities:**Contracts
                    receivable
                
                
                21,068
                
                
                113,792Current
                    portion of rent receivable
                
                
                39,527
                
                
                75,908Prepaid
                    expenses and other current assets
                
                
                24,465
                
                
                (3,307
                )Deposits
                
                
                (1,600
                )
                
                (800
                )Accounts
                    payable
                
                
                (395,169
                )
                
                1,013,595Accrued
                    liabilities
                
                
                345,738
                
                
                (4,086
                )Deferred
                    rent
                
                
                —
                
                
                4,450**Net
                    cash used for operating activities**
                
                
                (2,429,413
                )
                
                (2,872,418
                )**Investing
                    activities**Purchase
                    of equipment and improvements
                
                
                —
                
                
                (35,641
                )Purchase
                    of common stock of Spinewave, Inc. through exercise of
                    warrants
                
                
                —
                
                
                (500,000
                )**Net
                    cash used for investing activities**
                
                
                —
                
                
                (535,641
                )**Financing
                    activities**Net
                    proceeds from exercise of options and warrantsand
                    sale of common stock
                
                
                —
                
                
                3,177Net
                    proceeds from issuance of secured notes payable - related
                    party
                
                
                2,414,484
                
                
                2,249,700**Net
                    cash provided by financing activities**
                
                
                2,414,484
                
                
                2,252,877**Net
                    decrease in cash and cash equivalents**
                
                
                (14,929
                )
                
                (1,155,182
                )Cash
                    and cash equivalents at beginning of the period
                
                
                73,495
                
                
                1,211,748**Cash
                    and cash equivalents at end of the period**
                
                $
                58,566
                
                $
                56,566**Supplemental
                    disclosures of cash flow information**Interest
                    paid
                
                $
                4,738
                
                $
                3,282**Non
                    cash investing and financing activity**Imputed
                    dividend on extension of warrants
                
                $
                8,325
                
                $
                88,950Issuance
                    of common stock in settlement of indemnification
                    obligation
                
                $
                61,067
                
                $
                40,000Warrants
                    issued for loan fees
                
                $
                –
                
                $
                69,608See
                    accompanying notes.
 5





**PROTEIN
      POLYMER TECHNOLOGIES, INC.**


Notes
      to
      Unaudited Financial Statements





**1.**
            **Basis
                of Presentation and Significant Accounting
                Policies**




**Interim
      Financial Statements**





The
      financial statements of Protein Polymer Technologies, Inc. (the "Company")
      as of
      September 30, 2007 and for the three and nine months ended September 30, 2007
      are unaudited. These financial statements reflect all adjustments of a normal
      recurring nature which are, in the opinion of management, necessary to
      present fairly, in all material respects, the financial position, results of
      operations and cash flows for the interim period presented. The balance sheet
      as
      of December 31, 2006 was derived from the Company's audited financial
      statements. The results of operations for the three and nine months ended
      September 30, 2007 are not necessarily indicative of the results to be expected
      for the year ending December 31, 2007. These financial statements and the notes
      thereto should be read in conjunction with the audited financial statements
      included in our Annual Report on Form 10-KSB for the year ended December 31,
      2006, filed with the Securities and Exchange Commission.





**Going
      Concern and Liquidity**





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. For the nine months ended September 30, 2007,
      the Company incurred a net loss of approximately $2,682,000 and had a working
      capital deficit of approximately $7,474,188 at September 30, 2007. Our cash
      and
      cash equivalents of approximately $59,000 in combination with anticipated
      additional contract and license payments are insufficient to meet our
      anticipated capital requirements.





Since
      April 2006 the Company has relied primarily on borrowings pursuant to a note
      payable from a related party for capital needed to fund its operations and
      working capital requirements (see Note 4). The maturity of the note has been
      extended until January 10, 2008. There is no assurance this maturity date will
      be further extended. As
      of the
      end of September 2007 additional borrowings under the Company’s existing debt
      financing provided by a related party are unavailable and the lender continues
      to hold essentially all of the Company’s assets as collateral.





As
      discussed in Note 6, the Company entered into a Stock Purchase Agreement dated
      September 27, 2007, pursuant to which it has raised a total of $280,000 through
      November 14, 2007. The funds raised under this agreement are best efforts and
      any future sales of common stock have not been arranged.





Prior
      to
      the commercialization of its products, substantial additional capital resources
      will be required to fund continuing operations related to the Company’s
      research, development, manufacturing, clinical testing, and business development
      activities. The Company continues to explore other potential financing
      sources and collaborative partners and funding in the form of equity
      investments, debt instruments, license fees, milestone payments or research
      and
      development payments could be generated. There can be no assurance that any
      of
      these other potential sources of funds will be realized in the time frames
      required for continuing operations or on terms favorable to the Company, if
      at
      all. If adequate funds in the future are not available, the Company will be
      required to significantly curtail its operating plans and likely cease
      operations. These factors raise substantial doubt about the Company’s ability to
      continue as a going concern. The accompanying financial statements do not
      include any adjustments that might be necessary if the Company is unable to
      continue as a going concern.





6




**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements, and the amount of revenue and expense reported during
      the period. Actual results could differ from those estimates.





**Investments**





The
      Company determines the appropriate classification of its investments in equity
      securities at the time of acquisition and reevaluates such determinations at
      each balance-sheet date. Marketable equity securities not classified as trading,
      are classified as available-for-sale, and are carried at fair market value,
      with
      the unrealized gains and losses, net of tax, included in the determination
      of
      comprehensive income and reported in shareholders’ equity. Investments for which
      market prices are not available, are valued and reported at cost in periods
      subsequent to acquisition. No gains or losses are recognized until the
      securities are sold.




**Warrant
      Derivative Liability**





The
      Company accounts for warrants issued in accordance with EITF Issue No. 00-19,
      “Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company’s Own Stock) (“EITF 00-19”). Pursuant to EITF 00-19, an
      evaluation of specifically identified conditions is made to determine whether
      the fair value of warrants issued is required to be classified as a derivative
      liability. The fair value of warrants classified as derivative liabilities
      is
      adjusted for changes in fair value at each reporting period, and the
      corresponding non-cash gain or loss is recorded in current period earnings.




**Net
      Loss per Common Share**





Basic
      earnings per share is calculated using the weighted-average number of
      outstanding common shares during the period. Diluted earnings per share is
      calculated using the weighted-average number of outstanding common shares and
      dilutive common equivalent shares outstanding during the period, using either
      the as-converted method for convertible notes and convertible preferred stock
      or
      the treasury stock method for options and warrants.





Excluded
      from diluted loss per common share for the nine months ended September 30,
      2007
      and 2006 were 26,341,157 and 19,730,678 shares, respectively, issuable upon
      conversion of its convertible preferred stock, and options and warrants to
      purchase 28,713,074 and 26,008,076 shares of common stock, respectively, because
      the effect would be anti-dilutive. For purposes of this calculation, net loss
      in
      2007 and 2006 has been adjusted for imputed, accumulated and/or paid dividends
      on the preferred stock.




**Recently** I **ssued
      Accounting Pronouncements**





In
      June
      2006, the FASB issued Interpretation No. 48, *"Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109,"* (FIN
      48). FIN 48 clarifies the accounting for uncertainty in tax positions and
      requires that a Company recognize in its financial statements the impact of
      a
      tax position, if that position is more likely than not of being sustained on
      audit, based on the technical merits of the position. The provisions of FIN
      48
      are effective for fiscal years beginning after December 15, 2006. The adoption
      of this standard, effective January 1, 2007, did not have a significant impact
      on the Company's financial position, results of operation or cash
      flows.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“ SFAS No.
      157”). FAS No.
      157
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. This Statement focuses on
      creating consistency and comparability in fair value measurements. SFAS No.
      157 is effective for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years.  We are currently evaluating the
      impact of adopting SFAS 157 on our financial statements.





7




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115* (“SFAS
      No. 159”), which permits entities to choose to measure many financial
      instruments and certain other items at fair value. The fair value option
      established by this Statement permits all entities to choose to measure eligible
      items at fair value at specified election dates. A business entity shall report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings at each subsequent reporting date. Adoption is required
      for
      fiscal years beginning after November 15, 2007. Early adoption is permitted
      as of the beginning of a fiscal year that begins on or before November 15,
      2007, provided the entity also elects to apply the provisions of SFAS Statement
      No. 159.  The Company is currently evaluating the impact of adopting
      SFAS No. 159 on our financial statements.





**2.**
            **Technology
                License Agreement**




In
      March
      2007, the Company determined to discontinue its efforts to further develop
      and
      commercialize products licensed from Surgica Corporation (‘Surgica”) and the
      Company received notification from Surgica that Surgica was terminating the
      License Agreement due to alleged breaches of the agreement by the Company.
      Accordingly, the Company recorded an impairment charge of $1,046,503 at December
      31, 2006 to reduce the carrying value of the License Agreement to
      $0.




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




Accrued
      liabilities consist of the following approximate amounts:




**September****30,****2007**
            
            **December
                31, 2006**Payroll
                and employee benefits
            
            $
            87,000
            
            $
            94,000Accounting
                and professional fees
            
            
            25,000
            
            
            25,000Accrued
                interest
            
            
            474,000
            
            
            147,000Proceeds
                from sale of common stock
            
            
            40,000
            
            
            -Directors’
                fees payable
            
            
            35,000
            
            
            -Property
                tax
            
            
            30,000
            
            
            21,000Insurance
                premium financing
            
            
            -
            
            
            39,000Indemnification
                obligation
            
            
            -
            
            
            61,000Warrant
                derivative liability
            
            
            26,000
            
            
            36,000$
            717,000
            
            $
            423,000





**4.**
            **Secured
                Note Payable, Related
                Party**




On
      April
      13, 2006, an accredited investor, who is a significant shareholder of the
      Company, loaned $1,000,000 (the “Loan”) to the Company ($500,000 in cash and an
      additional $500,000 deposited with an escrow agent as a line of credit)
      represented by a note (the “Note”) issued by the Company to the investor in the
      principal amount of $1,000,000 (the “Principal”). The Note was originally due on
      July 7, 2006 (the “Maturity Date”) and bears annual interest at the rate of 8%
      payable on the Maturity Date. It is secured, in accordance with the terms of
      a
      security agreement (the “Security Agreement”), by a continuing security interest
      in and a general lien upon (i) 1,000,000 shares of Spine Wave, Inc. common
      stock
      owned by the Company; (ii) a warrant to purchase 1,000,000 shares of Spine
      Wave,
      Inc. common stock owned by the Company which has since been exercised; and
      (iii)
      all U.S. patents owned by the Company. The Note and the Security Agreement
      are
      both dated April 13, 2006. As consideration for the Loan, the Company granted
      a
      warrant to the investor to purchase an aggregate of 500,000 shares of the
      Company’s common stock at an exercise price of $0.30 per share. The investor’s
      counsel acts as the escrow agent and now serves as our outside general
      counsel.





8




On
      November 10, 2007, the Note was amended for the seventh time so that
      the Principal is now $5.876 Million and the Maturity Date is now January 10,
      2008. The outstanding indebtedness subject to the Note and Security Agreement
      was $5,876,000 and accrued interest payable was $413,000 at September 30,
      2007.





Pursuant
      to the terms of the Security Agreement, the Company entered into a patent
      security agreement, an escrow agreement, patent assignment, and a registration
      rights agreement, each dated as of April 13, 2006. According to the terms of
      the
      Security Agreement, the Company entered into the Escrow Agreement with an escrow
      agent for the investor. The Escrow Agreement provides for the disbursement
      of
      the funds held in escrow for application to Company expenses at the sole
      discretion of the investor’s designee. The Escrow Agreement terminates upon the
      event that the amount borrowed is paid in full and no event of default has
      occurred.




**5.**
            **Notes
                Payable**




On
      December 19, 2005, in connection with the Surgica License Agreement, the Company
      assumed several notes payable agreements. The notes bear interest at rates
      ranging from 6% to 10%, and mature at various dates through January 2009. As
      of
      September 30, 2007, the current and long term note balances were $262,000 and
      $257,000, respectively.




Based
      on
      the termination of the Surgica License Agreement in March 2007 the Company
      believes that it will be relieved of its liability for the assumed notes
      payable. However, until a final settlement agreement is reached between
      the Company and Surgica with respect to the disposition of the notes, the
      Company will continue to carry the notes on its balance sheet.




**6.**
            **Common
                Stock**





During
      the quarter ended March 31, 2007 the Company issued 400,000 shares of common
      stock, valued at $61,000, in connection with the settlement of an
      indemnification obligation agreement accrued by the Company at December 31,
      2006.





On
      September 20, 2007 at the Company’s Annual Meeting of Stockholders the
      stockholders approved amending the Company’s certificate of incorporation to
      increase the number of authorized shares of common stock from 120,000,000 to
      1,000,000,000.





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 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,
      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. 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.





As
      of
      September 30, 2007 the Company received $40,000 from a Purchase in exchange
      for
      the future issuance of 261,097 shares of common stock and a warrant, which
      expires on September 26, 2012, to purchase 261,097 shares of common stock at
      a
      per share price of $0.16852. The proceeds of the sale have been included with
      accrued liabilities until the shares have been issued by the
      Company.





Since
      September 30, 2007 the Company has sold, subject to the terms of the SPA and
      RRA, an additional 1,883,121 shares of common stock to Purchasers in exchange
      for $240,000.





9


**7.**
            **Stock
                Options**




On
      January 1, 2006 the Company adopted SFAS 123 (Revised 2004), "Share Based
      Payment," ("SFAS 123R"), using the modified prospective method. In accordance
      with SFAS No. 123R, the Company measures the cost of employee services received
      in exchange for an award of equity instruments based on the grant-date fair
      value of the award. That cost is recognized over the period during which an
      employee is required to provide service in exchange for the award - the
      requisite service period. The Company determines the grant-date fair value
      of
      employee share options using the Black-Scholes option-pricing
      model.




Under
      the
      modified prospective approach, SFAS 123R applies to new awards and to
      awards that were outstanding on January 1, 2006 that are subsequently modified,
      repurchased or cancelled. Under the modified prospective approach, compensation
      cost recognized for the first quarter of fiscal 2006 includes compensation
      cost
      for all share-based payments granted prior to, but not yet vested on, January
      1,
      2006, based on the grant-date fair value estimated in accordance with the pro
      forma provisions of SFAS No. 123R, and compensation cost for all share-based
      payments granted subsequent to January 1, 2006, based on the grant-date fair
      value estimated in accordance with the provisions of SFAS No. 123R. Prior
      periods were not restated to reflect the impact of adopting the new standard.
      During the three and nine month periods ended September 30, 2007 the Company
      recorded $24,000 and $133,000, respectively, in non-cash compensation expense
      related to previously issued stock options. The charges in the comparable
      periods ended September 30, 2006 were $83,000 and $1,425,000, respectively.
      As
      of September 30, 2007, there was approximately $60,000 of total unrecognized
      compensation costs related to unvested options, which is expected to be
      recognized over the next twenty months.




The
      Company did not grant options during the nine months ended September 30, 2007.
      The fair value of stock options granted in 2006 were estimated using the
      Black-Scholes model. Expected volatility is based on the historical volatilities
      of the Company's common stock. The expected life of employee stock options
      is
      determined using historical data of employee exercises and represents the period
      of time that stock options are expected to be outstanding. The risk free
      interest rate is based on U.S. Treasury constant maturity for the expected
      life
      of the stock option. The following assumptions were used in the Black-Scholes
      model:




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




Stock
      option activity for the nine months ended September 30, 2007 is as follows:





Options
                 Outstanding
            
            Weighted
                Average
                ExercisePrice
            
            Weighted
              Average
              Remaining
                 Contractual
              Term
              (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at December 31, 2006
            
            
            12,454,582
            
            $
            0.66
            
            
            
            
            $
            —Issued
            
            
            —
            
            
            —
            
            
            
            
            
            —Cancelled
            
            
            (50,000
            )
            
            (2.58
            )
            
            
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            
            
            
            —Outstanding
                at September 30, 2007
            
            
            12,404,582
            
            $
            0.65
            
            
            5.76
            
            
            —Exercisable
                at September 30, 2007
            
            
            12,167,532
            
            $
            0.65
            
            
            5.76
            
            $
            —




10




**8.**
            **Warrants
                to Purchase Common Stock**





Prior
      to
      their expiration date of January 31, 2007, the Board of Directors extended
      the
      expiration date of warrants to acquire 855,303 shares of the Company’s common
      stock from January 31, 2007 to January 31, 2008. The Company recorded an imputed
      dividend of approximately $8,000 during the quarter ended March 31, 2007 to
      reflect additional benefit created for the preferred stockholders in
      connection with the extension.





No
      warrants were exercised during the three and nine months ended September 30,
      2007.




A
      summary
      of warrant activity for the nine months ended September 30, 2007 is as
      follows:




Number
                of
              Warrants
              Outstanding
              and
              Exercisable
            
            Weighted-
              Average
              Exercise
              PriceOutstanding,
                December 31, 2006
            
            
            17,178,494
            
            $
            0.55Granted
            
            
            —
            
            $
            —Exercised
            
            
            —
            
            $
            —Expired
            
            
            (870,000
            )
            $
            1.14Outstanding,
                September 30, 2007
            
            
            16,308,494
            
            $
            0.53




At
      September 30, 2007, the weighted-average remaining contractual life of the
      warrants was approximately 16 months.





**9.**
            **Warrant
                Derivative Liability**





In
      accordance with EITF 00-19, warrants classified as derivative liabilities
      are adjusted to estimated fair market value each reporting period with the
      corresponding non-cash gain or loss reflected in the current period. At
      September 30, 2007, the estimated fair value of the warrant derivative liability
      was $26,000, and during the nine months ended September 30, 2007, the Company
      recorded a net gain of $10,000 based on the change in the estimated fair value
      during the period.





**10.**
            **Commitments
                and Contingencies**




In
      March
      2007, the Company received notification from Surgica’s legal counsel alleging
      that the Company had breached the Technology License Agreement and the Supply
      Agreement, and based thereon, Surgica was terminating these agreements. In
      connection with its allegations, Surgica demanded that the Company reassign
      the
      510K Clearances, as defined in the Technology License Agreement, back to
      Surgica. The Company does not believe it has breached these agreements, nor
      that
      they are obligated to reassign the 510K Clearances back to Surgica.




The
      Company recorded impairment charges at December 31, 2006 related to the
      capitalized costs of the Technology License Agreement and notes receivable
      entered into in connection with the Surgica Agreements of $1,046,503 and
      $257,133, respectively, in order to reduce the carrying value of these assets
      to
      $-0-. Additional costs may be incurred by the Company in connection with the
      resolution this matter with Surgica, and there is a possibility that litigation
      between the two companies may occur. In the event that litigation in this matter
      does transpire, the Company intends to vigorously defend it position and to
      seek
      the recovery of costs and other amounts expended pursuant to the Surgica
      Agreements.




11




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





**Forward
      Looking Statements**





Certain
      statements contained or incorporated by reference in this Quarterly Report
      on
      Form 10-QSB constitute "forward-looking statements" within the meaning of the
      Private Securities Litigation Reform Act of 1995. Such forward-looking
      statements involve known and unknown risks, uncertainties and other factors
      that
      may cause actual results, performance or achievements of the company, or
      industry results, to be materially different from any future results,
      performance or achievements expressed or implied by forward-looking statements.
      Such risks and uncertainties include, among others, history of operating losses,
      raising adequate capital for continuing operations, early stage of product
      development, scientific and technical uncertainties, competitive products and
      approaches, reliance upon collaborative partnership agreements and funding,
      regulatory testing and approvals, patent protection uncertainties and
      manufacturing scale-up and required qualifications. While these statements
      represent management's current judgment and expectations for the company, such
      risks and uncertainties could cause actual results to differ materially from
      any
      future results suggested herein. We undertake no obligation to release publicly
      the results of any revisions to these forward-looking statements to reflect
      events or circumstances arising after the date hereof.





**General
      Overview**





Protein
      Polymer Technologies, Inc. is a biotechnology company engaged in the research,
      development, production and clinical testing of medical products based on
      materials created from our patented technology to produce proteins of unique
      design. Additionally, we are committed to the acquisition of faster-to-market
      medical products in certain complementary growth markets. Since 1992, we have
      focused primarily on developing technology and products to be used for soft
      tissue augmentation, tissue adhesives and sealants, wound healing support and
      drug delivery devices. We have been unprofitable to date, and as of September
      30, 2007 had an accumulated deficit of approximately $69.7 million.




**Results
      of Operations**





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





*Contract,
      Licensing and Product Revenue* .
      Our
      revenues were $282,000 in for the nine months ended September 30, 2007 as
      compared to $451,000 in the comparable period of 2006. For the quarter ended
      September 30, 2007 our revenues were $15,000 as compared to $11,000 the three
      months ended September 30, 2006. During the first quarter of 2007
      revenues included $100,000 in licensing fess from our contractual
      relationship with Genencor International. Future payments arising from the
      Genencor agreement, if any, are subject to future commercialization of products.
      Contract revenue in 2006 was earned by primarily from providing materials and
      services in the development of an adhesive product for the repair of spinal
      discs laboratory services for Spine Wave, Inc.





*Research
      and Development Expenses* .
      Research and development expenses for the three months ended September 30,
      2007
      were $439,000, compared to $767,000 for the comparable period in 2006. Research
      and development expenses for the nine months ended September 30, 2007 were
      $1,712,000, compared to $2,952,000 for the comparable period in 2006. The
      decline from 2006 resulted from significantly reduced activity levels in 2007
      of
      clinical testing and regulatory consulting costs. Additionally, we only funded
      one month’s operating expenses for Surgica Corporation in 2007 as the result of
      our determination in March 2007 to discontinue our efforts to develop and
      commercialize the Surgica products. We expect our research and development
      expenses will increase in the future, to the extent additional capital is
      obtained, due to the expansion of product-directed development efforts including
      preclinical development of our surgical sealants. We do not anticipate that
      any
      additional operating expenses with respect to Surgica will be incurred in 2007.





*Selling,
      General and Administrative Expenses* .
      Selling, general and administrative expenses for the quarter ended September
      30,
      2007 were $453,000, as compared to $449,000 in 2006. For the nine months ended
      September 30, 2007 these expenses were $1,124,000 as compared to $3,066,000
      in
      the comparable period of 2006. We made significant reductions in administration
      expenses in the second half of 2006. Several highly compensated positions were
      eliminated and all non-mission sensitive expenses were reviewed and either
      eliminated or reduced. Additionally, during the three and nine months ended
      September 30, 2006, we recognized non-cash charges aggregating $83,000 and
      $1,425,000, respectively, as the result of adopting SFAS 123R for expenses
      related to stock options, compared to $24,000 and $133,000 for the respective
      three and nine months ended September 30, 2007.




12





To
      the
      extent possible, we continue to concentrate on controlling costs reflected
      in
      reduced travel, office supplies, and non-regulatory consulting costs. We expect
      our selling, general and administrative expenses will increase in the future,
      to
      the extent additional capital is obtained, consistent with supporting our
      research and development efforts and as business development, patent, legal
      and
      investor relations activities require.




*Interest
      Income and Expense* .
      Interest expense increased from $29,000 in the three months ended September
      30,
      2006 to $126,000 for the three months ended September 30, 2007. For the nine
      month period ended September 30, 2007 interest expense increased from $130,000
      to $331,000, as compared to the comparable period in 2006. These increases
      resulted directly from incurring approximately $5,876,000 of secured financing
      from a stockholder to sustain our operations since April 2006 and the assumption
      of $519,000 of promissory notes in connection with the Surgica transaction
      during December 2005. At September 30, 2007, the Company had accrued interest
      expense $474,000 in connection with these financings.





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





*Operating
      Losses* .
      For the
      three months ended September 30, 2007, we recorded a net loss applicable to
      common shareholders of $1,073,000 or $0.02 per share, as compared to $1,300,000
      or $0.02 per share in 2006. For the nine months ended September 30, 2007, we
      recorded a net loss applicable to common shareholders of $2,898,000 or $0.04
      per
      share, as compared to $5,982,000 or $0.09 per share in 2006. The difference
      in
      the net losses is as discussed in detail previously. The undeclared or imputed
      dividends in the nine months ended September 30, 2006 was greater than the
      comparable period in 2007 as the result of a non-cash imputed dividend that
      resulted from repricing and extending the term of certain warrants in 2006.





**Inflation**





To
      date,
      we believe that inflation and changing prices have not had a material impact
      on
      our continuing operations. However, we have experienced increased general and
      product liability insurance costs over the past two years, and these increases
      are expected to continue for the foreseeable future as our products incur
      increased exposure in expanded clinical trials.





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2007, we had cash and cash equivalents totaling $59,000 and we
      had
      a working capital deficit of $7,474,000 as compared to $4,946,000 at December
      31, 2006.





We
      do not
      have any off balance sheet financing activities and do not have any special
      purpose entities. We had no long-term capital lease obligations as of September
      30, 2007 or December 31, 2006. For the nine month period ended September 30,
      2007, we had no cash expenditures for capital equipment and leasehold
      improvements, as compared to $36,000 for the comparable period in the prior
      year. We do not anticipate any significant capital expenditures in 2007. We
      may
      enter into capital equipment lease arrangements in the future if available
      at
      appropriate rates and terms.




13





On
      April
      13, 2006, an accredited investor loaned us $1,000,000 (the “Loan”) ($500,000 in
      cash and an additional $500,000 deposited with an escrow agent as a line of
      credit) represented by a note (the “Note”) issued by us to the investor in the
      principal amount of $1,000,000 (the “Principal”). The Note was originally due on
      July 12, 2006 (the “Maturity Date”) and bears annual interest at the rate of
      8%, payable on the Maturity Date. It is secured, in accordance with the
      terms of a security agreement (the “Security Agreement”), by a continuing
      security interest in and a general lien upon (i) 1,000,000 shares of Spine
      Wave,
      Inc. common stock owned by us (ii) a warrant to purchase 1,000,000 shares of
      Spine Wave, Inc. common stock owned by us which has since been exercised; and
      (iii) all U.S. patents owned by us. The Note and the Security Agreement are
      both
      dated April 13, 2006. As consideration for the Loan we granted a warrant to
      the
      investor to purchase an aggregate of 500,000 shares of our common stock at
      an exercise price of $0.30 per share. The investor’s counsel acts as the escrow
      agent and now serves as our outside general counsel.





The
      Note
      has subsequently been amended seven times so that as of September 30, 2007,
      the
      principal balance is approximately $5,876,000 and the maturity date is now
      January 10, 2008. There is no assurance this maturity date will be further
      extended.





Pursuant
      to the terms of the Security Agreement, we entered into a patent security
      agreement, an escrow agreement, patent assignment, and a registration rights
      agreement, each dated as of April 13, 2006. According to the terms of the
      Security Agreement, we entered into the Escrow Agreement with an escrow
      agent for the investor. The Escrow Agreement provides for the disbursement
      of
      the funds held in escrow for application to Company expenses at the sole
      discretion of the investor’s designee. The Escrow Agreement terminates upon the
      event that the amount borrowed is paid in full and no event of default has
      occurred. Substantially all of the Company’s assets are pledged as collateral
      for this loan.





Our
      existing available cash and cash equivalents as of September 30, 2007, 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,
      the
      Company entered into a stock purchase agreement in September 2007 pursuant
      to
      which it has raised a total of $280,000 through November 14, 2007. Pursuant
      to the Stock Purchase Agreement, 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 issue five-year cashless warrants to each investor to purchase
      the
      same number of shares as those purchased by such investor at 110% of the price
      of the shares that 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. As with the Escrow Agreement relating
      to
      the Szulik loan, the Stock Purchase Agreement provides that TAG, as agent for
      the equity investors, advises the board as to which of the Company’s expenses
      will be paid with the funds invested by these investors.




This
      funding was arranged by TAG Virgin Islands, Inc., a related party TAG Virgin
      Islands, Inc., is a registered investment advisor and advises a number of our
      stockholders in investment decisions, including decisions about whether to
      invest in our stock. These clients include Messrs, Adelson and Farber and Dr.
      Kuhn, who are members of our Board of Directors, and Mr. Szulik and Redec &
Associates, LLC. Based upon our stock records and data supplied to us by our
      stockholders, we believe that clients of TAG beneficially own approximately
      55.1% of our common stock, prior to the stock purchases subject to the Stock
      Purchase Agreement 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.




Although
        the balance of our accounts payable have been marginally reduced since June
        2007, 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 chief executive
        officer's firm, R. I. Heller & Co., LLC, $175,000 for his services.
        Additionally, the Company is currently without administrative and accounting
        functions as a result of cutbacks necessitated by insufficient monetary
        resources. We are attempting to remedy this problem. Our board of directors
        has
        assumed daily control of the cash balances. TAG, as agent for the equity
        investors, advises the board as to which of the Company's expenses will be
        paid
        with the funds invested by these investors. 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 potential financing sources and collaborative
      partners, and additional funding in the form of equity investments, license
      fees, loans, milestone payments or research and development payments could
      be
      generated. There can be no assurance that any of these other sources of funding
      will be consummated in the timeframes needed for continuing operations or on
      terms favorable to us, if at all.




14





**Risk
      Factors**





Please
      read the following risk factors that can affect our business.





*If
      we
      continue to incur operating losses, we may be unable to continue our operations
      at planned levels and be forced to curtail or cease our
      operations.*





We
      have
      incurred operating losses since our inception in 1988, and will continue to
      do
      so for at least several more years. As of September 30, 2007, our accumulated
      deficit was approximately $69.7million and we have continued to incur losses
      since that date. The losses have resulted principally from expenses of research
      and development, and to a lesser extent, from general and administrative
      expenses. If these losses continue, they could cause the value of our stock
      to
      decline. See Item
      2, Management’s Discussion
      and
      Analysis of Financial Condition and Results of Operations; Liquidity and Capital
      Resources for a discussion of our acute cash flow problems and our debt and
      equity financings related thereto.





*If
      we
      fail to establish and manage strategic partnerships, we may be prevented from
      developing potential products or the time required for commercializing potential
      products may be increased.*





Our
      principal strategy is to enter into partnerships or licensing arrangements
      with
      medical or pharmaceutical companies with appropriate marketing and distribution
      capabilities to reduce the time and costs for developing and commercializing
      our
      potential products. We may not be able to establish additional strategic
      partnerships or licensing arrangements, or, if available, they may not be on
      terms and conditions favorable to our business. Additionally, these arrangements
      generally may be terminated under various circumstances, including termination
      at the discretion of the strategic partner without cause or without prior
      notice. Termination of the arrangements could seriously harm our business and
      financial condition. Furthermore, our strategy may lead to multiple alliances
      regarding different product opportunities that are active at the same time.
      We
      may not be able to successfully manage multiple arrangements in various stages
      of development.





We
      are
      discussing other potential collaboration agreements with prospective marketing
      partners. Furthermore, from time to time, we are party to certain materials
      evaluation agreements regarding biomedical applications of our products,
      polymers and technology, including applications in areas other than those
      identified as product candidates above. These agreements provide, or are
      intended to provide, for the evaluation of product feasibility. We may not
      be
      able to establish these agreements at all or do so in a timely manner and on
      reasonable terms. In addition, these agreements may not lead to successful
      product development and commercialization.




15





*We
      may not be able to produce commercially acceptable products because our
      technology is unproven. If we cannot prove our technology, we will not succeed
      in commercializing our products.*





Our
      technological strategy of designing and producing unique products based on
      genetically engineered proteins that do not have a harmful effect on biological
      systems, such as the human body, is commercially unproven. The process of
      developing products and achieving regulatory approvals is time consuming and
      prone to delays. We have completed only a few products that require


collaboration
      and marketing partners, and have not generated any significant revenues from
      product sales.





The
      products we are currently pursuing will require substantial further development,
      testing and regulatory approvals. Our research and development activities may
      not be successful and as such, we may not be able to produce commercially
      acceptable products.





*We
      must prove our products' effectiveness in clinical trials. If we are unable
      to
      successfully complete clinical trials, we may not be able to produce marketable
      products.*





Before
      obtaining regulatory clearance for the commercial sale of any of our products,
      we must demonstrate through preclinical studies and clinical trials that the
      potential product is safe and effective for use in humans for each particular
      use. Due to the inherent difficulties associated with clinical trials, we cannot
      guarantee that:





·
            we
                will be able to complete the clinical trials successfully, if at
                all;





·
            we
                will be able to demonstrate the safety and efficacy necessary to
                obtain
                the requisite regulatory approvals of product candidates;
                or





·
            the
                product candidates will result in marketable
                products.





*The
      biomedical and surgical repair industry involves intense competition and rapid
      technological changes. Our business may suffer if our competitors develop
      superior technology.*





We
      operate in the biomedical and surgical repair markets that involve intense
      competition. Our competitors in those markets include major pharmaceutical,
      surgical product, chemical and specialized biopolymer companies, many of which
      have financial, technical, research and development and marketing resources
      significantly greater than ours. Our biomaterials are used primarily in the
      manufacture of end-use products for medical applications that compete with
      other
      products that rely on the use of alternative materials or components. As a
      result, we compete with diverse, complex and numerous rapidly changing
      technologies. We believe that our ability to compete will be enhanced by the
      breadth of our issued patent claims, our other pending patent applications
      and
      our experience in protein engineering. However, we currently do not have the
      resources to compete commercially without the use of collaborative agreements
      with third parties.





Our
      product technology competes for corporate development and marketing partnership
      opportunities with numerous other biotechnology companies, research institutes,
      academic institutions and established pharmaceutical companies. We also face
      competition from academic institutions and other public and private research
      organizations that are conducting research and seeking patent protection, and
      may commercialize products on their own or through joint ventures. Although
      most
      of our competitors depend on technology other than protein engineering for
      developing products, we believe that several university laboratories are
      currently conducting research into similar protein engineering technology.
      Our
      competitors may succeed in developing products based on our technology or other
      technologies that are more effective than the ones we are developing, or that
      would render our technology and products obsolete and non-competitive, which
      may
      harm our business.




16





*We
      have not developed a process to manufacture our products on a commercially
      viable scale. We will lose potential revenues if we cannot manufacture products
      on a commercial scale* .





To
      date,
      we have manufactured only limited amounts of our biomedical products for
      internal testing, initial human clinical testing and, in certain cases,
      evaluation and testing by corporate partners and other third parties. We will
      be
      required to upgrade our manufacturing facilities to obtain manufacturing
      approvals from the FDA for the development and commercialization of certain
      biomedical products.





We
      have
      not yet developed a process to manufacture our products on a commercial scale
      and may not be able to, or have another party on our behalf, develop a process
      at a cost or in quantities necessary to become commercially viable. We may
      need
      to evaluate alternative methods to produce commercial quantities of our
      products. We may not be able to successfully assess the ability of other
      production methods or establish contract-manufacturing arrangements to meet
      our
      commercial objectives.





*Our
      business is subject to substantial regulation and may be harmed if we are unable
      to comply with the applicable laws.*





Regulation
      by governmental authorities in the United States and other countries affects
      the
      success of products resulting from biotechnological research. Our current
      operations and products are, and anticipated products and operations will be,
      subject to substantial regulation by a variety of local, state, federal and
      foreign agencies, particularly those products and operations related to
      biomedical applications. A few examples of the laws that govern our products
      and
      operations are:





·
            Occupational
                Safety and Health Act;





·
            Food,
                Drug & Cosmetic Act, as
                amended;





·
            FDA's
                Good Laboratory Practices; and





·
            FDA
                Quality System Regulations.





Compliance
      with the applicable laws and regulations is a costly and time-consuming process.
      We believe we are currently in substantial compliance with the laws and
      regulations applicable to our current operations. Although we intend to use
      our
      best efforts to comply with all applicable laws and regulations in the future,
      we may not be able to fully comply with the laws and regulations and as such,
      our business operations would be seriously harmed.





*Our
      business may be harmed if we are not able to retain key
      employees.*





As
      of
      November 1, 2007, we had fourteen full-time employees, two of whom hold Ph.D.
      degrees. Our success will depend largely upon the efforts of our scientists
      and
      certain of our executive officers who have been employed by us since the early
      stages of our business and understand our technology and business objectives.
      The loss of the services of any one of these individuals would seriously harm
      our business opportunities and prospects. Our success also depends on the
      recruitment and retention of additional qualified management and scientific
      personnel. We may not be able to attract and retain required personnel on
      acceptable terms, due to the competition for experienced personnel from other
      biotechnology, pharmaceutical and chemical companies, universities and
      non-profit research institutions. We do not maintain "key-man" or similar life
      insurance policies with respect to these persons to compensate us in the event
      of their deaths, which may harm our business.





*We
      may be sued for product liability and may not have sufficient protection under
      our insurance policies.*





We
      may
      face product liability claims with respect to our technology or products either
      directly or through our strategic partners. We may also be exposed to potential
      product liability risks whenever human clinical testing is performed or upon
      the
      use of any commercially marketed medical product. We believe that our prior
      sales of SmartPlastic(R), ProNectin (R) F and ProNectin(R) L products do not
      pose any material product liability risk. To our knowledge no product liability
      claims have ever been made against us. Before initiating human clinical testing
      of our technology, we procured product liability insurance that is limited
      to
      coverage of $1,000,000 per occurrence and in the aggregate $5 million. If
      plaintiffs succeed in their claims against us, if any, and if the coverage
      under
      our insurance policies is insufficient, our business would be seriously
      harmed.




17





*If
      we
      are unable to protect our proprietary technology, we may not be able to compete
      as effectively.*





We
      have
      27 United States patents, 13 foreign patents, and 4 additional United States
      patent applications are pending. We have not yet marketed, sold or developed
      our
      products outside the United States, except for limited amounts of ProNectin(R)
      F, ProNectin(R) L and SmartPlastic(R) cell culture products. The patent position
      of biotechnology companies, such as ours, is highly uncertain and involves
      complex legal, scientific and factual questions. For example:




·
            patents
                issued to us may be challenged, invalidated or
                circumvented;





·
            patents
                may not issue from any of our pending patent applications or, if
                issued,
                may not be sufficiently broad to protect our technology and products
                or
                provide us with any proprietary protection or competitive
                advantage;





·
            our
                competitors may have filed patent applications or may have obtained
                patents and other proprietary rights relating to products or processes
                similar to and competitive with ours. The scope and validity of such
                patents may not be known or the extent to which we may be required
                to
                obtain licenses under these patents or other proprietary rights.
                If
                required, we may not be able to obtain any licenses on acceptable
                terms,
                if at all;






·
            certain
                foreign intellectual property laws may not be as protective as those
                of
                the United States; or




·
            we
                may enter into collaborative research and development arrangements
                with
                our strategic partners that may result in the development of new
                technologies or products, but may also get us involved in a dispute
                over
                the ownership of rights to any technology or products that may be
                so
                developed.








*If
      we
      are unable to obtain patent protection, enforce our patent rights or maintain
      trade secrets and other protection for our products and technology, our business
      may be seriously harmed.*





We
      also
      seek to protect our intellectual property in part by confidentiality agreements
      with our employees and consultants. These agreements may be breached or
      terminated. We may not have an adequate remedy for any breach, and our trade
      secrets may otherwise become known or independently discovered by competitors,
      which would harm our business.





*Our
      common stock was delisted from the Nasdaq and will be difficult to
      sell.*





Our
      common stock was delisted from the Nasdaq SmallCap Market on September 20,
      1999,
      and now trades on the National Association of Securities Dealers' Electronic
      Bulletin Board. As a consequence of the delisting, it is more difficult to
      dispose of, or to obtain accurate quotations as to the market value of, our
      common stock. In addition, the delisting made our common stock substantially
      less attractive as collateral for margin and purpose loans, for investment
      by
      financial institutions under their internal policies or state investment laws,
      or as consideration in future capital raising transactions.




18





Our
      common stock is also subject to regulation as a "penny stock." The Securities
      and Exchange Commission has adopted regulations that generally define "penny
      stock" to be any equity security that has a market price or exercise price
      less
      than $5.00 per share, subject to certain exceptions, including listing on the
      Nasdaq SmallCap Market. For transactions covered by the penny stock rules,
      the
      broker-dealer must consider the suitability of the purchaser, receive the
      purchaser's written consent before the purchase, deliver a risk disclosure
      document before the purchase and disclose the commission payable for the
      purchase. Additionally, if the broker-dealer is the sole market maker, the
      broker-dealer must disclose this fact and the broker-dealer's presumed control
      over the market. Finally, monthly statements must be sent disclosing recent
      price information for the penny stock held in the account and information on
      the
      limited market in penny stocks.





The
      requirements of the penny stock rules restrict the ability to sell our common
      stock in the secondary market and the price at which our common stock can be
      sold. Since our common stock was delisted from the Nasdaq SmallCap Market,
      we
      have seen a decline in our average daily trading volume, and as a result, the
      trading price of our common stock has experienced wide
      fluctuations.





**ITEM
      3. Controls and Procedures**




Disclosure
      Controls and Procedures





The
      Company, under the supervision and with the participation of its management,
      including its Chief Executive Officer (the principal executive officer) and
      the
      principal financial officer, evaluated the effectiveness of the design and
      operation of its disclosure controls and procedures as of the end of the period
      covered by this report. Based on that evaluation, and taking into consideration
      the material weaknesses identified in the letter from the Company’s auditor as
      discussed below, the Chief Executive Officer and the Principal Financial Officer
      concluded, based on the disclosures set forth below, that as of the end of
      the
      period covered by this report, the Company’s disclosure controls and procedures
      were not effective for the purposes of recording, processing, summarizing
      and timely reporting of material information relating to the Company required
      to
      be included in its periodic reports.




We
      received a letter dated May 23, 2007 from Squar Milner, Peterson, Miranda &
Williamson, LLP (“Squar Milner”), our auditors, addressed to the Chairman
      of the Audit Committee of our Board of Directors in connection with the audit
      of
      our financial statements as of December 31, 2006, which identified certain
      matters involving internal control and our operations that Squar Milner
      considered to be significant deficiencies or material weaknesses under the
      standards of the Public Company Accounting Oversight Board. These material
      weaknesses were:





(1)
            lack
                of fulltime staff dedicated to accounting and financial reporting;





(2)
            insufficient
                personnel resources and technical accounting expertise within the
                accounting function to resolve non-routine or complex accounting
                matters;





(3)
            ineffective
                controls over period end financial close and reporting processes;





(4)
            inadequate
                procedures for appropriately identifying, assessing and applying
                accounting principles; and(5)
            Inadequate
                documentation and support for certain
                transactions.




Our
      management and our Audit Committee discussed this letter among them and
      discussed it with Squar Milner.





We
      have
      effected certain changes to improve our controls over all cash disbursements,
      including:





1.
            Weekly
                forecasting of cash receipts and disbursements reviewed and approved
                by a
                senior officer;




19




2.
            Approval
                by senior officers of all disbursements;
                and





3.
            Approval
                by senior officers of all purchase orders and
                invoices.




We
      have
      retained the services, on a third party basis, of a person experienced in
      financial supervision matters with sufficient experience to:





1.
            Oversee
                the daily accounting function, including cash receipts and disbursements,
                billing, payroll and month end bookkeeping
                processes;




2.
            Identify
                and resolve non-routine or complex accounting
                matters;




3.
            Control
                period end financial closing and reporting processes;
                and





4.
            Identify,
                assess and apply accounting principles.





We
      will
      continue to monitor and evaluate the effectiveness of our disclosure controls
      and procedures and our internal controls over financial reporting on an ongoing
      basis and are committed to taking further action and implementing additional
      improvements, as necessary and as funds allow.





We
      notified the members of our Audit Committee of the facts set forth in this
      report.





Internal
      Control Over Financial Reporting




Other
      than noted above, there have been no changes in our internal control over
      financial reporting identified in connection with the evaluation required by
      paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred
      during our last fiscal quarter that has materially affected, or is reasonably
      likely to materially affect our internal control over financial
      reporting.





**PART
      II.**





OTHER
      INFORMATION





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**




As
      discussed in Note
      6 to
      the Unaudited Financial Statements and Liquidity and Capital
      Resources ,
      above,
      from September 27, 2007 through November 14, 2007, we have sold a total of
      2,144,218 shares of our common stock for an aggregate purchase price of $280,000
      and issued warrants to purchase a like number of shares. See Note 6 and
      Liquidity and Capital Resources for information relating to these sales. All
      of
      the purchasers are Accredited Investors as defined in Rule 501 (a) promulgated
      under the Securities Act of 1933 and the shares were issued pursuant to the
      exemption from the registration provisions of that Act provided by Section
      4(2)
      thereof. The proceeds from this financing have been used to pay payroll and
      certain of our other outstanding obligations.





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





The
      annual meeting of stockholders was held on September 20, 2007. Proposals I,
      II
      and III were approved. The results are as follows:





Proposal
      I





The
      following directors were elected at the meeting to serve until the next annual
      meeting of stockholders, or until his earlier resignation, removal from office,
      death or incapacity:




**For**
            
            **Withheld**Richard
                Adelson
            
            
            45,215,666
            
            
            94,234Allan
                Farber
            
            
            47,220,666
            
            
            89,234Kerry
                L. Kuhn, M.D.
            
            
            47,220,666
            
            
            89,234James
                B. McCarthy
            
            
            47,220,666
            
            
            89,234William
                N. Plamondon, III
            
            
            44,866,695
            
            
            2,443,205




20





Proposal
      II





Ratification
      of appointment of Squar, Milner, Petersen, Miranda & Williamson, LLP as the
      Company’s independent registered public accounts for the year ended
      2007.




**For**
            
            **Against**
            
            **Abstained**46,856,803
            
            
            371,537
            
            
            81,560




Proposal
      III





Approval
      of the amendment to the certificate of incorporation increasing the authorized
      common stock from 120,000,000 shares to 1,000,000,000 shares.




**For**
            
            **Against**
            
            **Abstained**39,862,888
            
            
            7,343,968
            
            
            103,044




**Item
      6. Exhibits**




3.1
            Certificate
                of Amendment to the Certificate of Incorporation dated September
                20,
                2007.4.1
            Registration
                Rights Agreement dated as of September 27, 200710.1
            Stock
                Purchase Agreement dated as of September 27, 200710.6
            Amendment
                No. 7 to Secured Promissory Note issued to Matthew J. Szulik dated,
                November 10, 2007.31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Principal Financial Officer pursuant to Securities Exchange Act
                Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
                as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                2002.




21




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




PROTEIN
                POLYMER TECHNOLOGIES, INC.Date:
                November 19, 2007
            By:
            /s/
                William N. Plamondon, III
              William
                N. Plamondon, IIIChief
                Executive OfficerDate:
                November 19, 2007
            By:
            /s/
                William N. Plamondon, III
              William
                N. Plamondon, IIIPrincipal
                Financial Officer




22




**EXHIBIT
      INDEX**




3.1
            Certificate
                of Amendment to the Certificate of Incorporation dated September
                20,
                2007.4.1
            Registration
                Rights Agreement dated as of September 27, 200710.1
            Stock
                Purchase Agreement dated as of September 27, 200710.6
            Amendment
                No. 7 to Secured Promissory Note issued to Matthew J. Szulik dated,
                November 10, 2007.31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Principal Financial Officer pursuant to Securities Exchange Act
                Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
                as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                2002.




23