================================================================================

                                  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, 2006

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

   For the transition period from ___________________ to ____________________

                         Commission file number 0-19724

                       PROTEIN POLYMER TECHNOLOGIES, INC.
        (Exact name of small business issuer as specified in its charter)

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

                 10655 Sorrento Valley Road, San Diego, CA 92121
                    (Address of principal executive offices)

                                 (858) 558-6064
                           (Issuer's telephone number)

   (former name, former address and former fiscal 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 |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_|   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, 2006, 67,409,204
shares of common stock were outstanding.

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


                                       1
<PAGE>

                       Protein Polymer Technologies, Inc.

                                   FORM 10-QSB

INDEX

                                                                        Page No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

            Balance Sheets
               September 30, 2006 and December 31, 2005 .......................3

            Statements of Operations
               For the three months and nine months ended September 30,
               2006 and 2005...................................................4

            Statements of Cash Flows
               For the nine months ended September 30, 2006 and 2005...........5

            Notes to Financial Statements........................... ..........6

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations.................................................12

Item 3. Controls and Procedures...............................................19

PART II. OTHER INFORMATION

Item 6. Exhibits..............................................................20

        Signatures............................................................21


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                       Protein Polymer Technologies, Inc.
                                 Balance Sheets
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                         September 30,        December 31,
                                                                             2006                2005
                                                                        ----------------------------------
<S>                                                                     <C>                 <C>
Assets
Current assets:
   Cash and cash equivalents                                            $       56,566      $    1,211,748
   Contract receivable                                                              --             113,792
   Current portion of rent receivable                                           38,619              88,477
   Prepaid expenses and other current assets                                    25,094              32,440
                                                                        ----------------------------------
   Total current assets                                                        120,279           1,446,457
Deposits                                                                        30,478              29,679
Notes receivable                                                               253,538             242,884
   Rent receivable, net of current portion and reserve of $128,273 at
   September 30, 2006 and December 31, 2005                                         --              26,050
Technology license agreement                                                 1,064,943           1,106,435
Equipment and leasehold improvements, net                                      250,893             292,778
Investment, at cost                                                            500,000                  --
                                                                        ----------------------------------
Total assets                                                            $    2,220,131      $    3,144,283
                                                                        ==================================

Liabilities and stockholders' (deficit) equity
   Current liabilities:
   Accounts payable                                                     $    1,434,267      $      420,672
   Accrued expenses                                                            377,054             381,139
   Current maturities of notes payable                                       2,396,397             195,565
                                                                        ----------------------------------
   Total current liabilities                                                 4,207,718             997,376

   Notes payable, net of current maturities                                    372,371             323,506
   Deferred rent                                                                13,269               8,820
                                                                        ==================================
   Total liabilities                                                         4,593,358           1,329,702
                                                                        ----------------------------------

Stockholders' (deficit) equity:
   Convertible preferred stock, $.01 par value; 5,000,000 shares
    authorized; 65,645 and 66,045 shares issued and outstanding at
    September 30, 2006 and December 31, 2005, respectively -
    liquidation preference of $6,564,500 and $6,604,500 at
    September 30, 2006 and December 31, 2005, respectively                   6,019,917           6,059,917
    Common stock, $.01 par value; 225,000,000 shares authorized,
    67,409,204 shares issued and outstanding at September 30, 2006
    and 120,000,000 shares authorized, 67,311,408 shares issued and
    outstanding at December 31, 2005                                           674,104             673,125
Additional paid-in capital                                                  55,747,646          54,122,000
Accumulated deficit                                                        (64,814,894)        (59,040,461)
                                                                        ----------------------------------
Total stockholders' (deficit) equity                                        (2,373,227)          1,814,581
                                                                        ----------------------------------
Total liabilities and stockholders' (deficit) equity                    $    2,220,131      $    3,144,283
                                                                        ==================================
</TABLE>

See accompanying notes.



                                       3
<PAGE>

                       Protein Polymer Technologies, Inc.
                            Statements of Operations
                                   (unaudited)

<TABLE>
<CAPTION>
                                                   Three months ended             Nine months ended
                                                      September 30,                  September 30,
                                                  2006            2005            2006           2005
                                              ------------    ------------    ------------    ------------
<S>                                           <C>             <C>             <C>             <C>
Revenues:
   Contract revenue                           $         --    $     44,400    $    410,532    $    702,396
   Product and other income                         10,568           1,756          40,684           2,856
                                              ------------    ------------    ------------    ------------
 Total revenues                                     10,568          46,156         451,216         705,252
                                              ------------    ------------    ------------    ------------

Operating Expenses:
 Cost of sales                                          --              --           1,640              --
 Research and development                          767,024         661,040       2,951,882       1,909,415
 Selling, general and administrative               448,772         640,031       3,065,986       2,920,028
                                              ------------    ------------    ------------    ------------
Total expenses                                   1,215,796       1,301,071       6,019,508       4,829,443
                                              ------------    ------------    ------------    ------------
Loss from operations                            (1,205,228)     (1,254,915)     (5,568,292)     (4,124,191)
                                              ------------    ------------    ------------    ------------

Other income (expense):
    Interest income                                  3,656          15,750          13,293          31,951
    Interest expense                               (28,643)           (249)       (130,485)        (87,123)
                                              ------------    ------------    ------------    ------------
  Total other expense                              (24,987)         15,501        (117,192)        (55,172)
                                              ------------    ------------    ------------    ------------

 Net loss                                       (1,230,215)     (1,239,414)     (5,685,484)     (4,179,363)

    Undeclared and  imputed and/or
    paid dividends on preferred stock               69,980          69,980         296,609         689,242
                                              ------------    ------------    ------------    ------------

Net loss applicable to common shareholders    $ (1,300,195)   $ (1,309,394)   $ (5,982,093)   $ (4,868,605)
                                              ============    ============    ============    ============

Basic and diluted net loss per common share   $      (0.02)   $      (0.02)   $      (0.09)   $      (0.09)
                                              ============    ============    ============    ============

Shares used in computing basic and
diluted net loss per common share               67,409,204      67,262,112      67,357,505      55,846,564
                                              ============    ============    ============================
</TABLE>

See accompanying notes.


                                       4
<PAGE>

                       Protein Polymer Technologies, Inc.
                            Statements of Cash Flows
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                 Nine months ended
                                                                   September 30,
                                                                2006          2005
                                                            -----------    -----------
<S>                                                         <C>            <C>
Operating activities
Net loss                                                    $(5,685,484)   $(4,179,363)
Adjustments to reconcile net loss to net cash used for
operating activities:
   Warrants issued for services                                      --      1,247,132
   Depreciation and amortization                                119,017         30,340
   Share based compensation expense                           1,424,889             --
   Amortization of discounts on notes payable                        --         56,493
   Amortization of loan fees                                     69,608             --
Changes in operating assets and liabilities:
   Deposits                                                        (800)          (800)
   Prepaid expenses and other current assets                     (3,307)       (34,352)
   Rent receivable                                               75,908         35,000
   Contracts receivable                                         113,792        (44,400)
   Accounts payable                                           1,013,595        115,338
   Deposits payable                                                  --        (33,000)
   Accrued expenses                                              (4,086)        15,360
   Deferred revenue                                                  --       (102,784)
   Deferred rent                                                  4,450             --
                                                            -----------    -----------
Net cash used for operating activities                       (2,872,418)    (2,895,036)

Investing activities
   Purchase of equipment and improvements                       (35,641)      (217,881)
   Purchase of common stock of Spinewave, Inc. through
    exercise of warants                                        (500,000)            --
   Issuance of notes receivable                                      --       (199,496)
   Deferred acquisiton costs                                         --        (55,115)
                                                            -----------    -----------
Net cash used for investing activities                         (535,641)      (472,492)

Financing activities
   Net proceeds from exercise of options and warrants and
   sale of common stock                                           3,177      6,423,324
   Proceeds from issuance of secured note                     2,249,700             --
   Proceeds from issuance of debt - related party                    --        260,000
   Payments on notes payable - related party                         --       (150,000)
                                                            -----------    -----------
Net cash provided by financing activities                     2,252,877      6,533,324
                                                            -----------    -----------

Net increase (decrease) in cash and cash equivalents         (1,155,182)     3,165,796
Cash and cash equivalents at beginning of the period          1,211,748         82,222
                                                            -----------    -----------
Cash and cash equivalents at end of the period              $    56,566    $ 3,248,018
                                                            ===========    ===========

Supplemental disclosures of cash flow information
   Interest paid                                            $     3,282    $    87,123
Non cash investing and financing activity
   Imputed dividend on extension of warrants                $    88,950    $        --
   Conversion of Series G preferred stock to common stock   $    40,000    $    20,000
   Conversion of Series I preferred stock to common stock
   and warrants                                             $        --    $ 1,650,000
   Conversion of notes payable and accrued interest to
   common stock and warrants                                $        --    $ 1,213,855
   Imputed dividend on warrant repricing                    $        --    $   481,522
   Warrants issued for loan fees                            $    69,608    $   608,371
</TABLE>

See accompanying notes.


                                       5
<PAGE>

                       Protein Polymer Technologies, Inc.
                     Notes to Unaudited Financial Statements

Note 1. Basis of Presentation

Interim Financial Statements

The financial statements of Protein Polymer Technologies, Inc. (the "Company")
for the three and nine months ended September 30, 2006 are unaudited. These
financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are 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, 2005 was derived from the Company's audited financial
statements. The results of operations for the three and nine months ended
September 30, 2006 are not necessarily indicative of the results to be expected
for the year ending December 31, 2006. These financial statements and the notes
thereto should be read in conjunction with the audited financial statements
included in our Annual Report on Form 10KSB and 10KSB/A for the year ended
December 31, 2005, filed with the Securities and Exchange Commission.

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, 2006, the Company incurred a net loss of approximately $5,685,000.
As of September 30, 2006 we have a working capital deficit of approximately
$4,100,000. Our cash and cash equivalents of approximately $57,000 in
combination with (i) the balance from a secured loan, as amended, that provides
for advances aggregating $2,500,000 which has been amended and is now due on
January 10, 2007 and (ii) anticipated additional contract and license payments,
will be sufficient to meet our anticipated capital requirements only through the
end of December 2006.

Prior to the commercialization of its products, substantial additional capital
resources will be required to fund continuing operations related to the
Company's research, development, manufacturing, clinical testing, and business
development activities. The Company believes there may be a number of
alternatives available to meet the continuing capital requirements of its
operations, such as collaborative agreements and public or private financings.
Further, the Company is currently in discussions with several potential
financing sources and collaborative partners and from which funding in the form
of equity investments, debt instruments, license fees, milestone payments or
research and development payments could be generated. There can be no assurance
that any of these potential sources of funds will be realized in the time frames
needed for continuing operations or on terms favorable to the Company, if at
all. If adequate funds in the future are not available, the Company will be
required to significantly curtail its operating plans and may have to sell or
license out significant portions of the Company's technology or potential
products, or obtain a secured private financing or possibly cease operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern

Note 2. Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standard ("SFAS") No. 155, Accounting for
Certain Hybrid Financial Instruments, ("SFAS No. 155"). SFAS No. 155 is an
amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 155 establishes,
among other items, the accounting for certain derivative instruments embedded
within other types of financial instruments; and, eliminates a restriction on
the passive derivative instruments that a qualifying special-purpose entity may
hold. Effective for the Company beginning January 1, 2007, SFAS No. 155 is not
expected to have any impact on the Company's financial position, results of
operations or cash flows.

In March 2006, the FASB released SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of SFAS Statement No. 140, ("SFAS No. 156"). SFAS
No. 156 amends SFAS No. 140 to require that all separately recognized servicing
assets and liabilities in accordance with SFAS No. 140 be initially measured at
fair value, if practicable. Furthermore, this standard permits, but does not
require, fair value measurement for separately recognized servicing assets and
liabilities in subsequent reporting periods. SFAS No. 156 is also effective for
the Company beginning January 1, 2007; however, the standard is not expected to
have an impact on the Company's financial position, results of operation or cash
flows.


                                       6
<PAGE>

In the first quarter of 2006, the Company adopted SFAS No. 154, Accounting for
Changes and Error Corrections--a replacement of Accounting Principals Board
(APB) Opinion No. 20 and SFAS Statement No. 3 , ("SFAS No. 154") which changed
the requirements for the accounting for and reporting of a voluntary change in
accounting principle. The Company also adopted Statement No. 151, Inventory
Costs--an amendment of ARB No. 43, Chapter 4 ("SFAS No. 151") which, among other
changes, requires certain abnormal expenditures to be recognized as expenses in
the current period versus capitalized as a component of inventory. The adoption
of SFAS No. 154 did not impact the results presented and the impact on any
future periods will depend on the nature and significance of any future
accounting changes subject to the provisions of the statement. The adoption of
SFAS No. 151 did not have any impact on the Company's financial position,
results of operations or cash flows.

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 FIN 48 is not
expected to have any impact on the Company's financial position, results of
operations or cash flows.

In September 2006, the 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 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.

Note 3. Accounting for Stock-Based Compensation

On January 1, 2006 the Company adopted SFAS No.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 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 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, 2006, the
Company recorded $83,000 and $1,425,000, respectively in non-cash charges for
the implementation of SFAS No. 123R. As of September 30, 2006, there was
approximately $276,000 of total unrecognized compensation costs related to
unvested options.

The Company granted options to purchase 330,000 shares of common stock during
2006. The fair value of stock options granted in 2005 and 2006 were estimated
using the Black-Scholes model with the following assumptions: expected
volatilities ranging from 90% to of 210%, expected term of 3 years, risk-free
interest rates ranging from 3.50% to 5.08%, and expected dividend yield of 0%.
Expected volatility is based on the historical volatilities of the Company's
common stock. The expected life of employee stock options is determined using
historical data of employee exercises and represents the period of time that
stock options are expected to be outstanding. The risk free interest rate is
based on U.S. Treasury constant maturity for the expected life of the stock
option.


                                       7
<PAGE>

The following table summarizes the stock option transactions during the nine
months ended September 30, 2006:

<TABLE>
<CAPTION>
                                                                                                      Weighted
                                                                                                       average
                                                                                  Weighted            remaining
                                                                                   Average           contractual
                                                                                  Exercise              life
                                                              Shares                Price            (in years)
                                                        -----------------      ---------------    -----------------
<S>                                                         <C>                      <C>                 <C>
      Options outstanding at January 1, 2006                12,638,082               $0.72               7.93
      Options granted                                         330,000                $0.20                 --
      Options exercised                                          --                     --                 --
      Options terminated                                    (4,138,500)              $0.77                 --
                                                        -----------------
      Options outstanding at September 30, 2006              8,829,582               $0.35               6.45
                                                        =================
      Options exercisable at September 30, 2006              8,286,932               $0.69               6.30
                                                        =================
</TABLE>

Prior to January 1, 2006, the Company accounted for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Had compensation
cost for the plan been determined based on the fair value of the options at the
grant dates consistent with the method of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of SFAS No.
123," the Company's net earnings and earnings per share would have been:

<TABLE>
<CAPTION>
                                                       For the Three   For the Nine
                                                        Month Ended     Month Ended
                                                       September 30,   September 30,
                                                           2005            2005
                                                       -------------   -------------

<S>                                                     <C>            <C>
      Net loss available to common shareholders         $(1,309,000)   $(4,869,000)

      Deduct: Total stock-based employee
      compensation expense determined under fair
      value based method for all awards, net of
      related tax effects                                  (155,000)      (423,000)
                                                        -----------    -----------

      Pro forma net loss                                $(1,464,000)   $(5,292,000)
                                                        ===========    ===========

      Basic and diluted loss per share                  $     (0.02)   $     (0.09)
                                                        ===========    ===========
      Pro forma basic and diluted loss per share        $     (0.02)   $     (0.11)
                                                        ===========    ===========
</TABLE>

The pro forma compensation costs presented above were determined using the
weighted average fair values of options granted under the Company's stock option
plans. The fair value of the grants was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions. The assumptions
utilized for 2005 were:

      Expected life                   3
      Risk-free interest rate      3.50%
      Dividend yield                 --
      Volatility                    210%

Note 4. Revenue Recognition

Research and development contract revenues are recorded as earned in accordance
with the terms and performance requirements of the contracts. If the research
and development activities are not successful, we are not obligated to refund
payments previously received. Fees from the sale or license of technology are
recognized on a straight-line basis over the term required to complete the
transfer of technology or the substantial satisfaction of any performance
related responsibilities. License fee payments received in advance of amounts
earned are recorded as deferred revenue. Milestone payments are recorded as
revenue based upon the completion of certain contract specified events that
measure progress toward completion under certain long-term contracts. Royalty
revenue related to licensed technology is recorded when earned and in accordance
with the terms of the license agreement. Revenue from product sales is
recognized at the time product is shipped.


                                       8
<PAGE>

Note 5. Promissory Notes Receivable

On July 12, 2005, the Company entered into a non-binding letter of intent to
acquire Surgica Corporation, a medical device company that develops,
manufactures and markets embolization products. The letter of intent was
extended by mutual agreement until December 12, 2005. On December 19, 2005, the
Company entered into a technology license agreement with Surgica (see Note 9).

As specified in the Letter of Intent, the Company agreed to advance Surgica
certain funds for on-going operations in return for Promissory Notes. As of
September 30, 2006, the Company had loaned Surgica a total of $238,000. The
Promissory Notes are due and payable on January 5, 2008. Interest on the unpaid
balance of each Promissory Note accrues at the rate of 6.00% per annum, payable
annually on the 5th day of January, from the date of issuance through the date
that the principal of the Promissory Note is paid in full. As of September 30,
2006, the outstanding principal balance on the promissory notes were $238,000
and $16,000 has been accrued as interest receivable.

Note 6. Rent Receivable

The Company subleases 6,183 square feet of its office and research facilities
under a month to month arrangement for $13,000 per month plus utilities. From
December 2002 until July 2004, the sub-lessee was unable to make monthly rental
payments as the result of funding deficiencies. In August 2004 the sub-lessee
resumed making rental payments and as of September 2004 an additional $5,000 per
month is being paid as credit against previous rental obligations. Obligations
under the sublease are secured by certain listed property and equipment of the
sub-lessee. At September 30, 2006 the current portion due from the sub-lessee
was $39,000 and the long-term portion was $128,000 with an allowance for
collectibility of $128,000.

Note 7. Equipment and Leasehold Improvements

Equipment and leasehold improvements are comprised of the following:

                                                    September 30,   December 31,
                                                        2006            2005
                                                    ---------------------------
      Laboratory equipment                          $ 1,376,000     $ 1,375,000
                                                    ---------------------------
      Office equipment                                  220,000         218,000
      Leasehold improvements                            361,000         329,000
                                                    ---------------------------
                                                      1,957,000       1,922,000
      Less accumulated depreciation and
         amortization                                (1,706,000)     (1,629,000)
                                                    ---------------------------
                                                    $   251,000     $   293,000
                                                    ===========================

Depreciation expense was approximately $24,000 and $78,000 for the three and
nine months ended September 30, 2006, respectively.

Note 8. Notes Payable

On December 19, 2005, in connection with the Surgica License Agreement, the
Company assumed several notes payable agreements. The notes bear interest at
rates ranging from 6% to 10%, and mature at various dates through January 2009.
At September 30, 2006 the outstanding balance was $519,000 of which $146,000 is
classified as current.

On April 21, 2006, the Company entered into a Security Agreement and a secured
promissory note, each dated as of April 13, 2006, with an accredited investor
pursuant to which the investor loaned the Company a total of $1,000,000
($500,000 in cash and an additional $500,000 deposited with an escrow agent as a
line of credit) in exchange for (i) a warrant to purchase 500,000 shares of the
Company's common stock and (ii) a continuing security interest in and a general
lien upon (A) 1,000,000 shares of Spine Wave, Inc. ("SWI") common stock owned by
the Company; (B) a warrant, expiring April 30, 2009, to purchase 1,000,000
shares of Spine Wave, Inc. common stock owned by the Company currently set to
expire September 21, 2006; and (C) all U.S. patents owned. The secured
promissory note was originally due on July 7, 2006.


                                       9
<PAGE>

Since entering into the Security Agreement there has been three amendments to
the Promissory Note. The latest amendment as of September 29, 2006 provided for
the extension of the notes maturity to January 10, 2007 and increased the
maximum borrowings under the Security Agreement to $2.5 million. At September
30, 2006 the outstanding indebtedness subject to the promissory note and
Security Agreement was $2,249,700.

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.

As of September 30, 2006 the current and long term note balances were $2,396,000
and $372,000, respectively.

                 Quarter Ending         Notes Payable
                 September 30,            Maturities
                ----------------        -------------
                      2007               $ 2,396,000
                      2008                   115,000
                      2009                   258,000
                                         -----------
                Total maturities         $ 2,769,000
                                         ===========

Note 9. Technology License Agreement

On December 19, 2005, the Company entered into a License Agreement with Surgica
Corporation ("Surgica"), a medical device company that develops, manufactures
and markets embolization products. Embolization is a minimally invasive
procedure, generally performed by interventional radiologists, used to treat
uterine fibroids, liver cancer and neurovascular malformations. Pursuant to the
License Agreement, the Company acquired exclusive marketing and distribution
rights to Surgica's three embolization products, one issued patent, and
technical and market know-how. Concurrent with the signing of the License
Agreement, the Company completed a previously entered into Asset Purchase Option
Agreement ("Option Agreement") and entered into a Supply and Services Agreement
("Supply Agreement") with Surgica (See Note 3).

The Company capitalized a total of approximately $1,106,000 in connection with
this agreement based on cash consideration paid in the amount of $385,000, the
assumption of certain liabilities of Surgica totaling $521,000 and
indemnification of contingent liabilities up to a maximum of $200,000. Under the
terms of the License Agreement, the agreement will continue, unless terminated
earlier in accordance with its terms, for twenty (20) years.

Furthermore, the agreement provides that the License Agreement shall
automatically terminate and be effectively assigned to the Company if the
Company exercises its option to purchase the assets of the Licensor under the
Option Agreement, and that in the event the Company does not exercise this
option, the parties shall negotiate in good faith for the re-conveyance of the
license to the Licensor. The total capitalized amount is being amortized on a
straight line basis over the initial twenty (20) year term of the License
Agreement, with amortization commencing on January 1, 2006.

In addition to the cash payments and assumption of certain liabilities, the
License Agreement provides for Surgica to receive a royalty of twenty-five
percent (25%) of net profits, if any, on revenues generated by the sale by the
Company of Surgica products.

Technology license agreement consisted approximately of the following at
September 30, 2006 :

      Technology license agreement            $   1,106,000
      Less accumulated amortization                 (41,000)
                                              -------------
                                              $   1,065,000
                                              =============

Amortization expense was $14,000 and $41,000 for the three and nine months ended
September 30, 2006, respectively.

Note 10. Contracts Receivable

Under an existing Supply and Services agreement with Spine Wave Corporation, the
Company provides various research and development services for Spine Wave
including the production of product used in Spine Wave's clinical trials. These
services are billed upon the completion of various agreed upon work products. On
September 30, 2006 and December 31,2005, the Company had $-0- and approximately
$114,000, respectively, of Spine Wave invoices outstanding.


                                       10
<PAGE>

Note 11. Investment, at cost

In August 2006 the Company exercised its warrant to acquire 1,000,000 shares of
the common stock of Spine Wave, Inc. in exchange for $500,000. The investment
represents approximately 3% of Spine Wave's outstanding stock and is being
accounted for using the cost method.

Note 12. Commitments

Indemnification Against Claims related to License Agreement

In connection with the License Agreement (See Note 9), the Company agreed to
indemnify Surgica for up to $200,000 in connection with claims by the Sapphire
Group LLC for fees owed pursuant to an Engagement Letter entered into between
Surgica and the Sapphire Group LLC, as a result of agreements entered into
between Surgica and the Company. A former Director of the Company is a principal
of the Sapphire Group LLC.

Asset Purchase Option Agreement

On December 19, 2005 the Company completed the Option Agreement that had been
entered into with Surgica on November 23,2005. Under the terms of the Option
Agreement, the Company has the right to acquire substantially all of the assets
of Surgica for 2,000,000 shares of the Company's common stock and a potential
future incentive issuance of additional shares of the Company's common stock ("
Earn-out Shares"), based on the future sales performance of Surgica's products
during the first quarter of 2007. The additional shares of Earn-out common stock
will be issued, if at all, only if the average sales per quarter from the
operations to be transferred from Surgica to us for the first (1st) and second
(2nd) quarters of 2007 are equal to or greater than a predetermined set amount.
The Option Agreement is exercisable, at our sole discretion, for a term of up to
two (2) years from December 19, 2005. Once Surgica is given notice of the
Company's intent to exercise the option, if at all, the exercise of the option
itself will be subject to approval by Surgica's stockholders.

Supply and Services Agreement

On December 19, 2005 the Company entered into a Supply Agreement with Surgica.
Under the terms of the Supply Agreement, Surgica is obligated to provide product
development and manufacturing services to the Company and the Company is
obligated to fund monthly operating costs of Surgica up to amounts specified in
Supply Agreement, and purchase products for sale and for clinical use at prices
specified in the Supply Agreement. Pursuant to the terms of the Supply
Agreement, the Company is obligated to fund annual operating costs of Surgica of
up to approximately $800,000 during 2006. Thereafter, the Company's obligation
to fund Surgica's operating costs is subject to a future determination to be
made based on mutually agreed upon operating budgets.


                                       11
<PAGE>

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 recently acquired an exclusive license to three
FDA-cleared arterial embolization products and related technology from Surgica
Corporation. The transaction also included an option to acquire all of Surgica's
assets (See "Surgica Corporation" below). We have been unprofitable to date, and
as of September 30, 2006 had an accumulated deficit of approximately $65
million.

Protein polymers are synthetic proteins created "from scratch" through chemical
DNA (gene) synthesis, and produced in quantity by traditional large-scale
microbial fermentation methods. As a result, protein polymers contain no human
or animal components that could potentially transmit or cause disease. Due to
their synthetic design, protein polymers are capable of combining the biological
functionality of natural proteins with the chemical functionality and
exceptional physical properties of synthetic polymers. Our primary goal is to
develop medical products for use inside the body with significantly improved
outcomes as compared to current products and practices.

Our product candidates for surgical repair, augmentation and regeneration of
human tissues are in various stages of research and development. The more
advanced programs are bulking agents for soft tissue augmentation, particularly
for use in urethral tissue for the treatment of female stress incontinence,
tissue adhesive formulations for the repair of spinal discs damaged due to
injury or aging, and preclinical development of a new surgical sealant designed
to prevent air and fluid leaks following lung, gastrointestinal, and
cardiovascular surgery. We currently are devoting the majority of our resources
to the development and FDA approval of these products, and to the commercial
launch of the three Surgica embolization products.

Because of our technology's breadth of commercial opportunity, we are pursuing
multiple routes for commercial development. Currently, we independently are
developing the incontinence urethral bulking product and the surgical sealant.
We have established a comprehensive license and development agreement with
Genencor International for the use of our materials and technology to develop,
manufacture and commercialize products for industrial markets. Genencor
International is one of the world's largest manufacturers of industrial enzymes
and other biologically derived products. Through this arrangement, we could
receive milestone payments, and eventually royalties on the sale of products, if
any. For development and commercialization of our spinal disc repair product, we
entered into agreements with Spine Wave, Inc., which we expect will provide us
with both near term research and development support and eventually royalties on
the sale of licensed products, if any.

Significant Collaborative Agreements

Our collaborative development agreements generally contain provisions for
specific payments for defined activities, services, royalties on the sales of
developed products, and/or the accomplishment of performance benchmarks. These
agreements also may provide for equity investments or other financial
incentives. Technology license agreements are usually associated with
collaborative development agreements, but occasionally we will agree to a
license without an accompanying development agreement.


                                       12
<PAGE>

Surgica Corporation

On November 23, 2005, we entered into an Asset Purchase Option Agreement
("Option Agreement"), with Surgica Corporation ("Surgica"), a medical device
company that develops, manufactures and markets embolization products.
Embolization is a minimally invasive procedure, generally performed by
interventional radiologists, used to treat uterine fibroids, liver cancer and
neurovascular malformations. Pursuant to the Option Agreement we were granted a
one-year option (which may be extended by one year at our discretion) to acquire
substantially all of Surgica's assets in exchange for two million shares of our
common stock and a potential future incentive issuance of additional common
stock based on the future sales performance of Surgica's products during the
first and second quarters of 2007.

On December 19, 2005, we entered into a License Agreement and Supply and
Services agreement with Surgica, pursuant to which we acquired exclusive rights
to Surgica's technology and products. Upon execution and delivery of the License
Agreement, Surgica transferred to us its PVA Plus(TM), MaxiStat(TM), and
MicroStat(TM) 510(k) clearances from the FDA by delivering a duly executed bill
of sale and assignment. Other agreements executed concurrently included: (i) the
consent of AngioDynamics, Inc. for the assignment by Surgica to us of their
distributor agreement, dated as of June 28, 2002; (ii) a voting agreement (and
proxy) between us and Louis R. Matson; Surgica's President and Chief Executive
Officer and majority shareholder; (iii) an employment agreement between Surgica
and Louis R. Matson to expire no later than December 31, 2007; and (iv) a side
letter agreement between us and Louis R. Matson representing that, to his actual
knowledge, each of the representations and warranties of Surgica set forth in
the Option Agreement was true and correct at the date the Option Agreement was
executed. The following is a brief summary of the transaction.

Asset Purchase Option Agreement.

Under the terms of the Option Agreement, we have the option to acquire
substantially all of the assets of Surgica for (i) 2 million shares of our
common stock and (ii) a potential earn out payment of additional shares of our
common stock based on the future sales performance of Surgica's products during
the first and second quarters of 2007. The earnout payment of additional shares
of our common stock, if any, will be determined in part on the price per share
of our common stock based on the 90 day prior average price of our common stock
as of April 1, 2007. The option is exercisable, at our sole discretion, for a
term of up to two (2) years from December 19, 2005. Once Surgica is given notice
of our intent to exercise the option, if at all, the exercise of the option
itself will be subject to approval by Surgica's stockholders. There would be no
affect whatsoever if we decided not to exercise the asset purchase option.

License Agreement and Supply and Services Agreement.

Under the terms of the License Agreement, we acquired exclusive rights to
Surgica's three embolization products, one issued patent, and technical and
market know-how in return for (i) the assumption of approximately $522,000 of
certain Surgica liabilities, (ii) a cash payment to Surgica of approximately
$385,000, and (iii) in connection with the license agreement, the company agreed
to indemnify Surgica for up to $200,000 in connection with claims by a third
party for fees owed pursuant to an engagement letter entered into between
Surgica and the third party as a result of agreements entered into between
Surgica and the Company. Under the terms of the Supply and Services agreement
and License Agreement, Surgica is obligated to provide its goods and services,
including further product development, in exchange for (i) operating payments to
Surgica and (ii) a royalty of twenty-five percent (25%) of net profits, if any,
on revenues generated by the sale of Surgica products.

Employment Agreement.

Under the terms of the Option Agreement, Louis R. Matson and Surgica entered
into an employment agreement that provides, among other things, that Louis R.
Matson (i) retain the title of President of Surgica; (ii) be paid a specified
base salary; and (iii) be employed until December 31, 2007, unless terminated
prior to such date. It is currently contemplated that this employment agreement
will be assumed by us or a wholly-owned subsidiary of the Company if and when we
exercise the option.

Voting Agreement and Proxy.

As a condition of the Option Agreement, we entered into a voting agreement
pursuant to which Louis R. Matson agreed to vote all shares of Surgica that he
may own (i) in favor of the adoption of the Option Agreement; (ii) in favor of
adoption of the Asset Purchase Agreement and approval of the acquisition
contemplated thereby but only to the extent the option is exercised by the
Company; (iii) against any proposal for any acquisition transaction, other than
the acquisition, between Surgica and any person other than us and/or a
wholly-owned subsidiary; and (iv) against any other action or agreement that
would result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Surgica under the Option Agreement or Asset
Purchase Agreement or which would result in any of the conditions to the
consummation of the effectiveness of the option under the Option Agreement or
the acquisition under the Asset Purchase Agreement not being fulfilled.
Concurrently with the execution of the voting agreement, and pursuant to the
voting agreement's terms, Louis R. Matson delivered to us an irrevocable proxy
appointing the Company as the sole and exclusive attorney and proxy of Louis R.
Matson, with full power of substitution and resubstitution, to vote and exercise
all voting and related rights with respect to all shares of Surgica that he may
own in accordance with (ii), (iii), and (iv) above.


                                       13
<PAGE>

Asset Purchase Agreement.

Pursuant to the terms of the Option Agreement, we will have up to two years from
December 19, 2005 to exercise an option to purchase substantially all of the
assets of Surgica in exchange for 2 million shares of our common stock and a
potential future incentive issuance of additional shares of the Company's common
stock based on the future sales performance of Surgica's products during the
first and second quarters of 2007 which will be subject to a number of
conditions precedent, including approval by Surgica's stockholders. Pursuant to
the terms of the Asset Purchase Agreement, the shares will constitute
"restricted securities" as that term is defined in Section 144(a)(3) of the
Securities Act of 1933, as amended, and will be restricted as to their resale
for a period of at least one hundred eighty (180) days from the date the Asset
Purchase Agreement is executed.

The additional shares of our common stock will be issued, if at all, only if the
average sales per quarter from the operations to be transferred from Surgica to
us for the first and second quarters of 2007 are equal to or greater than a
predetermined set amount.

Each of the Option Agreement, License Agreement, Supply and Services Agreement
and Asset Purchase Agreement contain representations and warranties by us and
Surgica customary for transactions of this type.

Spine Wave

In April 2001, we entered into agreements with Spine Wave, Inc., ("Spine Wave")
to develop and commercialize an injectable protein-based formulation for the
repair of spinal discs damaged either by injury or aging. As consideration for
entering into an exclusive, worldwide license agreement with Spine Wave, we
received one million shares of the founding common stock in Spine Wave, valued
initially at $10,000. The shares of founding common stock were subject to a
vesting schedule; however, Spine Wave's right to repurchase unvested shares
terminated in 2002 upon their merger with VERTx, Inc. Royalties from the sale or
sublicensing of licensed products will be determined in the future based on the
gross margin (sales revenue less the cost of goods) realized by Spine Wave from
the sale of the products, if any.

In connection with the license agreement, we entered into a separate supply and
services agreement to provide Spine Wave with a variety of research and
development services, and to supply materials to Spine Wave for pre-clinical and
clinical testing. Spine Wave, in return, agreed to reimburse us for both our
direct costs and the associated overhead costs for the services provided.

In March 2002, we executed additional agreements with Spine Wave that expanded
our contractual research and development relationship, and that offered us
additional equity incentives in the form of Spine Wave common stock and
warrants. Under the amended supply and services agreement, we, on behalf of
Spine Wave, conducted pre-clinical safety and performance studies of a product
for spinal disc repair to support Spine Wave's regulatory filings both in the
U.S. and abroad to obtain approval to initiate human clinical testing. Our
continuing contractual responsibilities include the supply of product to be used
in clinical testing. Research and development services performed for Spine Wave
are reimbursed including both direct costs and associated overhead costs. Spine
Wave is responsible for clinical testing, regulatory approvals, and
commercialization. During the nine months ended September 30, 2006 we received
$411,000 in contract revenue from Spine Wave which represents the reimbursement
of direct costs plus overhead costs allocated to the research and development
resources used in performing the collaborative activities.

Additional equity incentives offered in conjunction with the expanded supply and
services agreement of March 17, 2002 consist of a four year warrant (the
expiration was recently extended until June 21, 2006, and upon meeting certain
conditions would be further extended to September 21, 2006) to purchase
1,000,000 shares of Spine Wave common stock at an exercise price of $0.50 per
share (Spine Wave preferred stock issued during this time was priced at $0.55
per share), and 400,000 shares of common stock valued at $0.05 per share subject
to repurchase at cost until each of three performance goals is achieved, or
until the repurchase option expired. The Company exercised the warrant and
acquired 1,000,000 shares of Spine Wave common stock during the third quarter of
2006. The performance goals consisted of: (i) completion of certain studies for
filing an investigational device exemption application (100,000 shares); (ii)
completion of additional studies for filing of the investigational device
exemption and provision of inventory for the pilot clinical study (150,000
shares); and (iii) completion of certain manufacturing arrangements, and
production of certain quantities of product (150,000 shares). Spine Wave's
repurchase option expired on December 31, 2005.

In October 2003, we executed a second amendment to the supply and services
agreement with Spine Wave that further defined the cost basis for reimbursement
of services provided by us to Spine Wave.


                                       14
<PAGE>

Significant License Agreements

      Our license agreements usually include provision for up-front compensation
and eventual royalties on the sale of licensed products. Terms of license
agreements typically commence as of the date executed and continue for a period
of the greater of twenty (20) years from execution date or the date upon which
the last of the patented technology under license expires.

Genencor International, Inc.

      In December 2000, we signed a broad-based, worldwide exclusive license
agreement with Genencor International, Inc. ("Genencor") enabling Genencor to
potentially develop a wide variety of new products for industrial markets. In
October 2002, the license agreement was amended to provide Genencor with an
additional one-year option to initiate development of products in the field of
non-medical personal care. In March 2005, the license was amended to fully
incorporate the field of personal care products into the license. As a result of
the agreements, Genencor may use our patented protein polymer design and
production technology, in combination with Genencor's extensive gene expression,
protein design, and large-scale manufacturing technology, to design and develop
new products with improved performance properties for defined industrial fields
and the field of non-medical personal care products.

      In return for the licensed rights, Genencor paid us an up-front license
fee of $750,000, and will pay royalties on the sale of any products
commercialized by Genencor under the agreement. The licensed technology was
transferred to Genencor upon execution of the license agreement without any
further product development obligation on our part. Future royalties on the net
sales of products incorporating the technology under license and developed by
Genencor will be calculated based on a royalty rate to be determined at a later
date. In addition, we are entitled to receive up to $5 million in milestone
payments associated with Genencor's achievement of various product development
milestones incorporating the licensed technology. In March 2005 we received a
second license milestone payment of $250,000 from Genencor for Genencor's
initiation of a product development project based on technology licensed from
us.

      In connection with the license agreement, Genencor was issued two
warrants, each convertible by formula into $500,000 of our common stock. Both
warrants have subsequently expired. As a result of the collaboration, in 2000 we
recognized $750,000 in license fee revenue (less the issuance of warrants to
purchase $1 million of our common stock valued at $319,000). The agreement
terminates on the date of expiration of the last remaining patent.

      On October 9, 2006 the Company's license agreement with Genencor was
amended. The amendment essentially provided for (i) the immediate funding of
$100,000 payment under the existing agreement, (ii) modification of the royalty
percentage from a variable rate concept to a single rate of 2% of Genecor's net
revenues earned from the product sales subject to the license, (iii) $100,000
payment in January, 2007 and (iv) modification of the milestone payment earned
under the agreement. As amended the Company is entitled to a milestone payment
of $250,000 when a product attains aggregate sales of $5.0 million. We are
entitled to a single milestone payment for each product.

Research and Development

      We currently maintain detailed project costs (direct costs plus allocated
overhead) for contractual research and development services. However, we do not
maintain cost breakdowns for our internal research and development projects due
to the extensive degree of overlap between our projects such as common
manufacturing, quality control, and developmental product testing.

      Our product for the treatment of female stress urinary incontinence is in
pilot human clinical testing. We are seeking to establish additional
partnerships to pursue pivotal clinical testing and the commercial development
of such products.

      In these types of applications, the use of sutures and staples for closing
the wound may permit leaks of air, in the case of pulmonary surgery, and fluids,
particularly blood in any surgery, and also gastrointestinal (GI) fluids in the
case of surgery on the colon (GI tract). In such surgeries, the use of an
effective sealant -- as an adjunct to sutures or staples -- to prevent leaks
could reduce hospitalization stays, reduce post-operative pain and
complications, and lower associated mortality rates. We estimate that about
500,000 gastrointestinal, 300,000 lung, and over 1.5 million cardiovascular
surgical procedures are performed each year worldwide where the use of a sealant
has the opportunity to significantly reduce complications and costs.

      We currently do not have sufficient cash to complete the development of
these products. We anticipate obtaining the necessary cash either by additional
equity financings, or by sharing the cost of development with potential
marketing partners, or a combination of both methods. If we are unable to obtain
the necessary cash, it will have a material adverse effect on us.


                                       15
<PAGE>

      Our spinal disc repair product being developed for our licensee, Spine
Wave, Inc., is in clinical testing. The timing of this project is under the
control of Spine Wave. Under our contract with Spine Wave, we are responsible
for development of the formulated product, its pilot manufacturing process, and
product production for clinical trials. Spine Wave is responsible for funding
all expenses associated with these activities. Contract revenue received from
Spine Wave is approximately equal to our cost (direct project costs plus
allocated laboratory and corporate overhead expenses) of the work performed.
Total research and development costs for the three and nine months ended
September 30, 2006 were approximately $767,000 and $2,952,000, respectively.

      To the extent sufficient capital resources are available, we continue to
research the use of our patented technology to produce proteins of unique design
for other tissue repair and medical device applications, principally for use in
supporting the wound healing process, including devices based on tissue
engineering, and in drug delivery devices. Our strategy for most of our programs
is to enter into collaborative development agreements with product marketing and
distribution companies. Although these relationships, to the extent any are
consummated, may provide significant near-term revenues through up-front
licensing fees, research and development payments and milestone payments, we
expect to continue incurring operating losses for the next several years.

Results of Operations

Contract and Licensing Revenue.

We earned $-0- and approximately $411,000 in contract and licensing revenue for
the three and nine month periods ended September 30, 2006, respectively, as
compared to approximately $44,000 and $702,000 for comparable periods in 2005.
Contract revenues from Spine Wave for the three months represent approximately
$-0- for materials and services provided in the development of an adhesive
product for the repair of spinal discs as compared to approximately $189,000 in
the same period a year ago. Product revenue for the quarter ended September 30,
2006 was approximately $11,000, which was earned principally from Angio
Dynamics, Inc. for Surgica embolization products. We received no licensing
income for the nine month period ended September 30, 2006 as compared to
$250,000 in licensing revenue in the nine months ended September 30, 2005 for a
milestone payment from Genencor International for Genencor's initiation of a
product development project based on technology licensed from us.

Research and Development Expenses.

Research and development expenses for the nine and three months ended September
30, 2006 were approximately $2,952,000 and $767,000, respectively, as compared
to approximately $1,909,000 and $661,000 incurred for the same periods in 2005.
The increase in research and development expenses were primarily due to costs
associated with preclinical animal testing of our sealant product necessary to
achieve regulatory approval to begin human clinical trials later this year, as
well as for on-going clinical testing, regulatory consulting costs, and costs
associated with manufacturing product for Spine Wave. Other related expenses
include those for expanded manufacturing capacity and manufacturing process
development, quality assurance efforts, and outside testing services. We expect
our research and development expenses will increase in the future, to the extent
additional capital is obtained, due to the expansion of product-directed
development efforts including further preclinical development of our surgical
sealants, increased human clinical testing, increased manufacturing
requirements, increased use of outside testing services, and increased research
and development services for Spine Wave.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses for the nine and three months ended
September 30, 2006 were approximately $3,066,000 and $449,000, respectively, as
compared to approximately $2,920,000 and $640,000 for the comparable periods in
2005.

The increase in selling, general and administrative expenses for the nine months
ended September 30, 2006 was primarily the result to the recognition of a
non-cash expense associated with the reporting of compensation expense for stock
options issued by the Company under SFAS No. 123R. There were also increases in
legal, consulting and other professional services related to due diligence and
other expenses pertaining to the potential Thuris acquisition and remaining
costs of the completion of the agreements with Surgica. Other expenses have been
fairly consistent over the past three years. We do anticipate some increases
during 2006 in the areas of insurance coverage and legal services, although we
anticipate that these increases will be offset by reductions in personnel
expense. To the extent possible, we continue to concentrate on controlling costs
reflected in reduced travel, office supplies, and non-regulatory consulting
costs.


                                       16
<PAGE>

The decline in selling, general and administrative expenses for the three months
ended September 30, 2006 was primarily the result of reduction of certain
management positions and the reduction of consulting and professional services
incurred in 2005 related to due diligence and other expenses pertaining to the
potential Thuris acquisition and remaining costs of the completion of the
agreements with Surgica. Other expenses have been fairly consistent over the
past three years. We do anticipate some increases during 2006 in the areas of
insurance coverage and legal services, although we anticipate that these
increases will be offset by reductions in personnel expense. To the extent
possible, we continue to concentrate on controlling costs reflected in reduced
travel, office supplies, and non-regulatory consulting costs.

Selling, general and administrative expenses may increase in the future, to the
extent additional capital is obtained, consistent with supporting our research
and development efforts and as business development, patent, legal and investor
relations activities require.

Interest Income.

Interest income was approximately $4,000 and $13,000 for the quarter and nine
months ended September 30, 2006, as compared to $16,000 and $32,000 for the same
periods in 2005. The company's excess funds were significantly reduced for short
term investments in 2006.

Interest Expense.

Interest expense was approximately $29,000 and $130,000 for the quarter and nine
months ended September 30, 2006, as compared to essentially nil and $87,000 for
the same periods in 2005.

Interest expense incurred during the third quarter of 2006 resulted from the
issuance of a secured promissory note in April 2006. As a result of the issuance
of the warrants associated with the secured promissory note issued, the Company
recorded additional interest expense of approximately $70,000 during the second
quarter of 2006.

Loss from Operations.

For the quarter ended September 30, 2006, our net loss was approximately
$1,230,000 versus the net loss incurred in the comparable quarter of 2005 of
approximately $1,240,000. Net loss applicable to common shareholders during the
quarter ended September 30, 2006 was approximately $1,300,000 ($0.02 per share)
as compared to approximately $1,309,000 ($0.02 per share) for the same period in
2005.

For the nine months ended September 30, 2006, our net loss was approximately
$5,685,000 versus the net loss incurred in the comparable period of 2005 of
approximately $4,179,000. Included in 2006 results is a non-cash charge of
$1,425,000 associated with the reporting of compensation expense for stock
options issued by the Company under SFAS No. 123R. Additionally the pre-clinical
development of our surgical sealant product and related research in preparation
for anticipated human clinical trials anticipated to begin later this year have
increase research and development expenses. Legal and acquisition costs related
to Surgica and Thuris were incurred during the 2005 period. Interest expense
increased as the result of the Company's issuance or a promissory note in April,
2006. Net loss applicable to common shareholders during the nine months ended
September 30, 2006 was approximately $5,982,000 ($0.09 per share) as compared to
approximately $4,869,000 ($0.09 per share) for the same period in 2005.

We expect to incur increasing operating losses for the next several years, to
the extent additional capital is obtained, based upon the continuation of the
development and testing of our surgical sealant product, and our product for the
treatment of female stress urinary incontinence, the associated FDA approval
process, and further development of the tissue adhesives program, as well as
expected increases in our other research and development, manufacturing and
business development activities. Our results depend in part on our ability to
establish strategic alliances and generate contract revenues, and upon increased
research, development and manufacturing efforts, pre-clinical and clinical
product testing and commercialization expenditures, and expenses incurred for
regulatory compliance and patent prosecution. Our results will also fluctuate
from period to period due to timing differences.

Inflation

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


                                       17
<PAGE>

Liquidity and Capital Resources

We do not have any off balance sheet financing activities and do not have any
special purpose entities. We had no long-term capital lease obligations as of
September 30, 2006 or December 31, 2005. For the three and nine month periods
ended September 30, 2006, our cash expenditures for capital equipment and
leasehold improvements totaled approximately $-0- and $36,000, respectively. For
the three and nine month periods ended September 30, 2005 our cash expenditures
for capital equipment and leasehold improvements totaled approximately $97,000
and $218,000, respectively.

We believe our existing available cash, cash equivalents and future loan
proceeds, as of November 14, 2006, in combination with continuing contractual
commitments will be sufficient to meet our anticipated capital requirements
through the end of December 2006. Substantial additional capital resources will
be required to fund continuing expenditures related to our research,
development, manufacturing and business development activities. In addition we
are pursuing a number of alternatives available to meet the continuing capital
requirements of our operations, such as collaborative agreements and public or
private financings. Further, we are continuing our reimbursed services to Spine
Wave. We are currently in discussions with potential financing sources and
collaborative partners, and additional funding in the form of equity
investments, license fees, loans, milestone payments or research and development
payments could be generated. There can be no assurance that any of these
potential sources of funds will be realized in the timeframes needed for
continuing operations or on terms favorable to us. If adequate funds are not
available, we will be required to significantly curtail our operating plans and
would likely have to sell or license out significant portions of our technology,
and possibly cease operations.


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<PAGE>

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
Director of Finance and Controller (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 Director of Finance and Controller concluded 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. The Company's management
received a letter dated March 24, 2006 (the "Letter") from Peterson & Co., LLP,
our independent auditors, addressed to the Chairman of the Audit Committee of
the Company's Board of Directors in connection with the audit of our financial
statements as of December 31, 2005, which identified certain matters involving
internal control and its operation that they consider to be significant
deficiencies or material weaknesses under the standards of the Public Company
Accounting Oversight Board. These material weaknesses were: (1) inadequate
segregation of duties in the areas of approving invoices and initiating wire
transfers; (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; and (4) inadequate procedures for appropriately
identifying, assessing and applying accounting principles.

The Company has effected certain changes to improve its controls over all cash
disbursements, including approval by senior officers of all purchase orders and
invoices. We have also utilized the services of external resources to mitigate
the deficiencies identified by our independent auditors in items 2, 3 and 4
above.

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 enhancements or improvements, as necessary and as funds allow.

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.


                                       19
<PAGE>

PART II.

                                OTHER INFORMATION

Item 6. Exhibits

10.1     Amendment No. 3 to Secured Promissory Note issued to Matthew J. Szulik
         dated, September 29, 2006.

31.1     Certification of Chief Executive Officer pursuant to Securities
         Exchange Act Rules 13a- 14(a)/15d-14(a), as adopted pursuant to Section
         302 of the Sarbanes-Oxley Act of 2002.

31.2     Certification of Director of Finance (Principal Financial Officer)
         pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as
         adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1     Certification of Chief Executive Officer and Director of Finance
         (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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<PAGE>

                                   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 14, 2006          By /s/ William N. Plamondon, III
                                                 ------------------------------
                                              William N. Plamondon, III
                                              Chief Executive Officer

             Date: November 14, 2006          By /s/ Janis Y. Neves
                                                 ------------------------------
                                              Janis Y. Neves
                                              Director of Finance, Controller
                                              and Corporate Secretary


                                       21
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number   Description

10.1     Amendment No. 3 to Secured Promissory Note issued to Matthew J. Szulik
         dated, September 29, 2006.

31.1     Certification of Chief Executive Officer pursuant to Securities
         Exchange Act Rules 13a- 14(a)/15d-14(a), as adopted pursuant to Section
         302 of the Sarbanes-Oxley Act of 2002.

31.2     Certification of Director of Finance (Principal Financial Officer)
         pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as
         adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1     Certification of Chief Executive Officer and Director of Finance
         (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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