<PAGE>
 
================================================================================

                                 UNITED STATES
                                        
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-QSB


(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
               For the quarterly period ended September 30, 1998

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
       For the transition period from _______________ to ______________

                        Commission file number 0-19724


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


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


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

                                (619) 558-6064
                          (Issuer's telephone number)


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

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 13, 1998, 10,747,060
shares of common stock were outstanding.

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

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                                       1
<PAGE>
 
                      PROTEIN POLYMER TECHNOLOGIES, INC.
                                        
                                  FORM 10-QSB

                                     INDEX



                                                                        Page No.
                                                                        --------

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements (unaudited)

          Condensed Balance Sheets -
           September 30, 1998 and December 31, 1997...................      3
 
          Condensed Statements of Operations -
           For the Three and Nine Months Ended September 30, 1998 
            and 1997 and the period July 6, 1988 (inception) to 
            September 30, 1998........................................      5
 
          Condensed Statements of Cash Flows -
           For the Nine Months Ended September 30, 1998 and 1997
            and the period July 6, 1988 (inception) to September 30, 
            1998......................................................      6
 
          Notes to Condensed Financial Statements.....................      8
 
Item 2.   Management's Discussion and Analysis of Financial Condition 
           and Results of Operations..................................     10
 

PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K............................     14

          Signature...................................................     15

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

                           Condensed Balance Sheets


<TABLE>
<CAPTION>
                                                   September 30,   December 31,
                                                       1998           1997
                                                   -------------   ------------
                                                    (unaudited)
<S>                                                <C>             <C>
Assets                                           
Current assets:                                  
  Cash and cash equivalents                          $1,667,280     $  325,021
  Short-term investments                                893,180        974,817
  Other current assets                                   65,848         88,868
                                                     ----------     ----------
Total current assets                                  2,626,308      1,388,706
                                                                    
  Deposits                                               37,477         36,617
  Notes receivable from officers                        144,000        153,000
  Equipment and leasehold improvements, net             683,905        769,564
                                                     ----------     ----------
                                                     $3,491,690     $2,347,887
                                                     ==========     ==========
                                                                    
Liabilities and stockholders' equity                                
Current liabilities:                                                
  Accounts payable                                   $  400,312     $  423,594
  Accrued employee benefits                             149,348        151,831
  Other accrued expenses                                 20,721         41,151
  Current portion capital lease obligations              82,060         75,110
                                                     ----------     ----------
Total current liabilities                               652,441        691,686
                                                                    
Long-term portion capital lease obligations             127,622        190,068
</TABLE>

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

                      Condensed Balance Sheets, continued



<TABLE>
<CAPTION>
                                                                  September 30,   December 31,
                                                                      1998            1997
                                                                  -------------   ------------
                                                                   (unaudited)
<S>                                                               <C>             <C>
Liabilities and stockholders' equity, continued
Stockholders' equity:
  Series D convertible preferred stock, $.01 par value, 71,600
   shares authorized, 1,344 and 28,214 shares issued and
   outstanding at September 30, 1998 and December 31, 1997,
   respectively - liquidation preference of $134,400                    124,622      2,667,403
  Series E convertible preferred stock, $.01 par value, 55,000                    
   shares authorized, 54,437.5 shares issued and outstanding                      
   at September 30, 1998 - liquidation preference of $5,437,500       5,277,813              -
  Series F convertible preferred stock, $.01 par value, 27,317                    
   shares authorized, 26,420 shares issued and outstanding at                     
   September 30, 1998 - liquidation preference of $2,642,000          2,497,795              -
  Common stock, $.01 par value, 25,000,000 shares authorized,                     
   10,575,811 and 10,420,722 shares issued and outstanding at                     
   September 30, 1998 and December 31, 1997, respectively               105,759        104,208 
  Additional paid-in capital                                         26,242,529     22,778,033
  Deficit accumulated during development stage                      (31,536,891)   (24,083,511)
                                                                   ------------   ------------
Total stockholders' equity                                            2,711,627      1,466,133
                                                                   ------------   ------------
                                                                   $  3,491,690   $  2,347,887
                                                                   ============   ============
</TABLE>

See accompanying notes.

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

                      Condensed Statements of Operations
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                     For the period
                                                                                      July 6, 1988 
                                 Three months ended          Nine months ended       (inception) to
                                    September 30,              September 30,            Sept. 30,   
                                 1998          1997          1998          1997           1998
                             -----------   -----------   -----------   -----------   --------------
<S>                          <C>           <C>           <C>           <C>           <C>
Revenues:                                                                             
  Contract revenue           $         -   $    91,510   $    50,000   $   324,510    $  4,358,715
  Interest income                 41,772        41,151        90,337       162,885       1,036,288
  Product and other income         6,725        27,840        41,019        61,744         596,438
                             -----------   -----------   -----------   -----------    ------------
Total revenues                    48,497       160,501       181,356       549,139       5,991,441
                                                                                      
Expenses:                                                                             
  Cost of sales                        -         5,380         4,373        23,301         279,894
  Research and development     1,123,299       835,844     3,040,682     2,252,069      20,287,950
  Selling, general and                                                                
   administrative                378,624       463,817     1,304,681     1,453,731      12,734,101
  Royalties                        6,250         6,250        18,750        28,750         283,921
                             -----------   -----------   -----------   -----------    ------------
Total expenses                 1,508,172     1,311,291     4,368,486     3,757,851      33,585,866
                             -----------   -----------   -----------   -----------    ------------
Net loss                      (1,459,676)   (1,150,790)   (4,187,130)   (3,208,712)    (27,594,425)
                                                                                      
Undeclared, imputed and/or                                                            
 paid dividends on                                                                    
 preferred stock                  69,410       117,657     3,474,913       361,569       4,892,605
                             -----------   -----------   -----------   -----------    ------------
Net loss applicable to                                                                
 common shareholders         $(1,529,086)  $(1,268,447)  $(7,662,043)  $(3,570,281)   $(32,487,030)
                             ===========   ===========   ===========   ===========    ============
Basic and diluted net loss                                             
 per common share            $     (0.14)  $     (0.14)  $     (0.73)  $     (0.39)
                             ===========   ===========   ===========   ===========
Shares used in computing                                               
 basic and diluted net                                                 
 loss per common share        10,575,811     9,332,156    10,492,508     9,173,040
                             ===========   ===========   ===========   ===========
</TABLE>

See accompanying notes.

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

                      Condensed Statements of Cash Flows
                                  (unaudited)



<TABLE>
<CAPTION>
                                                                        For the period
                                                                         July 6, 1988
                                                  Nine months ended     (inception) to
                                                    September 30,          Sept. 30,
                                                1998           1997          1998
                                             -----------   -----------  --------------
<S>                                          <C>           <C>          <C>
Operating activities
Net loss                                     $(4,187,130)  $(3,208,712)  $(27,594,425)
Adjustments to reconcile net loss to net                                 
 cash used for operating activities:                                     
  Stock issued for compensation and interest      37,500             -         62,395
  Depreciation and amortization                  273,697       124,166      1,533,416
  Write-off of purchased technology                    -             -        503,500
  Changes in assets and liabilities:                                     
   Deferred offering costs                             -        17,356              -
   Deposits                                         (860)      (16,222)       (37,477)
   Notes receivable from officers                  9,000             -       (144,000)
   Other current assets                           23,020      (226,217)       (65,848)
   Accounts payable                              (23,282)       20,032        400,312
   Accrued employee benefits                      (2,483)       31,146        149,348
   Other accrued expenses                        (20,430)         (521)        20,721
                                             -----------   -----------   ------------
Net cash used for operating activities        (3,890,968)   (3,258,972)   (25,172,058)
                                                                         
Investing activities                                                     
Purchase of technology                                 -             -       (570,000)
Purchase of equipment and improvements          (188,038)     (164,192)    (1,775,292)
Purchases of short-term investments             (893,180)   (3,193,468)   (17,054,847)
Sales of short-term investments                  974,817     1,886,510     16,161,667
                                             -----------   -----------   ------------
Net cash used for investing activities       $  (106,401)  $(1,471,150)  $ (3,238,472)
</TABLE>

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

                 Condensed Statements of Cash Flows, continued
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                       For the period
                                                                        July 6, 1988
                                                 Nine months ended     (inception) to
                                                    September 30,         Sept. 30,
                                                 1998         1997          1998
                                              ----------   ----------  --------------
<S>                                           <C>          <C>         <C>
Financing activities
Net proceeds from exercise of options and
 warrants, and sale of common stock           $  117,311   $4,658,836    $16,631,305
Net proceeds from issuance and conversion of  
 preferred stock                               5,277,813            -     12,215,565
Net proceeds from convertible notes and       
 detachable warrants                                   -            -      1,068,457
Payment on capital lease obligations             (55,496)      (7,427)       (79,090)
Payment on note payable                                -            -        (92,750)
Proceeds from note payable                             -            -        334,323
                                              ----------   ----------    -----------
Net cash provided by financing activities      5,339,628    4,651,409     30,077,810
                                              ----------   ----------    -----------
Net increase in cash and cash equivalents      1,342,259       78,713      1,667,280
Cash and cash equivalents at beginning of     
 period                                          325,021      267,357              -
                                              ----------   ----------    -----------
Cash and cash equivalents at end of period    $1,667,280   $  188,644    $ 1,667,280
                                              ==========   ==========    ===========
Supplemental disclosures of cash flow         
 information                                  
Equipment purchased by capital leases         $        -   $  215,592    $   288,772
Interest paid                                     20,848        3,074         92,084
Conversion of Series D preferred stock to     
 Series F preferred stock                      2,497,795            -      2,497,795
                                              
Conversion of Series D preferred stock to     
 common stock                                     44,990    2,097,341      2,142,331
                                              
Series D stock issued for Series C stock               -            -      2,073,925
Series C dividends paid with Series D stock            -            -        253,875
Series D dividends paid with common stock     $        -   $        -    $   422,341
</TABLE>

See accompanying notes.

                                       7
<PAGE>
 
                       PROTEIN POLYMER TECHNOLOGIES, INC.

                    Notes to Condensed Financial Statements
                                  (unaudited)

                               September 30, 1998


  1.  Basis of Presentation

  The condensed financial statements of Protein Polymer Technologies, Inc. (the
  "Company") for the three and nine months ended September 30, 1998 and 1997 are
  unaudited.  These financial statements reflect all adjustments, consisting of
  only normal recurring adjustments which, in the opinion of management, are
  necessary to state fairly the financial position at September 30, 1998 and the
  results of operations for the three and nine months ended September 30, 1998
  and 1997.  The results of operations for the three and nine months ended
  September 30, 1998 are not necessarily indicative of the results to be
  expected for the year ended December 31, 1998.  For more complete financial
  information, these financial statements and the notes thereto should be read
  in conjunction with the audited financial statements included in the Company's
  Annual Report and Form 10-KSB for the year ended December 31, 1997, filed with
  the Securities and Exchange Commission.

  2.  Basic and Diluted Loss Per Share

  As required, the Company adopted Financial Accounting Standards Board
  Statement No. 128, "Earnings Per Share," ("FAS No. 128") for the year ended
  December 31, 1997.  FAS No. 128 changes the method used to calculate earnings
  per share and requires the restatement of all prior periods reported.  Under
  FAS No. 128, the Company is required to present basic and diluted earnings per
  share if applicable.  Basic and diluted earnings per share are determined
  based on the weighted average number of shares outstanding during the period.
  Diluted earnings per share also includes potentially dilutive securities such
  as options and warrants outstanding and securities convertible into common
  stock.

  Both the basic and diluted loss per share for the three and nine months ended
  September 30, 1998 and 1997 are based on the weighted average number of shares
  of common stock outstanding during the periods.  Since potentially dilutive
  securities have not been included in the calculation of the diluted loss per
  share for both periods as their affect is antidilutive, there is no difference
  between the basic and diluted loss per share calculations.

  The net loss figures used for this calculation recognize imputed and
  accumulated dividends on the Company's Preferred Stock.  The accumulated
  dividends are payable when declared by the Board of Directors in cash or
  common stock.

  During April and May 1998, the Company issued Series E Convertible Preferred
  Stock whereby each share is at any time convertible into 80 shares of common
  stock at $1.25 per common share at the option of the holder.  At each date of
  issuance, the fair market value of the common stock was $2.00 per share.
  Therefore, each investor received a beneficial conversion feature of $.75 per
  common share.  The Company recorded this difference as an "imputed" dividend
  totaling $3,266,250 during the three months ended June 30, 1998.  (See
  Note 4. below regarding a second closing of Series E Convertible Preferred
  Stock.)

                                       8
<PAGE>
 
  3.  Liquidity

  The accompanying financial statements have been prepared assuming that the
  Company will continue as a going concern.  The Company believes its existing
  available cash, cash equivalents and short-term investments as of September
  30, 1998 is sufficient to meet its anticipated capital requirements until the
  second quarter of 1999.  Substantial additional capital resources will be
  required to fund continuing expenditures related to the Company's research,
  development, manufacturing and business development activities.  If adequate
  funds are not available, the Company will be required to significantly curtail
  its operating plans and may have to sell or license out significant portions
  of the Company's technology or potential products.

  4.  Series E Convertible Preferred Stock

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

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

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

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

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

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


  EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, CERTAIN STATEMENTS OR
  REFERENCES IN THIS QUARTERLY REPORT ON FORM 10-QSB CONSTITUTE "FORWARD-LOOKING
  STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
  OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
  UNCERTAINTIES AND OTHER FACTORS.  WHILE THESE STATEMENTS REPRESENT
  MANAGEMENT'S CURRENT JUDGEMENT AND EXPECTATIONS FOR THE COMPANY, SUCH RISKS
  AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
  FUTURE RESULTS SUGGESTED HEREIN; FURTHER, THE COMPANY IS NOT OBLIGATED TO
  PUBLICLY COMMENT SPECIFICALLY ON THOSE DIFFERENCES. RISKS ASSOCIATED WITH THE
  COMPANY'S ACTIVITIES INCLUDE SCIENTIFIC AND PRODUCT DEVELOPMENT UNCERTAINTIES,
  COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS, COMPETITIVE PRODUCTS AND
  APPROACHES, ATTAINING COLLABORATIVE PARTNERSHIP INTEREST AND FUNDING, PATENT
  PROTECTION UNCERTAINTIES, REGULATORY TESTING AND APPROVALS, AND MANUFACTURING
  SCALE-UP AND REQUIRED QUALIFICATIONS. THE READER IS ENCOURAGED TO REFER TO THE
  COMPANY'S 1997 ANNUAL REPORT AND FORM 10-KSB, AS WELL AS OTHER RECENT FILINGS
  WITH THE SECURITIES AND EXCHANGE COMMISSION, TO ASCERTAIN THE RISKS ASSOCIATED
  WITH THESE STATEMENTS.

  General Overview

  Protein Polymer Technologies, Inc. develops high performance biomaterials
  designed to improve medical and surgical outcomes.  Since its inception in
  1988, the Company has been a pioneer in protein design and synthesis, and as a
  result has achieved an exceptional proprietary position in protein-based
  materials technology.  The Company's biocompatible polymers have been
  genetically engineered to enable cell growth, promote the regeneration of
  tissue, bond to natural and synthetic surfaces, and resorb into tissue at
  controlled rates. Targeted applications include soft tissue augmentation,
  tissue adhesives and sealants, tissue engineering and wound healing, and
  localized drug delivery. The Company has also developed technology that can
  efficiently modify and improve the surface properties of more traditional
  implantable materials used in a variety of applications.  The Company has been
  unprofitable to date, and has an accumulated deficit of $31,536,891.

  In September 1995, the Company entered into collaborative agreements with
  Ethicon, Inc., a subsidiary of the Johnson & Johnson Company, related to the
  Company's surgical adhesives and sealants program.  Ethicon terminated the
  relationship in December 1997, which adversely affected the Company.  The
  Company does not currently have any agreements under which it would receive
  continuing contract research and milestone payments.  The Company's strategy
  with most of its programs is to enter into collaborative development
  agreements with major medical product marketing and distribution companies.
  Although these relationships, to the extent any are consummated, may provide
  significant near-term revenues in the form of up-front licensing fees,
  research and development reimbursements and milestone payments, the Company
  expects to continue incurring operating losses for several more years.

  Beginning in 1997, the Company has concentrated the focus of its research and
  development on the steps involved in the commercialization of its proprietary
  silk/elastin-based polymer hydrogel products for the treatment of female
  stress urinary incontinence, and for tissue augmentation applications in
  plastic, dermatological and reconstructive surgery. These hydrogels can be
  injected into the body as a liquid, and then quickly and spontaneously form
  biocompatible, durable hydrogel structures resulting in a contour change in
  the underlying tissue. Over the past year, the Company has completed a series
  of animal safety studies required by the U.S. Food and Drug Administration
  ("USFDA") before the products can be approved for testing in humans, and has

                                       10
<PAGE>
 
  upgraded its manufacturing facilities to meet USFDA standards to manufacture
  product for use in human testing. Currently, the Company is preparing
  Investigational Device Exemption ("IDE") applications for submission to the
  USFDA for each of these two product uses, and to the extent that sufficient
  cash is available and approval by the USFDA is granted, intends to begin human
  testing in 1999.

  In April and May 1998, the Company received approximately $5.3 million, net of
  estimated expenses, from the sale of its Series E Convertible Preferred Stock
  to a small group of accredited and institutional investors, consisting of
  54,437.5 shares at $100 per share.  Each share converts at any time at the
  holder's option into 80 shares of common stock at $1.25 per common share.
  Accompanying the sale of the Series E Convertible Preferred Stock was a
  warrant to purchase 40 shares of common stock at $2.50 a share, expiring 18
  months after the close of the private placement, and a second warrant to
  purchase 20 shares of common stock at $5.00 per share. The Company agreed to
  register the shares with the Securities and Exchange Commission within 120
  days after the closing; the registration was declared effective on October 13,
  1998.

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

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

  Results of Operations

  The Company received no contract research revenue for the three months ended
  September 30, 1998, compared to $92,000 of research revenue for the same
  period in 1997.  For the nine month period ended September 30, 1998, these
  revenues were $50,000, compared to $325,000 for the same period in 1997.  The
  revenue received in 1997 primarily consisted of contractual payments from
  Ethicon related to the Company's surgical adhesives and sealants program,
  along with smaller payments from certain materials evaluation agreements.

  Interest income was $42,000 for the three months ended September 30, 1998,
  versus $41,000 for the same period in 1997.  For the nine month period,
  interest income was $90,000, compared to $163,000 for the same period in 1997.
  The decrease in interest income resulted from the differences in timing
  related to the receipt of additional cash from the sale of stock in private
  placements during April and May 1998 versus January 1997.

  For the three months ended September 30, 1998 and 1997, sales from the
  Company's ProNectin(R) F product line were $6,700 and $28,000, respectively.
  For the nine month periods ended September 30, 1998 and 1997, these product
  sales were $37,000 and $62,000, respectively.  The decreases were due to the
  elimination of promotional expenditures and the cessation of direct marketing
  for the product line. These resources were redirected into preclinical and
  regulatory efforts.

  There was no cost of sales for the three months ended September 30, 1998,
  compared to $5,000 for the same period in 1997.  For the nine month period
  ended September 30, 1998, this expense was $4,000, compared to $23,000 for the
  same period in 1997.  The decreases related to changes in the mix of product
  sold, and a reduction in total revenues.  Royalty expenses paid to Integra
  Life 

                                       11
<PAGE>
 
  Sciences, Inc. were $6,000 for the three months ended September 30, 1998
  and 1997, and $19,000 for each of the nine month periods ended September 30,
  1998 and 1997.  A $10,000 annual royalty was paid to Stanford University
  during the nine month period ended September 30, 1997, but no such payment was
  made in the corresponding period of 1998 because the relevant patents had
  expired.

  Research and development expenses for the three months ended September 30,
  1998 were $1,123,000, compared to $836,000 for the same period in 1997, a 34%
  increase. For the nine month period ended September 30, 1998, these expenses
  were $3,041,000, compared to $2,252,000 for the same period in 1997, a 35%
  increase.  These increases were primarily attributable to expanded efforts
  related to the Company's soft tissue augmentation programs, as well as
  preparation for manufacturing and testing product according to clinical Good
  Manufacturing Practices ("GMP") as required by the Food and Drug
  Administration for conducting clinical testing in humans. The Company expects
  that its research and development expenses will continue at an increased level
  over time to the extent its programs are successfully progressing and
  additional capital is obtained.

  Selling, general and administrative expenses for the three months ended
  September 30, 1998 were $379,000, as compared to $464,000 for the same period
  in 1997, an 18% decrease.  For the nine month period ended September 30, 1998,
  these expenses were $1,305,000, compared to $1,454,000 for the same period in
  1997, a 10% decrease.  These decreases were primarily due to reduced legal and
  investor relations expenses.  The Company expects its selling, general and
  administrative expenses will increase in support of its research and
  development efforts, and to the extent additional capital is raised.

  For the three months ended September 30, 1998, the Company recorded a net loss
  applicable to common shareholders of $1,529,000, or $.14 per share, compared
  to a loss of $1,268,000, or $.14 per share for the same period in 1997.  For
  the nine month period ended September 30, 1998, the net loss applicable to
  shareholders was $7,662,000, or $.73 per share, compared to a loss of
  $3,570,000, or $.39 per share for the same period in 1997.  Included in the
  net loss figures for  the nine month periods of 1998 and 1997 were undeclared,
  imputed and/or paid dividends related to the Company's preferred stock.
  Imputed, non-cash dividends of $3,266,000 were included in the nine month
  periods ended September 30, 1998, to record the difference between the
  conversion price of preferred stock and the fair market value of the common
  stock on the preferred stock issuance date.  (See Note 2. of the financial
  statements, above.)

  The Company expects to incur similar or increasing operating losses for the
  immediate future (to the extent additional capital is obtained), due primarily
  to increases in the Company's product development, manufacturing and business
  development activities. The Company's results depend on its ability to
  generate product and contract revenues, establish and maintain collaborative
  partnerships, manage research and development, manufacturing, preclinical and
  clinical product testing and commercialization expenditures, achieve
  regulatory compliance and seek various regulatory approvals, complete patent
  prosecution, and other factors.  The Company's results will also fluctuate
  from period to period due to timing differences.

  To date the Company believes that inflation and changing prices have not had a
  material effect on its continuing operations.

  Liquidity and Capital Resources

  As of September 30, 1998, the Company had cash, cash equivalents and short-
  term investments of $2,560,000 as compared to $1,300,000 at December 31, 1997.
  As of September 30, 1998, the Company had working capital of $1,974,000,
  compared to $697,000 at December 31, 1997.  In April and May 1998, the Company
  received a total of approximately $5.3 million from the private placement of
  its Series E Convertible Preferred Stock.

                                       12
<PAGE>
 
  The Company had long-term debt obligations as of September 30, 1998 of
  $128,000 in capital lease obligations, versus $190,000 as of December 31,
  1997.  For the nine months ending September 30, 1998, the Company's
  expenditures for capital equipment and leasehold improvements totaled
  $188,000, compared with $380,000 for the same period last year.  The Company
  expects to increase its capital expenditures in the next two quarters (to the
  extent additional capital is obtained), as the Company continues to improve
  existing manufacturing facilities to meet U.S. Food and Drug Administration
  standards for production of products for human clinical testing, and in order
  to meet scale-up requirements for increased manufacturing capacity.  The
  Company may enter into additional capital lease arrangements, if available or
  under appropriate terms and timing.

  The Company believes its existing available cash, cash equivalents and short-
  term investments as of September 30, 1998 will be sufficient to meet its
  anticipated capital requirements until the second quarter of 1999.
  Substantial additional capital resources will be required to fund continuing
  expenditures related to the Company's research, development, manufacturing and
  business development activities.  The Company believes there may be a number
  of alternatives to meet the continuing capital requirements of its operations.
  These include collaborative agreements that could generate significant up-
  front licensing fees, research and development reimbursements and milestone
  payments, as well as public or private financings, such as the possible
  exercise of existing public and private warrants for the Company's common
  stock.  However, there can be no assurance that the requisite fundings will be
  consummated in the necessary time frames needed for continuing operations or
  on terms favorable to the Company. If adequate funds are not available, the
  Company will be required to significantly curtail its operating plans and may
  have to sell or license out significant portions of the Company's technology
  or potential products.

                                       13
<PAGE>
 
                          PART II.  OTHER INFORMATION



  Item 6.  EXHIBITS AND REPORTS ON FORM 8-K


  a.  Exhibits:

      Exhibit
      Number   Description
      ------   -----------

       27      Financial Data Schedule

  b.  Reports on Form 8-K

      On October 13, 1998, Protein Polymer Technologies, Inc. filed a Current
      Report on Form 8-K with the Commission. In Item 5. of the Report the
      Company reported that the it had been notified by the National Association
      of Securities Dealers ("NASD") that its public warrants (PPTIW), issued in
      conjunction with PPTI's 1992 public offering, no longer met Nasdaq's
      listing requirements due to a lack of market makers, and as a consequence,
      would no longer be listed on the Nasdaq Small Cap stock quotation system.

                                       14
<PAGE>
 
                                   SIGNATURE


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


                            PROTEIN POLYMER TECHNOLOGIES, INC.



  Date  November 13, 1998       By  /s/  J. Thomas Parmeter
        -----------------           -------------------------------
                                    J. Thomas Parmeter
                                    Chairman of the Board, Chief
                                    Executive Officer, President
 

  Date  November 13, 1998       By  /s/  Janis Y. Neves
        -----------------           -------------------------------
                                    Janis Y. Neves
                                    Director of Finance
                                    and Assistant Secretary

                                       15
<PAGE>
 
                                 EXHIBIT INDEX

 

  Exhibit                                                  Sequentially
  Number    Description                                    Numbered Page
  ------    -----------                                    -------------


   27       Financial Data Schedule                              17

                                       16