UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-Q




(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ______________________________ to
      ______________________________




Commission
file number 0-19724





PROTEIN
POLYMER


TECHNOLOGIES,
INC.


(Exact
name of registrant as specified in its charter)





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


11494
Sorrento Valley Road, San Diego, CA 92121


(Address
of principal executive offices) (Zip Code)




(858)
558-6064


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES  o NO  þ





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  o
            Accelerated
      filer  o
            Non-accelerated
      filer  o
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  þ





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES  o NO  þ





The
number of shares of the registrant’s common stock issued and outstanding as of
May 20, 2009 was 112,959,272.







PROTEIN
POLYMER TECHNOLOGIES, INC.




FORM
10-Q — QUARTERLY REPORT


FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009




TABLE OF CONTENTS




PagePART
      I.  FINANCIAL INFORMATIONItem
      1.
            Financial
      StatementsCondensed
      Balance Sheets as of March 31, 2009 and December 31, 2008
      (unaudited)
            3Condensed
      Statements of Operations for the Three Months Ended March 31, 2009 and
      2008 (unaudited)
            4Condensed
      Statements of Cash Flows for the Three Months ended March 31, 2009 and
      2008 (unaudited)
            5Notes
      to Condensed Financial Statements (unaudited)
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            22Item
      4T.
            Controls
      and Procedures
            22PART II.  OTHER
      INFORMATIONItem
      1.
            Legal
      Proceedings
            24Item
      1A.
            Risk
      Factors
            24Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            24Item
      3.
            Defaults
      Upon Senior Securities
            24Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            24Item
      5.
            Other
      Information
            24Item
      6.
            Exhibits
            25SIGNATURES
            26Exhibit
      10.6.6Exhibit
      31.1Exhibit
      31.2Exhibit
      32.1Exhibit
      32.2




2


PART
I — FINANCIAL INFORMATION





Item 1.  Financial
Statements





Note:
Contrary to the rules of the SEC, the Company’s consolidated financial
statements included in this filing have not been reviewed by an independent
public accountant in accordance with professional standards for conducting such
reviews.  The required review of the Company’s financial information
could not be completed without incurring undue hardship and expense. The
registrant undertakes the responsibility to file an amended Form 10-Q for this
period when the review is completed.  The Company will include the
review report of its independent public accountant with the amended
filing.





Protein
Polymer Technologies, Inc.


Condensed Balance Sheets


(unaudited)





March
      31
            
            
            December
      312009
            
            
            2008AssetsCurrent
      assets:Cash
            
            $
            1,507
            
            
            $
            1,291Prepaid
      expenses and other current assets
            
            
            90,539
            
            
            
            64,690Total
      current assets
            
            
            92,046
            
            
            
            65,981Equipment
      and leasehold improvements, net
            
            
            20,747
            
            
            
            24,429Investment
            
            
            520,000
            
            
            
            520,000Total
      assets
            
            $
            632,793
            
            
            $
            610,410Liabilities
      and stockholders' deficitCurrent
      liabilities:Accounts
      payable
            
            $
            976,900
            
            
            $
            919,435Accrued
      liabilities
            
            
            1,029,460
            
            
            
            844,073Secured
      note payable - related party, net of unamortized debt
    discount
            
            
            6,414,837
            
            
            
            6,414,837Notes
      payable - Surgica
            
            
            519,071
            
            
            
            519,071Notes
      payable - other, net of unamortized debt discount
            
            
            284,318
            
            
            
            164,969Total
      current liabilities
            
            
            9,224,586
            
            
            
            8,862,385Commitments
      and contingencies (Note 9)Stockholders'
      deficit:Convertible
      preferred stock, $0.01 par value; 5,000,000 shares authorized; 20,237
      shares issued and outstanding at March 31, 2009 and December 31, 2008 -
      liquidation preference of $2,084,032  and $2,082,930 at March
      31, 2009 and December 31, 2008, respectively.
            
            
            1,834,299
            
            
            
            1,834,299Common
      stock, $0.01 par value; 1,000,000,000 shares authorized;
      112,959,272  and  109,387,843 shares issued and
      outstanding at March 31, 2009 and December 31, 2008,
      respectively
            
            
            1,129,593
            
            
            
            1,093,878Additional
      paid-in capital
            
            
            62,144,795
            
            
            
            62,029,242Accumulated
      deficit
            
            
            (73,700,480
            )
            
            
            (73,209,394
            )Total
      stockholders' deficit
            
            
            (8,591,793
            )
            
            
            (8,251,975
            )Total
      liabilities and stockholders’ deficit
            
            $
            632,793
            
            
            $
            610,410





The
accompanying notes are an integral part of these financial
statements




3


Protein
Polymer Technologies, Inc.


Condensed Statements of Operations


(unaudited)




Three
      months endedMarch
      31,2009
            
            
            2008Revenues:Product
      and other income
            
            $
            535
            
            
            $
            -Total
      revenues
            
            
            535
            
            
            
            -Operating
      expenses:Research
      and development
            
            
            17,655
            
            
            
            551,974Selling,
      general and administrative
            
            
            300,265
            
            
            
            209,311Total
      expenses
            
            
            317,920
            
            
            
            761,285Net
      loss from operations
            
            
            (317,385
            )
            
            
            (761,285
            )Other
      income (expense):Interest
      and other expense
            
            
            (173,701
            )
            
            
            (169,928
            )Total
      other income (expense)
            
            
            (173,701
            )
            
            
            (169,928
            )Net
      loss
            
            
            (491,086
            )
            
            
            (931,213
            )Undeclared,
      imputed and/or paid dividends on preferred stock
            
            
            1,102
            
            
            
            69,030Net
      loss applicable to common shareholders
            
            $
            (492,188
            )
            
            $
            (1,000,243
            )Basic
      and diluted net loss per common share
            
            $
            (0.004
            )
            
            $
            (.012
            )Weighted
      average number of common shares outstanding – basic and
      diluted
            
            
            112,483,081
            
            
            
            80,179,370




The
accompanying notes are an integral part of these financial
statements




4


Protein Polymer
Technologies, Inc.


Condensed
Statements of Cash Flows


(unaudited)





Three
      months endedMarch
      312009
            
            
            2008Operating
      activities:Net
      loss
            
            $
            (491,086
            )
            
            $
            (931,213
            )Adjustments to reconcile net
      loss to net cash used for operating activities:Depreciation
            
            
            3,683
            
            
            
            25,094Share-based
      compensation expense
            
            
            1,454
            
            
            
            1,236Debt
      discount amortization
            
            
            29,163
            
            
            
            20,134Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
            
            
            (25,849
            )
            
            
            (20,605
            )Accounts
      payable
            
            
            57,465
            
            
            
            (55,094
            )Accrued
      liabilities
            
            
            185,386
            
            
            
            171,058Net
      cash used for operating activities
            
            
            (239,782
            )
            
            
            (789,390
            )Financing
      activities:Net
      proceeds from sale of common stock
            
            
            75,000
            
            
            
            775,000Net
      proceeds from issuance of note payable
            
            
            165,000
            
            
            
            -Net
      cash provided by financing activities
            
            
            240,000
            
            
            
            775,000Net
      increase (decrease) in cash
            
            
            216
            
            
            
            (14,390
            )Cash
      at beginning of the period
            
            
            1,291
            
            
            
            21,936Cash
      at end of the period
            
            $
            1,507
            
            
            $
            7,546Supplemental
      disclosures of cash flow informationInterest
      paid
            
            $
            444
            
            
            $
            659Non
      cash investing and financing activityDebt
      discount recorded in connection with issuance/amendment of
      warrants
            
            $
            74,814
            
            
            $
            135,449Secured
      note payable-related party issued for payment of accrued
      interest
            
            $
            -
            
            
            $
            538,837





The
accompanying notes are an integral part of these financial
statements




5


Protein
Polymer Technologies, Inc.


Notes to
Condensed Financial Statements


(unaudited)





Note
      1. Basis
      of Presentation and Summary of Significant Accounting
  Policies





The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission (“SEC”) related to a
quarterly report on Form 10-Q  under the modified rules and
regulations for “Smaller Reporting Companies”. Accordingly, they do not include
all of the information and disclosures required by U.S. generally accepted
accounting principles for complete financial statements. However, the Company
believes that the condensed financial statements, including the disclosures
herein, include all adjustments necessary in order to make the financial
statements presented not misleading. The balance sheet as of December 31, 2008
was derived from the Company’s unaudited financial statements.  The
financial statements herein should be read in conjunction with our financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2008, which has yet to be filed with the U.S. Securities
and Exchange Commission.  The results of operations for the three
months ended March 31, 2009 are not necessarily indicative of the results
expected for the fiscal year ending December 31, 2009.





Contrary
to the rules of the SEC, the Company’s consolidated financial statements
included in this filing have not been reviewed by an independent public
accountant in accordance with professional standards for conducting such
reviews.  The required review of the Company’s financial information
could not be completed without incurring undue hardship and expense. The
registrant undertakes the responsibility to file an amended Form 10-Q for this
period when the review is completed.  The Company will include the
review report of its independent public accountant with the amended
filing.





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 three months ended March 31, 2009, the
Company incurred a net loss of approximately $491,000, and at March 31, 2009,
the Company had a working capital deficit of approximately $9.1 million. Our
cash balance as of March 31, 2009 was $1,507 and, in combination with
anticipated additional contract and license payments, is insufficient to meet
our ongoing capital requirements.





From
January 1, 2009 through March 31, 2009, required operating capital has been
obtained through proceeds totaling $75,000 from equity purchases of 3,571,429
shares of common stock and 3,571,429 warrants pursuant to a Stock Purchase
Agreement entered into as of September 27, 2007. Between September 27, 2007 and
December 31, 2008, the Company received proceeds of $2,282,500 for the purchase
of 42,499,119 shares of common stock and 42,499,119 warrants pursuant to this
Stock Purchase Agreement.





Effective
January 9, 2008, the Company converted a related party note payable with an
outstanding principal balance of $5,876,000 plus accrued interest totaling
$539,000, to a new note payable agreement, with a scheduled maturity date of
September 1, 2008, in the principal amount of $6,415,000.  On
September 1, 2008, the scheduled maturity date of this note payable agreement
was extended to March 31, 2009.  On March 31, 2009, the maturity date
was extended to September 30, 2009.





On
February 6, 2009 and March 18, 2009, the Company received proceeds of $80,000
and $85,000, respectively, as loans.  These loans are represented by
unsecured notes issued by the Company.  These notes are due on
February 5, 2010 and March 17, 2010, respectively, and bear an annual interest
rate of 8%.  The interest and principal are payable on the maturity
dates, either in cash or common stock at a rate of $0.02 and $0.02 per share,
respectively, at the discretion of the Company.  As consideration for
the loans, the Company granted warrants to the noteholders to purchase an
aggregate of 4,000,000 and 4,250,000 shares, respectively, of the Company’s
common stock at an exercise price of $0.02 and $0.02 per share,
respectively.





Management
is currently in discussion with other potential financing sources and
collaborative partners and is investigating other funding in the form of equity
investments and license fees. If adequate funds are not available, the Company
will be required to significantly curtail operations, sell or license out
significant portions of its technology, or possibly cease
operations.  The financial statements do not include any adjustments
that might result should the Company be unable to continue as a going
concern.




6


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





Use
of Estimates





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





Investments





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




Revenue
and Expense Recognition





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





Stock-Based
Compensation





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





Under the
modified prospective approach, SFAS No. 123R applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in each period subsequent to December 31, 2005, includes
compensation cost for all share-based payments granted prior to, but not yet
vested on, January 1, 2006, based on the grant-date fair value estimated in
accordance with the pro forma provisions of SFAS No. 123, Share-Based Payment (“SFAS
No. 123”), and compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123R. Periods prior to January 1, 2006 were not
restated to reflect the impact of adopting the new standard.




7


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





Fair Value Measurement





The
carrying value of the Company’s cash, accounts payable, and short-term debt are
measured at cost and approximate their respective fair values because of the
short maturities of these instruments. Notes payable are recorded at cost which
approximates their fair value.





Net
Loss per Common Share





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





Excluded
from diluted loss per common share as of March 31, 2009 and 2008 were 5,102,639
and 62,037,741 shares, respectively, issuable upon conversion of convertible
preferred stock, and options and warrants to purchase  3,507,500 and
77,861,094 shares of common stock, respectively, because the effect would be
anti-dilutive.  For purposes of this calculation, net loss in 2009 and 2008
has been adjusted for imputed, accumulated and/or paid dividends on the
preferred stock.





Income
Taxes





The
Company records income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their future respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recorded or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.





A
valuation allowance is established to reduce the deferred tax asset if it is
more likely that the related tax benefits will not be realized in the
future.





Reclassifications





Certain
prior year amounts have been reclassified to conform to the 2009
presentation.





Recent
Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements (“SFASNo. 157”).SFASNo. 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.SFASNo. 157 is
effective with respect to financial assets and liabilities for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years.  For non-financial assets and liabilities, the effective date of
SFAS No. 157 has been deferred until fiscal years beginning after November 15,
2008.  Our adoption of SFAS No. 157 with respect to financial assets
and liabilities on January 1, 2008 did not have a material affect on our
financial statements.  The Company adopted SFAS No. 157 with respect
to non-financial assets and liabilities on January 1, 2009, and is in the
process of assessing the impact of SFAS No. 157, if any, on our financial
position, results of operations, and cash flows.





8


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“SFAS No. 159”), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The fair value
option established by this Statement permits all entities to choose to measure
eligible items at fair value at specified election dates. A business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Adoption
is required for fiscal years beginning after November 15,
2007.  Our adoption of SFAS No. 159 on January 1, 2008 did not have a
material effect on our financial statements.





In
October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a
Financial Asset When The Market for That Asset Is Not Active (“FSP
157-3”), to clarify the application of the provisions of SFAS 157 and how an
entity would determine fair value in an inactive market. FSP 157-3 is effective
immediately and applies to the Company’s March 31, 2009 financial statements.
The application of the provisions of FSP 157-3 did not materially impact the
Company’s consolidated financial position, results of operations and cash flows
as of and for the period ended March 31, 2009.





In
December 2007, the FASB issued FSP No. EITF 07-1, Accounting for Collaborative
Arrangements, (“EITF 07-1”), which is effective for fiscal years beginning after
December 15, 2008.  EITF 07-1 defines collaborative arrangements and
establishes reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third
parties.  EITF 07-1 also establishes the appropriate income statement
presentation and classification for joint operating activities and payments
between participants, as well as the sufficiency of the disclosures related to
these arrangements.  The Company adopted EITF 07-1 on January 1, 2009,
and is in the process of assessing the impact of EITF 07-1, if any, on our
financial position, results of operations, and cash flows.





In June
2007, the FASB issued FSP No. EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities (“EITF 07-3”), which is effective for fiscal years
beginning after December 15, 2007, and interim periods within those fiscal
years.  The EITF reached a conclusion that nonrefundable advance
payments for goods or services that will be used or rendered for future research
and development activities pursuant to an executory contractual arrangement
should be deferred and capitalized.  Such amounts should be recognized
as expense as the goods are delivered or the related services are
performed.  Entities should continue to evaluate whether they expect
the goods to be delivered or services to be rendered.  If an entity
does not expect the goods to be delivered or services to be rendered, the
capitalized advance payment should be charged to expense.  Our
adoption of EITF 07-3 on January 1, 2008 did not have a material impact on our
financial position, results of operations, or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) changes the accounting for business
combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance. The Company adopted SFAS No. 141 (R)
on January 1, 2009, and is in the process of assessing the impact of SFAS No.
141 (R), if any, on our financial position, results of operations, and cash
flows.





9


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160 changes the accounting for non-controlling
(minority) interests in consolidated financial statements including the
requirements to classify non-controlling interests as a component of
consolidated stockholders’ equity, and the elimination of “minority interest”
accounting in results of operations with earnings attributable to
non-controlling interests reported as part of consolidated earnings.
Additionally, SFAS No. 160 revises the accounting for both increases and
decreases in a parent’s controlling ownership interest.  The Company
adopted SFAS No. 160 on January 1, 2009, and is in the process of assessing the
impact of SFAS No. 160, if any, on our financial position, results of
operations, and cash flows.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS No. 161”), as amended and interpreted, which requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. Disclosing the fair
values of derivative instruments and their gains and losses in a tabular format
provides a more complete picture of the location in an entity’s financial
statements of both the derivative positions existing at period end and the
effect of using derivatives during the reporting period. Entities are required
to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Early adoption is permitted.  The Company adopted
SFAS No. 161 on January 1, 2009, and is in the process of assessing the impact
of SFAS No. 161, if any, on our financial position, results of operations, and
cash flows.





In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FAS
142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires
expanded disclosure related to the determination of intangible asset useful
lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008. The Company adopted FSP FAS 142-3 on January 1, 2009, and is in the
process of assessing the impact of FSP FAS 142-3, if any, on our financial
position, results of operations, and cash flows.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Policies (“SFAS 162”), which reorganizes the GAAP hierarchy.
The purpose of the new standard is to improve financial reporting by providing a
consistent framework for determining what accounting principles should be used
when preparing the U.S. GAAP financial statements. The standard is effective 60
days after the SEC’s approval of the PCAOB’s amendments to AU Section 411. The
adoption of SFAS 162 will not have an impact on the Company’s financial position
or results of operations.





In May
2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No. 14-1,
Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (“FSP APB 14-1”), which requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer’s
nonconvertible debt borrowing rate. FSP APB 14-1 will be effective for the
Company on January 1, 2009 and will require retroactive disclosure. The Company
adopted FSP APB 14-1 on January 1, 2009, and is in the process of assessing the
impact of FSP APB 14-1, if any, on our financial position, results of
operations, and cash flows.





10


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





In May
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60 (“SFAS No.
163”), which requires recognition of an insurance claim liability prior to an
event of default when there is evidence that credit deterioration has occurred
in an insured financial obligation.  SFAS No. 163 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years. The Company adopted SFAS No.
163 on January 1, 2009, and is in the process of assessing the impact of SFAS
No. 163, if any, on our financial position, results of operations, and cash
flows.





In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“EITF 03-6-1”), which requires entities to apply the two-class method of
computing basic and diluted earnings per share for participating securities that
include awards that accrue cash dividends (whether paid or unpaid) any time
common shareholders receive dividends and those dividends do not need to be
returned to the entity if the employee forfeits the award. EITF 03-6-1 will be
effective for the Company on January 1, 2009 and will require retroactive
disclosure. The Company adopted EITF 03-6-1on January 1, 2009, and is in the
process of assessing the impact of EITF 03-6-1, if any, on our financial
position, results of operations, and cash flows.





In June
2008, the FASB ratified the consensus reached on Emerging Issues Task Force
("EITF") Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entity's Own Stock ("EITF No. 07-5").  EITF No. 07-5
clarifies the determination of whether an instrument (or an embedded feature) is
indexed to an entity's own stock, which would qualify as a scope exception under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF
No. 07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. The Company adopted EITF 07-5 on January 1, 2009, and
is in the process of assessing the impact of EITF 07-5, if any, on our financial
position, results of operations, and cash flows.





Note
      2. Equipment





Equipment
consists approximately of the following:




March
      31,
            
            
            December
      31,2009
            
            
            2008Laboratory
      equipment
            
            $
            298,000
            
            
            $
            298,000Office
      equipment
            
            
            60,000
            
            
            
            60,000358,000
            
            
            
            358,000Less:
      accumulated depreciation and amortization
            
            
            (337,000
            )
            
            
            (334,000
            )$
            21,000
            
            
            $
            24,000





The
Company did not sell or otherwise dispose of any equipment during the three
months ended March 31, 2009.  The Company recorded a net gain on the
sale of equipment of approximately $41,000 during 2008.





Depreciation
and amortization expense was approximately $3,000 and $25,000 for the three
months ended March 31, 2009 and 2008, respectively.





11


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





Note
      3. Accrued
      Liabilities





Accrued
liabilities consist approximately of the following:





March
      31,
              
              
              December
      31,2009
              
              
              2008Payroll
      and employee benefits
              
              $
              52,000
              
              
              
              67,000Accounting
      & Professional Fees
              
              
              21,000
              
              
              
              -Accrued
      interest
              
              
              753,000
              
              
              
              610,000Insurance
      premium financing
              
              
              47,000
              
              
              
              27,000Directors
      fees
              
              
              110,000
              
              
              
              100,000Other
              
              
              46,000
              
              
              
              40,000$
              1,029,000
              
              
              
              844,000





Note
      4. Secured
      Notes Payable – Related Party





On April
13, 2006, a shareholder loaned $1,000,000 (the “Loan”) to the Company ($500,000
in cash and an additional $500,000 deposited with an escrow agent as a line of
credit) represented by a note (the “4/13/06 Note”) issued by the Company to the
shareholder in the principal amount of $1,000,000 (the “Principal”). The Note
was originally due on July 7, 2006 (the “Maturity Date”) and bore annual
interest at the rate of 8% payable on the Maturity Date. It was secured, in
accordance with the terms of a security agreement (the “Security Agreement”), by
a continuing security interest in and a general lien upon (i) 2,000,000 shares
of Spine Wave, Inc. common stock owned by the Company; and (ii) all U.S. patents
owned by the Company. The Note and the Security Agreement were both dated April
13, 2006.





As
consideration for the Loan, the Company granted a warrant (the “4/13/06
Warrant”) to the shareholder to purchase an aggregate of 500,000 shares of the
Company’s common stock at an exercise price of $0.30 per share. The fair value
of the 4/13/06 warrant, estimated to be $70,000, was recognized as interest over
the original term of the note.  The shareholder’s counsel acts as the
escrow agent and now serves as our outside general counsel. Through December 31,
2007, the 4/13/06 Note had been amended seven times so that as of December 31,
2007, the outstanding principal balance was $5,876,000, and had a scheduled
maturity date of January 10, 2008.





Effective
January 9, 2008, the Company replaced the 4/13/06 Note by issuing a new note
(the “1/09/08 Note”) in the principal amount of $6,415,000.  This
amount included the then $5,876,000 outstanding balance plus the then
outstanding $539,000 of accrued interest on the 4/13/06 Note.  The
1/09/08 Note bears annual interest at the rate 8%, the same as did the 4/13/06
Note, and matures on September 1, 2008.  The 1/09/08 Note is secured
in the same manner as was the 4/13/06 Note.  On September 1, 2008, the
scheduled maturity date of the 1/09/08 Note was extended to March 31,
2009.  On March 31, 2009, the scheduled maturity date of the 1/09/09
Note was further extended to September 30, 2009.  As of March 31,
2009, the amount due on the 1/09/09 includes the original $6,415,000 outstanding
balance plus $629,000 of accrued interest.





As
consideration for the lender agreeing to accept the 1/09/08 Note as payment for
the 4/13/06 Note, the Company i) issued the lender three-year warrants to
purchase an aggregate of 2,438,000 shares of the Company’s common stock at
$0.061 per share, ii) lowered the exercise price of the 4/13/06 Warrant from
$0.30 per share to $0.061 per share, and iii) extended the term of the 4/13/06
Warrant from April 30, 2009 to January 31, 2011.





12


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





In
accordance with Accounting Principals Board Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants,the relative fair value of the
warrants issued in connection with the 1/09/08 Note, estimated to be
approximately $117,000, was recorded as debt discount.  In addition,
the change in fair value of the 4/13/06 Warrant resulting from the modification
of the terms, estimated at $18,000, was also recorded as debt
discount.  The fair value of these warrants was estimated on the date
of grant using the Black Scholes option valuation model with the following
assumptions:





April
      2006
              Issuance
            
            
            January
      2008 Modification
            
            
            January
      2008 Issuance4/13/06
              Warrant
            
            
            4/13/06
              Warrant
            
            
            1/09/08
              WarrantExpected
      annual dividends
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Risk-free
      interest rate
            
            
            4.9
            %
            
            
            3.0
            %
            
            
            2.7
            %Expected
      term (in years)
            
            
            3.0
            
            
            
            1.3
            
            
            
            3.1Expected
      Volatility
            
            
            90.0
            %
            
            
            157.0
            %
            
            
            157.0
            %





The total
debt discount recorded was amortized as interest expense over the original term
of the 1/09/08 Note using the effective interest method, and, as of September
30, 2008, the debt discount was fully amortized.





Note
      5. Notes
      Payable





On the
following dates, the Company has received proceeds in the following amounts as
loans from clients of TAG Virgin Islands, Inc. (hereafter “TAG”):





Date
            
            Amount
            
            
            Conversion
      PriceOctober
      2, 2008
            
            $
            100,000
            
            
            $
            0.05November
      3, 2008
            
            
            105,000
            
            
            
            0.04December
      11, 2008
            
            
            25,000
            
            
            
            0.04December
      31, 2008
            
            
            55,867
            
            
            
            0.02February
      6, 2009
            
            
            80,000
            
            
            
            0.02March
      18, 2009
            
            
            85,000
            
            
            
            0.02Total
            
            $
            450,
      867





These
loans are represented by unsecured notes issued by the Company.  These
notes have a maturity term of one year, and bear an annual interest rate of
8%.  The interest and principal are payable on the maturity dates,
either in cash or common stock at the conversion prices indicated in the table
above at the discretion of the Company.




13


As
consideration for the loans, the Company granted warrants to the noteholders to
purchase shares in the following aggregate amounts and exercise
prices:





Date
            
            Amount
            
            
            Exercise
      PriceOctober
      2, 2008
            
            
            2,000,000
            
            
            $
            0.05November
      3, 2008
            
            
            2,625,000
            
            
            
            0.04December
      11, 2008
            
            
            625,000
            
            
            
            0.04December
      31, 2008
            
            
            2,793,350
            
            
            
            0.02February
      6, 2009
            
            
            4,000,000
            
            
            
            0.02March
      18, 2009
            
            
            4,250,000
            
            
            
            0.02Total
            
            
            16,293,350





TAG is a
registered investment advisor and advises a number of our stockholders,
including certain members of our Board of Directors, in investment decisions,
including decisions about whether to invest in our stock.  TAG has
discretionary authority to vote or dispose of the shares of our common stock
held in its client accounts and, therefore, may be deemed to be the beneficial
owner of such shares in accordance with the Commission's Rules.  TAG
has informed us that James Tagliaferri is the natural person at TAG with such
discretionary authority.  TAG expressly disclaims beneficial ownership
of any shares owned by its clients.





In
accordance with Accounting Principals Board Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants,the relative fair values of the
warrants issued in connection with these notes, estimated to be approximately
$204,000, were recorded as debt discount.  The fair value of these
warrants was estimated on the date of grant using the Black-Scholes option
valuation model with the following assumptions:





10/02/08
      Warrant
            
            
            11/03/08
      Warrant
            
            
            12/11/08
      Warrant
            
            
            12/31/08
      Warrant
            
            
            2/06/09
              Warrant
            
            
            3/18/09
              WarrantExpected
      annual dividends
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Risk-free
      interest rate
            
            
            1.9
            %
            
            
            1.5
            %
            
            
            1.1
            %
            
            
            1.1
            %
            
            
            1.4
            %
            
            
            1.3
            %Expected
      term (in years)
            
            
            3.0
            
            
            
            3.0
            
            
            
            3.0
            
            
            
            3.0
            
            
            
            3.0
            
            
            
            3.0Expected
      Volatility
            
            
            157.0
            %
            
            
            157.0
            %
            
            
            157.0
            %
            
            
            157.0
            %
            
            
            157.0
            %
            
            
            157.0
            %





The total
debt discount recorded will be amortized as interest expense over the expected
term of the notes using the effective interest method.





During
the three months ended March 31, 2009, the Company recorded non-cash interest
expense of approximately $29,000 based on the debt discount
amortization.





In
December 2005, in connection with a license agreement with Surgica Corporation
for the rights to certain intellectual property, the Company allegedly assumed
several notes payable agreements. The notes bear interest at rates ranging from
6% to 10%, and were scheduled to mature through January 2009.





Year
      Ending
              December
      31,
            
            Notes
      Payable
              Maturities2008
            
            419,0002009
            
            
            100,000Total
      maturities
            
            $
            519,000





On
October 15, 2008, the noteholders instituted suit against the Company in
Superior Court of California, County of Sacramento seeking payment of these
notes.  The name of the case is Lou Matson, Mary Matson, and Don
Brandon v Protein Polymer Technologies, Inc, Case Number
34-2008-00022190.  The Company defended this action, alleging, among
other things, that it had no liability for these notes.  Until a final
determination was made with respect to the disposition of the notes, the Company
continued to carry them on its balance sheet.  On May 19, 2009, the
plaintiffs filed a request for dismissal with prejudice of the action against
the Company, and the Company paid nothing to plaintiffs in exchange for the
dismissal.  Accordingly, as of March 31, 2009, the entire balance of
the outstanding notes payable in addition to the accrued interest thereon was
still reflected as a current liability.




14


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





Note
      6. Common
      Stock





The
Company’s Board of Directors agreed to the terms of a Stock Purchase Agreement
(“SPA”) and a Registration Rights Agreement (“RRA”), each dated as of September
27, 2007, with TAG as agent for certain purchasers of the Company’s common
stock. Based upon our stock records and data supplied to us by our stockholders,
we believe that clients of TAG beneficially owned approximately 55.1% of our
common stock as of September 27, 2007, prior to the stock purchases subject to
the SPA. The SPA essentially provides for the Company selling, from time to
time, shares of its common stock, par value $0.01, to the purchasers at a
purchase price determined as the closing price of the stock on sale date. As a
component of the purchase of the common stock, the purchaser also will receive a
warrant to purchase the same number of shares of common stock in the future.
Each warrant expires in five years from the date of purchase and is exercisable
at a per share price, subject to certain anti-dilution provisions, equal to 110%
of the purchase price paid by the purchase.





As of
November 28, 2007, the SPA was amended so that on and after that date the
warrants are exercisable at 100% of the price of the shares that are purchased.
The SPA can be terminated at any time by TAG. The purchasers have certain
registration rights, as provided by the RRA, to require the Company, at its
cost, to file an effective registration statement with the Securities and
Exchange Commission.  The Company is not subject to liquidated damages
or other penalties in the event that it fails to meet the registration
obligations included in the RRA.





For the
three months ended March 31, 2009, the Company received aggregate proceeds of
$75,000 for the purchase of 3,571,429 shares of common stock and 3,571,429
warrants, subject to the terms of the SPA and RRA.





Note
      7. Stock
      Options





The
Company did not grant options during the three months ended March 31,
2009.  Stock option activity for the three months ended March 31, 2009
is as follows:





Options Outstanding
              
              
              Weighted Average Exercise
    Price
              
              
              Weighted Average Remaining Contractual Term
      (Years)Outstanding
      at December 31, 2008
              
              
              3,507,500
              
              
              $
              0.68
              
              
              
              4.40Issued
              
              
              -Cancelled
              
              
              -Exercised
              
              
              -Outstanding
      at March 31, 2009
              
              
              3,507,500
              
              
              
              0.68
              
              
              
              4.15Exercisable
      at March 31, 2009
              
              
              3,498,587
              
              
              $
              0.68
              
              
              
              4.14





During
the three month periods ended March 31, 2009 and 2008, respectively, the Company
recognized $1,454 and $1,236 in stock-based compensation expense.  As
of March 31, 2009, there was $969 of unrecognized compensation expense related
to unvested shared-based compensation arrangements which is expected to be fully
recognized by the end of 2009.




15


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





Note
      8. Warrants
      to Purchase Common Stock





During the three months ended
March 31, 2009, the Company granted warrants to purchase an aggregate of
3,571,429 of the Company’s common stock pursuant to the terms of a stock
purchase agreement dated September 27, 2007 (See Note 6).  Such
warrants are exercisable at a price of $0.02 per share and expire in January
2014.





The
Company also granted warrants to purchase an aggregate of 8,250,000 shares of
the Company’s common stock pursuant to the terms of two note agreements dated
February 5, 2009 and March 18, 2009 (see Note 5).  Such warrants are
exercisable at a price of $0.02 per share and expire in February and March 2012,
respectively.





No
warrants were exercised during the three months ended March 31, 2009. A summary
of warrant activity for the three months ended March 31, 2009 is as
follows:





Number
      of
              Warrants
              Outstanding
      and
              Exercisable
            
            Weighted-
              Average
              Exercise
              PriceOutstanding,
      December 31, 2008
            66,039,664
            
            $
            0.14Granted
            11,821,429
            
            $
            0.02Exercised
            -
            
            $
            -Expired
            -
            
            $
            -Outstanding,
      March 31, 2009
            77,861,093
            
            $
            0.12





At March
31, 2009, the weighted-average remaining contractual life of the warrants was
approximately 3.1 years.





Note
      9. Commitments
      and Contingencies





Facilities
Lease Agreement





The
Company leased its office and research facilities totaling 27,000 square feet
under an operating lease which expired on April 30, 2008. The Company did not
renew the facilities lease and has vacated the premises. As of March 31, 2009,
the Company had accrued $25,000 in repair and maintenance costs related to the
termination of this facilities lease. We are currently exploring arrangements to
relocate our administrative offices and are outsourcing our laboratory and
production facilities.




Through
April 30, 2008, the Company subleased 6,183 square feet of its office and
research facilities under a month-to-month arrangement for $13,000 per month
plus utilities. As of March 31, 2009, our former sub-lessee owed us
approximately $200,000 for accrued unpaid rent. Due to the uncertainty regarding
the collectibility of the amount owed, the entire balance is fully reserved as
of March 31, 2009.




16


Protein
Polymer Technologies, Inc.


Notes
to Condensed Financial Statements


(unaudited)





Note
      10. Subsequent
      Events




Additional
developments during the period April 1, 2009 through May 20, 2009 include the
following:





·
            On
      April 20, 2009, the Company received proceeds of $100,000 as a loan from
      clients of TAG.  This loan is represented by an unsecured note
      issued by the Company.  The note is due on April 19, 2010 and
      bears an annual interest rate of 8%.  The interest and principal
      are payable on the maturity date, either in cash or common stock at a rate
      of $0.020 per share, at the discretion of the Company.  As
      consideration for the loan, the Company granted a warrant to the
      noteholders to purchase an aggregate of 5,000,000 shares of the Company’s
      common stock at an exercise price of $0.020 per
  share.





·
            On
      May 7, 2009, the Company received proceeds of $50,000 as a loan from
      clients of TAG.  This loan is represented by an unsecured note
      issued by the Company.  The note is due on May 6, 2010 and bears
      an annual interest rate of 8%.  The interest and principal are
      payable on the maturity date, either in cash or common stock at a rate of
      $0.026 per share, at the discretion of the Company.  As
      consideration for the loan, the Company granted a warrant to the
      noteholders to purchase an aggregate of 1,923,077 shares of the Company’s
      common stock at an exercise price of $0.026 per
  share.





·
            See
      Note 5 for information relating to the pending dismissal of litigation
      against the Company relating to the Company’s alleged liability for notes
      issued in connection with the Company’s transactions with Surgica
      Corporation.





17


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





The
interim financial statements and this Management’s Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the financial statements and notes thereto for the year ended December 31,
2008, and the related Management’s Discussion and Analysis of Financial
Condition and Results of Operations, both of which are contained in our Annual
Report on Form 10-K for the year ended December 31, 2008, which has yet to
be filed with the U.S. Securities and Exchange Commission. In addition to
historical information, this discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. When used herein,
the words “believe,” “anticipate,” “expect,” “estimate” and similar expressions
are intended to identify such forward-looking statements. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including but not limited to those set forth under
the caption “Risk Factors” in the Form 10-K for the year ended December 31,
2008. We undertake no obligation to update any of the forward-looking statements
contained herein to reflect any future events or developments.





Contrary
to the rules of the SEC, the Company’s consolidated financial statements
included in this filing have not been reviewed by an independent public
accountant in accordance with professional standards for conducting such
reviews.  The required review of the Company’s financial information
could not be completed without incurring undue hardship and expense. The
registrant undertakes the responsibility to file an amended Form 10-Q for this
period when the review is completed.  The Company will include the
review report of its independent public accountant with the amended
filing.





Company
and Technology Background





Protein
Polymer Technologies, Inc. (hereafter the “Company” or “we”), a Delaware
corporation, is a biotechnology company incorporated on July 6, 1988. We are
engaged in the research, development, and production of bio-active devices to
improve medical and surgical outcomes. Through our patented technology to
produce proteins of unique design, biological and physical product components
are integrated to provide for optimized clinical performance.




We are
focused on developing products to improve medical and surgical outcomes, based
on an extensive portfolio of proprietary biomaterials. Biomaterials are
materials that are used to direct, supplement, or replace the functions of
living systems. The interaction between materials and living systems is dynamic.
It involves the response of the living system to the materials (e.g.,
biocompatibility) and the response of the materials to the living system (e.g.,
remodeling). The requirements for performance within this demanding biological
environment have been a critical factor in limiting the possible metal, polymer,
and ceramic compositions to a relatively small number that to date have been
proven useful in medical devices implanted within the body.




The goal
of biomaterials development historically has been to produce inert materials,
i.e., materials that elicit little or no response from the living system.
However, we believe that such conventional biomaterials are constrained by their
inability to convey appropriate messages to the cells that surround them, the
same messages that are conveyed by proteins in normal human
tissues.




The
products we have targeted for development are based on a new generation of
biomaterials which have been designed to be recognized and accepted by human
cells to aid in the natural process of bodily repair, (including the healing of
tissue and the restoration or augmentation of its form and function) and,
ultimately, to promote the regeneration of tissues. We believe that the
successful realization of these properties will substantially expand the role
that artificial devices can play in the prevention and treatment of human
disability and disease, and enable the culture of native tissues for successful
reimplantation.





Through
our proprietary core technology, we produce high molecular weight polymers that
can be processed into a variety of material forms such as gels, sponges, films,
and fibers, with their physical strength and rate of resorption tailored to each
potential product application. These polymers are constructed of the same amino
acids as natural proteins found in the body. We have demonstrated that our
polymers can mimic the biological and chemical functions of natural proteins and
peptides, such as the attachment of cells through specific membrane receptors
and the ability to participate in enzymatic reactions, thus overcoming a
critical limitation of conventional biomaterials. In addition, materials made
from our polymers have demonstrated excellent biocompatibility in a variety of
preclinical safety studies.





18


Our
patented core technology enables messages that direct activities of cells to be
precisely formulated and presented in a structured environment similar to what
nature has demonstrated to be essential in creating, maintaining and restoring
the body’s functions. Our protein polymers are made by combining the techniques
of modern biotechnology and traditional polymer science. The techniques of
biotechnology are used to create synthetic genes that direct the biological
synthesis of protein polymers in recombinant microorganisms. The methods of
traditional polymer science are used to design novel materials for specific
product applications by combining the properties of individual “building block”
components in polymer form.





In
contrast to natural proteins, either isolated from natural sources or produced
using traditional genetic engineering techniques, our technology results in the
creation of new proteins with unique properties. We have demonstrated an ability
to create materials that:





·
            combine
      properties of different proteins found in
  nature;


·
            reproduce
      and amplify selected activities of natural
  proteins;


·
            eliminate
      undesired properties of natural proteins;
and


·
            incorporate
      synthetic properties via chemical
modifications




This
ability is fundamental to our current primary product research and development
focus — tissue repair and regeneration. Tissues are highly organized structures
made up of specific cells arranged in relation to an extra-cellular matrix
(“ECM”), which is principally composed of proteins. The behavior of cells is
determined largely by their interactions with the ECM. Thus, the ability to
structure the cells’ ECM environment allows the protein messages they receive —
and their activity — to be controlled.





Results
of Operations





Revenues. Revenues from product sales
for the three months ended March 31, 2009 were $535 compared to $0 revenue
generated in the comparable period in 2008. Future revenues are subject to
future collaborative development and licensing agreements.





We cannot
forecast with any degree of certainty which potential product lines will be
subject to future collaborations or other strategic transactions, when such
arrangements will be secured, if at all, and to what degree such arrangements
would affect our development plans and capital requirements. As a result, we
cannot be certain when and to what extent we will receive cash inflows from the
commercialization of product candidates or collaboration agreements, if at
all.





Research and
Development Expenses. Research and development
expenses for the three months ended March 31, 2009 and 2008, respectively, were
approximately $18,000 and $552,000.  We expect our research and
development expenses will increase in the future only to the extent that
additional capital is obtained or future collaborative development and licensing
agreements are secured.





Selling, General
and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2009 and 2008,
respectively, were approximately $300,000 and $209,000.  To the extent
possible, we continue to concentrate on controlling costs in this area. We
expect our selling, general and administrative expenses will increase in the
future only to the extent that additional capital is obtained or future
collaborative development and licensing agreements are secured.




19


Operating
Losses. For the three months ended March 31, 2009, we recorded a net loss
applicable to common shareholders of $492,000 or $0.004 per share, as compared
to a loss of $1,018,474 or $0.012 per share for the comparable period in
2008.





Inflation





To date,
we believe that inflation and changing prices have not had a material impact on
our continuing operations.





Liquidity
and Capital Resources





As of
March 31, 2009 and 2008, respectively, we had cash totaling approximately $2,000
and $8,000. As of March 31, 2009, we had a working capital deficit of $9,133,000
compared to a working capital deficit of $8,796,000 at December 31,
2008.





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 March 31,
2009. During the three months ended March 31, 2009, we did not purchase or sell
any capital equipment or leasehold improvements.  We do not anticipate
significant expenditures for capital equipment or leasehold improvements for the
remainder of 2009.





Our
existing available cash as of March 31, 2009, and continuing contractual
commitments, are insufficient to meet our anticipated funding requirements.
Substantial additional capital resources are required to fund continuing
expenditures related to our operating, research, development, manufacturing and
business development activities. As discussed in Note 6 to the financial
statements, the Company entered into a common stock purchase agreement
(hereafter “SPA”) in September 2007 and has raised $2,357,500 as of May 20,
2009, as a result of that SPA.  Pursuant to the SPA, which has been
our main source of external financing since September 2007, the investors
purchase shares of our common stock at the closing price of the stock on the day
the investment is made. In addition, we issued a five-year warrant to each
investor to purchase the same number of shares as those purchased by such
investor at 110% of the price at which the shares are purchased. As of November
28, 2007, the SPA was amended so that warrants issued on and after that date are
exercisable at 100% of the price at which the shares are
purchased.  We have also granted the investors demand and piggy-back
registration rights covering the shares purchased and the sharers issuable upon
exercise of the warrants. Prior to the SPA, required funding was provided to us
through a note payable agreement (known as the Szulik Loan) by Matthew Szulik,
one of our stockholders. This loan was outlined in previous filings and is
further described in Note 4 to the financial statements. As with the Escrow
Agreement relating to the Szulik Loan, the Stock Purchase Agreement provides
that TAG Virgin Islands, Inc. (hereafter “TAG”), as agent for the equity
investors, will advise the Board as to which of the Company’s expenses will be
paid with the funds invested by these investors.





As of
January 9, 2008, we replaced the Szulik Loan by issuing to Mr. Szulik a new note
in the principal amount of $6,415,000.  This amount included the then
$5,876,000 outstanding principal balance plus the then outstanding $539,000 in
accrued interest on the old note.  The new note bears annual interest
at the rate 8%, the same as did the old note, matures on September 1, 2008 and
is secured in the same manner as was the old note.  On September 1,
2008, the scheduled maturity date of the 1/09/08 Note was extended to March 31,
2009, and on March 31, 2009, the scheduled maturity date was extended to
September 30, 2009.  As consideration for Mr. Szulik agreeing to
accept the new note, we issued him three-year warrants to purchase an aggregate
of 2,438,000 shares of our common stock at $0.061 per share and lowered the
exercise price of warrants to purchase 500,000 shares of our common stock that
we had previously issued to him from $0.30 per share to $0.061 per
share.





20


On
February 6, 2009 and March 18, 2009, the Company received proceeds of $80,000
and $85,000, respectively, as loans from clients of TAG.  These loans
are represented by unsecured notes issued by the Company.  These notes
are due on February 5, 2010 and March 17, 2010, respectively, and bear an annual
interest rate of 8%.  The interest and principal are payable on the
maturity dates, either in cash or common stock at a rate of $0.02 per share, at
the discretion of the Company.  As consideration for the loans, the
Company granted warrants to the noteholders to purchase an aggregate of
4,000,000 and 4,250,000 shares, respectively, of the Company’s common stock at
an exercise price of $0.02 per share.





TAG is a
registered investment advisor and advises a number of our stockholders,
including certain members of our Board of Directors, in investment decisions,
including decisions about whether to invest in our stock.  Based upon
our stock records and data supplied to us by our stockholders, we believe that
clients of TAG beneficially own approximately 57.9% of our common stock as of
May 20, 2009.  TAG has discretionary authority to vote or dispose of
the shares of our common stock held in its client accounts and, therefore, may
be deemed to be the beneficial owner of such shares in accordance with the
Commission's Rules.  TAG has informed us that James Tagliaferri is the
natural person at TAG with such discretionary authority.  TAG
expressly disclaims beneficial ownership of any shares owned by its
clients.





As noted
above, we believe our existing available cash as of March 31, 2009 will not be
sufficient to meet our anticipated capital requirements during
2009.  We are unable to pay certain vendors in a timely manner and
remain over 90 days past due with certain critical vendors, such as outside
laboratories and law firms. We currently owe our former chief executive
officer's firm, R. I. Heller & Co., LLC, $125,000 for his services.
Additionally, we are currently outsourcing administrative and accounting
functions as a result of cutbacks necessitated by insufficient monetary
resources. We are attempting to remedy this problem. Our ability to continue
operating is dependent on the receipt of additional funding and substantial
additional capital resources will be required to fund continuing expenditures
related to our research, development, manufacturing and business development
activities. If adequate funds are not available, we will be required to
significantly curtail our operating plans and most likely cease operations. We
are still in discussions with other potential financing sources and
collaborative partners, and are seeking additional funding in the form of equity
investments, license fees, loans, milestone payments or research and development
payments. We cannot assure that any of these other sources of funding will be
consummated in the timeframes needed for continuing operations or on terms
favorable to us, if at all.





Caution
on Forward-Looking Statements





Any
statements in this report about our expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. You can identify these forward-looking statements by
the use of words or phrases such as “believe,” “may,” “could,” “will,”
“estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,”
“should” or “would.” Among the factors that could cause actual results to differ
materially from those indicated in the forward-looking statements are risks and
uncertainties inherent in our business including, without limitation: the
potential for the FDA to impose non-clinical, clinical or other requirements to
be completed before or after use of any of our intellectual property or
methodology; our ability to demonstrate to the satisfaction of potential
collaborative development partners of the feasibility of utilizing our
intellectual property or methodology; the failure to generate the potential to
enter into and the terms of any strategic transaction relating to our
intellectual property or methodology; the scope, validity and duration of patent
protection and other intellectual property rights for our intellectual property
or methodology ; estimates of the potential markets for our intellectual
property or methodology and our ability to compete in these markets; our
products, our expected future revenues, operations and expenditures and
projected cash needs; our ability to raise sufficient capital and other risks
detailed in this report. Although we believe that the expectations reflected in
our forward-looking statements are reasonable, we cannot guarantee future
results, events, levels of activity, performance or achievement. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, unless required by
law. This caution is made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.




21


Item 3. Quantitative and
Qualitative Disclosures about Market Risk





As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.





Item 4T.
Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by the Company in the reports we file or
submit under the Securities Exchange Act of 1934, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Interim Chief Executive
Officer and Interim Principal Financial Officer, who is the same person, to
allow timely decisions regarding required disclosure.  As reported in
our Annual Report on Form 10-KSB for the year ended December 31, 2007 (filed on
May 12, 2008), Company management identified material weaknesses in our internal
accounting control over financial reporting as of December 31, 2007,
including:





·
            Pervasive,
      entity-level control deficiencies across key COSO components in the
      Company’s control environment,
including:




·
            Controls
      over the period-end financial closing and reporting
    processes;


·
            Controls
      over managerial override;


·
            Controls
      to prevent or reduce the risk of fraudulent
  activity;


·
            Controls
      to monitor other controls, including the role of the Board of Directors;
      and


·
            Controls
      related to risk assessment.





·
            An
      absence of independence and financial expertise on the Board of Directors,
      limiting its ability to provide effective
  oversight.


·
            An
      absence of a formalized process to manage the Company’s internal controls
      over financial reporting and become compliant with Section 404 of the
      Sarbanes-Oxley Act.


·
            Inadequate
      controls over the period-end financial close and reporting
      processes;


·
            Insufficient
      personnel resources and technical accounting expertise within the
      accounting function to provide for adequate segregation of duties and
      resolve non-routine or complex accounting matters;
  and


·
            Inadequate
      documentation of policies, procedures, and controls related to finance and
      accounting, including inadequate procedures for appropriately identifying,
      assessing, and applying accounting
principles.





As a
result of these material weaknesses, management concluded that the Company’s
internal control over financial reporting was not effective as of December 31,
2007.




22


As of
March 31, 2009, our management, including our Interim Chief Executive Officer
and Interim Principal Financial Officer, who is the same person, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). As part
of its evaluation, management evaluated whether the previously reported material
weaknesses in internal control over financial reporting continue to exist.
Company management has determined that it cannot assert that the reported
material weaknesses have been effectively remediated as of March 31, 2009.
Accordingly, Company management, including our Interim Chief Executive Officer
and Interim Principal Financial Officer, who is the same person, has concluded
that Company’s disclosure controls and procedures were not effective as of March
31, 2009.





Notwithstanding
the identified material weaknesses, Company management has concluded that the
financial statements included in this Quarterly Report present fairly, in all
material respects, the Company’s financial position, results of operations and
cash flows for the periods presented in conformity with accounting principles
generally accepted in the United States.





There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.




23


PART II — OTHER
INFORMATION





Item 1.
Legal Proceedings





From time
to time, we are involved in litigation and proceedings in the ordinary course of
our business. We are not currently involved in any legal proceeding that we
believe would have a material adverse effect on our business or financial
condition.





On
October 15, 2008, certain alleged noteholders instituted suit against the
Company in Superior Court of California, County of Sacramento, seeking payment
of outstanding notes payable allegedly owed by the Company. The name of the case
is Lou Matson, Mary Matson, and Don Brandon v Protein Polymer Technologies, Inc,
Case Number 34-2008-00022190.  On May 19, 2009, the plaintiffs filed a
request for dismissal with prejudice of the action against the Company, and the
Company paid nothing to plaintiffs in exchange for the dismissal.





Item 1A. Risk
Factors





Not
applicable.





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





During
the three months ended March 31, 2009, we received an aggregate of $75,000 for
the purchase of 3,571,429 common shares and 3,571,429 warrants to purchase our
common stock.  On February 6, 2009 and March 18, 2009 we sold notes in
the principal amounts of $80,000 and $85,000 and issued warrants in connection
therewith to purchase 4,000,000 and 4,250,000 shares of our common stock,
respectively.  Reference is made to Liquidity and Capital resources
under Management’s Discussion and Analysis of Financial Condition and Results of
Operations or information relating to these sales.  The sales were
made pursuant to the exemption from the registration provisions of the
Securities Act of 1933 provided by Section 4 (2) thereof.





As of May
20, 2009, we had used substantially all of the net proceeds which were generated
from the sale of our securities described in the preceding paragraph to fund
ongoing operations. We have no remaining proceeds from these sales and will
require further sales or other financing transactions or collaborative
development agreements to maintain ongoing operations.





Item 3. Defaults
upon Senior Securities





Not
applicable.





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





Not
applicable.





Item 5. Other
Information





Not
applicable.





24


Item 6.
Exhibits





The
following documents are included or incorporated by reference:





Exhibit
      Number
            Description10.6.1*
            Secured
      Promissory Note Replacement Agreement, dated as of January 9, 2008,
      between the Company and Matthew J. Szulik.10.6.2*
            Secured
      Promissory Note issued to Matthew J. Szulik, dated as of January 9,
      2008.10.6.3*
            Form
      of Warrant to Purchase Shares of Common Stock of the Company in connection
      with the Secured Promissory Note issued to Matthew J. Szulik, dated as of
      January 9. 2008.10.6.4**
            Form
      of Promissory Note issued to noteholders, dated as of October 2, 2008,
      November 3, 2008, December 11, 2008, December 31, 2008, February 6, 2009,
      March 18, 2009, April 20, 2009, and May 7, 2009.10.6.5**
            Form
      of Warrant to Purchase Shares of Common Stock of the Company in connection
      with the Promissory Note issued to noteholders, dated as of October 2,
      2008, November 3, 2008, December 11, 2008, December 31, 2008, February 6,
      2009, March 18, 2009, April 20, 2009, and May 7, 2009.10.6.6
            Secured
      Promissory Note Replacement Agreement, dated as of March 31, 2009, between
      the Company and Matthew J. Szulik.31.1
            Certification
      of Interim Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Interim Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            Certification
      of Interim Principal Financial Officer pursuant to 18 U.S.C. Section 1350
      as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
      2002.







*
            Incorporated
      by reference to Registrant’s Report on Form 10-KSB for the fiscal year
      ended December 31, 2008, SEC File No. 000-19724, as filed with the
      Commission on May 12, 2008.**
            Incorporated
      by reference to Registrant’s Report on Form 10-Q for the quarter ended
      September 30, 2008, SEC File No. 000-19724, as filed with the Commission
      on November 19, 2008.





25


SIGNATURES





In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




PROTEIN
      POLYMER TECHNOLOGIES, INC.Date:
      May 20, 2009
            By:
            /s/ James B.
      McCarthy
              
              James
      B. McCarthyInterim
      Chief Executive OfficerDate:
      May 20, 2009
            By:
            /s/
      James B. McCarthy
              James
      B. McCarthyInterim
      Principal Financial Officer




26