================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-KSB

(Mark One)

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934
        For the fiscal year ended December 31, 2002

                                       OR

[_]     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
       Incorporation or Organization)                        Identification No.)


                 10655 Sorrento Valley Road, San Diego, CA 92121
                    (Address of Principal Executive Offices)


                    Issuer's Telephone Number: (858) 558-6064


        Securities registered pursuant to Section 12(b) of the Act: None


           Securities registered pursuant to Section 12(g) of the Act:
                                  Common Stock
                                (Title of Class)



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
   --------          --------


Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]


The issuer's revenues for the most recent fiscal year were $3,018,881.


The aggregate market value of the voting common stock held by  non-affiliates of
the issuer on  February  25,  2002 was  $12,706,375.  Stock  held by  directors,
officers and shareholders  owning 5% or more of the outstanding common stock (as
reported  on  Schedules  13D  and  13G)  were  excluded  as they  may be  deemed
affiliates.   This  determination  of  affiliate  status  is  not  a  conclusive
determination for any other purpose.


The number of shares of the registrant's common stock outstanding as of February
25, 2002 was 29,763,535.


                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the following  document are incorporated by reference in Part III of
this report:


Definitive  Proxy  Statement to be filed with the Commission no later than April
30, 2003 with respect to the registrant's 2003 Annual Meeting of Stockholders.


Transitional Small Business Disclosure Format:     Yes           No   X
                                                      --------     --------
================================================================================


<PAGE>


                       PROTEIN POLYMER TECHNOLOGIES, INC.

                                   FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

                                                                                 Page No.
                                                                                 --------

<S>                                                                                 <C>
PART I..........................................................................     2

    Item 1.  Description of Business............................................     2

    Item 2.  Description of Property............................................    14

    Item 3.  Legal Proceedings..................................................    14

    Item 4.  Submission of Matters to a Vote of Security Holders................    14


PART II.........................................................................    15

    Item 5.  Market for Common Equity and Related
             Stockholder Matters................................................    15

    Item 6.  Management's Discussion and Analysis...............................    17

    Item 7.  Financial Statements...............................................    F-1

    Item 8.  Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure...............................................    23


PART III........................................................................    23

    Item 9.  Directors, Executive Officers; Compliance with Section 16(c) of the
             Exchange Act.......................................................    23

    Item 10. Executive Compensation.............................................    23

    Item 11. Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters....................................    23

    Item 12. Certain Relationships and Related Transactions.....................    23

    Item 13. Exhibits and Reports on Form 8-K...................................    23

    Item 14. Controls and Procedures............................................    28

    Signatures..................................................................    29
</TABLE>


                                       1
<PAGE>


                                     PART I

Item 1. Business

Forward Looking Statements

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

Company Background

        Protein  Polymer  Technologies,  Inc.,  a  Delaware  corporation,  is  a
development-stage  biotechnology  company  incorporated  on July 6, 1988. We are
engaged in the research, development, production and clinical testing of medical
products  based on materials  created from our  patented  technology  to produce
proteins of unique design.  Since 1992, we have focused  primarily on developing
materials technology and products to be used for:

        o       soft tissue augmentation;

        o       tissue adhesives and sealants;

        o       wound healing support; and

        o       drug delivery devices.

        We have also developed  coating  technology that can efficiently  modify
and  improve the surface  properties  of  traditional  biomedical  devices.  Our
primary  goal is to  develop  medical  products  for use  inside  the body  with
significantly  improved  patient  outcomes as compared to current  products  and
practices.

        We began studies to identify our most promising materials technology for
use in soft tissue augmentation products in 1996. In December 1999, we initiated
human clinical testing of a product based on our technology for the treatment of
female stress urinary  incontinence.  This pilot clinical study is ongoing.  The
investigational   device   exemption   approved  by  the  U.S.   Food  and  Drug
Administration  ("FDA")  allows us to test the safety and  effectiveness  of the
incontinence product in women over the age of 40 who have become incontinent due
to the shifting of their bladder or the weakening of the muscle at its base that
controls the flow of urine, or both problems combined.

        We estimate that more than 2.5 million women begin to experience  stress
urinary  incontinence  in the United States each year. In most untreated  cases,
the problem becomes  progressively  more pronounced.  Due to limited efficacy or
invasiveness  of  current  treatments,  only a  small  proportion  of the  women
experiencing stress urinary incontinence are clinically treated, relying instead
on pads and plugs and the like that only address the symptoms. In contrast,  our
product is injected,  typically in an outpatient procedure, into urethral tissue
at the base of the bladder forming a solid implant that provides  support to the
muscles controlling the flow of urine. We believe that our product, if approved,
will prove to be easy for the

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<PAGE>


physician  to use,  offer  enduring  effectiveness,  and avoid most of the other
limitations of urethral bulking products on the market or in development.

        In January 2000, we entered into an agreement with Femcare, Ltd. for the
commercialization of our incontinence product in Europe and Australia. Under the
agreement, Femcare is responsible for clinical testing, regulatory approval, and
product sales and marketing within Europe and Australia,  and we are responsible
for product manufacturing. We will receive royalties on the sale of the licensed
product,  if any,  and we have the  right to  ultimately  supply  materials  for
commercial  product sales.  Contingent on successful  clinical trials, we expect
commercialization  of the  product  to begin in Europe at least one year  before
approval for marketing  the product in the United  States could be obtained.  We
are continuing discussions with other companies to establish strategic alliances
for  commercializing  our  incontinence  product in the U.S.  and other  markets
outside Europe and Australia.

        The  soft  tissue  augmentation   materials  technology  underlying  the
incontinence product has the potential to be effective and desirable in a number
of  other  clinical  applications.  In  November  2000,  the  FDA  approved  our
investigational  device  exemption to begin human  clinical  testing of a tissue
augmentation   product  based  on  this  technology  for  use  in  cosmetic  and
reconstructive  surgery applications.  The product is injected into or under the
skin for the correction of dermal contour deficiencies (facial lines,  wrinkles,
scars, etc.). In April 2001, we initiated human clinical testing of the product.
This pilot clinical study is ongoing.

        We estimate that  approximately  350,000  cosmetic  tissue  augmentation
procedures using injected materials (e.g.  collagen,  fat) were performed in the
U.S  in  1998,   having  grown  over  20%  compared  to  1996.  With  a  product
demonstrating greater durability than currently available materials,  we believe
the number of procedures could grow dramatically.

        Between 1994 and 1997,  our efforts were  focused  predominantly  on the
development of tissue adhesive and sealant technology. We have demonstrated both
the adhesive performance and the biocompatibility of our product formulations in
animal models,  including the  resorption of the adhesive  matrix in conjunction
with the  progression  of wound healing.  We remain  committed to the commercial
development  of our tissue  adhesive and sealant  technology  and have worked to
determine the most significant market and product opportunities for its use.

        In April 2001,  we entered  into  agreements  with Spine  Wave,  Inc. to
develop and commercialize an injectable protein-based formulation for the repair
of  damaged  or  deteriorated  spinal  discs.  Based on our  proprietary  tissue
adhesive  technology,  the product under  development has the potential to be an
effective outpatient surgical treatment for chronic low back pain.

        Low back pain is the leading cause for  healthcare  expenditures  in the
United States and the fastest growing major segment of the orthopedic  industry,
with a market of $2.1  billion in  revenues  and a growth  rate of more than 25%
annually,  according to a February 2000 Viscogliosi  Bros., LLC., Spine Industry
Analysis Series report. The leading surgical treatments for spine include spinal
fusions,  discectomies,  and laminectomies,  but the market for disc replacement
and  repair is  expected  to grow more  rapidly  than  other  treatments  as new
products are approved over the next five years. Within the overall spine market,
it is estimated that the potential market for treatment or replacement of spinal
discs will surpass $1 billion by 2007.

        As a result of the  agreements  we executed,  Spine Wave has acquired an
exclusive,  worldwide  license  to our  technology  for use in spinal  and other
defined orthopedic applications. In return, we received equity in Spine Wave, we
will receive royalties on the sale or sublicensing of licensed products, if any,
and we have the right to  ultimately  supply  materials for  commercial  product
sales. In addition to the license  agreement we agreed, in a separate supply and
services  agreement,  to  provide  Spine  Wave with a variety  of  research  and
development  services and to supply materials to Spine Wave for pre-clinical and
clinical  testing.  Spine Wave is responsible for clinical  testing,  regulatory
approvals,  and commercialization.  We expect our work with Spine Wave will lead
to a product for spinal disc repair in human clinical testing during 2003.

        In December 2000, we signed a broad-based,  worldwide  exclusive license
agreement with Genencor  International,  Inc.  enabling  Genencor to potentially
develop a wide variety of new products for industrial  markets. In October 2002,
the  license  agreement  was  amended to  provide  Genencor  with an  additional
one-


                                       3
<PAGE>


year option to  initiate  development  of  products in the field of  non-medical
personal  care.  As a result of the  agreement,  Genencor  may use our  patented
protein polymer design and production technology, in combination with Genencor's
extensive  gene  expression,   protein  design,  and  large-scale  manufacturing
technology,  to design  and  develop  new  products  with  improved  performance
properties for defined  industrial fields and the field of non-medical  personal
care products.

        Our cash balance as of December 31, 2002 was $734,000. In March 2003, we
received  $3,005,000  (less  expenses) from the sale of Series I Preferred Stock
and associated  warrants.  We believe this amount in combination with continuing
contractual   commitments  is  sufficient  to  meet  our   anticipated   capital
requirements through April 2004.  Substantial  additional capital resources will
be  required  to fund our  research,  development,  manufacturing  and  business
development  activities.  We  believe  there  may be a  number  of  alternatives
available to meet the continuing capital requirements of our operations, such as
collaborative  agreements and public or private financings.  We are currently in
preliminary  discussions  with  potential  financing  sources and  collaborative
partners and funding in the form of equity investments,  license fees, milestone
payments or research and development  payments could be generated.  There can be
no assurance  that any of these  fundings will be  consummated in the timeframes
needed for continuing  operations or on terms favorable to us. If adequate funds
are not available,  we will be required to  significantly  curtail our operating
plans and would likely have to sell or license out  significant  portions of our
technology,  and  possibly  cease  operations.  (See the  Liquidity  and Capital
Resources   section  of   Management's   Discussion  and  Analysis  for  further
discussion.)

        To the  extent  sufficient  resources  are  available,  we  continue  to
research the use of our  technology  for other tissue repair and medical  device
applications,  principally  for use in  supporting  the wound  healing  process,
including devices based on tissue engineering, and in drug delivery devices.

Technology

        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., degradation).  The requirements for performance within this
demanding  biological  environment  have been a critical  factor in limiting the
myriad of 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 pre-clinical feasibility studies.

        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


                                       4
<PAGE>


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:

        o       combine properties of different proteins found in nature;
        o       reproduce and amplify selected activities of natural proteins;
        o       eliminate undesired properties of natural proteins; and
        o       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
extracellular  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.

Fundamental Protein Polymers

        Our primary  products under  development  are based on protein  polymers
combining  selected  properties  from two of the most  extraordinary  structural
proteins found in nature:  silk and elastin.  Silk,  based upon its  crystalline
structure,  has long been known as an incredibly strong material, and has a long
history of medical use in humans as a material for sutures.  Elastin  fibers are
one of the most remarkable  rubber-like  materials ever studied.  Found in human
tissues  such as skin,  lungs and  arteries,  elastin  fibers  must  expand  and
contract over a lifetime,  and can be extended  nearly three times their resting
length without damaging their flexibility.

        Despite  the  incredible  individual  properties  of silk  and  elastin,
neither of these natural  protein  materials is capable of being  processed into
forms other than what nature has  provided  without  destroying  their  valuable
materials  properties.  However,  our  proprietary  technology  has  enabled the
creation  of  polymers  that  combine  the  repeating   blocks  of  amino  acids
responsible for the strength of silk and the elasticity of elastin. By precisely
varying the number and sequence of the different blocks in the assembled protein
polymer,   new   combinations   of  properties   suitable  for  various  medical
applications have been created.

        We have also created protein polymers based on repeating blocks of amino
acids  found in two  other  classes  of  structural  proteins  found in  nature:
collagen  and keratin.  Collagen is the  principal  structural  component of the
body, found in some shape or form in virtually every tissue,  ranging from shock
absorbing cartilage to light transmitting corneas.  Keratin is a major component
in hair, nails and skin. The development of materials based on these polymers is
at an early stage of research.

Product Candidates and Anticipated Markets

        Our  technology  and  materials  have the  potential to create  products
useful in a variety of medical  markets.  Our  current  development  efforts are
principally focused on preparations for scale-up and validation of manufacturing
processes for our hydrogel  bulking agents for soft tissue  augmentation and our
work for Spine  Wave on a product  for spinal  disc  repair.  Opportunities  for
research and  development of product  candidates for other medical uses continue
to be  evaluated,  particularly  those based on our tissue  adhesive and sealant
technology.

        All of our product  candidates are subject to pre-clinical  and clinical
testing requirements for obtaining U.S. Food and Drug Administration's ("FDA's")
marketing approval.  The actual development of product candidates,  if any, will
depend on a number of factors,  including the  availability of funds required to
research,   develop,  test  and  obtain  necessary  regulatory  approvals;   the
anticipated  time to market;  the  potential


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<PAGE>


revenues  and  margins  that  may  be  generated  if  a  product   candidate  is
successfully  developed and commercialized;  and the Company's assessment of the
potential market acceptance of a product candidate.

        Soft Tissue Augmentation

        Conditions  where  there is a need to augment  the body's  soft  tissues
include both  cosmetic  and medical  applications.  In the former,  for example,
current procedures  include the injection of collagen-based  materials to smooth
out  facial  wrinkles,  acne scars and to modify lip  contours.  However,  these
treatments  only last a matter of months,  which puts them  economically  out of
reach for a large portion of the population of people who would otherwise desire
the procedure.

        Medical   applications   include  the   treatment   of  stress   urinary
incontinence,    vesico-ureteral   reflux,    gastroesophageal   reflux,   fecal
incontinence,  the reversible blockage of fallopian tubes for birth control, and
the  augmentation of vocal chords.  We believe there is a lack of materials with
suitable properties for these  applications,  primarily because materials having
the required  durability in vivo either lack the requisite  biocompatibility  or
the ability to be easily injected.

        We  have  developed   protein   polymers  that   demonstrate   excellent
biocompatibility,  are  soluble  in water at room  temperature,  and are  easily
injected into body  tissues,  irreversibly  forming  soft,  durable gels at body
temperature. Previously, we have shown gels of similar composition to persist at
least 18 months in an animal model.

        Our  bulking  agents are  unique in that they are  applied as an aqueous
solution,   easily  injected  through  a  30-gauge  needle,   rapidly  spreading
throughout the native tissue  architecture.  With the increase from room to body
temperature,  the polymer solution  irreversibly  transforms within minutes to a
soft, pliable hydrogel.  Importantly, the volume of material remains constant in
the liquid to gel  transition,  such that the tissue  expansion  observed by the
physician upon administration will be subsequently maintained.

        This is in direct  contrast to the majority of  competing  technologies,
which are  suspensions or slurries of solid particles in an aqueous carrier such
as saline.  When  injected  through an  appropriately  sized  needle,  with some
difficulty  due to their  thick  constitution,  the  carrier  liquid  dissipates
through the tissues with time,  usually within 24 hours,  such that roughly half
of the effective  bulking volume is lost.  This requires the physician to either
overcompensate  for the expected volume  reduction upon initial  administration,
with  increased  risks to the patient,  or to "top off" the bulking  effect with
repeated  administrations of the product over time, with substantially increased
costs.

        Other hydrogel  technologies of which we are aware are either  preformed
gels,  difficult to administer by injection,  or polymer  solutions mixed with a
chemical   cross-linking  agent  prior  to  injection.   We  believe  that  such
technologies  are limited in their  overall  performance  including  durability,
biocompatibility and ease of administration.

        In August 1999,  we obtained the FDA's  approval of our  investigational
device  exemption  to begin  human  clinical  testing of a product  based on our
technology  for the treatment of female stress  urinary  incontinence.  We began
pilot  clinical  testing of the product's  safety and efficacy in December 1999.
Through our partner, Femcare, European clinical trials were initiated at the end
of 2001. We project expanding into a multi-site  pivotal clinical study in 2004,
to the extent resources are available.

        In November 2000, we obtained the FDA's approval of our  investigational
device  exemption  to begin  human  clinical  testing of a product  based on our
technology  for use in cosmetic and  reconstructive  surgery  applications.  The
product is injected into or under the skin for the  correction of dermal contour
deficiencies (facial lines,  wrinkles,  scars, etc.) caused by aging or disease.
We began pilot  clinical  testing of the product's  safety and efficacy in April
2001. We project expanding into a multi-site  pivotal clinical study in 2004, to
the extent resources are available.

        Tissue Adhesives and Sealants

        Certain tissue adhesives and sealants that seek to avoid the limitations
of sutures,  staples,  pins and screws have been  developed  and  marketed for a
number of years outside the United States by other parties. In


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1998,  the  FDA  approved  two  such  products  for  certain  uses  in the  U.S.
DermaBond(TM), a cyanoacrylate adhesive, was approved for topical application to
close skin incisions and lacerations.  Cyanoacrylate adhesives set fast and have
high strength,  but are toxic to certain tissues and form brittle  plastics that
do not  resorb.  These  limitations  restrict  their  use to  bonding  the outer
surfaces of skin together.  Tisseel(TM),  a fibrin sealant, was approved for use
as  an  adjunct  to  hemostasis  in  surgery.  Fibrin  sealants  have  excellent
hemostatic properties,  but are derived from human and/or animal blood products,
set slowly, have low strength, and lose their strength rapidly.

        A third category of tissue  adhesives  combines natural proteins such as
collagen or albumin with aldehyde  cross-linking agents. Such products have been
marketed in Europe for limited life-threatening indications and the FDA approved
one such  product,  BioGlue(R),  in 2001 for use as an adjunct  to  sutures  and
staples in open surgery to repair  large  arteries.  The aldehyde  cross-linking
agents employed (i.e.  glutaraldehyde,  formaldehyde) in such products are known
to cause adverse tissue reactions.  Additional  adhesive and/or sealant products
employing other polymer systems and cross-linking agents have also been approved
in the U.S. or are under development.

        We are seeking to develop tissue adhesives and sealants that combine the
biocompatibility  of fibrin  glues  (without  the risks  associated  with use of
blood-derived  products)  with  the high  strength  and  fast  setting  times of
cyanoacrylates.  Unique  features  include  significant  elasticity  within  the
adhesive  matrix (to move as tissues  move) and the  capability of tailoring the
resorption rate of the adhesive matrix with the rate at which the wound heals. A
non-resorbable  adhesive or sealant  can only be used where the damaged  tissues
will not heal. Otherwise, a barrier to wound healing is unavoidably created.

        We  have   demonstrated   both   the   adhesive   performance   and  the
biocompatibility  of our product  formulations  in animal models,  including the
resorption of the adhesive  matrix in conjunction  with the progression of wound
healing. We have worked to determine the specific markets and products providing
the most  significant  opportunities  for the use of our  adhesive  and  sealant
technology.

        Our  tissue  adhesive  technology  combines a protein  polymer  designed
specifically to react with a cross-linking agent under physiological conditions.
These two  fluid  components  are  mixed  just  prior to their  delivery  to the
treatment  site,  which can be  accomplished  through a fine gauge  needle.  The
material then rapidly cures to a tough,  elastic  hydrogel that strongly adheres
to surrounding tissues. Chemical cross-linking of the protein polymer allows for
the development of a hydrogel with much more robust  mechanical  properties than
can be achieved  with the protein  polymer  alone (i.e.,  in  comparison  to our
bulking  agents).  We  are  conducting   pre-clinical  tests  of  such  adhesive
formulations.

        As a  result  of  our  evaluations  of the  medical  market  needs,  the
properties  achievable with our technology,  and the capabilities of competitive
technologies,  we initially focused our product development interests on certain
orthopedic applications,  particularly those related to the repair of the spinal
disc for the treatment of chronic low back pain.

        Beginning in April 2001, Spine Wave has funded our efforts to develop an
injectable  protein-based  formulation  for the repair of spinal  discs  damaged
either by injury or aging. Based on our proprietary tissue adhesive  technology,
the product  under  development  has  potential  to be an  effective  outpatient
surgical treatment for chronic low back pain. Spine Wave is progressing with the
use of this technology for the treatment of spinal disc conditions.

        We have identified  additional product targets based on our adhesive and
sealant  technology  and are seeking to  establish  additional  partnerships  to
pursue their development.

        Wound Healing Support

        The  current  market  for  wound  care  products  is  highly  segmented,
involving a variety of different  approaches to wound care.  Products  currently
marketed and being developed by other parties include fabric  dressings (such as
gauze),   synthetic  materials  (such  as  polyurethane  films)  and  biological
materials  (such as growth  factors and living  tissue skin graft  substitutes).
While the type of product used varies  depending on the type of wound and extent
of tissue damage, we believe that a principal treatment goal in all instances is
to stimulate  wound healing while  regenerating  functional (as opposed to scar)
tissue.


                                       7
<PAGE>


        We have developed protein polymers which we believe may be useful in the
treatment  of dermal  wounds,  particularly  chronic  wounds such as  decubitous
ulcers,  where  both  reconstruction  of the  ECM  and  re-establishment  of its
function are desired. These polymers,  based on key ECM protein sequence blocks,
are biocompatible,  fully resorbable and have been processed into gels, sponges,
films and  fibrous  sheets.  We believe  that such  materials,  if  successfully
developed, could improve the wound-healing process by providing physical support
at the wound site for cell  migration  and tissue  regeneration  and as delivery
systems for growth factors. Additionally,  such materials may serve as scaffolds
for  the ex vivo  production  of  living  tissue  substitutes  based  on  tissue
engineering.

        This  program  is in  the  early  stages  of  research,  which  we  have
principally  conducted in collaboration with third parties.  Such collaborations
have primarily focused on the treatment of dermal wounds.

        Controlled Release Drug Delivery

        Oral delivery of drugs is the most  preferred  route of  administration.
However,  for many drugs this is not  possible  and  alternative  drug  delivery
routes are required.  Alternative routes include  transdermal,  mucosal,  and by
implantation or injection.  For implantation or injection, it is often desirable
to extend the  availability  of the drug in order to minimize  the  frequency of
these invasive procedures. A few materials have been commercialized which act as
depots for a drug when  implanted or injected,  releasing  the drug over periods
ranging from one month to several years.  Other  material and drug  combinations
are being  developed by third  parties.  We believe that the properties of these
materials for such  applications  can be  substantially  improved  upon,  making
available the use of depot systems for a wider range of drugs and applications.

        Our soft tissue  augmentation  products,  wound  healing  matrices,  and
medical  device  coating  technology  all provide  platforms  for drug  delivery
applications,  serving as controlled  release drug depots.  The protein  polymer
materials we have developed exhibit  exceptional  biocompatibility,  provide for
control over rates of  resorption,  and are  fabricated  using  aqueous  solvent
systems  at  ambient  temperatures  --  attributes  which  can  be  critical  in
maintaining the activity of the drug, particularly  protein-based drugs emerging
from  the  biotechnology  industry.  This  program  is in the  early  stages  of
research.

Manufacturing, Marketing and Distribution

        Pre-clinical and clinical testing of potential  medical device products,
where the results  will be submitted to the FDA,  requires  compliance  with the
FDA's Good  Laboratory  Practices  ("GLP") and other Quality System  Regulations
("QSR"). We have implemented,  and continue to implement, polymer production and
quality  control  procedures,  and have made certain  facilities  renovations to
operate in conformance  with FDA  requirements.  We believe our current  polymer
production  capacity is sufficient for supplying our  development  programs with
the  required  quality and  quantity of  materials  needed for  feasibility  and
pre-clinical  testing and initial ("pilot")  clinical testing.  To expand beyond
initial clinical trials, we will require additional manufacturing capacity.

        We are  considering  several  methods for  increasing  production of our
biomedical  product  candidates to meet pivotal  clinical  trial and  commercial
requirements. For example, we may expand our existing facility to produce needed
quantities  of materials  under FDA's GLP and QSR  regulations  for clinical and
commercial use. Alternatively,  we may establish external contract manufacturing
arrangements  for  needed  quantities  of  materials.  However,  there can be no
assurance  that  such  arrangements,  if  desired,  could  be  entered  into  or
maintained on acceptable  terms, if at all, or that the existence or maintenance
of such  arrangements  would not adversely  affect our margins or our ability to
comply  with  applicable   governmental   regulations.   The  actual  method  or
combination of methods that we may ultimately  pursue will depend on a number of
factors, including availability,  cost and our assessment of the ability of such
production methods to meet our commercial objectives.

        We have  entered  into an  agreement  with  Femcare  for  marketing  and
distribution  of our product for  treatment of stress  urinary  incontinence  in
Europe and Australia, if the required regulatory approvals are obtained. We have
entered  into  agreements  with Spine Wave for  marketing  and  distribution  of
products  for use in  spinal  and  other  defined  orthopedic  applications.  We
currently expect that our other biomedical products, if any were commercialized,
would be marketed and distributed by corporate partners.  While this arrangement
could minimize our marketing  costs and  facilitate  wider  distribution  of any
biomedical products we may develop,


                                       8
<PAGE>


these arrangements could possibly reduce our revenues and profits as compared to
what would be possible if we directly sold such products.

Research and Development

        Information   regarding   Company-sponsored   research  and  development
activities  and  contract  research and  development  revenue is set forth below
under the heading "Management's Discussion and Analysis".

Collaborative and License Agreements

        Because of the highly  technical focus of our business,  we must conduct
extensive  research and  development  prior to any commercial  production of our
biomedical products or the biomaterials from which they are created. During this
development stage, our ability to generate revenues is limited.  Because of this
limitation,  we do not have sufficient  resources to devote to extensive testing
or  marketing  of our  products.  Our  primary  method  to  expand  our  product
development, testing and marketing capabilities is to seek to form collaborative
arrangements with selected  corporate  partners with specific  resources that we
believe complement our business strategies and goals.

        The medical device industry has traditionally  licensed from development
stage  companies   product   candidates  whose  safety  and  efficacy  has  been
demonstrated at least in pilot human clinical trials. In December 1999, we began
human clinical testing of our product for the treatment of female stress urinary
incontinence.  In April 2001, we began human clinical testing of our product for
use in the correction of dermal contour deficiencies.

        Information   regarding  our  significant   collaborative   and  license
agreements  is set forth below under the heading  "Management's  Discussion  and
Analysis".

Other Agreements

        We  are  discussing  other  potential   collaboration   agreements  with
prospective marketing partners.  There can be no assurance that we will continue
such discussions or that we will be able to establish such agreements at all, or
do so in a timely manner and on reasonable  terms,  or that such agreements will
lead to successful product development and commercialization. From time to time,
we are party to certain materials  evaluation  agreements  regarding  biomedical
applications of our products, polymers and technology, including applications in
areas other than those identified as product  candidates above. These agreements
provide, or are intended to provide,  for the evaluation of product feasibility.
There can be no assurance  that we will  continue to be able to  establish  such
agreements at all, or do so in a timely manner and on reasonable  terms, or that
such  agreements will lead to joint product  development  and  commercialization
agreements.

Intense Competition

        The principal  anticipated  commercial uses of our  biomaterials  are as
components of end-use products for biomedical and other specialty  applications.
End-use  products using or  incorporating  our  biomaterials  would compete with
other  products  that rely on the use of  alternative  materials.  For  example,
bulking  agents for soft tissue  augmentation  are currently  marketed  based on
bovine and human cadaver collagen and, outside the U.S.,  silicone particles and
other synthetic materials. Similarly, all targeted applications of our potential
products  will  compete  with  other   products   having  the  same  or  similar
applications.

        The areas of  business  in which we engage  and  propose  to engage  are
characterized   by  intense   competition  and  rapidly   evolving   technology.
Competition  in the  biomedical  and  surgical  repair  markets is  particularly
significant.  Our  competitors  in the  biomedical  and surgical  repair markets
include  major  pharmaceutical,   surgical  product,  chemical  and  specialized
biopolymer  companies,  many of which have  financial,  technical,  research and
development and marketing resources significantly greater than our own. Academic
institutions  and other  public  and  private  research  organizations  are also
conducting  research  and  seeking  patent  protection  in the  same or  similar
application areas, and may commercialize  products on their own or through joint
ventures.  Most of our competitors depend on synthetic polymer technology rather
than protein  engineering  for  developing  products.  However,  we believe that
DuPont, BioElastics Research,


                                       9
<PAGE>


Ltd. and several university  laboratories are currently conducting research into
similar protein engineering technology.

        The primary  elements of  competition  in the  biomedical  and  surgical
repair products market are performance,  cost, safety, reliability,  convenience
and commercial production  capabilities.  We believe that our ability to compete
in this market will be enhanced by the breadth of our issued patent claims,  our
other  pending  patent  applications,  our  early  entry  into the field and our
experience in protein engineering.

Patents and Trade Secrets

        We  are  aggressively   pursuing  domestic  and   international   patent
protection  for  our   technology,   making  claim  to  an  extensive  range  of
recombinantly  prepared  structural  and functional  proteins,  the DNA encoding
these proteins, methods for preparing this synthetic repetitive DNA, methods for
the  production  and   purification  of  protein   polymers,   end-use  products
incorporating   such   materials   and  methods  for  their  use.  Due  to  this
multi-layered  patent  strategy,  each  of our  products  under  development  is
protected  by multiple  patents  claiming  different  aspects of the  underlying
inventions.

        The United  States Patent and  Trademark  Office has issued  twenty-four
patents to us. Additionally, we have four U.S. patent applications pending.

        We have been granted five U.S.  patents  which broadly cover the polymer
compositions  used in our product  development  efforts  and/or the DNA encoding
these  polymers.  These polymers are generally  defined by the use of repetitive
amino acid sequences found in naturally  occurring proteins (e.g. silk, elastin,
collagen, keratin). The last of these patents will expire in 2015. Additionally,
we  have  been  granted  two  U.S.  patents  which  specifically  cover  polymer
compositions  based on  repetitive  silk and elastin  units and the DNA encoding
these polymers. The last of these patents will expire in 2014.

        The  silk/elastin  copolymers  used  in  our  soft  tissue  augmentation
products  and our tissue  adhesive  products,  including  the spinal disc repair
product, and the genes used to produce them have amino acid and/or DNA sequences
within the  claims of all seven of these  patents.  We also have been  granted a
U.S. patent that covers the method of using polymers such as these  silk/elastin
copolymers for soft tissue augmentation. This patent will expire in 2017.

        We have been granted six U.S.  patents  covering our tissue adhesive and
sealant  technologies.  Three of these  patents cover the  cross-linked  polymer
compositions  and/or methods of using our polymers and a cross-linking  agent to
adhere or seal tissues,  including the filling of defects in tissues. The spinal
disc repair product under  development,  as well as other  anticipated  products
based on our  adhesive  and  sealant  technology,  fall within the claims of all
three of these  patents.  The last of these patents will expire in 2015.  One of
the  remaining  three  patents  covers the special case of our polymers that are
capable of being  cross-linked by enzymes,  such as those found naturally in the
body,  which will  expire in 2015.  The other two  remaining  patents  cover the
special  case where  primers  are used to enhance  the  mechanical  strength  of
protein-based  tissue adhesives and sealants.  Both of these patents will expire
in 2017.

        We have been  granted two U.S.  patents  covering  the  methods  used to
construct the  synthetic  DNA encoding  proteins  having  repetitive  amino acid
sequences.  The claims of these  patents are not limited by the  specific  amino
acid  sequence of the  polymers  produced  using the  methods.  Therefore,  they
provide very broad coverage of our core  technology.  Both of these patents will
expire in 2014.

        We have been  granted  and  maintain  eight  U.S.  patents  that are not
currently central to our product development focus.  However,  they either do or
may support the  interests  of licensees  of our  technology  or may support our
future product development  efforts.  One of the patents specifically covers DNA
encoding a polymer useful for in vitro cell culture,  which will expire in 2010.
Two of the  patents  specifically  cover  collagen-like  proteins  and  the  DNA
encoding  them,  both  of  which  will  expire  in  2013.  One  of  the  patents
specifically covers a purification method for silk-like proteins,  developed for
large-scale  industrial  use,  which  will  expire in 2010.  Two of the  patents
specifically  cover  compositions,  formed  objects  and  methods of making such
objects,  combining  traditional  thermoplastic  resins and  proteins  providing
chemical or biological activity.  Both of these patents will expire in 2015. Two
of the patents specifically cover our water-insoluble


                                       10
<PAGE>


polymers that have been chemically modified to make them water-soluble. The last
of these two patents will expire in 2015.

        Although  we  believe  our  existing  issued  patent  claims  provide  a
competitive  advantage,  there can be no assurance  that the scope of our patent
protection is or will be adequate to protect our technology or that the validity
of any patent issued will be upheld in the future. Additionally, with respect to
our pending  applications,  there can be no  assurance  that any patents will be
issued, or that, if issued,  they will provide  substantial  protection or be of
commercial benefit to us.

        Although we do not currently  have any  operations  outside the U.S., we
anticipate  that our potential  products will be marketed on a worldwide  basis,
with possible manufacturing operations outside the U.S. Additionally, current or
potential  products of our licensees  are, or are expected to be,  marketed on a
worldwide basis with current or potential  manufacturing  operations outside the
U.S. Accordingly,  international patent applications  corresponding to the major
U.S.  patents  described  above  have been filed in  foreign  countries.  Due to
translation   costs  and  patent   office   fees,   international   patents  are
significantly   more  expensive  to  obtain  and  maintain  than  U.S.  patents.
Additionally,  there are differences in the requirements  concerning novelty and
the types of claims that can be obtained  compared to U.S.  patent laws, as well
as the nature of the rights  conferred by a patent grant. We carefully  consider
these factors in consultation  with our patent  counsel,  as well as the size of
the potential markets represented, in determining the foreign countries in which
to file patents.

        In almost all cases, we file for patents in Europe and Japan. Currently,
we  maintain  ten  issued  foreign   patents,   and  fifteen   pending   foreign
applications.  One of the issued  foreign  patents is in Europe and the scope of
its claims broadly covers protein polymers having functional activity, including
those polymers used in our soft tissue augmentation and tissue adhesive products
under  development.  This  patent  will  expire in 2009.  In order to reduce our
patent-related  expenses,  we are  continuing  to  implement  a  policy  of only
maintaining  foreign  patents  or  applications  in  Europe  and  Japan,  unless
otherwise  required  due to our  license  agreements.  This has  resulted in our
abandoning issued, allowed and pending foreign patent cases.

        Because  of  the  uncertainty   concerning  patent  protection  and  the
unavailability  of patent  protection for certain  processes and techniques,  we
also rely upon trade secret protection and continuing  technological  innovation
to maintain our  competitive  position.  Although all our employees  have signed
confidentiality  agreements,  there  can be no  assurance  that our  proprietary
technology will not be independently developed by other parties, or that secrecy
will not be  breached.  Additionally,  we are aware  that  substantial  research
efforts in protein  engineering  technology  are taking  place at  universities,
government   laboratories  and  other  corporations  and  that  numerous  patent
applications  have been filed.  We cannot predict  whether we may have to obtain
licenses  to use any  technology  developed  by third  parties or  whether  such
licenses can be obtained on commercially reasonable terms, if at all.

        In the course of our business,  we employ  various  trademarks and trade
names in packaging and  advertising  our products.  We have assigned the federal
registration of our ProNectin(R) trademark and our SmartPlastic(R) trademark for
ProNectin  F  Activated  Cultureware  to  Sanyo  Chemical  Industries,  Ltd.  in
connection with the sale to Sanyo of our cell culture business in February 2000.
We intend to protect and promote all of our trademarks  and, where  appropriate,
will seek federal registration of our trademarks.

Regulatory Matters

        Regulation by  governmental  authorities  in the United States and other
countries is a significant  factor  affecting the success of products  resulting
from  biotechnological  research.  Our current  operations and products are, and
anticipated  products and operations will be, subject to substantial  regulation
by a variety of agencies,  particularly those products and operations related to
biomedical  applications.  Currently,  our activities are subject principally to
regulation under the  Occupational  Safety and Health Act and the Food, Drug and
Cosmetic Act (including amendments and updates).

        Extensive pre-clinical and clinical testing and pre-market approval from
the FDA is  required  for new  medical  devices,  drugs  or  vaccines,  which is
generally  a  costly  and  time-consuming  process.  We  are  required  to be in
compliance  with many of the FDA's  regulations to conduct testing in support of
product  approvals;  in particular,  compliance  with the FDA's Good  Laboratory
Practices (GLP) and applicable Quality System


                                       11
<PAGE>


Regulations (QSR). Where we have conducted such testing,  our company may choose
to file  product  approval  submissions  ourselves  or  maintain  with the FDA a
"Master File" containing,  among other items,  such test results.  A Master File
can  then  be  accessed  by the FDA in  reviewing  particular  product  approval
submissions from companies commercializing products based on our materials.

        There can be no  assurance  that we, or our  customers,  will be able to
obtain  or  maintain  the  necessary  approvals  from  the FDA or  corresponding
international  regulatory  authorities,  or that we will be able to  maintain  a
Master File in accordance with FDA regulations.  In either case, our anticipated
business  could be  adversely  affected.  To the extent we  manufacture  medical
devices, or a component material supplied to a medical device  manufacturer,  we
will be required to conform commercial manufacturing operations to the FDA's QSR
requirements. We would also be required to register our facility with the FDA as
an  establishment   involved  in  the  manufacture  of  medical   devices.   QSR
requirements  are rigorous,  and there can be no assurance that compliance could
be  obtained  in a timely  manner and without  the  expenditure  of  substantial
resources, if at all. International quality system requirements,  i.e., ISO 9001
issued by the  International  Organization for  Standardization,  is the quality
model used by medical  product  manufacturers  and is  required  for the sale of
medical devices in Europe. ISO 9001 standards are similar to the FDA's QSR.

        In August 1999, we obtained the FDA's approval of our IDE to begin human
clinical  testing of our  product for the  treatment  of female  stress  urinary
incontinence. We initiated clinical testing of this product in December 1999. In
November  2000,  we obtained FDA approval to begin human  clinical  testing of a
product for use in cosmetic and  reconstructive  surgery for the  correction  of
dermal contour deficiencies (facial lines, wrinkles,  scars, etc.). We initiated
clinical  testing  of this  product  in April  2001.  We have  implemented,  and
continue to implement,  polymer production and quality control  procedures,  and
have made certain  facilities  renovations,  to operate in conformance  with FDA
requirements.

        Our research,  development  and  production  activities  are, or may be,
subject  to  various  federal  and  state  laws  and  regulations   relating  to
environmental  quality  and the  use,  discharge,  storage,  transportation  and
disposal of toxic and hazardous substances.  The Company's future activities may
be subject to regulation under the Toxic Substances  Control Act, which requires
us to obtain  pre-manufacturing  approval  for any new  "chemical  material"  we
produce  for  commercial  use that does not fall  within  the  FDA's  regulatory
jurisdiction.  We believe we are currently in  substantial  compliance  with all
such laws and regulations.  Although we intend to use our best efforts to comply
with all  environmental  laws and  regulations  in the  future,  there can be no
assurance  that we will be able to fully  comply  with such  laws,  or that full
compliance will not require substantial capital expenditures.

Product Liability and Absence of Insurance

        Our business may expose us to potential product liability risks whenever
human  clinical  testing  is  performed,  or upon  the  use of any  commercially
marketed  medical  product.  Prior to initiating  human clinical  testing of our
urethral bulking agent, we procured product liability insurance.  This insurance
coverage has been expanded to cover the cosmetic  augmentation  product as well.
There can be no assurance,  however,  that we will be able to continue to obtain
such insurance on acceptable  terms or that such insurance will provide adequate
coverage against potential liabilities.  A successful product liability claim or
series of claims could result in a material adverse effect on our business.


                                       12
<PAGE>


<TABLE>
<CAPTION>

Executive Officers of the Registrant

Name                                  Age       Position with the Company
----                                  ---       -------------------------

<S>                                   <C>       <C>
J. Thomas Parmeter                    63        Chairman of the Board of Directors, President and
                                                Chief Executive Officer

Joseph Cappello, Ph.D.                46        Vice President, Research and Development, Chief
                                                Technical Officer and Director, Clinical Research

Philip J. Davis                       73        Corporate Secretary

Franco A. Ferrari, Ph.D.              51        Vice President, Laboratory Operations and Polymer
                                                Production and Director, Molecular Genetics

John E. Flowers                       46        Vice President, Planning and Operations

Janis Y. Neves                        52        Director, Finance and Administration, Treasurer
                                                and Assistant Secretary
</TABLE>

        Mr. Parmeter has been the Company's  President,  Chief Executive Officer
and  Chairman of the Board of Directors  since its  inception in July 1988 (and,
from July 1988 to July 1992, its Chief Financial Officer). From 1982 to November
1987, Mr. Parmeter was President, Chief Executive Officer and, from June 1987 to
June 1988, Chairman of the Board of Syntro Corporation.

        Dr.  Cappello  has been  the  Company's  Vice  President,  Research  and
Development since February 1997 and Chief Technical Officer since February 1993.
He has been the Company's  Director,  Clinical  Research,  since July 2002. From
September 1988 to February 1993, he was the Company's Senior Research  Director,
Protein Engineering.

        Mr. Davis has been the Company's Secretary since January 1989. Mr. Davis
has been a director of the Company since April 1995;  he previously  served as a
director of the Company  from  January 1989 until  October  1991.  Mr. Davis was
employed by Donaldson,  Lufkin & Jenrette in June 1994 and retired at the end of
2000  as  a  Managing   Director  of  Investment   Banking.   He  was  Director,
Institutional  Sales at Merrill  Lynch,  Inc.  (formerly  Merrill  Lynch Capital
Markets) from February  1991 to June 1994,  and was a Vice  President at Merrill
Lynch, Inc. from 1986 to 1991.

        Dr. Ferrari has been the Company's Vice President, Laboratory Operations
and Director,  Molecular  Genetics since  February 1993.  From September 1988 to
February  1993,  he  was  the  Company's  Senior  Research   Director,   Genetic
Engineering.

        Mr.  Flowers  has  been  the  Company's  Vice  President,  Planning  and
Operations,  since February  1993.  From September 1988 to February 1993, he was
the Company's Vice President, Commercial Development.

        Ms. Neves has been the Company's Director of Finance since November 1998
and Controller and Assistant  Secretary since January 1990. From July 1988 until
January 1990, Ms. Neves was the Company's Business Office Manager.

        All of our executive officers were elected by the Board of Directors and
serve at its  discretion.  No  family  relationships  exist  between  any of the
officers or directors of our company.

Employees

        As of February 28, 2003,  we had 18  full-time  employees,  of whom four
have employment  contracts with our company and three hold Ph.D. degrees. We are
highly dependent on the services of our executive  officers and scientists.  The
loss of the  services  of any one of these  individuals  would  have a  material
adverse effect on the  achievement of our development  objectives,  our business
opportunities  and  prospects.  The  recruitment  and  retention  of  additional
qualified management and scientific personnel is also critical to our


                                       13
<PAGE>


success.  There can be no  assurance  that we will be able to attract and retain
required  personnel  on  acceptable  terms,  due to  the  competition  for  such
experienced personnel from other biotechnology,  pharmaceutical,  medical device
and chemical companies, universities and non-profit research institutions.

Item 2. Properties

        We do not own any real property.  We lease  approximately  27,000 square
feet in San Diego,  California  from Del Mar  Partnership.  The leased  property
includes our administrative  offices, which encompass approximately 4,000 square
feet, and our laboratory facilities, which encompass approximately 15,000 square
feet.  The current  annual  rent for this space is  approximately  $620,000.  We
currently  sublease  at cost an  additional  6,000  square  feet of  office  and
laboratory space in our present facility.  The master lease expires in May 2005.
The sublease  originally  expired at the end of January  2003,  but is currently
continuing on a month-to-month basis. We believe that our current facilities are
adequate to meet our needs until the end of 2003.

Item 3. Legal Proceedings

        None.

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

        No matter was submitted to a vote of security  holders during the fourth
quarter of 2002.


                                       14
<PAGE>


                                     PART II


Item 5. Market for Common Equity and Related Stockholder Matters.

NASDAQ Delisting

        Prior to  September  1999,  our common  stock traded on The Nasdaq Stock
Market under the symbol  "PPTI".  Our common stock was delisted  from the NASDAQ
Small Cap Quotation  System,  effective  September 20, 1999. The reasons for the
delisting  were  failure to maintain  the minimum bid  requirement  of $1.00 per
share  for  our  common  stock,  and  failure  to meet  the  minimum  net  asset
requirement   of  $2   million.   Our   common   stock  is  now  traded  on  the
"over-the-counter"  NASD Bulletin Board. To access the quotations for our common
stock, use the call letters PPTI.OB.

        The high and low bid  prices  set  forth  below  represent  inter-dealer
prices without retail markups,  markdowns or commissions,  and may not represent
actual transactions.  The source of the high and low information set forth below
was provided by Yahoo Finance (http://chart.yahoo.com).


                    -----------------------------------------------
                                               Trade Prices
                                               ------------
                           2002             High         Low
                           ----             ----         ---
                         First Quarter    $0.990        $0.460
                         Second Quarter    1.190         0.280
                         Third Quarter     0.350         0.230
                         Fourth Quarter    0.670         0.220

                           2001
                           ----
                         First Quarter    $1.380        $0.660
                         Second Quarter    1.000         0.650
                         Third Quarter     1.110         0.510
                         Fourth Quarter    0.750         0.310
                    -----------------------------------------------


        As of February 25, 2003, we had approximately 162 shareholders of record
of our common stock; we estimate we had approximately  1,500 beneficial holders.
We have never paid cash  dividends on our common stock.  We currently  intend to
retain earnings,  if any, for use in the operation and expansion of our business
and therefore do not anticipate paying any cash dividends on our common stock in
the foreseeable future.

Equity Compensation Plan Information

The  following  table  provides  information  as of December 31, 2002  regarding
equity compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.



                                       15
<PAGE>


<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------
                                                                                 Number of securities
                                                                                  remaining available
                                Number of Securities                              for future issuance
                                  to be issued upon       Weighted-average           under equity
                                     exercise of          exercise price of       compensation plans
                                 outstanding options,    outstanding options,     (excluding securities
        Plan Category            warrants and rights     warrants and rights    reflected in column (a)
--------------------------------------------------------------------------------------------------------
<S>                                     <C>                      <C>                     <C>
                                         (a)                      (b)                       (c)
Equity Compensation Plans
approved by security holders
   Stock Option Plans(1)                1,941,450                $1.020                  1,500,050
   Employee Stock Purchase Plan(2)            -                      -                      80,165
Equity Compensation Plans not
approved by security holders(3)           664,050                $0.571                     n/a
--------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes  shares of common stock to be issued upon exercise of stock options
granted  under the 1989  Employee  Stock Option Plan,  the 1992  Employee  Stock
Option Plan,  the 2002  Employee  Stock Option Plan,  and the 1996  Non-employee
Director's Stock Option Plan.
(2) Includes  shares of common stock  available  for future  issuance  under the
Employees Stock Purchase Plan.
(3) Includes  shares of common stock to be issued upon  exercise of  out-of-plan
non-qualified options granted.

------------------------------------------

Recent Sales of Unregistered Securities

        In August 2002,  certain holders of warrants,  issued in connection with
the sale of Series G  Preferred  Stock,  exercised  their  warrants  to purchase
common  stock which were due to expire in August  2003.  The  original  exercise
price was $0.40 per share.  As an inducement to exercise the warrant  early,  we
offered each holder a reduced exercise price of $0.30 per share and the issuance
of a new  warrant for a similar  number of shares at an exercise  price of $0.10
per share. As a result we raised $682,500. The newly issued warrants will expire
on the last day of August 2003.

        The issuances of the warrants where exercise was noted above were exempt
from registration  under Section 4(2) of the Securities Act, as they were issued
pursuant to  requirements  of Rule 506 of  Regulation  D  promulgated  under the
Securities Act.


                                       16
<PAGE>


Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Forward Looking Statements

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

General Overview

        Protein Polymer Technologies, Inc., is a development-stage biotechnology
company engaged in the research, development, production and clinical testing of
medical  products  based on materials  created from our patented  technology  to
produce  proteins of unique  design.  Since 1992,  we have focused  primarily on
developing  technology  and  products to be used for soft  tissue  augmentation,
tissue adhesives and sealants; wound healing support; and drug delivery devices.
We  have  been  unprofitable  to  date,  and  as of  December  31,  2002  had an
accumulated deficit of $(43,907,000).

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

        Our  product   candidates   for  surgical   repair,   augmentation   and
regeneration of human tissues are in various stages of research and development.
The more  advanced  programs  are bulking  agents for soft tissue  augmentation,
particularly  for use in  urethral  tissue for the  treatment  of female  stress
incontinence  and in dermal tissue for cosmetic and  reconstructive  procedures,
and tissue adhesive  formulations  for the repair of spinal discs damaged due to
injury or aging.  We currently are devoting the majority of our resources to the
development and FDA approval of these products.

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


                                       17
<PAGE>


Significant Collaborative Agreements

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

Spine Wave
----------

        In April 2001, we entered into agreements with Spine Wave, Inc.  ("Spine
Wave"), to develop and commercialize an injectable protein-based formulation for
the repair of spinal discs damaged either by injury or aging.  As  consideration
for entering into an exclusive,  worldwide license agreement with Spine Wave, we
received one million shares of the founding  common stock in Spine Wave,  valued
initially  at  $10,000.  Royalties  from the sale or  sublicensing  of  licensed
products  will be  determined  in the future  based on the gross  margin  (sales
revenue  less the cost of  goods)  realized  by Spine  Wave from the sale of the
products.

     The shares of  founding  common  stock are  subject  to a vesting  schedule
consisting  of  three  triggers   corresponding  to  Spine  Wave's  progress  in
commercializing  products  using the  licensed  technology.  Unvested  shares of
founding  common stock are subject to  repurchase  by Spine Wave at the original
purchase  price.  One-third  of the shares of founding  common  stock vest on or
after each trigger.

        In  connection  with the license  agreement,  we entered into a separate
supply and services  agreement to provide  Spine Wave with a variety of research
and development services, and to supply materials to Spine Wave for pre-clinical
and clinical testing. Spine Wave, in return, agreed to reimburse us for both our
direct costs and the associated overhead costs for the services provided. During
2001,  we  recognized  contract  revenues  of  $450,000  related  to  activities
performed under the collaborative agreement.

        In March 2002, we executed  additional  agreements with Spine Wave, Inc.
that expanded our contractual  research and development  relationship,  and that
offered us additional  equity  incentives in the form of Spine Wave common stock
and warrants.  Under the amended supply and services agreement, we, on behalf of
Spine Wave, are proceeding with pre-clinical safety and performance studies of a
product  for  spinal  disc  repair  to  support   Spine  Wave's   filing  of  an
investigational  device  exemption  with the FDA to obtain  approval to initiate
human  clinical  testing.  During the  subsequent  period  leading to regulatory
marketing  approval,  our  contractual  responsibilities  include  the supply of
product  to  be  used  in  clinical   testing  and  preparation  for  commercial
manufacturing operations.  Research and development services performed for Spine
Wave are reimbursed  including both direct costs and associated  overhead costs.
Spine Wave is  responsible  for  clinical  testing,  regulatory  approvals,  and
commercialization.  For the year ended  December  31, 2002 and for the period of
project inception to date we received  $2,427,000 and $2,877,000,  respectively,
in contract revenue from Spine Wave which represents the reimbursement of direct
costs plus overhead costs  allocated to the research and  development  resources
used in performing the collaborative activities.

        Additional  equity  incentives  offered in conjunction with the expanded
supply and services  agreement of March 17, 2002 consist of a three year warrant
to purchase  1,000,000 shares of Spine Wave common stock at an exercise price of
$0.50 per share  (recently  issued Spine Wave preferred stock was also priced at
$0.50 per share),  and 400,000  shares of common stock valued at $0.05 per share
subject to repurchase at cost until each of three performance goals is achieved.
The  performance  goals consist of: (i) completion of certain studies for filing
an  investigational   device  exemption   application  (100,000  shares);   (ii)
completion  of  additional  studies  for  filing of the  investigational  device
exemption  and  provision of inventory  for the pilot  clinical  study  (150,000
shares);  and  (iii)  completion  of  certain  manufacturing  arrangements,  and
production of certain quantities of product (150,000 shares). As of December 31,
2002, the first of the three performance goals had been met.


                                       18
<PAGE>


 Significant License Agreements

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

Femcare, Ltd.
-------------

        In January  2000,  we  entered  into an  agreement  with  Femcare,  Ltd.
("Femcare"),  for the  commercialization  in Europe and Australia of our product
for  treatment of stress  urinary  incontinence.  Under the terms of the license
agreement,  Femcare paid a $1 million non-refundable license fee in exchange for
the patented  technology and a three year  commitment from us to provide support
to Femcare in its efforts to  clinically  test our products in Great Britain and
to achieve European regulatory  approval.  We have not incurred any research and
development  costs  associated  with our support efforts to date. As a result of
the arrangement,  we recognized  approximately  $333,000 in deferred license fee
revenue  for each of 2000,  2001,  and the year  ended  December  31,  2002.  In
accordance  with the  agreement,  we will receive a royalty on net product sales
generated by Femcare,  and we have the right to manufacture  commercial  product
for Femcare.  The agreement  terminates on the greater of 20 years or upon which
the last of the licensed patents expire.

Genencor International, Inc.
----------------------------

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

        In return for the licensed rights,  Genencor paid us an up-front license
fee  of  $750,000,   and  will  pay  royalties  on  the  sale  of  any  products
commercialized  by Genencor  under the  agreement.  The licensed  technology was
transferred  to Genencor  upon  execution of the license  agreement  without any
further product development  obligation on our part. Future royalties on the net
sales of products  incorporating  the technology  under license and developed by
Genencor will be calculated  based on a royalty rate to be determined at a later
date.  In  addition,  we are  entitled to receive up to $5 million in  milestone
payments  associated with Genencor's  achievement of various  industrial product
development  milestones  incorporating  the  licensed  technology.  There  is no
limitation on the amount of milestone  payments we can receive from Genencor for
Genencor's  product  development  in the  field  of  non-medical  personal  care
products.  In December 2002 we received a license  milestone payment of $250,000
from Genencor for Genencor's  initiation of a product  development project based
on technology licensed from us.

        In  connection  with the  license  agreement,  Genencor  was  issued two
warrants,  each  convertible  by formula into $500,000 of our common stock.  The
first warrant  could be converted  into 442,478  shares at an exercise  price of
$1.13 per share.  The second warrant could be converted into 1,250,000 shares at
an exercise price of $0.40 per share. As a result of the collaboration,  in 2000
we recognized  $750,000 in license fee revenue (less the issuance of warrants to
purchase  $1 million of our common  stock  valued at  $319,000).  The  agreement
terminates on the date of expiration of the last remaining patent.

Research and Development

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


                                       19
<PAGE>


        Our product for the treatment of female stress urinary  incontinence  is
in pilot human clinical  testing.  We project beginning pivotal clinical testing
during 2004.  We expect these trials,  including  patient  follow-up,  will take
approximately 24 months, and the subsequent Food and Drug Administration  review
of our pre-market approval submission may take an additional 12 months. Assuming
this schedule is met and the product is approved,  U.S. sales of the product are
projected to begin in 2007.  Commercial  manufacturing  process  development and
completion  of the  clinical  trials are  estimated  to cost  approximately  $10
million.  Femcare,  Ltd., our licensee for this product in Europe and Australia,
has advised us that  commercialization  of the product in Europe potentially can
occur at least one year in advance of U.S. commercialization.

        Our tissue  augmentation  product for use in cosmetic and reconstructive
surgery  applications is in pilot human clinical  testing.  We project beginning
pivotal clinical testing during 2004. We expect these trials,  including patient
follow-up,  will take  approximately 15 months, and the subsequent Food and Drug
Administration  review of our pre-market  approval  submission may take up to an
additional 12 months. Assuming this schedule is met and the product is approved,
U.S.  sales  are  projected  to begin in 2006.  The  pivotal  clinical  trial is
estimated to cost approximately $2.2 million.  This product is based on the same
manufacturing  technology  as our product  for the  treatment  of female  stress
urinary   incontinence,   and  thus,  the  incremental   cost  of  manufacturing
development is estimated to be approximately $0.1 million.

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

        Our spinal disc repair product being  developed for our licensee,  Spine
Wave, Inc., is in pre-clinical  testing. The timing of this project is under the
control of Spine Wave.  Under our contract with Spine Wave,  we are  responsible
for  development of the  formulated  product,  its  manufacturing  process,  and
product production for both clinical trials and commercialization. Spine Wave is
responsible for funding all expenses associated with these activities.  Contract
revenue  received  from Spine Wave is  approximately  equal to our cost  (direct
project costs plus allocated  laboratory and corporate overhead expenses) of the
work performed. Total research and development costs for the year ended December
31,  2002 and for the  period of  project  inception  to date are  approximately
$2,427,000 and $2,877,000 respectively.

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


Results of Operations

        Contract and Licensing Revenue.  We received  $3,011,000 in contract and
licensing  revenue for the year ended  December 31, 2002 as compared to $783,000
for the year ended December 31, 2001, and $1,107,000 for the year ended December
31, 2000.  Contract revenue for the past year primarily  represents  payments of
approximately  $2,427,000  from Spine Wave,  Inc.,  for  materials  and services
provided  in the  development  of an  adhesive  product for the repair of spinal
discs.  We received  $450,000 in contract  revenue  from Spine Wave in 2001.  In
2000, we received  approximately  $50,000 in contract revenue from  Perkin-Elmer
for a development  project.  Licensing revenue in 2002 primarily  represents the
amortized portion of an up-front license payment of $1 million (being recognized
ratably  over a period of three  years) from  Femcare  Ltd.  for the  commercial
rights to our  incontinence  product  in  Europe  and  Australia,  and a license
milestone  payment  of  $250,000  from  Genencor  International  for  Genencor's
initiation of a product  development  project based on technology  licensed from
us.  Licensing  revenue in 2001  comprised the amortized  license  payments from
Femcare, Ltd. Licensing revenues in 2000 included the amortized license payments
from  Femcare,  Ltd.,  payments  from Sanyo  Chemical  Industries  Ltd.  for the
comprehensive license to our


                                       20
<PAGE>


in vitro cell culture business and existing product  inventory,  and an up-front
license fee of $750,000 (less the issuance of warrants to purchase $1 million of
our common stock valued at $319,000)  received from Genencor  International  for
rights to use our technology in the development of certain industrial products..

        Interest Income.  Interest income was $7,000 for the year ended December
31, 2002, as compared to $41,000 for 2001 and $79,000 for 2000. The year-to-year
variability resulted from the amount and timing of the receipt of equity capital
and the amounts of excess cash available for investment.

        Research and Development Expenses. Research and development expenses for
the year ended  December 31, 2002 were  $2,699,000,  compared to $2,611,000  for
2001, and $2,322,000 in 2000. The  fluctuations  are primarily due to variations
in clinical  testing and  regulatory  consulting  costs.  The cost of conducting
human  clinical  testing  began  at the end of  1999  for  our  product  for the
treatment  of  stress  urinary   incontinence,   and  in  2001  for  our  tissue
augmentation  product  for use in  cosmetic  and  reconstuctive  surgery.  Other
related  expenses  include  those  for  expanded   manufacturing   capacity  and
manufacturing  process  development,  quality  assurance  efforts,  and  outside
testing services.  We expect our research and development expenses will increase
in  the  future,  to the  extent  additional  capital  is  obtained,  due to the
expansion of  product-directed  development  efforts  including  human  clinical
testing, increased manufacturing requirements,  increased use of outside testing
services, and increased research and development services for Spine Wave, Inc.

        Selling,  General  and  Administrative  Expenses.  Selling,  general and
administrative expenses for the year ended December 31, 2002 were $1,336,000, as
compared to $1,366,000  for 2001,  and  $1,366,000 in 2000.  These expenses have
been low in the past three years due to our corporate  downsizing  and generally
tighter cost management.  To the extent possible,  we continue to concentrate on
controlling   costs  reflected  in  reduced   travel,   office   supplies,   and
non-regulatory   consulting   costs.   We  expect  our   selling,   general  and
administrative  expenses will increase in the future,  to the extent  additional
capital is obtained,  consistent  with  supporting our research and  development
efforts  and as  business  development,  patent,  legal and  investor  relations
activities require.

        Operating  Losses.  For the year ended  December 31, 2002, we recorded a
net loss applicable to common shareholders of $1,294,000, or $0.05 per share, as
compared to $3,424,000,  or $0.16 per share for 2001, and  $2,776,000,  or $0.16
per share for 2000.  The  difference  in the net losses and the losses per share
between 2002 and 2001,  and 2000, is primarily  due to tighter cost  management,
and  differences  in license  and  contract  fees  received  from  collaborative
partners. The 2002, 2001 and 2000 losses and per share calculations also include
$278,000 in each year,  of  undeclared  dividends  with respect to our preferred
stock.

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

Inflation

        To date, we believe that  inflation  and changing  prices have not had a
material  impact  on our  continuing  operations.  However,  given  the State of
California's   recent  energy   crisis,   our  utility   costs  have   increased
significantly  over the past year, and these  increases are expected to continue
for the foreseeable future.


                                       21
<PAGE>


Liquidity and Capital Resources

        As of December 31, 2002, we had cash,  cash  equivalents  and short-term
investments totaling $734,000,  as compared to $234,000 at December 31, 2001. As
of December 31, 2002, we had working capital of $189,000,  compared to a working
capital  deficiency of $585,000 at December 31, 2001. In March 2003, we received
$3,005,000  in cash  (less  expenses)  from  the sale of  Series  I  Convertible
Preferred  Stock and  associated  common stock warrants to a group of accredited
and institutional investors (see Item 8, "Subsequent Event." in the Notes to the
Financial Statements).

        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 December 31, 2002 or December 31,  2001.  For the year ended  December 31,
2002, our cash  expenditures  for capital  equipment and leasehold  improvements
totaled  $32,000,  compared with $110,000 for the same period in the prior year.
To the extent capital is available,  we anticipate that these  expenditures will
be  increased  in 2003  for  laboratory  renovations  and  additional  equipment
required to meet the FDA's applicable  Quality System  regulation as we scale up
our manufacturing  operations to meet product requirements for expanded clinical
testing. We may enter into capital equipment lease arrangements in the future if
available at appropriate rates and terms.

        We believe our existing  available cash, cash equivalents and short-term
investments as of December 31, 2002, in combination  with cash received in March
2003  from the sale of  Series I  Preferred  Stock  and  continuing  contractual
commitments  will be sufficient  to meet our  anticipated  capital  requirements
through April 2004. Substantial additional capital resources will be required to
fund continuing expenditures related to our research, development, manufacturing
and  business  development  activities.  In addition we are pursuing a number of
alternatives  available  to meet  the  continuing  capital  requirements  of our
operations,  such as collaborative  agreements and public or private financings.
Further,  we are continuing our reimbursed  services to Spine Wave,  Inc. We are
currently  in  preliminary  discussions  with  potential  financing  sources and
collaborative   partners,   and  additional   funding  in  the  form  of  equity
investments,  license  fees,  milestone  payments  or research  and  development
payments  could  be  generated.  There  can be no  assurance  that  any of these
fundings will be consummated in the timeframes needed for continuing  operations
or on terms  favorable to us. If adequate  funds are not  available,  we will be
required to  significantly  curtail our operating plans and would likely have to
sell or license out significant  portions of our technology,  and possibly cease
operations.


                                       22
<PAGE>


Item 7. Financial Statements


        Filed  herewith  are the  following  Audited  Financial  Statements  for
Protein Polymer Technologies, Inc. (a Development Stage Company):


<TABLE>
<CAPTION>

        Description                                                                     Page
        -----------                                                                     ----

<S>                                                                                      <C>
        Report of Peterson & Co., Independent Auditors............................. .... F-2

        Report of Ernst & Young LLP, Independent Auditors.......................... .... F-3

        Balance Sheets at December 31, 2002 and 2001............................... .... F-4

        Statements of Operations for the years ended December 31, 2002, 2001
           and 2000 and the period July 6, 1988 (inception) to December 31, 2002... .... F-5

        Statements of Stockholders Equity for the period July 6, 1988 (inception)
           to December 31, 2002.................................................... .... F-6

        Statements of Cash Flows for the years ended December 31, 2002, 2001
           and 2000 and the period July 6, 1988 (inception) to December 31, 2002... .... F-9

        Notes to Financial Statements.............................................. .... F-11
</TABLE>


                                       F-1

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


Board of Directors and Stockholders
Protein Polymer Technologies, Inc.


We have audited the accompanying balance sheets of Protein Polymer Technologies,
Inc. (a  Development  Stage  Company) as of December 31, 2002 and 2001,  and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years then ended and for the period July 6, 1988 (inception) to December
31, 2002.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  The financial  statements  of Protein  Polymer
Technologies,  Inc. as of and for the year ended  December  31, 2000 and for the
period July 6, 1988  (inception)  to December 31, 2000,  were audited by Ernst &
Young LLP whose report dated February 8, 2001,  expressed an unqualified opinion
on those statements.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits to obtain  reasonable  assurance  about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.  We  believe  that  our  audits  provide   a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Protein Polymer  Technologies,
Inc. (a  Development  Stage  Company) as of December 31, 2002 and 2001,  and the
results  of its  operations  and its cash flows for the years then ended and for
the period July 6, 1988  (inception)  to December  31, 2002 in  conformity  with
accounting principles generally accepted in the United States of America.



                                            PETERSON & CO.

San Diego, California
February 27, 2003, except for Note 8 as to which the date is March 25, 2003


                                      F-2
<PAGE>


                Report of Ernst & Young LLP, Independent Auditors


The Board of Directors and Stockholders
Protein Polymer Technologies, Inc.


We have audited the accompanying balance sheet of Protein Polymer  Technologies,
Inc. (a  Development  Stage  Company) as of December 31,  2000,  and the related
statements of operations, stockholders' equity and cash flows for the year ended
December  31, 2000 and for the period July 6, 1988  (inception)  to December 31,
2000.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Protein Polymer  Technologies,
Inc. (a Development  Stage Company) at December 31, 2000, and the results of its
operations  and its cash flows for the year ended  December 31, 2000 and for the
period  July 6,  1988  (inception)  to  December  31,  2000 in  conformity  with
accounting principles generally accepted in the United States.

As  discussed  in  Note  1  to  the  financial   statements,   Protein   Polymer
Technologies, Inc. (a Development State Company) has reported accumulated losses
during the development  stage aggregating  $(39,743,572) and without  additional
financing,  lacks  sufficient  working capital to fund  operations  beyond March
2001,  which raises  substantial  doubt about its ability to continue as a going
concern.  Management's  plans as to these  matters are  described in Note 1. The
2000 financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.


                                            ERNST & YOUNG LLP



San Diego, California
February 8, 2001


                                      F-3
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                                 Balance Sheets


<TABLE>
<CAPTION>

                                                                               December 31,
                                                                           2002           2001
                                                                      -------------------------------
<S>                                                                   <C>            <C>
Assets
Current assets:
  Cash and cash equivalents                                           $      733,978 $      234,271
  Other current assets                                                        30,773         57,520
                                                                      -------------------------------
Total current assets                                                         764,751        291,791

Deposits                                                                      29,679         29,679
Equipment and leasehold improvements, net                                     80,928        205,247
                                                                      -------------------------------

                                                                      $      875,358 $      526,717
                                                                      ===============================

Liabilities and stockholders' equity (deficit)
Current liabilities:
  Accounts payable                                                    $      389,109 $      356,942
  Accrued employee benefits                                                  112,714        118,987
  Other accrued expenses                                                      49,530         43,398
  Deferred revenue                                                                 -        333,333
   Deferred rent                                                              24,111         24,111
                                                                      -------------------------------
Total current liabilities                                                    575,464        876,771

Long-term portion deferred rent                                               24,111         48,222

Stockholders' equity (deficit):
  Convertible Preferred Stock, $.01 par value, 5,000,000 shares
  authorized, 76,120 and 88,258 shares issued and outstanding at
  December 31, 2002 and 2001, respectively - liquidation
    preference of $7,612,000 and $8,825,800 at December 31, 2002
      and December 31, 2001, respectively                                  7,266,780      8,480,530
  Common stock, $.01 par value, 60,000,000 shares authorized,
    29,731,535 and 21,740,650 shares issued and outstanding at
    December 31, 2002 and 2001, respectively                                 297,327        217,418
  Additional paid-in capital                                              36,618,235     33,794,177
  Deficit accumulated during development stage                           (43,906,559)   (42,890,401)
                                                                      -------------------------------
Total stockholders' equity (deficit)                                         275,783       (398,276)
                                                                      -------------------------------

                                                                      $      875,358 $      526,717
                                                                      ===============================
</TABLE>


See accompanying notes.

                                       F-4

<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                            Statements of Operations


<TABLE>
<CAPTION>


                                                                                      For the period
                                                                                       July 6, 1988
                                                                                      (inception) to
                                                Years ended December 31,               December 31,
                                          2002             2001            2000            2002
                                    ------------------------------------------------------------------
<S>                                 <C>              <C>             <C>             <C>
Revenues:
  Contract and licensing revenue    $    3,010,571   $      783,334  $    1,107,396  $    9,258,586
  Interest income, net                       6,810           40,778          79,087       1,246,947
  Product and other income                   1,500            5,950           3,012         694,779
                                    ------------------------------------------------------------------
Total revenues                           3,018,881          830,062       1,189,495      11,200,312

Expenses:
  Research and development               2,698,733        2,611,317       2,321,974      32,386,105
  Selling, general and
  administrative                         1,336,306        1,365,574       1,365,598      18,772,381
                                    ------------------------------------------------------------------
Total expenses                           4,035,039        3,976,891       3,687,572      51,158,486
                                    ------------------------------------------------------------------

Net loss                                (1,016,158)      (3,146,829)     (2,498,077)    (39,958,174)

Undeclared and/or paid dividends on
  preferred stock                          277,639          277,639         277,639       6,072,571
                                    ------------------------------------------------------------------

Net loss applicable to common
  shareholders                      $   (1,293,797)  $   (3,424,468) $   (2,775,716) $  (46,030,745)
                                    ==================================================================

Net loss per common share - basic
  and diluted                       $         (.05)  $         (.16) $         (.16)
                                    ==================================================

Shares used in computing net loss
  per common share - basic and
  diluted                               27,659,838       20,964,233      17,771,744
                                    ==================================================
</TABLE>


See accompanying notes.


                                       F-5
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 2002


<TABLE>
<CAPTION>


                                                                      Common stock                       Preferred stock
                                                          --------------------------------------------------------------------------
                                                               Shares             Amount            Shares             Amount
                                                          --------------------------------------------------------------------------
<S>                                                          <C>               <C>             <C>                   <C>
 Issuance of common stock at
    $.01 per share for cash                                        400,000     $        4,000                 -      $           -
 Issuance of common stock at
    $.62 per share for cash
    and receivables                                              1,116,245             11,162                 -                  -
 Receivables from sale of
   common stock                                                          -                  -                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1988                                     1,516,245             15,162                 -                  -
 Repayment of receivables
    from sale of common stock                                            -                  -                 -                  -
 Issuance of common stock at
    $.62 per share                                                 359,136              3,594                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1989                                     1,875,381             18,756                 -                  -
 Exercise of common stock
    options at $.01 per share
    for cash                                                        60,000                600                 -                  -
 Issuance of common stock at
    $.68 per share for cash
    and compensation                                                 5,000                 50                 -                  -
 Common stock repurchased at
    $.01 per share for cash                                        (25,000)              (250)                -                  -
 Common stock issued at $.68
    per share for cash and
    compensation                                                    25,000                250                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1990                                     1,940,381             19,406                 -                  -
 Exercise of common stock
    options at $.68 per share
    for cash                                                         5,000                 50                 -                  -
 Exercise of warrants for
    common stock                                                   483,755              4,837                 -                  -
 Conversion of notes payable
    to common stock                                                339,230              3,391                 -                  -
 Conversion of notes payable
    to preferred stock                                                   -                  -           278,326              2,783
 Issuance of preferred stock
    at $2.00 per share for
    cash, net of issuance costs                                          -                  -           400,000              4,000
 Issuance of warrants for cash                                           -                  -                 -                  -
 Issuance of warrants in
    connection with convertible
    notes payable                                                        -                  -                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1991                                     2,768,366             27,684           678,326              6,783
 Initial public offering at
    $6.50 per unit, net of
    issuance costs                                               1,667,500             16,676                 -                  -
 Conversion of Series B preferred
    stock into common stock in
    connection with initial public
    offering                                                       678,326              6,783          (678,326)            (6,783)
 Conversion of Series A preferred
    stock into common stock at
    $1.13342 per share                                             713,733              7,137                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1992                                     5,827,925             58,280                 -                  -
 Exercise of common stock options
    at $.68 per share                                                3,000                 30                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1993                                     5,830,925             58,310                 -                  -
 Issuance of preferred stock
    at $100 per share for cash,
    net of issuance costs                                                -                  -            21,600          2,073,925
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1994                                     5,830,925             58,310            21,600          2,073,925
 Issuance of preferred stock
    at $100 per share for cash
    and cancellation of bridge
    loan, net of issuance costs                                          -                  -            25,000          2,432,150
 Series C dividends paid in
    Series D preferred stock                                             -                  -             2,539            253,875
 Interest paid in Series D
    preferred stock                                                      -                  -                48              4,795
 Exercise of common stock options
    at $.53 per share                                                2,000                 20                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1995                                     5,832,925   $         58,330            49,187      $   4,764,745


<CAPTION>


                                                                                  Deficit
                                                                                accumulated
                                                              Additional           during      Receivables from         Total
                                                                                development                          Stockholders
                                                            paid-in capital        stage             stock              equity
                                                          --------------------------------------------------------------------------
<S>                                                          <C>               <C>               <C>                 <C>
 Issuance of common stock at
    $.01 per share for cash                                  $            -    $            -    $            -      $       4,000
 Issuance of common stock at
    $.62 per share for cash
    and receivables                                                 681,838                 -                 -            693,000
 Receivables from sale of
   common stock                                                           -                 -           (86,000)           (86,000)
 Net loss                                                                 -          (322,702)                -           (322,702)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1988                                        681,838          (322,702)          (86,000)           288,298
 Repayment of receivables
    from sale of common stock                                             -                 -            86,000             86,000
 Issuance of common stock at
    $.62 per share                                                  219,358                 -                 -            222,952
 Net loss                                                                 -          (925,080)                -           (925,080)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1989                                        901,196        (1,247,782)                -           (327,830)
 Exercise of common stock
    options at $.01 per share
    for cash                                                              -                 -                 -                600
 Issuance of common stock at
    $.68 per share for cash
    and compensation                                                  3,350                 -                 -              3,400
 Common stock repurchased at
    $.01 per share for cash                                               -                 -                 -               (250)
 Common stock issued at $.68
    per share for cash and
    compensation                                                     16,750                 -                 -             17,000
 Net loss                                                                 -        (1,501,171)                -         (1,501,171)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1990                                        921,296        (2,748,953)                -         (1,808,251)
 Exercise of common stock
    options at $.68 per share
    for cash                                                          3,350                 -                 -              3,400
 Exercise of warrants for
    common stock                                                    295,493                 -                 -            300,330
 Conversion of notes payable
    to common stock                                                 508,414                 -                 -            511,805
 Conversion of notes payable
    to preferred stock                                              553,869                 -                 -            556,652
 Issuance of preferred stock
    at $2.00 per share for
    cash, net of issuance costs                                     703,475                 -                 -            707,475
 Issuance of warrants for cash                                        3,000                 -                 -              3,000
 Issuance of warrants in
    connection with convertible
    notes payable                                                    28,000                 -                 -             28,000
 Net loss                                                                 -        (1,143,119)                -         (1,143,119)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1991                                      3,016,897        (3,892,072)                -           (840,708)
 Initial public offering at
    $6.50 per unit, net of
    issuance costs                                                8,911,024                 -                 -          8,927,700
 Conversion of Series B preferred
    stock into common stock in
    connection with initial public
    offering                                                              -                 -                 -                  -
 Conversion of Series A preferred
    stock into common stock at
    $1.13342 per share                                            1,717,065                 -                 -          1,724,202
 Net loss                                                                 -        (3,481,659)                -         (3,481,659)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1992                                     13,644,986        (7,373,731)                -          6,329,535
 Exercise of common stock options
    at $.68 per share                                                 2,010                 -                 -              2,040
 Net loss                                                                 -        (3,245,436)                -         (3,245,436)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1993                                     13,646,996       (10,619,167)                -          3,086,139
 Issuance of preferred stock
    at $100 per share for cash,
    net of issuance costs                                                 -                 -                 -          2,073,925
 Net loss                                                                 -        (3,245,359)                -         (3,245,359)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1994                                     13,646,996       (13,864,526)                -          1,914,705
 Issuance of preferred stock
    at $100 per share for cash
    and cancellation of bridge
    loan, net of issuance costs                                           -                 -                 -          2,432,150
 Series C dividends paid in
    Series D preferred stock                                              -          (253,875)                -                  -
 Interest paid in Series D
    preferred stock                                                      -                  -                 -              4,795
 Exercise of common stock options
    at $.53 per share                                                1,040                  -                 -              1,060
 Net loss                                                                -         (2,224,404)                -         (2,224,404)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1995                                 $   13,648,036    $  (16,342,805)                -      $   2,128,306
</TABLE>


See accompanying notes.


                                       F-6
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 2002


<TABLE>
<CAPTION>


                                                                      Common stock                       Preferred stock
                                                          --------------------------------------------------------------------------
                                                               Shares             Amount            Shares             Amount
                                                          --------------------------------------------------------------------------
<S>                                                          <C>               <C>             <C>                   <C>
 Exercise of common stock warrants
    at $1.25 per share                                             932,960     $        9,330                 -      $           -
 Exercise of common stock warrants
    at $2.50 per share, net of
    issuance costs                                                 322,663              3,226                 -                  -
 Exercise of common stock warrants
    at $1.00 per share                                              25,000                250                 -                  -
 Exercise of common stock options                                  136,000              1,360                 -                  -
 Stock repurchases                                                 (16,320)              (163)                -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1996                                     7,233,228             72,333            49,187          4,764,745
 Issuance of common stock at
    $2.50 per share, net of
    issuance costs                                               1,904,000             19,040                 -                  -
 Exercise of common stock options                                   28,000                280                 -                  -
 Issuance of common stock under
    stock purchase plan                                             15,036                151                 -                  -
 Conversion of Series D preferred
    stock into common stock                                      1,032,537             10,325           (20,973)        (2,097,342)
 Series D dividends paid in
    common stock                                                   207,921              2,079                 -                  -
 Net loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1997                                    10,420,722            104,208            28,214          2,667,403

 Issuance of common stock under
    stock purchase plan                                             36,715                368                 -                  -
 Exercise of common stock options                                   12,000                120                 -                  -
 Issuance of common stock at
    $1.60 per share, net of
    issuance costs                                                  23,439                234                 -                  -
 Issuance of Series E preferred
    stock, net of issuance costs                                         -                  -            54,438          5,277,813
 Grant of stock to finder                                           64,000                640                 -                  -
 Conversion of Series D and E
    preferred stock into common stock                              270,364              2,704            (3,450)          (344,990)
 Net Loss                                                                -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1998                                    10,827,240            108,274            79,202          7,600,226
 Issuance of common stock under
    stock purchase plan                                             19,429                194                 -                  -
 Issuance of common stock and
    warrants for services
    rendered and debt issued                                        16,941                180                 -                  -
 Issuance of Series G preferred
    stock, net of issuance costs                                         -                  -            21,000          2,074,596
 Conversion of Series E preferred
    stock into common stock                                        731,000              7,310            (9,138)          (913,750)
 Exercise of common stock and
    Series E warrants at $.50
    per share                                                    1,848,900             18,489                 -                  -
 Net Loss and comprehensive loss                                         -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 1999                                    13,443,510            134,447            91,064          8,761,072
 Issuance of common stock under
    stock purchase plan                                            287,303              2,873                 -                  -
 Issuance of warrants and
    stock options for services
    rendered                                                             -                  -                 -                  -
 Exercise of common stock options                                   85,500                855                 -                  -
 Exercise of common stock warrants
    at $.50 per share                                            4,215,000             42,150                 -                  -
 Conversion of Series E preferred
    stock into common stock                                        879,000              8,790           (10,988)        (1,098,800)
 Net Loss and comprehensive loss                                         -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 2000                                    18,910,313     $      189,115            80,076      $   7,662,272


<CAPTION>


                                                                                  Deficit
                                                                                accumulated
                                                             Additional            during      Receivables from        Total
                                                                                development                         Stockholders
                                                           paid-in capital         stage             stock             equity
                                                          --------------------------------------------------------------------------
<S>                                                          <C>               <C>             <C>                   <C>
 Exercise of common stock warrants
    at $1.25 per share                                      $    1,156,870     $            -    $            -      $   1,166,200
 Exercise of common stock warrants
    at $2.50 per share, net of
    issuance costs                                                 779,413                  -                 -            782,639
 Exercise of common stock warrants
    at $1.00 per share                                              24,750                  -                 -             25,000
 Exercise of common stock options                                   91,650                  -                 -             93,010
 Stock repurchases                                                 (81,437)                 -                 -            (81,600)
 Net loss                                                                -         (2,864,432)                -         (2,864,432)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1996                                    15,619,282        (19,207,237)                -          1,249,123
 Issuance of common stock at
    $2.50 per share, net of
    issuance costs                                               4,601,322                  -                 -          4,620,362
 Exercise of common stock options                                   20,200                  -                 -             20,480
 Issuance of common stock under
    stock purchase plan                                             29,950                  -                 -             30,101
 Conversion of Series D preferred
    stock into common stock                                      2,087,017                  -                 -                  -
 Series D dividends paid in
    common stock                                                   420,262           (422,341)                -                  -
 Net loss                                                                -         (4,453,933)                -         (4,453,933)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1997                                    22,778,033        (24,083,511)                -          1,466,133
 Issuance of common stock under
    stock purchase plan                                             38,010                  -                 -             38,378
 Exercise of common stock options                                    7,920                  -                 -              8,040
 Issuance of common stock at
    $1.60 per share, net of
    issuance costs                                                  37,266                  -                 -             37,500
 Issuance of Series E preferred
    stock, net of issuance costs                                 3,266,250         (3,266,250)                -          5,277,813
 Grant of stock to finder                                           79,360                  -                 -             80,000
 Conversion of Series D and E
    preferred stock into common stock                              342,286                  -                 -                  -
 Net Loss                                                                -         (5,638,203)                -         (5,638,203)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1998                                    26,549,125        (32,987,964)                -          1,269,661
 Issuance of common stock under
    stock purchase plan                                             15,111                  -                 -             15,305
 Issuance of common stock and
    warrants for services
    rendered and debt issued                                        26,440                  -                 -             26,620
 Issuance of Series G preferred
    stock, net of issuance costs                                         -                  -                 -          2,074,596
 Conversion of Series E preferred
    stock into common stock                                        906,440                  -                 -                  -
 Exercise of common stock and
    Series E warrants at $.50
    per share                                                      905,961                  -                 -            924,450
 Net Loss and comprehensive loss                                         -         (4,257,531)                -         (4,257,531)
                                                          --------------------------------------------------------------------------
Balance at December 31, 1999                                    28,403,077        (37,245,495)                -             53,101
 Issuance of common stock under
    stock purchase plan                                            186,096                  -                 -            188,969
 Issuance of warrants and
    stock options for services
    rendered                                                       345,244                  -                 -            345,244
 Exercise of common stock options                                   73,240                  -                 -             74,095
 Exercise of common stock warrants
    at $.50 per share                                            2,065,350                  -                 -          2,107,500
 Conversion of Series E preferred
    stock into common stock                                      1,090,010                  -                 -                  -
 Net Loss and comprehensive loss                                         -         (2,498,077)                -         (2,498,077)
                                                          --------------------------------------------------------------------------
Balance at December 31, 2000                                 $  32,163,017      $ (39,743,572) $              -      $     270,832
</TABLE>


See accompanying notes.


                                      F-7
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 2002


<TABLE>
<CAPTION>


                                                                      Common stock                       Preferred stock
                                                          --------------------------------------------------------------------------
                                                               Shares             Amount            Shares             Amount
                                                          --------------------------------------------------------------------------
<S>                                                          <C>               <C>             <C>                   <C>
 Issuance of Series H preferred
    stock, net of issuance costs                                         -                  -            12,182          1,218,258
 Issuance of common stock under
    stock purchase plan                                             14,837                148                 -                  -
 Issuance of stock options
    for services rendered                                                -                  -                 -                  -
 Exercise of common stock options                                    3,500                 35                 -                  -
 Exercise of common stock warrants
    at $.50 per share                                            2,492,000             24,920                 -                  -
 Conversion of Series E preferred
    stock into common stock                                        320,000              3,200            (4,000)          (400,000)
 Net Loss and comprehensive loss                                         -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 2001                                    21,740,650     $      217,418            88,258      $   8,480,530

 Conversion of Series E preferred
    stock into common stock                                        515,000              5,150            (6,438)          (643,750)
 Conversion of Series G preferred
    stock into common stock                                      1,140,000             11,400            (5,700)          (570,000)
 Exercise of common stock warrants,
    net of associated costs                                      6,260,000             62,600                 -                  -
 Issuance of common stock under
    stock purchase plan                                             47,385                474                 -                  -
 Exercise of common stock options                                   28,500                285                 -                  -
 Net Loss and comprehensive loss                                         -                  -                 -                  -
                                                          --------------------------------------------------------------------------
Balance at December 31, 2002                                    29,731,535     $      297,327            76,120      $   7,266,780
                                                          ==========================================================================


<CAPTION>


                                                                                  Deficit
                                                                                accumulated
                                                             Additional            during      Receivables from         Total
                                                                                development                          Stockholders
                                                           paid-in capital         stage             stock              equity
                                                          --------------------------------------------------------------------------
<S>                                                          <C>               <C>             <C>                   <C>
 Issuance of Series H preferred
    stock, net of issuance costs                                         -                  -                 -          1,218,258
 Issuance of common stock under
    stock purchase plan                                              9,836                  -                 -              9,984
 Issuance of stock options
    for services rendered                                            1,834                  -                 -              1,834
 Exercise of common stock options                                    1,610                  -                 -              1,645
 Exercise of common stock warrants
    at $.50 per share                                            1,221,080                  -                 -          1,246,000
 Conversion of Series E preferred
    stock into common stock                                        396,800                  -                 -                  -
 Net Loss and comprehensive loss                                         -         (3,146,829)                -         (3,146,829)
                                                          --------------------------------------------------------------------------
Balance at December 31, 2001                                 $  33,794,177      $ (42,890,401) $              -      $    (398,276)

 Conversion of Series E preferred
    stock into common stock                                        638,600                  -                 -                  -
 Conversion of Series G preferred
    stock into common stock                                        558,600                  -                 -                  -
 Exercise of common stock warrants,
    net of associated costs                                      1,601,950                  -                 -          1,664,550
 Issuance of common stock under
    stock purchase plan                                             15,103                  -                 -             15,577
 Exercise of common stock options                                    9,805                  -                 -             10,090
 Net Loss and comprehensive loss                                         -         (1,016,158)                -         (1,016,158)
                                                          --------------------------------------------------------------------------
Balance at December 31, 2002                                 $  36,618,235      $ (43,906,559) $              -     $     275,783
                                                          ==========================================================================
</TABLE>

See accompanying notes.



                                      F-8
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                            Statements of Cash Flows


<TABLE>
<CAPTION>


                                                                                            For the period
                                                                                             July 6, 1988
                                                                                            (inception) to
                                                        Years ended December 31,             December 31,
                                                  2002            2001            2000           2002
                                            ----------------------------------------------------------------
<S>                                         <C>             <C>             <C>             <C>
Operating activities
Net loss                                    $   (1,016,158) $   (3,146,829) $   (2,498,077) $  (39,958,174)
Adjustments to reconcile net loss to net
  cash used for operating activities:
    Stock and warrants issued for services
       rendered and debt interest                        -           1,836         345,244         472,676
    Depreciation and amortization                  155,885         154,601         155,060       2,358,384
    Write-off of purchased technology                    -               -               -         503,500
    Changes in assets and liabilities:
      Deposits                                           -          41,498         (35,000)        (29,679)
      Notes receivable from officers                     -         140,000               -               -
      Other current assets                          26,747          (2,340)         (5,914)        (30,773)
      Accounts payable                              32,167         149,961        (178,951)        389,109
      Accrued employee benefits                     (6,273)         49,330         (14,678)        112,714
      Other accrued expenses                         6,133          (4,020)         30,300          49,531
      Deferred revenue                            (333,333)       (333,334)        666,667               -
      Deferred rent                                (24,111)        (23,858)            218          48,222
                                            ----------------------------------------------------------------
 Net cash used for operating activities         (1,158,943)     (2,973,155)     (1,535,131)    (36,084,490)

Investing activities
Purchase of technology                                   -               -               -        (570,000)
Purchase of equipment and improvements             (31,566)       (109,593)        (45,313)     (1,997,286)
Purchases of short-term investments                      -               -               -     (16,161,667)
Sales of short-term investments                          -               -               -      16,161,667
                                            ----------------------------------------------------------------
Net cash provided by (used for) investing
  activities                                       (31,566)       (109,593)        (45,313)     (2,567,286)

Financing activities
Net proceeds from issuance of common
  stock                                          1,690,216       1,257,629       2,370,565      22,856,076
Net proceeds from issuance of preferred
  stock                                                  -       1,218,258               -      15,508,418
Net proceeds from convertible notes and
  detachable warrants                                    -               -               -       1,068,457
Payments on capital lease obligations                    -         (25,088)        (79,593)       (288,770)
Payment on note payable                                  -               -               -        (242,750)
Proceeds from note payable                               -               -               -         484,323
                                            ----------------------------------------------------------------
Net cash provided by financing activities        1,690,216       2,450,799       2,290,972      39,385,754
                                            ----------------------------------------------------------------

Net increase (decrease) in cash and cash
  equivalents                                      499,707        (631,949)        710,528         733,978
Cash and cash equivalents at beginning of
  the period                                       234,271         866,220         155,692               -
                                            ----------------------------------------------------------------
Cash and cash equivalents at end of the
  period                                    $      733,978  $      234,271  $      866,220  $      733,978
                                            ================================================================
</TABLE>


                                       F-9
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                            Statements of Cash Flows


<TABLE>
<CAPTION>


                                                                                             July 6, 1988
                                                                                            (inception) to
                                                        Years ended December 31,             December 31,
                                                  2002            2001            2000           2002
                                            ----------------------------------------------------------------
<S>                                         <C>             <C>             <C>             <C>
Supplemental disclosures of cash flow
  information
Equipment purchased by capital leases       $            -  $            -  $            -  $      288,772
Interest paid                                        2,170          19,490           7,204         146,775
Imputed dividend on Series E stock                       -               -               -       3,266,250
Conversion of Series D preferred stock to
  common stock                                           -               -               -       2,142,332
Conversion of Series E preferred stock to
   common stock                                    643,750         400,000       1,098,800       3,356,300
Conversion of Series G preferred stock to
   common stock                                    570,000               -               -         570,000
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.


                                      F-10
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements



1.      Organization and Significant Accounting Policies

Organization and business activities

Protein Polymer Technologies,  Inc. ("PPTI" or the "Company") was established to
design, produce and market genetically engineered protein polymers for a variety
of biomedical and specialty materials applications. The Company was incorporated
in Delaware  on July 6, 1988.  For the period from its  inception  to date,  the
Company has been a development stage enterprise, and accordingly,  the Company's
operations have been directed primarily toward developing  business  strategies,
raising  capital,  research  and  development  activities,  conducting  clinical
testing of its product  candidates,  exploring marketing channels and recruiting
personnel.

Liquidity

As of December 31, 2002, the Company had cash,  cash  equivalents and short-term
investments  totaling  $734,000 as compared to $234,000 at December 31, 2001. As
of December 31, 2002, the Company had a working capital of $189,000  compared to
a working  capital  deficiency  of $585,000 at December 31, 2001. In March 2003,
the Company  received  $3,005,000  (less  expenses)  in  additional  capital and
capital  commitments  from the sale of  preferred  stock (see Note 8  Subsequent
Events).

The Company  believes  its  available  cash,  cash  equivalents  and  short-term
investments,  in combination  with anticipated  additional  contract and license
payments will be sufficient to meet its anticipated capital requirements through
April  2004.  Prior  to  the  commercialization  of  its  products,  substantial
additional  capital  resources  will be required to fund  continuing  operations
related to the Company's research, development, manufacturing, clinical testing,
and business development activities.  The Company believes there may be a number
of  alternatives  available to meet the continuing  capital  requirements of its
operations,  such as collaborative  agreements and public or private financings.
Further,  the  Company  is  currently  in  discussions  with  several  potential
financing sources and  collaborative  partners and funding in the form of equity
investments,  license  fees,  milestone  payments  or research  and  development
payments  could  be  generated.  There  can be no  assurance  that  any of these
fundings will be consummated in the time frames needed for continuing operations
or on terms  favorable to the Company.  If adequate  funds in the future are not
available,  the Company will be required to significantly  curtail its operating
plans and may have to sell or license out significant  portions of the Company's
technology or potential products, and possibly cease operations.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with a maturity of
three months or less at the time of purchase to be cash equivalents.


                                      F-11
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


1.      Organization and Significant Accounting Policies (continued)

Equipment and leasehold improvements

Equipment  and  leasehold  improvements  are  stated at cost,  less  accumulated
depreciation  and  amortization.  Equipment is  depreciated  over the  estimated
useful life of the asset,  typically one to seven years, using the straight-line
method.  Leasehold improvements are amortized over the shorter of the lease term
or life of the  asset.  Equipment  and  leasehold  improvements  consist  of the
following:

<TABLE>
<CAPTION>

                                                                   December 31,
                                                                2002           2001
                                                          -------------------------------
<S>                                                       <C>             <C>
Laboratory equipment                                      $   1,803,000   $   1,773,000
Office equipment                                                177,000         175,000
Leasehold improvements                                          306,000         306,000
                                                          -------------------------------
                                                              2,286,000       2,254,000
Less accumulated depreciation and amortization               (2,205,000)     (2,049,000)
                                                          -------------------------------
                                                          $      81,000   $     205,000
                                                          ===============================
</TABLE>

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.

Significant Collaborative Agreements

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


                                      F-12
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


1.      Organization and Significant Accounting Policies (continued)

Spine Wave,  Inc. In April 2001, the Company  entered into agreements with Spine
Wave,  Inc.  ("Spine  Wave"),   to  develop  and   commercialize  an  injectable
protein-based  formulation  for the  repair of spinal  discs  damaged  either by
injury or aging.  As  consideration  for entering into an  exclusive,  worldwide
license  agreement with Spine Wave,  the Company  received one million shares of
the founding common stock in Spine Wave, valued initially at $10,000.  Royalties
from the sale or  sublicensing  of licensed  products  will be determined in the
future based on the gross margin (sales revenue less the cost of goods) realized
by Spine Wave from the sale of the products.

The shares of founding common stock are subject to a vesting schedule consisting
of three  triggers  corresponding  to Spine Wave's  progress in  commercializing
products using the licensed technology. Unvested shares of founding common stock
are  subject  to  repurchase  by  Spine  Wave at the  original  purchase  price.
One-third of the shares of founding  common stock vest on or after each trigger.
As of December 31, 2002,  the Company had not vested any of the founding  common
stock because none of the trigger events had yet occurred.

In connection  with the license  agreement,  the Company entered into a separate
supply and services  agreement to provide  Spine Wave with a variety of research
and development services, and to supply materials to Spine Wave for pre-clinical
and clinical testing. Spine Wave, in return, agreed to reimburse the Company for
both our  direct  costs  and the  associated  overhead  costs  for the  services
provided.  During 2001,  the Company  recognized  contract  revenues of $450,000
related to activities performed under the collaborative agreement.

In March 2002, the Company executed additional  agreements with Spine Wave, Inc.
that expanded its contractual  research and development  relationship,  and that
offered  the  Company  additional  equity  incentives  in the form of Spine Wave
common stock and warrants.  Under the amended supply and services agreement, the
Company,  on behalf of Spine Wave, is proceeding  with  pre-clinical  safety and
performance  studies of a product for spinal disc repair to support Spine Wave's
filing of an investigational device exemption with the FDA to obtain approval to
initiate  human  clinical  testing.  During  the  subsequent  period  leading to
regulatory  marketing  approval,  the  Company's  contractual   responsibilities
include the supply of product to be used in clinical testing and preparation for
commercial manufacturing operations. Research and development services performed
for Spine  Wave are  reimbursed  including  both  direct  costs  and  associated
overhead  costs.  Spine Wave is  responsible  for clinical  testing,  regulatory
approvals,  and commercialization.  For the year ended December 31, 2002 and for
the period of project  inception  to date the Company  received  $2,427,000  and
$2,877,000,  respectively,  in contract revenue from Spine Wave which represents
the  reimbursement of direct costs plus overhead costs allocated to the research
and development resources used in performing the collaborative activities.

Additional equity incentives offered in conjunction with the expanded supply and
services agreement of March 17, 2002 consist of a three year warrant to purchase
1,000,000 shares of Spine Wave common stock


                                      F-13
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


1.      Organization and Significant Accounting Policies (continued)

at an exercise  price of $0.50 per share  (recently  issued Spine Wave preferred
stock was also priced at $0.50 per share),  and 400,000  shares of common  stock
valued at $0.05 per share  subject  to  repurchase  at cost  until each of three
performance goals is achieved.  The performance goals consist of: (i) completion
of certain studies for filing an  investigational  device exemption  application
(100,000  shares);  (ii)  completion  of  additional  studies  for filing of the
investigational  device  exemption  and  provision  of  inventory  for the pilot
clinical study (150,000 shares);  and (iii) completion of certain  manufacturing
arrangements,  and production of certain quantities of product (150,000 shares).
As of December 31, 2002, the first of the three performance goals had been met.

Significant License Agreements

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

Femcare,  Ltd.  In January  2000,  The Company  entered into an  agreement  with
Femcare, Ltd. ("Femcare"),  for the commercialization in Europe and Australia of
the Company's  product for treatment of stress urinary  incontinence.  Under the
terms of the license agreement, Femcare paid a $1 million non-refundable license
fee in exchange for the patented technology and a three year commitment from the
Company to provide  support to  Femcare in its  efforts to  clinically  test the
products  in Great  Britain and to achieve  European  regulatory  approval.  The
Company has not incurred any research and development  costs associated with its
support efforts to date. As a result of the arrangement,  the Company recognized
approximately  $333,000 in deferred  license fee revenue for each of 2000, 2001,
and the year ended  December 31, 2002. In  accordance  with the  agreement,  the
Company will receive a royalty on net product  sales  generated by Femcare,  and
has the right to  manufacture  commercial  product for  Femcare.  The  agreement
terminates  on the  greater of 20 years or upon  which the last of the  licensed
patents expire.

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

In return for the licensed rights, Genencor paid the Company an up-front license
fee  of  $750,000,   and  will  pay  royalties  on  the  sale  of  any  products
commercialized  by Genencor  under the  agreement.  The licensed  technology was
transferred  to Genencor  upon  execution of the license  agreement  without any
further


                                      F-14
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


1.      Organization and Significant Accounting Policies (continued)

product development obligation on our part. Future royalties on the net sales of
products  incorporating  the technology  under license and developed by Genencor
will be calculated  based on a royalty rate to be determined at a later date. In
addition,  the  Company is  entitled  to  receive up to $5 million in  milestone
payments  associated with Genencor's  achievement of various  industrial product
development  milestones  incorporating  the  licensed  technology.  There  is no
limitation  on the amount of  milestone  payments  the Company can receive  from
Genencor for Genencor's product development in the field of non-medical personal
care products. In December 2002 the Company received a license milestone payment
of $250,000 from  Genencor for  Genencor's  initiation of a product  development
project based on technology licensed from the Company.

In connection with the license agreement, Genencor was issued two warrants, each
convertible  by formula into  $500,000 of our common  stock.  The first  warrant
could be converted  into 442,478 shares at an exercise price of $1.13 per share.
The second warrant could be converted into 1,250,000 shares at an exercise price
of $0.40  per  share.  As a result  of the  collaboration,  in 2000 the  Company
recognized  $750,000 in license fee  revenue  (less the  issuance of warrants to
purchase $1 million of the  Company's  common  stock  valued at  $319,000).  The
agreement terminates on the date of expiration of the last remaining patent.

Accounting for Stock-Based Compensation

As permitted  by SFAS No. 123,  Accounting  for  Stock-Based  Compensation,  the
Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to
Employees,  ("APB  25")  and  related  Interpretations  in  accounting  for  its
stock-based  compensation.  Under APB 25, if the exercise  price of the employee
stock options equals or exceeds the deemed fair value of the underlying stock on
the date of grant,  no  compensation  expense is recognized.  In accordance with
EITF 96-18,  equity  instruments  issued to  non-employees  are recorded at fair
value and recognized over the related  service period.  The effects of using the
fair  value  accounting  method,  as  described  in SFAS  Statement  No. 123 are
described below in Note 2.

Net loss per common share

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

The net loss per common share for the years ended  December  31, 2002,  2001 and
2000 is  based  on the  weighted  average  number  of  shares  of  common  stock
outstanding during the periods. Potentially dilutive securities include options,
warrants and convertible preferred stock; however, such securities have not been


                                      F-15
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


1.      Organization and Significant Accounting Policies (continued)

included in the  calculation of the net loss per common share as their effect is
antidilutive.  Since this is the case, there is no difference  between the basic
and dilutive net loss per common share for any of the periods presented and none
of the  prior  periods  were  required  to be  restated.  For  purposes  of this
calculation,  net loss in 2002,  2001 and 2000 has been adjusted for accumulated
and/or paid dividends on the preferred stock.

New Accounting Standards

In June 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS 141,
Business  Combinations.   This  statement  addresses  financial  accounting  and
reporting for business  combinations and supersedes APB Opinion No. 16, Business
Combinations,  and SFAS No. 38, Accounting for  Preacquisition  Contingencies of
Purchased  Enterprises.  SFAS 141 requires all business  combinations  initiated
after June 30, 2001 be accounted for under the purchase method.  The adoption of
SFAS 141 did not have a material effect on the Company's financial statements.

In June 2001, the FASB issued SFAS 142,  Goodwill and Other  Intangible  Assets.
SFAS 142 addresses financial  accounting and reporting for acquired goodwill and
other intangible  assets and supersedes APB Opinion No. 17,  Intangible  Assets.
SFAS 142 is  effective  for fiscal  years  beginning  after  December  15, 2001.
Management  does not believe its adoption  will effect the  Company's  financial
statements.

In June  2001,  the FASB  issued  SFAS  143,  Accounting  for  Asset  Retirement
Obligations.   SFAS  143  addresses  financial   accounting  and  reporting  for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and pertains to legal  obligations  related to
retirement of long-lived assets that result from the acquisition,  construction,
development and the normal operations of long-lived  assets,  except for certain
obligations of lessees.  SFAS 143 is effective for fiscal years  beginning after
June 15,  2002.  Management  does not  believe  its  adoption  will  effect  the
Company's financial statements.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal  of  Long-Lived  Assets.  This  statement   supersedes  SFAS  No.  121,
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
be Disposed of, and APB Opinion No. 30, Reporting the results of Operations.

Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and  Infrequently  Occurring  Events and Transactions and amends ARB No.
51, Consolidated  Financial  Statements.  SFAS 144 is effective for fiscal years
beginning after December 15, 2001. Management does not believe its adoption will
effect the Company's financial statements.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
which rescinds SFAS No. 4, "Reporting  Gains and Losses from  Extinguishment  of
Debt," SFAS No. 44,  "Accounting  for Intangible  Assets of Motor  Carriers" and
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund  Requirements
and  amends  SFAS No. 13,  "Accounting  for  Leases."  This  statement  updates,
clarifies and  simplifies  existing  accounting  pronouncements.  As a result of
rescinding SFAS No. 4 and SFAS No. 64, the criteria in


                                      F-16
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


1.      Organization and Significant Accounting Policies (continued)

Accounting  Principles Bulletin No. 30 will be used to classify gains and losses
from   extinguishment  of  debt.  This  statement  is  effective  for  financial
statements  issued for fiscal years  beginning  after May 15, 2002.  The Company
does not expect the  adoption  of SFAS No. 145 to have a material  impact on the
Company's financial position or its results of operations.

In June 2002,  the  Financial  Accounting  Standards  Board issued SFAS No. 146,
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant
issues regarding the recognition,  measurement,  and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are  currently  accounted  for pursuant to the  guidance  that the Emerging
Issues  Task Force  ("EITF")  has set forth in EITF Issue No.  94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a  Restructuring)."  The scope of
SFAS No. 146 also includes costs related to terminating a contract that is not a
capital lease and certain  termination  benefits provided to employees under the
terms of one-time benefit arrangements.  SFAS No. 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002.

Use of estimates

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

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 than not that the related tax  benefits  will not be realized in the
future.

Reclassification

Certain account  reclassifications have been made to the financial statements of
the prior year in order to conform to classifications  used in the current year.
These changes had no impact on  previously  stated  financial  statements of the
Company.


                                      F-17
<PAGE>

                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


2.      Stockholders' Equity

Convertible Preferred Stock

On July 24, 2001, the Company had a private placement of 12,182 shares of Series
H convertible  Preferred  Stock and warrants to purchase an aggregate of 304,550
shares  of common  stock  with a small  group of  institutional  and  accredited
investors in exchange for cash and convertible notes totaling $1.2 million.

Each  share  of  Series H  Preferred  Stock  is  convertible  at any time at the
election of the holder into 133.33 shares of common stock at a conversion  price
of  $0.75  per  share,  subject  to  certain   anti-dilution   adjustments.   No
underwriters  were engaged by the Company in connection  with such issuance and,
accordingly,  no underwriting  discounts were paid. The offering was 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.

Each share of Series H Preferred  Stock also received two common stock warrants.
One  warrant  is  exercisable  at any time for 15 shares  of common  stock at an
exercise price of $1.50 per share, and expires approximately 12 months after the
close of the  offering;  the other  warrant  is  exercisable  at any time for 10
shares of common  stock at an  exercise  price of $2.00 per share,  and  expires
approximately 24 months after the close of the offering.

During  March  2001,  the  Company  issued  convertible  notes  to  two  current
shareholders  in exchange  for a total of  $800,000.  The notes  provided for an
interest rate of 7% and both principal and interest were convertible into Series
H Preferred  Stock at a common  equivalent  price of $0.75 per share.  The notes
were converted in July 2001.

On August 16, 1999, the Company received  $1,775,000 for 17,750 shares of Series
G  Preferred  Stock  from  several   institutional  and  accredited   individual
investors.  On September 15, 1999, the Company  received an additional  $325,000
for 3,250 shares of Series G Preferred  Stock,  for a total of $2,100,000.  Each
share of Series G Convertible Preferred Stock was priced at $100 per share. Each
share can be converted at any time by the holder into common stock at a price of
$0.50 per  share,  subject to certain  antidilution  adjustments.  Each share of
Preferred Stock also receives a common stock warrant, exercisable for 12 months,
that allows the holder to acquire 200 shares of PPTI common  stock at a price of
$0.50 per share.

In April 1999, the Company received  approximately $508,000 from the exercise of
redeemable  publicly traded warrants originally issued as part of PPTI's Initial
Public  Offering.  Following  the  close of  business  on April  15,  1999,  the
remaining unexercised redeemable,  publicly traded, warrants expired. On May 12,
1999, the Company received  approximately $416,000 from the exercise of warrants
issued in  conjunction  with the private  placement  of the  Company's  Series E
Convertible Preferred Stock.


                                      F-18
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


2.      Stockholders' Equity (continued)

In 1998, the Company raised  approximately  $5.4 million from the sale of 54,437
shares of Series E Convertible Preferred Stock ("Series E Stock") priced at $100
per share,  with warrants to purchase an aggregate of 3,266,250 shares of common
stock to a small group of institutional and accredited investors.  In connection
with this  transaction,  the  Company  recorded  a non-cash  "imputed  dividend"
expense of  $3,266,250 in order to account for the  difference  between the fair
market value of the common stock and the conversion price of the preferred stock
into common stock.

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.

Each share of Series E Stock 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  expired  approximately  18 months  after the close of the
offering;  the other warrant was exercisable at any time for 20 shares of common
stock at an  exercise  price of $5.00 per share,  and expired  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 were
issued  as a finder  and  document  review  fee paid to a lead  investor.  These
warrants have now expired.  An 18 month warrant to acquire  32,000 common shares
exercisable  at $2.50 per share,  a 24 month  warrant to acquire  16,000  common
shares  exercisable  at $5.00 per  share,  and 5 year  warrants  to  acquire  an
aggregate of 25,200 common shares  exercisable at $2.50 per share were issued to
certain persons for service as finders in relation to the private placement. The
18 month and 24 month warrants have now expired.

In connection with the above private placement, the Company issued 26,420 shares
of its Series F Convertible  Preferred  Stock ("Series F Stock") in exchange for
the same number of shares of outstanding  Series D Convertible  Preferred  Stock
("Series D Stock").

Each share of Series D and F Stock  earns a  cumulative  dividend  at the annual
rate of $10 per share,  payable if and when declared by the  Company's  Board of
Directors,  in the form of cash,  common stock or any combination  thereof.  The
Series D and F Stock are convertible  into common stock after two years from the
date of issuance at the holder's  option.  The  conversion  price at the time of
conversion is the lesser of $3.75 or the market price.  The Series D and F Stock
are  redeemable  at the  Company's  option  after  four  years  from the date of
issuance. Automatic conversion of all of the Series D and F Stock will occur if:
(a) the Company  completes a public offering of common stock at a price of $2.50
or higher;  or (b) the  holders  of a majority  thereof  elect to  convert.  The
Company has the option to demand  conversion  of the Series D and F Stock if the
average  market price of its common stock equals or exceeds $5.00 per share over
a  period  of  twenty  business  days.  The  Series  D Stock  has a  liquidation
preference of $100 per share plus accumulated dividends.

The Series E Stock is convertible,  at the option of the holder,  into shares of
the Company's  common stock,  subject to  anti-dilution  adjustments,  and has a
preference in liquidation of $100 per share, but only after any


                                      F-19
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


2.      Stockholders' Equity (continued)

preference  is paid or declared set apart for the Series D Stock.  The Company's
Series F Stock is  equivalent  to its Series E Stock with regard to  liquidation
preferences.  All  other  terms  of the  Series F Stock  remain  the same as the
Company's Series D Stock.

Holders of the Series E Stock are  entitled  to  receive  dividends  when and if
declared by the Company's Board of Directors; however, no such dividends will be
declared  or paid  on the  Series  E Stock  until  the  preferential  cumulative
dividends  on the Series D and F Stock have been fully paid or declared  and set
apart. Automatic conversion of all Series E Stock will occur if: (a) the Company
completes a public  offering of common  stock at a price of $7.50 or higher;  or
(b) the holders of more than 75% of outstanding Series E Stock elect to convert.

Series  D, E, F, and H  Convertible  Preferred  Stock  have been  designated  as
non-voting stock.

Exercise and Exchange of Warrants

In August 2002, certain holders of warrants,  issued in connection with the sale
of Series G Preferred  Stock,  exercised their warrants to purchase common stock
which were due to expire in August 2003.  The original  exercise price was $0.40
per share.  As an incentive to exercise the warrant early,  the Company  offered
each holder a reduced  exercise  price of $0.30 per share and the  issuance of a
new  warrant for a similar  number of shares at an  exercise  price of $0.10 per
share. As a result, the Company raised $683,000.  The newly issued warrants will
expire on the last day of August 2003.

During January 2002, certain holders of warrants,  issued in connection with the
sale of Series G Preferred  Stock,  exercised  their warrants to purchase common
stock which were due to expire in February 2002. The original exercise price was
$0.50 per share.  As an  incentive to exercise  the warrant  early,  the Company
offered each holder a reduced  exercise price of $0.25 and the issuance of a new
eighteen  month warrant for a similar  number of shares at an exercise  price of
$0.40 per share.  As a result the  Company  raised  $990,000.  The newly  issued
warrants will expire on the last day of August 2003.

During March 2001,  certain  holders of warrants  issued in connection  with the
sale of Series G Preferred  Stock  exercised  their warrants to purchase  common
stock,  which were due to expire in February,  2001, but which had been extended
by the Company's Board of Directors originally until February 2002. The original
exercise  price was $1.50 per share.  As an  incentive  to exercise  the warrant
early,  the Company offered to reduce the exercise price to $0.50 and offer each
holder a new one year  warrant  for a similar  number  of shares at an  exercise
price of $1.00 per share.  As a result,  the  Company  raised  $1,246,000  (less
expenses).  The newly  issued  warrants  will expire on the last day of February
2002.

Employee Stock Purchase Plan

In September  1996 the Company  established  the Protein  Polymer  Technologies,
Inc., Employee Stock Purchase Plan ("Plan"). The Plan commenced January 2, 1997,
and allows for offering periods of up to two


                                      F-20
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


2.      Stockholders' Equity (continued)

years with  quarterly  purchase  dates  occurring  the last business day of each
quarter.  The  purchase  price per share is generally  calculated  at 85% of the
lower of the fair  market  value on an  eligible  employee's  entry  date or the
quarterly  purchase date.  The maximum  number of shares  available for issuance
under the Plan is 500,000;  an eligible employee may purchase up to 5,000 shares
per  quarter.  The Plan  Administrator  consists of a committee  of at least two
non-employee  directors of the Company.  The  Company's  Board of Directors  may
modify  the Plan at any  time.  During  2002,  a total  of  47,385  shares  were
purchased  under the Plan at prices  ranging  from $0.27 to $0.40.  The value of
shares issued under the Plan as calculated in accordance  with  Statement 123 is
not significant and is not included in the following pro forma information.

Stock Options

In June 1996, the Company adopted the 1996  Non-Employee  Directors Stock Option
Plan ("1996 Plan"),  which provides for the granting of nonqualified  options to
purchase up to 250,000  shares of common stock to  directors of the Company.  In
April 2002, the 1996 Plan was amended to increase the number of options  awarded
to 10,000.  Such grants of options to purchase 10,000 shares of common stock are
awarded  automatically  on the first  business day of June during each  calendar
year  to  every  Participating  Director  then in  office,  subject  to  certain
adjustments.  No  Participating  Director is  eligible to receive  more than one
grant per year.  The  purchase  price of each  option is set at the fair  market
value of the common  stock on the date of grant.  Each  option has a duration of
ten years,  and is  exercisable  six months after the grant date.  The Company's
Board or Directors (or a designated committee of the Board) administers the 1996
Plan. At

December 31, 2002,  250,000  options to purchase  common stock have been granted
under the 1996 Plan with 230,000 options exercisable.

In April 2002,  the Company  adopted the 2002 Stock Option Plan,  which provides
for the issuance of incentive and  non-statutory  stock options for the purchase
of up to 1,500,000 shares of common stock to its key employees and certain other
individuals.  The options will expire ten years from their  respective  dates of
grant.  Options become exercisable ratably over periods of up to five years from
the dates of grant.  The  purchase  price of each option  approximated  the fair
market value of the common stock on the date of grant.  At December 31, 2002, no
options had yet been granted under the plan.

The Company adopted the 1992 Stock Option Plan,  which provides for the issuance
of incentive and non-statutory stock options for the purchase of up to 1,500,000
shares of common stock to its key employees and certain other  individuals.  The
1992 Stock Option Plan expired as of December 31, 2002. The options granted will
expire  ten  years  from  their  respective  dates  of  grant.   Options  become
exercisable  ratably  over  periods of up to five years from the dates of grant.
The  purchase  price of each option  approximated  the fair market  value of the
common stock on the date of grant.  At December  31,  2002,  options to purchase
808,000 shares of common stock were exercisable.


                                      F-21
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


2.      Stockholders' Equity (continued)

The Company adopted the 1989 Stock Option Plan,  which provided for the issuance
of incentive and  non-statutory  stock options for the purchase of up to 500,000
shares of common stock to key employees and certain other individuals.  The 1989
Stock Option Plan expired as of March 17, 1999. The options  granted will expire
ten years  from their  respective  dates of grant.  Options  granted in the plan
became  exercisable  ratably  over  periods of up to five years from the date of
grant. At December 31, 2002, options for 289,000 shares were exercisable.

Since  inception,  the  Company has granted  non-qualified  options  outside the
option plans to  employees,  directors  and  consultants.  At December 31, 2002,
options for 609,000 shares were exercisable.

The following table summarizes the Company's stock option activity:


<TABLE>
<CAPTION>


                                               Years ended December 31, 2002
                          ----------------------------------------------------------------------
                                   2002                     2001                  2000
                          ----------------------------------------------------------------------
                                        Weighted                 Weighted                Weighted
                                        Average                  Average                 Average
                                        Exercise                 Exercise                Exercise
                            Options       Price      Options       Price     Options       Price
                          ----------------------------------------------------------------------
<S>                         <C>            <C>       <C>            <C>      <C>          <C>
 Outstanding - beginning
        of year             2,124,000      $1.09     1,917,500      $1.22    1,998,000    $1.23

     Granted                  692,500      $0.35       521,500      $0.70      173,500    $1.07
     Exercised                (28,500)     $0.35        (3,500)     $0.47      (85,500)   $0.87
     Forfeited/Expired       (182,500)     $1.05      (311,500)     $1.21     (168,500)   $1.52
                          ----------------------------------------------------------------------

 Outstanding - end of year  2,605,500      $0.90     2,124,000      $1.09    1,917,500    $1.22
                          =======================================================================

 Exercisable - end of year  1,936,000      $1.01     1,568,300      $1.23    1,298,000    $1.34
                          =======================================================================
</TABLE>

The exercise  prices for options  outstanding as of December 31, 2001 range from
$0.22 to $3.75. The weighted average remaining contractual life of these options
is approximately 6.94 years.

Statement 123 pro forma information

Pro forma  information  regarding  net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for employee stock options under
the fair value method prescribed by SFAS No. 123, using the Black-Scholes option
pricing model. The fair value was estimated using the following weighted-average
assumptions: a risk free interest rate of 3.9% for 2002, 5.0% for 2001 and 5.50%
for 2000; a  volatility  factor of the  expected  market price of the  Company's
common stock of 214% for 2002,


                                      F-22
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements


2.      Stockholders' Equity (continued)

23% for 2001, and 100% for 2000;  expected  option lives of 10 years for 2002, 5
years for 2001, 10 years for 2000; and no dividend yields for all years.

The  Black-Scholes  option  valuation model was originally  developed for use in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly  different from those of traded options and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the expected life of the options. The Company's pro
forma information is as follows:

<TABLE>
<CAPTION>

                                                2002             2001             2000
                                                ----             ----             ----
<S>                                       <C>               <C>              <C>
 Net loss as reported                     $   (1,293,797)   $   (3,424,468)  $   (2,775,716)
 Net loss per share as reported                    (0.05)            (0.16)           (0.16)
 Net loss pro forma                           (1,456,680)       (3,552,051)      (3,077,468)
 Net loss per share pro forma                      (0.05)            (0.17)           (0.17)
 Weighted average fair value per share
   of options granted during the year     $         0.34    $         0.54   $         0.95
</TABLE>

The pro forma effect on net loss for 2002,  2001 and 2000 is not  representative
of the pro forma  effect on net loss in future  years  because  it does not take
into consideration pro forma compensation  expense from option grants made prior
to 1995.

3.      Stockholder Protection Agreement

In 1997,  the  Company's  Board of Directors  adopted a  Stockholder  Protection
Agreement  ("Rights Plan") that distributes  Rights to stockholders of record as
of  September  10,  1997.  The  Rights  Plan  contains   provisions  to  protect
stockholders in the event of an unsolicited attempt to acquire the Company.  The
Rights trade together with the common stock,  and generally  become  exercisable
ten business days after a person or group acquires or announces the intention to
acquire 15% or more of the Company's  outstanding  shares of common stock,  with
certain  permitted  exceptions.  The Rights then  generally  allow the holder to
acquire  additional shares of the Company's capital stock at a discounted price.
The issuance of the Rights is not a taxable event, does not affect the Company's
reported  earnings  per  share,  and does not  change  the  manner  in which the
Company's common stock is traded.


                                      F-23
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


4.      Note Receivable from Officer

A loan for  $140,000,  secured  by a  pledge  of  stock,  was made to one of the
Company's  officers on April 16, 1997,  solely to meet tax  obligations  arising
from the exercise of a stock option.  Interest  accrued at the annual rate of 8%
on the unpaid principal balance.  In July 1999, the loan term was extended until
April 2005. The note and accumulated  interest  totaling $190,000 were repaid in
December 2001.

5.      Commitments

The Company  leases its office and research  facilities  totaling  27,000 square
feet under an operating  lease,  which expires in May 2005. The facilities lease
is subject to an annual  escalation  provision  based  upon the  Consumer  Price
Index.  The lease  provides for deferred rent payments;  however,  for financial
purposes rent expense is recorded on a straight-line  basis over the term of the
lease.  Accordingly,  deferred rent in the accompanying balance sheet represents
the  difference  between rent  expense  accrued and amounts paid under the lease
agreement.

Annual future minimum operating lease payments are as follows:

                             Year Ending                Operating
                            December 31,                  Leases
                            ------------             -----------------
                               2003                    $  637,000
                               2004                       656,000
                               2005                       214,000
                                                     -----------------
                     Total minimum operating
                     lease payments                    $1,507,000
                                                     =================

Rent  expense,  net of rental  income,  was  approximately  $620,000,  $380,000,
$367,000,  and $5,005,000  for the years ended December 31, 2002,  2001 and 2000
and  for  the  period  July 6,  1988  (inception)  through  December  31,  2002,
respectively.  Rental income was approximately $163,000, $219,000 and 66,000 for
the years ended December 31, 2002, 2001 and 2000,  respectively and $448,000 for
the period July 6, 1988 (inception) through December 31, 2002.

6.      Income Taxes

At December  31,  2002,  the Company had net  operating  loss  carryforwards  of
approximately  $36,794,000 for federal income tax purposes, which may be applied
against future income, if any, and will begin expiring in 2004 unless previously
utilized.   In  addition,   the  Company  had   California  net  operating  loss
carryforwards of approximately  $13,043,000,  which will begin expiring in 2004.
The  difference  between the tax loss  carryforwards  for federal and California
purposes is  attributable  to the  capitalization  of research  and  development
expenses for California tax purposes,  certain limitations in the utilization of
California loss carryforwards, and the expiration of certain California tax loss
carryforwards.


                                      F-24
<PAGE>


                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


6.      Income Taxes (continued)

The Company also has federal and California  research and development tax credit
carryforwards of approximately $1,461,000 and $789,000, respectively, which will
begin expiring in 2004 unless previously utilized.

Some of these carryforward benefits may be subject to limitations imposed by the
Internal Revenue Code. The Company  believes these  limitations will not prevent
carryforward benefits from being realized.

Significant  components of the Company's  deferred tax assets as of December 31,
2002 are shown below. A valuation  allowance of $15,835,000  has been recognized
to offset the deferred tax assets as realization of such assets is uncertain.


<TABLE>
<CAPTION>
                                                                       2002             2001
                                                               ----------------------------------
<S>                                                            <C>              <C>
Deferred tax assets:
  Net operating loss carryforwards                                $13,628,000   $ 13,182,000
  Research and development credits                                  1,973,000      1,711,000
  Other, net                                                          234,000        382,000
                                                               ----------------------------------
Total deferred tax assets                                          15,835,000     15,275,000
Valuation allowance for deferred tax assets                       (15,835,000)   (15,275,000)
                                                               ----------------------------------
Net deferred tax assets                                        $            -   $          -
                                                               ==================================
</TABLE>

7.      Employee Benefits Plan

On  January  1,  1993,  the  Company  established  a  401(k)  Savings  Plan  for
substantially  all  employees  who meet  certain  service and age  requirements.
Participants  may  elect  to defer up to 20% of  their  compensation  per  year,
subject  to  legislated  annual  limits.  Each year the  Company  may  provide a
discretionary  matching  contribution.  As of December 31, 2002, the Company had
not made a contribution to the 401(k) Savings Plan.

8.      Subsequent Event

On March 25,  2003,  purchasers  of  Series I  Convertible  Preferred  Stock and
Warrants committed  $3,005,000 for 30,050 shares of Series I Preferred Stock and
common  stock  warrants.  Purchasers  paid  $100  for  each  share  of  Series I
Convertible Preferred stock and each share is convertible into approximately 181
shares  of the  Company's  common  stock.  Each  initial  purchaser  of Series I
Preferred  Stock  also  received   common  stock  warrants.   Two  warrants  are
exercisable  at any  time  for  approximately  27  common  shares  per  share of
preferred  stock at exercise  prices of $0.65 and $0.88 per share  respectively,
and expire 18 months  after the closing of the  offering;  the other  warrant is
exercisable  at any  time  for  approximately  18  common  shares  per  share of
preferred  stock at an exercise price of $1.65 per share,  and expires 48 months
after the closing of the offering.  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 file a registration  statement covering resales of the
shares of common stock  underlying the Series I Preferred Stock and the warrants
with the Securities and Exchange Commission on or before May 1, 2003.


                                      F-25
<PAGE>


Item 8. Changes in and  Disagreements  with  Accountants  on Accounting  and
        Financial Disclosure

        None.

                                    PART III


Items 9, 10, 11 and 12 are incorporated by reference from the Company's
        definitive  Proxy  Statement  to  be  filed  by  the  Company  with  the
        Commission no later than April 30, 2002.


Item 13.       Exhibits, Financial Statements and Reports on Form 8-K

(a)(1) and (2) Financial Statements and Schedules

               The Financial  Statements  are  incorporated  herein as a part of
               Item 7.


(a)(3)         Exhibits

               The  following   documents  are  included  or   incorporated   by
               reference:

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

        3.1 (4)          Certificate  of  Incorporation   of  the  Company,   as
                         amended.

        3.1.1 (4)        Certificate   of   Designation   of   Series  X  Senior
                         Participating Preferred Stock.

        3.1.2 (11)       Certificate  of  Designation  of  Series E  Convertible
                         Preferred Stock.

        3.1.3 (11)       Certificate  of  Designation  of  Series F  Convertible
                         Preferred Stock.

        3.1.4 (12)       Certificate  of  Designation  of  Series G  Convertible
                         Preferred Stock.

        3.1.5 (18)       Certificate  of  Designation  of  Series H  Convertible
                         Preferred Stock.

        3.2 (4)          Bylaws of the Company, as amended.

        10.1 (1)         1989  Stock  Option  Plan,   together   with  forms  of
                         Incentive  Stock  Option   Agreement  and  Nonstatutory
                         Option Agreement.

        10.2 (2)         1992 Stock  Option Plan of the Company,  together  with
                         forms  of   Incentive   Stock  Option   Agreement   and
                         Nonstatutory Option Agreement.

        10.3 (1)         Form  of   Employee's   Proprietary   Information   and
                         Inventions Agreement.

        10.4 (1)         Form of Consulting Agreement.

        10.5 (1)         Form of Indemnification Agreement.

        10.6 (2)         License Agreement,  dated as of April 15, 1992, between
                         the Board of  Trustees  of the Leland  Stanford  Junior
                         University and the Company.


                                       23
<PAGE>


        10.7 (4)         Amended  and  Restated  Registration  Rights  Agreement
                         dated  September  14,  1995,  among the Company and the
                         holders of its Series D Preferred Stock.

        10.8 (4)         Securities  Purchase  Agreement  related to the sale of
                         the Company's Series D Preferred Stock.

        10.9 (5)         Letter  Agreement  dated as of October 4, 1996  between
                         the  Company  and MBF I, LLC  ("MBF")  relating  to the
                         provision of consulting and advisory services.

        10.10 (5)        Form of Warrant  with  respect to a warrant  for 50,000
                         shares  issued to MBF,  and to be used with  respect to
                         additional warrants which may be issued to MBF.

        10.11 (5)        Registration  Rights  Agreement  dated as of October 4,
                         1996 between the Company and MBF.

        10.12 (5)        Securities  Purchase  Agreement  dated as of January 6,
                         1997 among the Company and the investors  named therein
                         relating to the sale and purchase of  1,904,000  shares
                         of the Company's common stock.

        10.13 (8)        Lease,  with exhibits,  dated March 1, 1996 between the
                         Company and Sycamore/San Diego Investors.

        10.14 (6)        Second  Amendment  to Lease  between  the  Company  and
                         Sycamore/San Diego Investors, dated March 1, 1996.

        10.15 (6)        1996 Non-Employee Directors' Stock Option Plan.

        10.16 (7)        Stockholder  Protection  Agreement,  dated  August  22,
                         1997,   between  the  Company  and  Continental   Stock
                         Transfer & Trust Company as rights agent.

        10.17 (8)        Employee  Stock  Purchase  Plan,  together with Form of
                         Stock Purchase Agreement.

        10.18 (9)        Lease,  with rider and exhibits,  dated April 13, 1998,
                         between the Company and Sycamore/San Diego Investors.

        10.19 (10)       First  Amendment to  Stockholder  Protection  Agreement
                         dated   April  24,   1998,   between  the  Company  and
                         Continental  Stock  Transfer & Trust  Company as rights
                         agent.

        10.20 (11)       Securities  Purchase  Agreement  related to the sale of
                         the  Company's  Series E  Convertible  Preferred  Stock
                         dated  as of April  13,  1998  among  the  Company  and
                         Investors  named  therein  related to the  purchase  of
                         54,437.50 shares of Series E Preferred Stock.

        10.21 (11)       Form of First Warrants to purchase Common Stock related
                         to the sale of the Company's Series E Preferred Stock.

        10.22 (11)       Form  of  Second  Warrants  to  purchase  Common  Stock
                         related to the sale of the Company's Series E Preferred
                         Stock

        10.23 (11)       Letter of  Agreement  dated April 13, 1998  between the
                         Company and Johnson & Johnson  Development  Corporation
                         for the  exchange  of up to  27,317  shares of Series D
                         Preferred Stock for a like number of shares of Series F
                         Preferred Stock.


                                       24
<PAGE>


        10.24 (12)       Securities  Purchase  Agreement  related to the sale of
                         the Company's Series G Convertible Preferred Stock.

        10.25 (12)       Form of  Warrant to  Purchase  Common  Stock  issued in
                         connection with the Series G Preferred Stock.

        10.26 (12)       Second Amendment to Stockholder  Protection  Agreement,
                         dated July 26, 1999 between the Company and Continental
                         Stock Transfer and Trust Company as rights agent.

        10.27 (13)**     License and  Development  Agreement dated as of January
                         26, 2000  between  the Company and  Prospectivepiercing
                         Limited, to be known as Femcare Urology Limited.

        10.28 (13)**     Supply  Agreement  dated as of January 26, 2000 between
                         the Company and Femcare Urology Limited.

        10.29 (13)**     Escrow  Agreement  dated as of January 26, 2000 between
                         the Company and Femcare Urology Limited.

        10.30 (13)       License Agreement dated as of February 18, 2000 between
                         the Company and Sanyo Chemical Industries, Ltd.

        10.31 (14)**     License  Agreement  dated December 21, 2000 between the
                         Company and Genencor International, Inc.

        10.32 (14)       Form of  Warrant to  Purchase  Common  Stock  issued in
                         connection with License  Agreement  between the Company
                         and Genencor International, Inc.

        10.33 (15)       Securities  Purchase  Agreement  related to the sale of
                         the Company's Series H Preferred Stock.

        10.34 (18)**     Founder Stock Purchase  Agreement  dated April 12, 2001
                         between the Company and Spine Wave, Inc.

        10.35 (18)**     License  Agreement  dated  April 12,  2001  between the
                         Company and Spine Wave, Inc.

        10.36 (18)**     Escrow  Agreement  dated  April 12,  2001  between  the
                         Company and Spine Wave, Inc.

        10.37 (18)**     Supply and  Services  Agreement  dated  April 12,  2001
                         between the Company and Spine Wave, Inc.


                                       25
<PAGE>


        10.38 (16)       Amendment, dated as of February 17, 2000, to Employment
                         Agreements shown above as exhibits 10.30,  10.31, 10.32
                         and 10.33.

        10.39 (19)**     Amendment No. 1 to Supply and Services  Agreement dated
                         February  12, 2002  between the Company and Spine Wave,
                         Inc.

        10.40 (19)**     Stock  Purchase and Vesting  Agreement  dated March 21,
                         2002 between the Company and Spine Wave, Inc.

        10.41 (17)       Warrant  to  Purchase  Shares of Common  Stock of Spine
                         Wave, Inc. issued to the Company.

        10.42            First Amendment to the License  Agreement dated October
                         1, 2002 between the Company and Genencor International,
                         Inc.

        10.43            Employment  Agreement,  dated as of December  31, 2002,
                         between the Company and J. Thomas Parmeter.

        10.44            Employment  Agreement,  dated as of December  31, 2002,
                         between the Company and John E. Flowers.

        10.45            Employment  Agreement,  dated as of December  31, 2002,
                         between the Company and Joseph Capello.

        10.46            Employment  Agreement,  dated as of December  31, 2002,
                         between the Company and Franco A. Ferrari.

        23.1             Consent of Peterson & Co., Independent Auditors.

        23.2             Consent of Ernst & Young LLP, Independent Auditors.

        99.1             Certifications  Pursuant to 18 U.S.C.  Section 1350, as
                         Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002


                                       26
<PAGE>


        (1)    Incorporated by reference to the Company's Registration Statement
               on Form S-1 (No.  33-43875) filed with the Commission on November
               12,  1991,  as amended by  Amendments  Nos. 1, 2, 3 and 4 thereto
               filed on November 25, 1991,  December 23, 1991,  January 17, 1992
               and January 21, 1992, respectively.

        (2)    Incorporated by reference to Registrant's Report on Form 10-K for
               the  fiscal  year  ended  December  31,  1992,  as filed with the
               Commission on March 31, 1993.

        (3)    Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  1994,  as filed with the
               Commission on March 30, 1995.

        (4)    Incorporated by reference to  Registrant's  Report on Form 10-QSB
               for the  quarter  ended  September  30,  1995,  as filed with the
               Commission on October 25, 1995.

        (5)    Incorporated by reference to Registrant's  current Report on Form
               8-K, as filed with the Commission on January 7, 1997.

        (6)    Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  1996,  as filed with the
               Commission on March 27, 1997.

        (7)    Incorporated by reference to Registrant's  Current Report on Form
               8-K, as filed with the Commission on August 27, 1997.

        (8)    Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  1997,  as filed with the
               Commission on April 15, 1998.

        (9)    Incorporated by reference to  Registrant's  Report on Form 10-QSB
               for  the  quarter  ended  March  31,  1998,  as  filed  with  the
               Commission on May 15, 1998.

        (10)   Incorporated by reference to  Registrant's  Report on Form 10-QSB
               for the Quarter ended June 30, 1998, as filed with the Commission
               on August 14, 1998

        (11)   Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  1998,  as filed with the
               Commission on March 5, 1999.

        (12)   Incorporated by reference to  Registrant's  Report on Form 10-QSB
               for the  quarter  ended  September  30,  1999,  as filed with the
               Commission on November 12, 1999.

        (13)   Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  1999,  as filed with the
               Commission on March 24, 2000.

        (14)   Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  2000,  as filed with the
               Commission on February 22, 2001.

        (15)   Incorporated by reference to  Registrant's  Report on Form 10-QSB
               for the  quarter  ended  September  30,  2001,  as filed with the
               Commission on November 14, 2001.

        (16)   Incorporated by reference to  Registrant's  Report on Form 10-KSB
               for the fiscal year ended  December 31,  2001,  as filed with the
               Commission on March 18, 2002.

        (17)   Incorporated by reference to  Registrant's  Report on Form 10-QSB
               for the  quarter  ended  September  30,  2002,  as filed with the
               Commission on November 13, 2002.

        (18)   Incorporated by reference to Registrant's report on Form 10-KSB/A
               for the fiscal  year ended  December  31,  2001 as filed with the
               Commission on March 5, 2003.


                                       27
<PAGE>


        (19)   Incorporated by reference to Registrant's report on Form 10-QSB/A
               for the  period  ended  September  30,  2002 as  filed  with  the
               Commission on March 5, 2003.

        **     Portions  of this  document  have  been  redacted  pursuant  to a
               Request for Confidential  Treatment filed with the Securities and
               Exchange Commission.

(b)            Reports on Form 8-K.

               No reports on Form 8-K were filed  during the last quarter of the
               period covered by this report.


Item 14.       Controls and Procedures

               The Company maintains disclosure controls and procedures designed
               to  ensure  that  information  required  to be  disclosed  in the
               Company's  reports under the Securities  Exchange Act of 1934, as
               amended, is recorded,  processed,  summarized and reported within
               the  time  periods  specified  by  the  Securities  and  Exchange
               Commission  and  that  such   information   is  accumulated   and
               communicated  to the  Company's  management,  including its Chief
               Executive  Officer and Director of Finance,  as  appropriate,  to
               allow timely decisions  regarding  disclosures.  In designing and
               evaluating the disclosure controls and procedures,  the Company's
               management recognized that any controls and procedures, no matter
               how well  designed  and  operated,  can provide  only  reasonable
               assurance of achieving the desired  control  objectives  and that
               the  Company's  management  necessarily  applied its  judgment in
               evaluating the cost-benefit relationship of possible controls and
               procedures.

               Within 90 days of the filing  date of this  report,  the  Company
               performed an  evaluation of the  effectiveness  of the design and
               operation of its disclosure controls and procedures as defined in
               Rules 13a-14(c) and 15d-14(c) promulgated under the Exchange Act.
               The evaluation was performed  under the  supervision and with the
               participation   of  the  Company's   management,   including  the
               Company's Chief Executive Officer and Director of Finance.  Based
               upon that evaluation, the Chief Executive Officer and Director of
               Finance  concluded  that the  Company's  disclosure  controls and
               procedures  were effective in ensuring that material  information
               relating to the  Company was made known to them by others  within
               the Company during the period in which this report was prepared.

               There have been no significant  changes in the Company's internal
               controls  or in other  factors  that could  significantly  affect
               these controls  subsequent to the date the Company  completed its
               evaluation.


                                       28
<PAGE>


                                    SIGNATURE


         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                            PROTEIN POLYMER TECHNOLOGIES, INC.


March 28, 2003               By             /S/  J. THOMAS PARMETER
                                            -----------------------
                                            J. Thomas Parmeter
                                            Chairman of the Board, Chief
                                            Executive Officer, President


         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.


<TABLE>
<CAPTION>


Signature                               Capacity                                 Date
---------                               --------                                 ----

<S>                                     <C>                                     <C>
/S/  J. THOMAS PARMETER                 Chairman of the Board, Chief            March 28, 2003
-----------------------------           Executive Officer, President
J. Thomas Parmeter                      (Principal Executive Officer)


/S/  JANIS Y. NEVES                     Director of Finance, Controller,        March 28, 2003
-----------------------------           and Assistant Secretary
Janis Y. Neves                          (Principal Financial Officer)


/S/  RICHARD ADELSON                    Director                                March 28, 2003
-----------------------------
Richard Adelson

/S/  EDWARD E. DAVID                    Director                                March 28, 2003
-----------------------------
Edward E. David, Ph.D.

/S/  PHILIP J. DAVIS                    Director                                March 28, 2003
-----------------------------
Philip J. Davis

/S/  EDWARD J. HARTNETT                 Director                                March 28, 2003
-----------------------------
Edward J. Hartnett

/S/  J. PAUL JONES                      Director                                March 28, 2003
-----------------------------
J. Paul Jones, Ph.D.

/S/  KERRY L. KUHN                      Director                                March 28, 2003
-----------------------------
Kerry L. Kuhn, M.D.

/S/  GEORGE R. WALKER                   Director                                March 28, 2003
-----------------------------
George R. Walker
</TABLE>


                                       29
<PAGE>


                                  CERTIFICATION
                          PURSUANT TO 17 CFR 240.13a-14
                                PROMULGATED UNDER
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, J. Thomas Parmeter, certify that:

1.      I have  reviewed  this annual  report on Form 10-KSB of Protein  Polymer
        Technologies, Inc.;

2.      Based on my  knowledge,  this annual  report does not contain any untrue
        statement of a material fact or omit to state a material fact  necessary
        to make the statements made, in light of the  circumstances  under which
        such  statements  were made, not  misleading  with respect to the period
        covered by this annual report;

3.      Based on my knowledge,  the financial  statements,  and other  financial
        information  included  in this  annual  report,  fairly  present  in all
        material  respects the financial  condition,  results of operations  and
        cash flows of the  registrant  as of, and for, the periods  presented in
        this annual report;

4.      The  registrant's  other  certifying  officers and I are responsible for
        establishing  and  maintaining  disclosure  controls and  procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and
        have:

        (a)     designed such disclosure  controls and procedures to ensure that
                material information  relating to the registrant,  including its
                consolidated subsidiaries,  is made known to us by others within
                those  entities,  particularly  during  the period in which this
                annual report is being prepared;

        (b)     evaluated  the  effectiveness  of  the  registrant's  disclosure
                controls and procedures as of a date within 90 days prior to the
                filing date of this annual report (the "Evaluation Date"); and

        (c)     presented  in this  annual  report  our  conclusions  about  the
                effectiveness of the disclosure controls and procedures based on
                our evaluation as of the Evaluation Date;

5.      The registrant's other certifying  officers and I have disclosed,  based
        on our most recent  evaluation,  to the  registrant's  auditors  and the
        audit  committee  of   registrant's   board  of  directors  (or  persons
        performing the equivalent functions):

        (a)     all  significant  deficiencies  in the  design or  operation  of
                internal  controls which could adversely affect the registrant's
                ability to record, process,  summarize and report financial data
                and have identified for the  registrant's  auditors any material
                weaknesses in internal controls; and


                                       30
<PAGE>


        (b)     any fraud, whether or not material,  that involves management or
                other employees who have a significant  role in the registrant's
                internal controls; and

6.      The registrant's other certifying  officers and I have indicated in this
        annual  report  whether  there  were  significant  changes  in  internal
        controls or in other factors that could  significantly  affect  internal
        controls subsequent to the date of our most recent evaluation, including
        any  corrective  actions  with regard to  significant  deficiencies  and
        material weaknesses.


Date: March 28, 2003

/s/ J. Thomas Parmeter
--------------------------
J. Thomas Parmeter
Chief Executive Officer


                                       31
<PAGE>


                                  CERTIFICATION
                          PURSUANT TO 17 CFR 240.13a-14
                                PROMULGATED UNDER
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Janis Y. Neves, certify that:

1.      I have  reviewed  this annual  report on Form 10-KSB of Protein  Polymer
        Technologies, Inc.;

2.      Based on my  knowledge,  this annual  report does not contain any untrue
        statement of a material fact or omit to state a material fact  necessary
        to make the statements made, in light of the  circumstances  under which
        such  statements  were made, not  misleading  with respect to the period
        covered by this annual report;

3.      Based on my knowledge,  the financial  statements,  and other  financial
        information  included  in this  annual  report,  fairly  present  in all
        material  respects the financial  condition,  results of operations  and
        cash flows of the  registrant  as of, and for, the periods  presented in
        this annual report;

4.      The  registrant's  other  certifying  officers and I are responsible for
        establishing  and  maintaining  disclosure  controls and  procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and
        have:

        (a)     designed such disclosure  controls and procedures to ensure that
                material information  relating to the registrant,  including its
                consolidated subsidiaries,  is made known to us by others within
                those  entities,  particularly  during  the period in which this
                annual report is being prepared;

        (b)     evaluated  the  effectiveness  of  the  registrant's  disclosure
                controls and procedures as of a date within 90 days prior to the
                filing date of this annual report (the "Evaluation Date"); and

        (c)     presented  in this  annual  report  our  conclusions  about  the
                effectiveness of the disclosure controls and procedures based on
                our evaluation as of the Evaluation Date;

5.      The registrant's other certifying  officers and I have disclosed,  based
        on our most recent  evaluation,  to the  registrant's  auditors  and the
        audit  committee  of   registrant's   board  of  directors  (or  persons
        performing the equivalent functions):

        (a)     all  significant  deficiencies  in the  design or  operation  of
                internal  controls which could adversely affect the registrant's
                ability to record, process,  summarize and report financial data
                and have identified for the  registrant's  auditors any material
                weaknesses in internal controls; and


                                       32
<PAGE>


        (b)     any fraud, whether or not material,  that involves management or
                other employees who have a significant  role in the registrant's
                internal controls; and

6.      The registrant's other certifying  officers and I have indicated in this
        annual  report  whether  there  were  significant  changes  in  internal
        controls or in other factors that could  significantly  affect  internal
        controls subsequent to the date of our most recent evaluation, including
        any  corrective  actions  with regard to  significant  deficiencies  and
        material weaknesses.


Date: March 28, 2003

/s/ Janis Y. Neves
--------------------------
Janis Y. Neves
Director of Finance and Assistant Secretary


                                       33
<PAGE>


                                  EXHIBIT INDEX


        10.42     First Amendment to the License Agreement dated October 1, 2002
                  between the Company and Genencor International, Inc.

        10.43     Employment Agreement, dated as of December 31, 2002, between
                  the Company and J. Thomas Parmeter.

        10.44     Employment Agreement, dated as of December 31, 2002, between
                  the Company and John E. Flowers.

        10.45     Employment Agreement, dated as of December 31, 2002, between
                  the Company and Joseph Capello.

        10.46     Employment Agreement, dated as of December 31, 2002, between
                  the Company and Franco A. Ferrari.

        23.1      Consent of Peterson & Co., Independent Auditors.

        23.2      Consent of Ernst & Young LLP, Independent Auditors.

        99.1      Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley act of 2002