**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, 2006ORTRANSITION
                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 in its charter)




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


10655
      Sorrento Valley Road, San Diego, CA 92121


(Address
      of principal executive offices) (Zip Code)




Issuer’s
      telephone number: (858) 558-6064




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




Securities
      registered pursuant to Section 12(g) of the Exchange Act:


Common
      Stock


(Title
      of
      Class)




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  |_|




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 in response to Item 405 of
      Regulation S-B contained in this form, 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.  |_|




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes ___  No  X




The
      issuer’s revenues for the most recent fiscal year were $605,000.




The
      aggregate market value of the voting common equity held by non-affiliates
      computed by reference to the price at which the common equity sold, or the
      average bid and asked price of such common equity, as of March 30, 2007 was
      $7,806,450. Stock held by directors, officers and shareholders owning 5% or
      more
      of the outstanding common equity (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 equity outstanding as of March 30, 2007 was
      67,809,204.




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 with respect to the registrant’s
      2007 Annual Meeting of Stockholders.




Transitional
      Small Business Disclosure
      Format: Yes ___  No X









**PROTEIN
      POLYMER TECHNOLOGIES, INC.**




**FORM
      10-KSB**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**




**TABLE
      OF CONTENTS**




**Page**


**PART
                I**
            2Item
                1.
            Business
            12Item
                2.
            Properties
            12Item
                3.
            Legal
                Proceedings
            12Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            12**PART
                II**
            12Item
                5.
            Market
                for Common Equity, Related Stockholder Matters and
                Small Business Issuer Purchases of Equity Securities
            12Item
                6.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            14Item
                7.
            Financial
                Statements
            F-1Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            21Item
                8A.
            Controls
                And Procedures
            21Item
                8B.
            Other
                Information
            21**PART
                III**
            21Item
                13.
            Exhibits
            21Signatures
            
            26




1
 
  **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
      and Technology Background**




Protein
      Polymer Technologies, Inc., a Delaware corporation, is a biotechnology company
      incorporated on July 6, 1988. We are engaged in the research, development and
      production of bio-active devices to improve medical and surgical outcomes.
      Through our patented technology to produce proteins of unique design, biological
      and physical product components are integrated to provide for optimized clinical
      performance. Additionally, we are committed to the acquisition of
      faster-to-market medical products in certain complementary growth
      markets.




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
      preclinical safety 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 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.  2


In
      contrast to natural proteins, either isolated from natural sources or produced
      using traditional genetic engineering techniques, our technology results in
      the
      creation of new proteins with unique properties.




We
      have
      demonstrated an ability to create materials that:




•
            combine
                properties of different proteins found in nature;•
            reproduce
                and amplify selected activities of natural proteins;•
            eliminate
                undesired properties of natural proteins; and•
            incorporate
                synthetic properties via chemical modifications


This
      ability is fundamental to our current primary product research and development
      focus — tissue repair and regeneration. Tissues are highly organized structures
      made up of specific cells arranged in relation to an 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. New combinations of properties suitable for
      various medical applications have been created by precisely varying the number
      and sequence of the different blocks in the assembled protein
      polymer,.




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.




We
      are
      focused internally on developing protein polymers that are useful in products
      for (1) soft tissue augmentation, (2) tissue adhesives and sealants, and (3)
      drug delivery devices. Our products are based on a new generation of
      biomaterials designed to aid in the process of bodily repair by promoting the
      healing of tissue and restoration or augmentation of its form and function.
      These platform biomaterials are genetically engineered, high molecular weight
      proteins, processed into products with tailored physical structure and
      biological characteristics.




Our
      internal product development efforts are targeted toward a variety of markets
      based on a common biomaterials platform. These include: injectable disc nucleus
      for the treatment of injured or degenerated spinal discs, strong and
      fast-setting, resorbable surgical sealants for use in general and cardiovascular
      procedures following primary wound closure, adhesion barriers, scaffolds for
      wound healing and tissue engineering. Other markets of interest, which are
      in an
      earlier stage of development, include those for drug delivery devices.




We
      also
      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.


3




**Product
      Candidates and Anticipated Markets for Protein Polymer
      Technology**




Our
      protein polymer technology and materials have the potential to create products
      useful in a variety of medical markets. Opportunities for research and
      development of product candidates for other medical uses continue to be
      evaluated.




All
      of
      these product candidates are subject to preclinical and clinical testing
      requirements for obtaining FDA and international regulatory authorities’
marketing approvals. 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 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.




Surgical
      Tissue Sealants (STS): 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 the United States, approved
      products have fallen into several categories. DermaBond® (not our trademark), a
      synthetic cyanoacrylate adhesive, is approved for topical application to close
      skin incisions and lacerations. Cyanoacrylate adhesives set fast and have high
      strength, but form brittle plastics that do not resorb. This limitation
      restricts their use to bonding the outer surfaces of skin together. Tisseel®
(not our trademark), a fibrin sealant, is 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 synthetic cross-linking agents such as gluraraldehyde. Such
      products were originally marketed in Europe for limited, life-threatening
      indications and the FDA approved one such product, BioGlue® (not our trademark),
      in 2001 for use as an adjunct to sutures and staples in open surgery to repair
      large arteries. The aldehyde cross-linking agents employed in such products
      (i.e., glutaraldehyde, formaldehyde) are known to cause adverse tissue
      reactions. DuraSeal® (not our trademark), a sealant product composed of a
      synthetic polymer called polyethylene glycol, is a relatively weak sealant
      approved for use in neurosurgery. To date, none of the products available in
      the
      U.S. for use inside the body have found widespread acceptance among surgeons,
      for reasons ranging from their lack of performance based on properties such
      as
      adhesiveness, flexibility, and resorption rate, complexity of use, or concerns
      about the perceived benefit to risk.





We
      have
      developed surgical adhesives and sealants that are easy for the surgeon to
      use,
      and 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 strength
      and elasticity within the adhesive matrix (to move as tissues move) and the
      capability of tailoring the resorption rate of the adhesive matrix to the rate
      at which the wound heals. A non-resorbable adhesive or sealant can only be
      used
      where the damaged tissues are not going to grow together. Otherwise, a barrier
      to wound healing is unavoidably created.





We
      have
      demonstrated both the adhesive performance and the biocompatibility of our
      product formulations in preclinical studies, including resorption of the
      adhesive matrix in conjunction with the progression of wound healing. As a
      result of our evaluations of the unmet surgeon needs, the properties achievable
      with our technology, and the capabilities of competitive technologies, specific
      applications providing the most significant opportunities have been
      targeted.





Sealant
      Performance/Properties





·
            Sets
                quickly to an adhesive hydrogel.


·
            Adheres
                well to tissue, seals gas and fluid
                leaks.


·
            Minimal
                material swelling.


·
            Resorbable
                and non-resorbable formulations.


·
            Two
                absorption rates.


·
            Reduces
                post-operative adhesions.





Our
      tissue adhesive technology combines a silk-elastin polymer designed specifically
      to react with a biocompatible cross-linking agent under physiological
      conditions. Two fluid components are mixed just prior to their delivery to
      the
      treatment site, which can be accomplished through a fine gauge needle and
      in  4


spray
      form. The material then rapidly cures to a tough, elastic hydrogel that strongly
      adheres to surrounding tissues.





Wound
      Healing & Tissue Regeneration: 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 the 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.





We
      have
      developed protein polymers that we believe may be useful in the treatment of
      dermal wounds, particularly chronic wounds such as decubitous ulcers, where
      both
      reconstruction of the extracellular matrix ("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 in
      situ 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.





Urethral
      Bulking Agent (UBA) - Polymer
      47K: UBA effectively relieves female stress incontinence by injecting liquid
      that rapidly changes to long-lasting solid bulk to the tissue surrounding the
      urethra. Our UBA injection procedure, an alternative to surgery, most often
      requires only one treatment. UBA is a more effective and longer lasting bulking
      agent than the competition. The UBA gel is resistant to migration. A closure
      report has been filed with the FDA .





Dermal
      Filler Device: The soft
      tissue augmentation materials technology underlying the incontinence product
      has
      the potential to be useful 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. Based on a number of factors, including
      the projected time to market, the competitive environment, the uncertainty
      of
      achieving our product design goals, and the expenses associated with the
      program, we have decided that it is in the best interests of the Company not
      to
      continue our independent development efforts for this product.




**Manufacturing,
      Marketing and Distribution**





Preclinical
      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 preclinical testing
      and initial (“pilot”) clinical testing. We will require additional manufacturing
      capacity to expand beyond initial clinical trials.




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 reconfigure our existing facility to produce needed quantities
      of materials under FDA’s GLP and QSR requirements for clinical and commercial .
      Alternatively, we may establish external contract manufacturing arrangements
      for
      needed quantities of materials. However, we cannot assure 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.


5




**Research
      and Development**




Local
      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, our surgical adhesive and sealant formulations,
      and our wound healing matrices 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 that can be critical in maintaining
      the activity of the drug, particularly protein-based drugs emerging from the
      biotechnology industry. This program is in the preclinical research
      stage.





**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.




Spine
      Wave:





Low
      back
      pain is the leading cause for healthcare expenditures in the United States,
      resulting in more than $50 billion in direct and indirect medical expense,
      and
      products used to treat it are 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.





We
      are a
      technology partner with Spine Wave, Inc. We own 2.4 million shares of Spine
      Wave, Inc. common stock. We used our patented tissue adhesive technology to
      create Spine Wave’s NuCore Ô intervertebral disc repair material. We manufactured the NuCoreTM material for
      Spine Wave’s clinical trials.





The
      spine
      supports about one-half of the body’s weight and is a highly flexible structure.
      The spinal disc is like a jelly-filled tire between the bony vertebrae, a key
      component providing for flexibility and acting as a shock absorber. It has
      no
      blood supply and thus is not able to repair itself. Exposure to heavy loads
      or
      extreme twisting motions can cause tears in the outer portion of the disc,
      allowing the jelly-like material (the nucleus) to extrude. Additionally, with
      age the disc degenerates. The injury to or degeneration of the disc results
      in
      fundamental changes in its mechanical properties and also impacts surrounding
      tissues in a variety of ways, which can result in persistent pain.





Currently,
      there are no satisfactory treatments available for chronic low back pain due
      to
      damaged or deteriorated discs. In extreme cases, a spinal fusion may be
      performed to limit the mobility of the joint. However, this procedure requires
      invasive surgery, restricts mobility, and leads to further degeneration of
      the
      spine.  6


A
      number
      of products are reported to be in development, ranging from complete replacement
      with an artificial disc to implantation of “pillows” within the disc space. We
      and Spine Wave believe an injectable product that can be used in an outpatient
      procedure, avoiding surgery required for implants and thus minimizing additional
      damage to the disc and/or surrounding structures will be a preferred approach.
      Collaborative feasibility studies have demonstrated that the injectable disc
      nucleus product has physical properties mimicking those of the natural nucleus;
      is able to withstand the large, cyclical forces seen by the human spine; and
      resists expulsion under high loads due to its adherence to the disc wall.





Spine
      Wave’s NuCoreTM Injectable Nucleus device, based on our patented tissue adhesive
      technology, is an injectable protein polymer formulation for repair of spinal
      discs damaged as a result of injury or aging. Injected in a liquid form, the
      NuCoreTM material rapidly cures to a gel that has physical properties which mimic
      those of the natural nucleus. Spine Wave has enrolled patients in Degenerative
      Disc Disease and microdiscectomy studies of the NuCoreTM Injectable Nucleus
      device in four countries: Switzerland, Australia, Germany and the United
      States.





We
      created this core technology and manufactured the product for Spine Wave, Inc.’s
      U.S. and European trials. Spine Wave has transitioned to CMC Biopharmaceuticals
      to manufacture the recombinant protein for NuCoreTM Injectable Nucleus for
      commercial in-market supply.




Surgica
      Corporation:




In
      December 2005, we entered into agreements with Surgica Corporation, including
      a
      license agreement for the exclusive rights to Surgica’s technology and products.
      Pursuant to these agreement we have provided Surgica with approximately $771,000
      in financing to support its operations. Additionally, we acquired an option
      to
      purchase all of Surgica’s assets, and entered into a supply and services
      agreement for Surgica to provide us with, among other services, product for
      commercial distribution. The option has terminated.




On
      or
      about March 13, 2007, we received a letter from Surgica’s counsel alleging that
      we had breached the license agreement and the supply and services agreement
      and,
      based thereon, Surgica was terminating these agreements and, accordingly, our
      rights to Surgica’s technology and products. In connection therewith Surgica’s
      counsel demanded that we reassign the 501(k) Clearances, as defined in the
      license agreement, back to Surgica. We do not believe that we have breached
      these agreements. Accordingly, we do not believe that we are obligated to
      reassign the 501(k) Clearances back to Surgica and have so notified Surgica.




Genencor
      International, Inc .




In
      December 2000, we signed a broad-based, worldwide exclusive license agreement
      with Genencor International, Inc. enabling Genencor, potentially, to develop
      a
      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 in the field of non-medical personal care products.




In
      March
      2005, the license was amended to fully incorporate the field of personal care
      products into the license. As a result of the agreements, Genencor may use
      our
      patented protein polymer design and production technology, in combination with
      Genencor's extensive gene expression, protein design, and large-scale
      manufacturing technology, to design and develop new products with improved
      performance properties for defined industrial fields and the field of
      non-medical personal care products.




In
      return
      for the licensed rights, Genencor paid 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 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. In March 2005 we received
      a
      second license milestone


7




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 in to
      500,000 shares of our common stock. Both warrants have subsequently
      expired.




As
      a
      result of the collaboration, in 2000 we recognized an aggregate of
 $750,000 in license fee revenue (less the issuance of warrants to purchase
      1 million shares of our common stock valued at $319,000) through December 31,
      2006, of which $100,000 was recognize as revenue during 2006. The agreement
      terminates on the date of expiration of the last remaining patent.




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




**Other
      Agreements**




We
      are
      discussing other potential collaboration agreements with prospective marketing
      partners. We cannot assure 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. We cannot assure
      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




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, 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




o
            performance,


o
            cost,


o
            safety,


o
            reliability,


o
            convenience,
                and


o
            commercial
                production capabilities.




8




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-six patents to
      us.
      Additionally, we have five U.S. patent applications pending.




We
      have
      been granted five U.S. patents that 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 that 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 eight U.S. patents covering our tissue adhesive and sealant
      technology. 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
      five 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 four remaining patents cover the special case where
      primers are used to enhance the mechanical strength of protein-based tissue
      adhesives and sealants. 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 polymers that have been chemically
      modified to make them water-soluble. The last of these two patents will expire
      in 2015.  9


Although
      we believe our existing issued patent claims provide a competitive advantage,
      we
      cannot assure 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, we cannot
      assure 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, we have filed international patent applications corresponding
      to
      the major U.S. patents described above 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
      fifteen issued foreign patents, and five 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. Generally, we only maintain
      foreign patents or applications in Europe and Japan, unless otherwise required
      due to our license agreements.




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® trademark and our SmartPlastic® 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) of both the U.S. and the State
      of California.




Extensive
      preclinical 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 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.  10


We
      cannot
      assure 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 if we are unable to obtain and maintain these approvals
      and/or comply with these regulations. 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, e.g., ISO
      13485
      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 13485 standards are similar to the FDA’s
      QSR.




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. Our 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, we cannot assure 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 beginning human clinical testing of our
      investigational devices, we procured product liability insurance. Prior to
      shipping the products, we obtained the applicable product liability insurance.
      We are maintaining the insurance, expanding the coverage as appropriate in
      concert with the development and use of our products. We cannot assure, 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.




**Executive
      Officers of the Registrant**


Name
            
            Age
            
            Position
                with the CompanyWilliam
                N. Plamondon, III
            
            59
            
            Chairman
                of the Board and Chief Executive OfficerJoseph
                Cappello, Ph.D.
            
            50
            
            Vice
                President, Research and Development, Chief Technical Officer and
                Director,
                Clinical ResearchFranco
                A. Ferrari, Ph.D.
            
            55
            
            Vice
                President, Laboratory Operations and Polymer Production and Director,
                Molecular GeneticsJohn
                E. Flowers
            
            50
            
            Vice
                President, Planning and Operations




Mr.
      Plamondon is our Chairman and Chief Executive Officer, a position he has held
      since April 2005. Mr. Plamondon has served as a director since March 2005.
      Mr.
      Plamondon also serves as the President and Chief Executive Officer of R.I.
      Heller & Co., LLC, a management consulting firm, a position he has held
      since 1998. Previously, Mr. Plamondon served as President and Chief Executive
      Officer of ANC Rental Corporation from October 2001 until October 2003, as
      Chief
      Executive Officer of First Merchants Acceptance Corp. from May 1997 until May
      1998, and as President and Chief Executive Officer of Budget Rent-a-Car from
      June 1992 until February 1997.  11


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




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




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




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
      March 31, 2007, we had 18 full-time employees, of who two 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 success.
      We cannot assure 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 of office
      and
      laboratory space in San Diego. The leased property includes our administrative
      offices, which encompass approximately 4,000 square feet, and our laboratory
      facilities, which encompass approximately 23,000 square feet. The current annual
      rent for this space is approximately $680,000. We currently sublease 6,000
      square feet of office and laboratory space in our current facility to a third
      party (“Biopraxis”), offsetting our rental expense as of December 31, 2006
      by approximately $157,000. The master lease expires in May 2008. The sublease
      annual 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 2007.




**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
      2006.




**PART
      II**




**Item
                5.**
            **Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities.**


*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.  12


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****2006**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            0.33
            
            $
            0.19Second
                Quarter
            
            
            0.28
            
            
            0.15Third
                Quarter
            
            
            0.21
            
            
            0.12Fourth
                Quarter
            
            
            0.23
            
            
            0.12**2005**First
                Quarter
            
            $
            1.250
            
            $
            0.
                460Second
                Quarter
            
            
            1.100
            
            
            0.440Third
                Quarter
            
            
            0.610
            
            
            0.350Fourth
                Quarter
            
            
            0.400
            
            
            0.180




As
      of
      March 31, 2007, we had approximately 193 shareholders of record of our common
      stock; we estimate we had approximately 1,500 beneficial holders as of that
      date. 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, 2006 regarding equity
      compensation plans (including individual compensation arrangements) under which
      our equity securities are authorized for issuance.




**Plan
                Category**
            
            **Number
                of securities**
              **to
                be issued upon**
              **exercise
                of outstanding**
              **options,
                warrants and**
              **rights**
            
            **Weighted-average
                exercise price of outstanding**
              **options,
                warrants and rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))****(a)**
            
            **(b)**
            
            **(c)****Equity
                Compensation Plans approved by security holders**Stock
                Option Plans1
            
            
            10,770,532
            
            $
            0.649
            
            
            1,479,468Employee
                StockPurchase
                Plan2
            
            
            —
            
            
            —
            
            
            —**Equity
                Compensation Plans not approved by security holders****3**
            
            
            1,684,050
            
            $
            0.732
            
            
            n/a





1Includes
                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.2Includes shares of common stock available for future issuance under
                the
                Employee Stock Purchase Plan.3Includes
                shares of common stock to be issued upon exercise of out-of-plan
                non-qualified options granted.




13




**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 biotechnology company engaged in the research,
      development, production and clinical testing of medical products based on
      materials created from our patented technology to produce proteins of unique
      design. Additionally, we are committed to the acquisition of faster-to-market
      medical products in certain complementary growth markets. Since 1992, we have
      focused primarily on developing technology and products to be used for tissue
      adhesives and sealants; wound healing support; and drug delivery devices.




14
 
 **Results
          of Operations**
 
 **Operating
          Results for the Year Ended December 31, 2006 as compared to the
          2005**
 
 *Contract
          and Licensing Revenue* .
          We
          earned $533,000 in contract and licensing revenue for the year ended December
          31, 2006 as compared to $861,000 for the year ended December 31, 2005.
          Contract
          revenue for 2006 were earned by providing for materials and services in
          the
          development of an adhesive product for the repair of spinal discs laboratory
          services for Spine Wave. Additionally, we earned $100,000 in licensing
          fees from
          Genencor International.
 
 *Research
          and Development Expenses* .
          Research and development expenses for the year ended December 31, 2006
          were
          $3,690,000, compared to $2,908,000 for 2005. The fluctuations primarily
          result
          from clinical testing, Surgica operating expenses and regulatory consulting
          costs. We expect our research and development expenses will increase in
          the
          future, to the extent additional capital is obtained, due to the expansion
          of
          product-directed development efforts including preclinical development
          of our
          surgical sealants. We do not anticipate that the $770,000 expenses incurred
          with
          respect to Surgica will be incurred in 2007.
 
 *Selling,
          General and Administrative Expenses* .
          Selling, general and administrative expenses for the year ended December
          31,
          2006 were $4,759,000, as compared to $3,735,000 for 2005. We have made
          improvements in reducing the administration expenses in 2006. Several highly
          compensated positions were eliminated and all non-mission sensitive expenses
          were reviewed and either eliminated or reduced.
 
 The
          following discusses items which were incurred in each year that are
          non-recurring or of particular significance. During 2005 we incurred
          non-recurring fees with respect to the contemplated, but terminated, Thuris
          transaction. We incurred non-cash expense in the second quarter of 2005
          in the
          amount of $1,245,000 related to the issuance of warrants for services to
          William
          N. Plamondon III, the Company’s Chief Executive Officer. During 2006 we
          recognized non-cash charges aggregating $1,507,000 as the result of adopting
          SFAS No. 123 (revised 2004) “Share Based Payment” for stock options.
          Additionally, we determined that our License Agreement with Surgica was
          terminated and resulted in our providing an allowance for impairment of
          $1,047,000 and a $257,000 provision for bad debts related to the notes
          receivable that Surgica owed to us. As the result of settling a contingent
          obligation for $200,000 with the Sapphire Group that we settled with the
          issuance of 400,000 shares of our common stock, we recognized a gain of
          $139,000.
 
 Although
          the remainder of selling, general and administrative expenses has been
          fairly
          consistent over the past two years, we did experience some increases during
          2005
          in the areas of insurance coverage and legal services. To the extent possible,
          we continue to concentrate on controlling costs reflected in reduced travel,
          office supplies, and non-regulatory consulting costs. We expect our selling,
          general and administrative expenses will increase in the future, to the
          extent
          additional capital is obtained, consistent with supporting our research
          and
          development efforts and as business development, patent, legal and investor
          relations activities require.
 
 *Interest
          Income/(Expense)* .
          Interest income was $16,900 for the year ended December 31, 2006, as compared
          to
          $41,000 for 2005. The year-to-year variability resulted from our lack of
          cash
          resources available for investment during 2006 than was generated in 2005
          as the
          result of the receipt of equity capital. Interest expense increased
          significantly from $88,000 in 2005 to $221,000 in 2006. This increase was
          the
          direct result of incurring $3,462,000 of secured financing from a stockholder
          to
          sustain our operations in 2006 and the assumption of $519,000 of promissory
          notes in connection with the Surgica transaction during December
          2005.
 
 *Operating
          Losses* .
          For the
          year ended December 31, 2006, we recorded a net loss applicable to common
          shareholders of $8,245,000 or $0.12 per share, as compared to $6,581,000
          or
          $0.11 per share for 2005. The difference in the net losses are as discussed
          in
          detail previously. The undeclared or imputed dividends decreased as the
          result
          of a non-cash imputed dividend that resulted from extending the term of
          certain
          warrants in 2005. The average numbers of shares outstanding increased by
          approximately 8,635,000 since the additional shares that were issued during
          2005
          were outstanding for the entire year of 2006.
  15
 **Liquidity
          and Capital Resources**
 
 As
          of
          December 31, 2006, we had cash, cash equivalents and short-term investments
          totaling $73,000, as compared to $1,212,000 at December 31, 2005. As of
          December
          31, 2006, we had a working capital deficit of $4,946,000 compared to working
          capital of $449,000 at December 31, 2005.
 
 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, 2006 or December 31, 2005. For the year ended December 31, 2006, our
          cash
          expenditures for capital equipment and leasehold improvements totaled $37,000,
          compared with $257,000 for the same period in the prior year. We do not
          anticipate that these expenditures will be increased in 2007. We may enter
          into
          capital equipment lease arrangements in the future if available at appropriate
          rates and terms.
 
 On
          April
          13, 2006, an accredited investor loaned us $1,000,000 (the “Loan”) ($500,000 in
          cash and an additional $500,000 deposited with an escrow agent as a line
          of
          credit) represented by a note (the “Note”) issued by us to the investor in the
          principal amount of $1,000,000 (the “Principal”). The Note was originally due on
          July 12, 2006 (the “Maturity Date”) and bears annual interest at the rate of 8%
          payable on the Maturity Date. It is secured, in accordance with the terms
          of a
          security agreement (the “Security Agreement”), by a continuing security interest
          in and a general lien upon (i) 1,000,000 shares of Spine Wave, Inc. common
          stock
          owned by us (ii) a warrant to purchase 1,000,000 shares of Spine Wave,
          Inc.
          common stock owned by us which has since been exercised; and (iii) all
          U.S.
          patents owned by us. The Note and the Security Agreement are both dated
          April
          13, 2006. As consideration for the Loan us granted a warrant to the investor
          to
          purchase an aggregate of 500,000 shares of our common stock at an exercise
          price of $0.30 per share. The investor’s counsel acts as the escrow agent and
          now serves as our outside general counsel.
 
 The
          Note
          has subsequently been amended five times so that as of April 10, 2007 the
          principal balance is approximately $4.8 million and the maturity date is
          August
          10, 2007. At December 31, 2006, the outstanding indebtedness subject to
          the Note
          and Security Agreement was $3,462,000.
 
 Pursuant
          to the terms of the Security Agreement, we entered into a patent security
          agreement, an escrow agreement, patent assignment, and a registration rights
          agreement, each dated as of April 13, 2006. According to the terms of the
          Security Agreement, we entered into the Escrow Agreement with an escrow
          agent for the investor. The Escrow Agreement provides for the disbursement
          of
          the funds held in escrow for application to Company expenses at the sole
          discretion of the investor’s designee. The Escrow Agreement terminates upon the
          event that the amount borrowed is paid in full and no event of default
          has
          occurred.
 
 We
          believe our existing available cash and cash equivalents as of March 31,
          2007,
          in combination with continuing contractual commitments will be sufficient
          to
          meet our anticipated capital requirements only through May 2007. Substantial
          additional capital resources will be required to fund continuing expenditures
          related to our research, development, manufacturing and business development
          activities. 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. We are currently in discussions
          with potential financing sources and collaborative partners, and additional
          funding in the form of equity investments, license fees, loans, milestone
          payments or research and development payments could be generated. There
          can be
          no assurance that any of these fundings will be consummated in the timeframes
          needed for continuing operations or on terms favorable to us, if at all.
          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.
 
 16
 **Risk
          Factors**
 
 Please
          read the following risk factors that can affect our business.
 
 *If
          we
          continue to incur operating losses, we may be unable to continue our operations
          at planned levels and be forced to curtail or cease our
          operations.*
 
 We
          have
          incurred operating losses since our inception in 1988, and will continue
          to do
          so for at least several more years. As of December 31, 2006, our accumulated
          deficit was approximately $67,008,000 and we have continued to incur losses
          since that date. The losses have resulted principally from expenses of
          research
          and development and to a lesser extent, from general and administrative
          expenses. If these losses continue, they could cause the value of our stock
          to
          decline.
 
 We
          believe our existing available cash, cash equivalents and accounts receivable,
          in combination with anticipated contract research payments and revenues
          received
          from the transfer of clinical testing materials, will be sufficient to
          meet our
          anticipated capital requirements only through May 2007. Substantial additional
          capital resources will be required to fund continuing expenditures related
          to
          our research, development, manufacturing and business development activities.
          If
          we do not raise adequate funds, we will be required to significantly curtail
          or
          cease our operations, and may have to sell or license out significant portions
          of our technology or potential products.
 
 We
          believe there may be a number of alternatives to meeting the continuing
          capital
          requirements of our operations, including additional collaborative agreements
          and public or private financings. However, these alternatives may not be
          consummated in the necessary time frames needed for continuing operations
          or on
          terms favorable to us. Since April, 2006, one of our stockholders has been
          providing financing to us to support our operations. As of the date hereof
          we
          have borrowed and aggregate of $4,800,000 from this stockholder. We cannot
          assure that this stockholder will continue to provide financing to us when
          needed. Our business and financial condition will be materially adversely
          affected in the event that he ceases to provide this financing if
          needed.
  *If
          we
          fail to establish and manage strategic partnerships, we may be prevented
          from
          developing potential products or the time required for commercializing
          potential
          products may be increased.*
 
 Our
          principal strategy is to enter into partnerships or licensing arrangements
          with
          medical or pharmaceutical companies with appropriate marketing and distribution
          capabilities to reduce the time and costs for developing and commercializing
          our
          potential products. We may not be able to establish additional strategic
          partnerships or licensing arrangements, or, if available, they may not
          be on
          terms and conditions favorable to our business. Additionally, these arrangements
          generally may be terminated under various circumstances, including termination
          at the discretion of the strategic partner without cause or without prior
          notice. Termination of the arrangements could seriously harm our business
          and
          financial condition. Furthermore, our strategy may lead to multiple alliances
          regarding different product opportunities that are active at the same time.
          We
          may not be able to successfully manage multiple arrangements in various
          stages
          of development.
 
 We
          are
          discussing other potential collaboration agreements with prospective marketing
          partners. Furthermore, from time to time, we are party to certain materials
          evaluation agreements regarding biomedical applications of our products,
          polymers and technology, including applications in areas other than those
          identified as product candidates above. These agreements provide, or are
          intended to provide, for the evaluation of product feasibility. We may
          not be
          able to establish these agreements at all or do so in a timely manner and
          on
          reasonable terms. In addition, these agreements may not lead to successful
          product development and commercialization.
 
 *We
          may not be able to produce commercially acceptable products because our
          technology is unproven. If we cannot prove our technology, we will not
          succeed
          in commercializing our products.*
 
 Our
          technological strategy of designing and producing unique products based
          on
          genetically engineered proteins that do not have a harmful effect on biological
          systems, such as the human body, is commercially unproven. The process
          of
          developing products and achieving regulatory approvals is time consuming
          and
          prone to delays. We have completed only a few products that require
          collaboration and marketing partners, and have not generated any significant
          revenues from product sales.
 
 17
 The
          products we are currently pursuing will require substantial further development,
          testing and regulatory approvals. Our research and development activities
          may
          not be successful and as such, we may not be able to produce commercially
          acceptable products.
 
 *We
          must prove our products' effectiveness in clinical trials. If we are unable
          to
          successfully complete clinical trials, we may not be able to produce marketable
          products.*
 
 Before
          obtaining regulatory clearance for the commercial sale of any of our products,
          we must demonstrate through preclinical studies and clinical trials that
          the
          potential product is safe and effective for use in humans for each particular
          use. Due to the inherent difficulties associated with clinical trials,
          we cannot
          guarantee that:
 
 o
                we
                    will be able to complete the clinical trials successfully, if
                    at
                    all;
 
 o
                we
                    will be able to demonstrate the safety and efficacy necessary
                    to obtain
                    the requisite regulatory approvals of product candidates;
                    or
 
 o
                the
                    product candidates will result in marketable
                    products.
 
 *The
          biomedical and surgical repair industry involves intense competition and
          rapid
          technological changes. Our business may suffer if our competitors develop
          superior technology.*
 
 We
          operate in the biomedical and surgical repair markets that involve intense
          competition. Our competitors in those markets include major pharmaceutical,
          surgical product, chemical and specialized biopolymer companies, many of
          which
          have financial, technical, research and development and marketing resources
          significantly greater than ours. Our biomaterials are used primarily in
          the
          manufacture of end-use products for medical applications that compete with
          other
          products that rely on the use of alternative materials or components. As
          a
          result, we compete with diverse, complex and numerous rapidly changing
          technologies. We believe that our ability to compete will be enhanced by
          the
          breadth of our issued patent claims, our other pending patent applications
          and
          our experience in protein engineering. However, we currently do not have
          the
          resources to compete commercially without the use of collaborative agreements
          with third parties.
 
 Our
          product technology competes for corporate development and marketing partnership
          opportunities with numerous other biotechnology companies, research institutes,
          academic institutions and established pharmaceutical companies. We also
          face
          competition from academic institutions and other public and private research
          organizations that are conducting research and seeking patent protection,
          and
          may commercialize products on their own or through joint ventures. Although
          most
          of our competitors depend on technology other than protein engineering
          for
          developing products, we believe that several university laboratories are
          currently conducting research into similar protein engineering technology.
          Our
          competitors may succeed in developing products based on our technology
          or other
          technologies that are more effective than the ones we are developing, or
          that
          would render our technology and products obsolete and non-competitive,
          which may
          harm our business.
 
 *We
          have not developed a process to manufacture our products on a commercially
          viable scale. We will lose potential revenues if we cannot manufacture
          products
          on a commercial scale* .
 
 To
          date,
          we have manufactured only limited amounts of our biomedical products for
          internal testing, initial human clinical testing and, in certain cases,
          evaluation and testing by corporate partners and other third parties. We
          will be
          required to upgrade our manufacturing facilities to obtain manufacturing
          approvals from the FDA for the development and commercialization of certain
          biomedical products.
 
 We
          have
          not yet developed a process to manufacture our products on a commercial
          scale
          and may not be able to, or have another party on our behalf, develop a
          process
          at a cost or in quantities necessary to become commercially viable. We
          may need
          to evaluate alternative methods to produce commercial quantities of our
          products. We may not be able to successfully assess the ability of other
          production methods or establish contract-manufacturing arrangements to
          meet our
          commercial objectives.
 
 18
 *Our
          business is subject to substantial regulation and may be harmed if we are
          unable
          to comply with the applicable laws.*
 
 Regulation
          by governmental authorities in the United States and other countries affects
          the
          success of products resulting from biotechnological research. Our current
          operations and products are, and anticipated products and operations will
          be,
          subject to substantial regulation by a variety of local, state, federal
          and
          foreign agencies, particularly those products and operations related to
          biomedical applications. A few examples of the laws that govern our products
          and
          operations are:
 
 o
                Occupational
                    Safety and Health Act;
 
 o
                Food,
                    Drug & Cosmetic Act, as
                    amended;
 
 o
                FDA's
                    Good Laboratory Practices; and
 
 o
                FDA
                    Quality System Regulations.
 
 Compliance
          with the applicable laws and regulations is a costly and time-consuming
          process.
          We believe we are currently in substantial compliance with the laws and
          regulations applicable to our current operations. Although we intend to
          use our
          best efforts to comply with all applicable laws and regulations in the
          future,
          we may not be able to fully comply with the laws and regulations and as
          such,
          our business operations would be seriously harmed.
 
 *Our
          business may be harmed if we are not able to retain key
          employees.*
 
 As
          of
          April 1, 2007, we had eighteen full-time employees, of whom five have employment
          contracts with us, and two of whom hold Ph.D. degrees. Our success will
          depend
          largely upon the efforts of our scientists and certain of our executive
          officers
          who have been employed by us since the early stages of our business and
          understand our technology and business objectives. The loss of the services
          of
          any one of these individuals would seriously harm our business opportunities
          and
          prospects. Our success also depends on the recruitment and retention of
          additional qualified management and scientific personnel. We may not be
          able to
          attract and retain required personnel on acceptable terms, due to the
          competition for experienced personnel from other biotechnology, pharmaceutical
          and chemical companies, universities and non-profit research institutions.
          We do
          not maintain "key-man" or similar life insurance policies with respect
          to these
          persons to compensate us in the event of their deaths, which may harm our
          business.
 
 *We
          may be sued for product liability and may not have sufficient protection
          under
          our insurance policies.*
 
 We
          may
          face product liability claims with respect to our technology or products
          either
          directly or through our strategic partners. We may also be exposed to potential
          product liability risks whenever human clinical testing is performed or
          upon the
          use of any commercially marketed medical product. We believe that our prior
          sales of SmartPlastic(R), ProNectin (R) F and ProNectin(R) L products do
          not
          pose any material product liability risk. To our knowledge no product liability
          claims have ever been made against us. Before initiating human clinical
          testing
          of our technology, we procured product liability insurance that is limited
          to a
          coverage of $1,000,000 per occurrence and in the aggregate $5 million.
          If
          plaintiffs succeed in their claims against us, if any, and if the coverage
          under
          our insurance policies is insufficient, our business would be seriously
          harmed.
 
 *If
          we
          are unable to protect our proprietary technology, we may not be able to
          compete
          as effectively.*
 
 We
          have
          26 United States patents, 14 foreign patents, and five additional United
          States
          patent applications are pending. We have not yet marketed, sold or developed
          our
          products outside the United States, except for limited amounts of ProNectin(R)
          F, ProNectin(R) L and SmartPlastic(R) cell culture products. The patent
          position
          of biotechnology companies, such as ours, is highly uncertain and involves
          complex legal, scientific and factual questions. For example:
 
 19
 o
                patents
                    issued to us may be challenged, invalidated or
                    circumvented;
 
 o
                patents
                    may not issue from any of our pending patent applications or,
                    if issued,
                    may not be sufficiently broad to protect our technology and products
                    or
                    provide us with any proprietary protection or competitive
                    advantage;
 
 o
                our
                    competitors may have filed patent applications or may have obtained
                    patents and other proprietary rights relating to products or
                    processes
                    similar to and competitive with ours. The scope and validity
                    of such
                    patents may not be known or the extent to which we may be required
                    to
                    obtain licenses under these patents or other proprietary rights.
                    If
                    required, we may not be able to obtain any licenses on acceptable
                    terms,
                    if at all;
 
 o
                certain
                    foreign intellectual property laws may not be as protective as
                    those of
                    the United States; or
 
 o
                we
                    may enter into collaborative research and development arrangements
                    with
                    our strategic partners that may result in the development of
                    new
                    technologies or products, but may also get us involved in a dispute
                    over
                    the ownership of rights to any technology or products that may
                    be so
                    developed.
 
 *If
          we
          are unable to obtain patent protection, enforce our patent rights or maintain
          trade secrets and other protection for our products and technology, our
          business
          may be seriously harmed.*
 
 We
          also
          seek to protect our intellectual property in part by confidentiality agreements
          with our employees and consultants. These agreements may be breached or
          terminated. We may not have an adequate remedy for any breach, and our
          trade
          secrets may otherwise become known or independently discovered by competitors,
          which would harm our business.
 
 *Our
          common stock was delisted from the Nasdaq and will be difficult to
          sell.*
 
 Our
          common stock was delisted from the Nasdaq SmallCap Market on September
          20, 1999,
          and now trades on the National Association of Securities Dealers' Electronic
          Bulletin Board. As a consequence of the delisting, it is more difficult
          to
          dispose of, or to obtain accurate quotations as to the market value of,
          our
          common stock. In addition, the delisting made our common stock substantially
          less attractive as collateral for margin and purpose loans, for investment
          by
          financial institutions under their internal policies or state investment
          laws,
          or as consideration in future capital raising transactions.
 
 Our
          common stock is also subject to regulation as a "penny stock." The Securities
          and Exchange Commission has adopted regulations that generally define "penny
          stock" to be any equity security that has a market price or exercise price
          less
          than $5.00 per share, subject to certain exceptions, including listing
          on the
          Nasdaq SmallCap Market. For transactions covered by the penny stock rules,
          the
          broker-dealer must consider the suitability of the purchaser, receive the
          purchaser's written consent before the purchase, deliver a risk disclosure
          document before the purchase and disclose the commission payable for the
          purchase. Additionally, if the broker-dealer is the sole market maker,
          the
          broker-dealer must disclose this fact and the broker-dealer's presumed
          control
          over the market. Finally, monthly statements must be sent disclosing recent
          price information for the penny stock held in the account and information
          on the
          limited market in penny stocks.
 
 The
          requirements of the penny stock rules restrict the ability to sell our
          common
          stock in the secondary market and the price at which our common stock can
          be
          sold. Since our common stock was delisted from the Nasdaq SmallCap Market,
          we
          have seen a decline in our average daily trading volume, and as a result,
          the
          trading price of our common stock has experienced wide
          fluctuations.
  20




**Item
              7.**
            **Financial
                Statements**




Filed
      herewith are the following Audited Financial Statements for Protein Polymer
      Technologies, Inc.




Description
            PageReport
                of Independent Registered Public Accounting Firm
            F-2Balance
                Sheets at December 31, 2006 and 2005
            F-3Statements
                of Operations for the years ended December 31, 2006 and
                2005
            F-4Statements
                of Stockholders’ Equity for the years ended December 31, 2006 and
                2005
            F-5Statements
                of Cash Flows for the years ended December 31, 2006 and
                2005
            F-6Notes
              to Financial Statements
            F-7




F-1
 
 R EPORT  OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM
 
 To
            the
            Board of Directors and Stockholders of
 Protein
            Polymer Technologies, Inc.
 
 We
            have
            audited the accompanying balance sheets of Protein Polymer Technologies,
            Inc.
            (the “Company”) as of December 31, 2006 and 2005, and the related statements of
            operations, stockholders' equity (deficit), and cash flows for the years
            then
            ended. 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 the standards of the Public Company
            Accounting Oversight Board (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 *.*  The
            Company is not required to have, nor were we engaged to perform, an audit
            of its
            internal control over financial reporting. Our audit included consideration
            of
            internal control over financial reporting as a basis for designing audit
            procedures that are appropriate in the circumstances, but not for the
            purpose of
            expressing an opinion on the effectiveness of the Company’s internal control
            over financial reporting. Accordingly, we express no such opinion. An
            audit also includes examining, on a test basis, evidence supporting the
            amounts
            and disclosures in the financial statements, 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.
            as of December 31, 2006 and 2005, and the results of its operations and
            its cash
            flows for the years then ended, in conformity with accounting principles
            generally accepted in the United States of America.
 
 As
            discussed in Note 1 to the financial statements, the Company changed
            its method
            of accounting for stock-based compensation, effective January 1, 2006,
            as a
            result of the adoption of Statement of Financial Accounting Standards
            No. 123R, *Share-Based
            Payments* .
 
 The
            accompanying financial statements have been prepared assuming that the
            Company
            will continue as a going concern. As discussed in Note 1 to the financial
            statements, the Company has reported recurring losses from operations
            through
            December 31, 2006 and had a working capital deficit at December 31, 2006.
            These
            factors raise substantial doubt about the Company’s ability to continue as a
            going concern. Management’s plans as to these matters are described in Note 1.
            The accompanying financial statements do not include any adjustments
            that might
            result from the outcome of this uncertainty.
 
 
 /s/
              SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
  San
            Diego, California
 May
            1,
            2007
  F-2


Protein
          Polymer Technologies, Inc.
 Balance
          Sheets
 December
                    31,2006
                
                2005AssetsCurrent
                    assets:Cash
                    and cash equivalents
                
                $
                73,495
                
                $
                1,211,748Contract
                    receivable
                
                
                21,068
                
                
                113,792Current
                    portion of rent receivable
                
                
                39,527
                
                
                88,477Prepaid
                    expenses and other current assets
                
                
                49,940
                
                
                32,440Total
                    current assets
                
                
                184,030
                
                
                1,446,457Deposits
                
                
                29,679
                
                
                29,679Notes
                    receivable
                
                
                -
                
                
                242,884Rent
                    receivable, net of current portion and reserve of $128,273 at
                    December 31,
                    2006 and 2005
                
                
                -
                
                
                26,050Technology
                    license agreement
                
                
                -
                
                
                1,106,435Equipment
                    and leasehold improvements, net
                
                
                228,475
                
                
                292,778Investment,
                    at cost
                
                
                520,000
                
                
                -Total
                    assets
                
                $
                962,184
                
                $
                3,144,283Liabilities
                    and stockholders' (deficit) equityCurrent
                    liabilities:Accounts
                    payable
                
                $
                1,098,820
                
                $
                420,672Accrued
                    liabilities
                
                
                422,730
                
                
                381,139Secured
                    note payable - related party
                
                
                3,461,516
                
                
                -Current
                    maturities of notes payable
                
                
                146,697
                
                
                195,565Total
                    current liabilities
                
                
                5,129,763
                
                
                997,376Notes
                    payable, net of current maturities
                
                
                372,374
                
                
                323,506Deferred
                    rent
                
                
                13,269
                
                
                8,820Total
                    liabilities
                
                
                5,515,406
                
                
                1,329,702Commitments
                  and
                  contingencies (Note 13)Stockholders'
                    (deficit) equity:Convertible
                    preferred stock, $0.01 par value; 5,000,000 shares authorized;
                    65,645 and
                    66,045 shares issued and outstanding at December 31, 2006 and
                    2005,
                    respectively - liquidation preference of $6,564,500 and $6,604,500
                    at
                    December 31, 2006 and 2005, respectively.
                
                
                6,019,917
                
                
                6,059,917Common
                    stock, $0.01 par value; 120,000,000 shares authorized, 67,409,204
                    and
                    67,311,092 shares issued and outstanding at December 31, 2006
                    and 2005, respectively
                
                
                674,092
                
                
                673,114Additional
                    paid-in capital
                
                
                55,760,511
                
                
                54,122,011Accumulated
                    deficit
                
                
                (67,007,742
                )
                
                (59,040,461
                )Total
                    stockholders' (deficit) equity
                
                
                (4,553,222
                )
                
                1,814,581Total
                    liabilities and stockholders’ (deficit) equity
                
                $
                962,184
                
                $
                3,144,283
 See
          accompanying notes.
 F-3
  Protein
          Polymer Technologies, Inc.
 Statements
        of Operations
 Years
                    ended December 31,2006
                
                2005Revenues:Contract
                    revenue
                
                $
                533,301
                
                $
                861,188Product
                    and other income
                
                
                71,551
                
                
                6,245Total
                    revenues
                
                
                604,852
                
                
                867,433Operating
                    Expenses:Cost
                    of sales
                
                
                1,640
                
                
                –Research
                    and development
                
                
                3,690,451
                
                
                2,907,585Selling,
                    general and administrative
                
                
                4,758,970
                
                
                3,735,239Total
                    expenses
                
                
                8,451,061
                
                
                6,642,824Loss
                    from operations
                
                
                (7,846,209
                )
                
                (5,775,391
                )Other
                    income (expense):Interest
                    income
                
                
                16,889
                
                
                41,245Interest
                    expense
                
                
                (221,472
                )
                
                (88,072
                )Gain
                      on extinguishment of indemnification obligation
                
                
                138,933
                
                
                –Gain
                    on derivative liability
                
                
                33,528
                
                
                –Total
                    other expense
                
                
                (32,122
                )
                
                (46,827
                )Net
                    loss
                
                
                (7,878,311
                )
                
                (5,822,218
                )Undeclared
                    and imputed and/or paid dividends on preferred stock
                
                
                366,589
                
                
                759,222Net
                    loss applicable to common shareholders
                
                $
                (8,244,920
                )
                $
                (6,581,440
                )Basic
                    and diluted net loss per common share
                
                $
                (0.12
                )
                $
                (0.11
                )Shares
                    used in computing basic and diluted net loss per common
                    share
                
                
                67,370,405
                
                
                58,735,519
  See
            accompanying notes.
 F-4
  PROTEIN
          POLYMER TECHNOLOGIES, INC.
 Statements
          of Stockholders' Equity
 For
          the
          years ended December 31, 2006 and 2005
  TotalAdditional
                
                
                
                Stockholders'Common
                    Stock
                
                Preferred
                    Stock
                
                Paid-in
                
                Accumulated
                
                equityShares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Deficit
                
                (deficit)Balance
                    at December 31, 2004
                
                
                39,651,123
                
                $
                396,512
                
                
                82,945
                
                $
                7,749,917
                
                $
                43,278,117
                
                $
                (52,736,661
                )
                $
                (1,312,115
                )Conversion
                    of Series G preferred stock into common stock
                
                
                80,000
                
                
                800
                
                
                (400
                )
                
                (40,000
                )
                
                39,200
                
                
                –
                
                
                –Conversion
                    of Series I preferred stock into common stock
                
                
                2,999,998
                
                
                30,000
                
                
                (16,500
                )
                
                (1,650,000
                )
                
                1,620,000
                
                
                –
                
                
                –Exercise
                    of Series G warrants at $.33 per share
                
                
                855,303
                
                
                8,553
                
                
                –
                
                
                –
                
                
                273,697
                
                
                –
                
                
                282,250Issuance
                    of common stock and warrants inprivate
                    placement, net of issuance costs
                
                
                23,556,224
                
                
                235,562
                
                
                –
                
                
                –
                
                
                7,027,180
                
                
                –
                
                
                7,262,742Discount
                    on notes payable and warrants issued
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                39,335
                
                
                –
                
                
                39,335Imputed
                    dividend associated with repricing and issuance of warrants
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                481,582
                
                
                (481,582
                )
                
                –Issuance
                    of warrants and options in exchange for services
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                1,271,277
                
                
                –
                
                
                1,271,277Issuance
                    of common stock under stock purchase plan
                
                
                14,742
                
                
                147
                
                
                –
                
                
                –
                
                
                4,980
                
                
                –
                
                
                5,127Exercise
                    of common stock options
                
                
                154,018
                
                
                1,540
                
                
                –
                
                
                –
                
                
                86,643
                
                
                –
                
                
                88,183Net
                    loss
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (5,822,218
                )
                
                (5,822,218
                )Balance
                    at December 31, 2005
                
                
                67,311,408
                
                
                673,114
                
                
                66,045
                
                
                6,059,917
                
                
                54,122,011
                
                
                (59,040,461
                )
                
                1,814,581Conversion
                    of Series G preferred stock into common stock
                
                
                80,000
                
                
                800
                
                
                (400
                )
                
                (40,000
                )
                
                39,200
                
                
                –
                
                
                –Share
                    based compensation expense
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                1,507,350
                
                
                –
                
                
                1,507,350Imputed
                    dividend on extension of warrant
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                88,950
                
                
                (88,950
                )
                
                –Issuance
                    of common stock under stock purchase plan
                
                
                17,796
                
                
                178
                
                
                –
                
                
                –
                
                
                3,000
                
                
                –
                
                
                3,178Net
                    loss
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (7,878,331
                )
                
                (7,878,331
                )Balance
                    at December 31, 2006
                
                
                67,409,204
                
                $
                674,092
                
                
                65,645
                
                $
                6,019,917
                
                $
                55,760,511
                
                $
                (67,007,742
                )
                $
                (4,553,222
                )
  F-5
  Protein
          Polymer Technologies, Inc.
 Statements
          of Cash Flows
  Years
                    ended December 31,2006
                
                2005**Operating
                    activities**Net
                    loss
                
                $
                (7,878,331
                )
                $
                (5,822,218
                )Adjustments
                    to reconcile net loss to net cash used for operating
                    activities:Warrants
                    issued for services
                
                
                –
                
                
                1,245,295Provision
                    for impairment of note receivable
                
                
                257,133Provision
                    impairment of license agreement
                
                
                1,046,503
                
                
                –Stock
                    options issued for services
                
                
                –
                
                
                25,982Gain
                    on extinguishment of indemnification obligation
                
                
                (138,933
                )
                
                –Depreciation
                    and amortization
                
                
                161,145
                
                
                48,733Share-based
                    compensation expense
                
                
                1,507,350
                
                
                –Amortization
                    of discounts on notes payable
                
                
                –
                
                
                56,493Non-cash
                    gain on stock received
                
                
                (20,000
                )
                
                –Amortization
                    of loan fees
                
                
                69,608
                
                
                –Gain
                    on derivative liability
                
                
                (33,528
                )
                
                –**Changes
                    in operating assets and liabilities:**Contracts
                    receivable
                
                
                92,724
                
                
                (113,792
                )Rent
                    receivable
                
                
                75,000
                
                
                50,000Prepaid
                    expenses and other current assets
                
                
                (31,749
                )
                
                (19,670
                )Accounts
                    payable
                
                
                678,148
                
                
                102,456Accrued
                    liabilities
                
                
                144,446
                
                
                33,084Deposits
                    payable
                
                
                –
                
                
                (33,000
                )Deferred
                    revenue
                
                
                –
                
                
                (102,784
                )Deferred
                    rent
                
                
                4,449
                
                
                8,820**Net
                    cash used for operating activities**
                
                
                (4,066,035
                )
                
                (4,520,601
                )**Investing
                    activities**Purchase
                    of equipment and improvements
                
                
                (36,912
                )
                
                (256,931
                )Purchase
                    of common stock of Spinewave, Inc. through exercise of
                    warrants
                
                
                (500,000
                )
                
                –Cash
                    paid for license agreement
                
                
                –
                
                
                (384,505
                )Issuance
                    of notes receivable
                
                
                –
                
                
                (242,884
                )**Net
                    cash used for investing activities**
                
                
                (536,912
                )
                
                (884,320
                )**Financing
                    activities**Net
                    proceeds from exercise of options and warrants and sale of common
                    stock
                
                
                3,178
                
                
                6,424,447Proceeds
                    from issuance of debt - related party
                
                
                3,461,516
                
                
                260,000Payments
                    on notes payable - related party
                
                
                –
                
                
                (150,000
                )**Net
                    cash provided by financing activities**
                
                
                3,464,694
                
                
                6,534,447**Net
                    (decrease) increase in cash and cash equivalents**
                
                
                (1,138,253
                )
                
                1,129,526Cash
                    and cash equivalents at beginning of the period
                
                
                1,211,748
                
                
                82,222**Cash
                    and cash equivalents at end of the period**
                
                $
                73,495
                
                $
                1,211,748**Supplemental
                    disclosures of cash flow information**Interest
                    paid
                
                $
                5,253
                
                $
                65,819**Non
                    cash investing and financing activity**Imputed
                    dividend on extension of warrants
                
                $
                88,950
                
                $
                481,582Conversion
                    of Series G preferred stock to common stock
                
                $
                40,000
                
                $
                40,000Conversion
                    of Series I preferred stock to common stock and warrants
                
                $
                –
                
                $
                1,650,000Conversion
                    of notes payable and accrued interest to common stock and
                    warrants
                
                $
                –
                
                $
                1,213,855Warrants
                    issued for loan fees
                
                $
                –
                
                $
                608,371Derivative
                    liability recorded in connection with warrants
                
                $
                69,608
                
                $
                –Assumption
                    of liabilities and indemnification in connection with purchase
                    of license
                    agreement
                
                $
                –
                
                $
                721,930
  See
          accompanying notes.
 F-6
 
 Protein
          Polymer Technologies, Inc.
 Notes
          to
          Financial Statements
 
 **1.**
                **Organization
                    and Significant Accounting
                    Policies**
  **Organization
          and business activities**
 
 Protein
          Polymer Technologies, Inc. (the “Company”) is a biotechnology company focused on
          the design, clinical development, and commercialization of genetically
          engineered protein polymers for a variety of biomedical and specialty materials
          applications. The Company was incorporated in Delaware on July 6,
          1988.
 
 **Going
            Concern and Liquidity**
 
 The
          accompanying financial statements have been prepared on a going concern
          basis,
          which contemplates the realization of assets and the satisfaction of liabilities
          in the normal course of business. For the year ended December 31, 2006,
          the
          Company incurred a net loss of $7,878,000 and had a working capital deficit
          of
          approximately $4,946,000 at December 31, 2006. Our cash and cash equivalents
          of
          approximately $73,000 in combination with anticipated additional contract
          and
          license payments, are insufficient to meet our anticipated capital
          requirements.
 
 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 a potential financing source and collaborative
          partners and funding in the form of equity investments, debt instruments,
          license fees, milestone payments or research and development payments could
          be
          generated. There can be no assurance that any of these potential sources
          of
          funds will be realized in the time frames needed for continuing operations
          or on
          terms favorable to the Company, if at all. If adequate funds in the future
          are
          not available, the Company will be required to significantly curtail its
          operating plans and may have to sell or license out significant portions
          of the
          Company’s technology or potential products, or obtain a secured private
          financing or possibly cease operations. These factors raise substantial
          doubt
          about the Company’s ability to continue as a going concern. The accompanying
          financial statements do not include any adjustments that might be necessary
          if
          the Company is unable to continue as a going concern
 
 **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-7
 **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 three to seven years, using the straight-line method.
          Leasehold
          improvements are amortized over the shorter of the lease term or life of
          the
          asset.
 
 **Impairment
          of Long-Lived Assets**
 
 Long-lived
          assets and certain identifiable intangibles are reviewed for impairment
          whenever
          events or changes in circumstances indicate that the carrying amount may
          not be
          recoverable. If the fair value is less than the carrying amount of the
          asset, a
          loss is recognized for the difference. Fair value is determined based on
          market
          quotes, if available, or is based on valuation techniques.
 
 **Revenue
          and Expense Recognition**
 
 Research
          and development contract revenues are recorded as earned in accordance
          with the
          terms and performance requirements of the contracts. If the research and
          development activities are not successful, the Company is not obligated
          to
          refund payments previously received. Fees from the sale or license of technology
          are recognized on a straight-line basis over the term required to complete
          the
          transfer of technology or the substantial satisfaction of any performance
          related responsibilities. License fee payments received in advance of amounts
          earned are recorded as deferred revenue. Milestone payments are recorded
          as
          revenue based upon the completion of certain contract specified events
          that
          measure progress toward completion under certain long-term contracts. Royalty
          revenue related to licensed technology is recorded when earned and in accordance
          with the terms of the license agreement. Research and development costs
          are
          expensed as incurred.
 
 **Stock-Based
          Compensation**
 
 On
          January 1, 2006 the Company adopted Statement of Financial Accounting Standards
          (“SFAS”) No. 123 (Revised 2004), *Share-Based
          Payment,* (“SFAS
          No. 123R”), using the modified prospective method. In accordance with SFAS No.
          123R, the Company measures the cost of employee services received in exchange
          for an award of equity instruments based on the grant-date fair value of
          the
          award. That cost is recognized over the period during which an employee
          is
          required to provide service in exchange for the award - the requisite service
          period. The Company determines the grant-date fair value of employee share
          options using the Black-Scholes option-pricing model.
 
 Under
          the
          modified prospective approach, SFAS No. 123R applies to new awards and
          to awards
          that were outstanding on January 1, 2006 that are subsequently modified,
          repurchased or cancelled. Under the modified prospective approach, compensation
          cost recognized during the year ended December 31, 2006 includes compensation
          cost for all share-based payments granted prior to, but not yet vested
          on,
          January 1, 2006, based on the grant-date fair value estimated in accordance
          with
          the pro forma provisions of SFAS No. 123, *Share-Based
          Payment* (“SFAS
          No. 123”), and compensation cost for all share-based payments granted subsequent
          to January 1, 2006, based on the grant-date fair value estimated in accordance
          with the provisions of SFAS No. 123R. Prior periods were not restated to
          reflect
          the impact of adopting the new standard.
 
 Prior
          to
          2006, the Company accounted for its employee stock-based compensation plans
          using the intrinsic value method, as prescribed by APB Opinion No. 25, *Accounting
          for Stock Issued to Employees* ,
          and
          related interpretations. Accordingly, the Company recorded deferred compensation
          costs related to its employee stock options when the current market price
          of the
          underlying stock exceeded the exercise price of each stock option on the
          measurement date (usually the date of grant). During 2005, the Company
          did not
          grant any stock options to employees or members of the Company’s Board of
          Directors with exercise prices below the market price on the measurement
          date.
 
 F-8
 Had
          compensation cost for the plan been determined based on the fair value
          of the
          options at the grant dates consistent with the method of SFAS No. 148, *Accounting
          for Stock-Based Compensation - Transition and Disclosure - an Amendment
          of SFAS
          No. 123* ,
          the
          Company’s net earnings and earnings per share would have been:
  2005Net
                    loss as applicable to common shareholders
                
                $
                (6,581,440
                )Deduct:
                    Total stock-based employee compensationexpense
                    determined under fair value based methodfor
                    all awards, net of related tax effects
                
                
                (805,098
                )Pro
                    forma net loss
                
                $
                (7,386,538
                )Earnings
                    per share:Basic
                    - as reported
                
                $
                (0.11
                )Basic
                    - pro forma
                
                $
                (0.13
                )
 
 The
          fair
          value was estimated using the following assumptions; risk free interest
          rate of 4.47%; a factor of 125% for both the weighted-average and expected
          volatility factors expected market price of the Company’s common stock;
          expected option term 3.25 years and no expected dividends.
  If
          the
          fair value method had been adopted, net loss for 2005 would have been increased
          by $805,000 more than reported and loss per share would have increased
          approximately $0.02 in 2005.
 
 **Fair
          Value Measurement**
 
 The
          carrying value of the Company’s cash, accounts receivable, accounts payable and
          short-term debt are measured at cost and approximate their respective fair
          values because of the short maturities of these instruments. Notes payable
          are
          recorded at cost which approximates their fair value.
 
 **Technology
          License Agreement**
 
 Costs
          related to technology license agreements are capitalized when incurred
          and are
          recorded net of accumulated amortization. The Company adopted Statement
          of
          Financial Accounting Standards (“SFAS”) No. 142, *Goodwill
          and Other Intangible Assets* ,
          (“SFAS
          142”) pursuant to which the capitalized costs are amortized over the expected
          useful life of twenty years. SFAS No. 142 further requires that these
          assets be reviewed for impairment at least annually.
 
 **Investments**
 
 The
          Company determines the appropriate classification of its investments in
          equity
          securities at the time of acquisition and reevaluates such determinations
          at
          each balance-sheet date. Marketable equity securities not classified as
          trading,
          are classified as available-for-sale, and are carried at fair market value,
          with
          the unrealized gains and losses, net of tax, included in the determination
          of
          comprehensive income and reported in shareholders’ equity. Investments for which
          market prices are not available, are valued and reported at cost in periods
          subsequent to acquisition. No gains or losses are recognized until the
          securities are sold.
  **Warrant
          Derivative Liability**
 The
            Company accounts for warrants issued in accordance with EITF Issue No.
            00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
            Settled in, a Company’s Own Stock) (“EITF 00-19”). Pursuant to EITF 00-19, an
            evaluation of specifically identified conditions is made to determine
            whether
            the fair value of warrants issued is required to be classified as a derivative
            liability. The fair value of warrants classified as derivative liabilities
            is
            adjusted for changes in fair value at each reporting period, and the
            corresponding non-cash gain or loss is recorded in current period earnings.
  **Net
          Loss per Common Share**
 
 Basic
          earnings per share is calculated using the weighted-average number of
          outstanding common shares during the period. Diluted earnings per share
          is
          calculated using the weighted-average number of outstanding common shares
          and
          dilutive common equivalent shares outstanding during the period, using
          either
          the as-converted method for convertible notes and convertible preferred
          stock or
          the treasury stock method for options and warrants.
 
 F-9
 
 Excluded
              from diluted loss per common share as of December 31, 2006 and 2005
              were
              19,730,678 and 11,460,600 shares, respectively, issuable upon conversion
              of
              convertible preferred stock, and options and warrants to purchase 29,633,076
              and
              29,316,576 shares of common stock, respectively, because the effect
              would be
              anti-dilutive.  For purposes of this calculation, net loss in 2006 and 2005
              has been adjusted for imputed, accumulated and/or paid dividends on
              the
              preferred stock.
 
 **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.
  **Revenue
          Concentration**
 During
            the year ended December 31, 2006, the Company had contract research agreements
            with two customers that accounted for 81% and 19% of the contract research
            revenues, respectively, earned by the Company and one customer that accounted
            for 100% of the product sales earned by the Company. During the year
            ended
            December 31, 2005, the Company had contract research agreements with
            two
            customers that accounted for 71% and 19% of the contract research revenues,
            respectively, earned by the Company and 1 customer that accounted for
            100% of
            the product sales earned by the Company.
  **Income
          Taxes**
 
 The
          Company records income taxes using the asset and liability method. Deferred
          tax
          assets and liabilities are recognized for the estimated future tax consequences
          attributable to differences between the financial statement carrying amounts
          of
          existing assets and liabilities and their future respective tax bases.
          Deferred
          tax assets and liabilities are measured using enacted tax rates in effect
          for
          the year in which those temporary differences are expected to be recorded
          or
          settled. The effect on deferred tax assets and liabilities of a change
          in tax
          rates is recognized in income in the period that includes the enactment
          date.
 
 A
          valuation allowance is established to reduce the deferred tax asset if
          it is
          more likely that the related tax benefits will not be realized in the
          future.
 
 **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.
 
 **Recently** I **ssued
          Accounting Pronouncements**
 
 In
          February 2006, the Financial Accounting Standards Board (“FASB”) released
          Statement of Financial Accounting Standard (“SFAS”) No.  155, *Accounting
          for Certain Hybrid Financial Instruments,* ("SFAS No. 155"). SFAS No. 155 is an amendment of SFAS No.  133, *Accounting
          for Derivative Instruments and Hedging Activities* ,
          and
          SFAS No. 140, *Accounting
          for Transfers and Servicing of Financial Assets and Extinguishments of
          Liabilities* .
          SFAS No. 155 establishes, among other items, the accounting for certain
          derivative instruments embedded within other types of financial instruments;
          and, eliminates a restriction on the passive derivative instruments that
          a
          qualifying special-purpose entity may hold. Effective for the Company beginning
          January 1, 2007, SFAS No. 155 is not expected to have any impact on
          the Company's financial position, results of operations or cash flows.
 
 In
          March 2006, the FASB released SFAS No. 156, *Accounting
          for Servicing of Financial Assets, an amendment of SFAS Statement
          No. 140,* ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require
          that all separately recognized servicing assets and liabilities in accordance
          with SFAS No. 140 be initially measured at fair value, if practicable.
          Furthermore, this standard permits, but does not require, fair value measurement
          for separately recognized servicing assets and liabilities in subsequent
          reporting periods. SFAS No. 156 is also effective for the Company beginning
          January 1, 2007; however, the standard is not expected to have an impact on
          the Company's financial position, results of operation or cash flows.
 
 F-10
 In
          the
          first quarter of 2006, the Company adopted SFAS No. 154, *Accounting
          for Changes and Error Corrections—a replacement of Accounting Principals Board
          (APB) Opinion No. 20 and SFAS Statement No. 3* ,
          ("SFAS No. 154") which changed the requirements for the accounting for and
          reporting of a voluntary change in accounting principle. The Company also
          adopted Statement No. 151, *Inventory
          Costs—an amendment of ARB No. 43, Chapter 4* ("SFAS No.
          151") which, among other changes, requires certain abnormal expenditures
          to be
          recognized as expenses in the current period versus capitalized as a component
          of inventory. The adoption of SFAS No. 154 did not impact the results
          presented and the impact on any future periods will depend on the nature
          and
          significance of any future accounting changes subject to the provisions
          of the
          statement. The adoption of SFAS No. 151 did not have any impact on the
          Company's financial position, results of operations or cash flows.
 
 In
          June
          2006, the FASB issued Interpretation No. 48, *"Accounting
          for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
          109,"* (FIN
          48). FIN 48 clarifies the accounting for uncertainty in tax positions and
          requires that a Company recognize in its financial statements the impact
          of a
          tax position, if that position is more likely than not of being sustained
          on
          audit, based on the technical merits of the position. The provisions of
          FIN 48
          are effective for fiscal years beginning after December 15, 2006. The adoption
          of FIN 48 is not expected to have any impact on the Company's
          financial position, results of operations or cash flows.
 
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“ SFAS No.
          157”). SFAS No.
          157defines
          fair value, establishes a framework for measuring fair value, and expands
          disclosures about fair value measurements. This Statement focuses on creating
          consistency and comparability in fair value measurements. SFAS No.
          157is
          effective for fiscal years beginning after November 15, 2007, and interim
          periods within those fiscal years.  We are currently evaluating the impact
          of adopting SFAS 157 on our financial statements.
 
 In
          September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108
          (“SAB
          108”) to require registrants to quantify financial statement misstatements
          that
          have been accumulating in their financial statements for years and to correct
          them, if material, without restating. Under the provisions of SAB 108,
          financial
          statement misstatements are to be quantified and evaluated for materiality
          using
          both balance sheet and income statement approaches. SAB 108 is effective
          for
          fiscal years ending after November 15, 2006. The adoption of SAB 108 did
          not
          have a material impact on our financial statements.
 
 In
          February 2007, the FASB issued SFAS No. 159 *The
          Fair Value Option for Financial Assets and Financial Liabilities—Including an
          amendment of FASB Statement No. 115* (“SFAS
          No. 159”), which permits entities to choose to measure many financial
          instruments and certain other items at fair value. The fair value option
          established by this Statement permits all entities to choose to measure
          eligible
          items at fair value at specified election dates. A business entity shall
          report
          unrealized gains and losses on items for which the fair value option has
          been
          elected in earnings at each subsequent reporting date. Adoption is required
          for
          fiscal years beginning after November 15, 2007. Early adoption is permitted
          as of the beginning of a fiscal year that begins on or before November 15,
          2007, provided the entity also elects to apply the provisions of SFAS Statement
          No. 159.  The Company is currently evaluating the expected effect of
          SFAS No. 159 on its consolidated financial statements and is currently not
          yet in a position to determine such effects.
  F-11




**2.**
                **Equipment
                    and Leasehold Improvements**
  **December
                    31,****2006**
                
                **2005**Laboratory
                    equipment
                
                $
                1,378,000
                
                $
                1,375,000Office
                    equipment
                
                
                220,000
                
                
                218,000Leasehold
                    improvements
                
                
                360,000
                
                
                329,0001,958,000
                
                
                1,922,000Less
                    accumulated depreciation and amortization
                
                
                (1,730,000
                )
                
                (1,629,000
                )$
                228,000
                
                $
                293,000
  Depreciation
          expense was $101,000 and $49,000 for the years ended December 2006 and
          2005,
          respectively.
  **3.**
                **Rent
                    Receivable**
  The
          Company subleases 6,183 square feet of its office and research facilities
          under
          a month to month arrangement for $13,000 per month plus utilities. From
          December
          2002 until July 2004, the sub-lessee was unable to make monthly rental
          payments
          due to a lack of funding. In August 2004 the sub-lessee resumed making
          rental
          payments and as of September 2004 an additional $5,000 per month is being
          paid
          as credit against previous rental obligations. Obligations under the sublease
          are secured by certain listed property and equipment of the sub-lessee.
          At
          December 31, 2006 and 2005 the current portion of rent receivable was $40,000
          and $88,000 respectively and the long term portion was $-0- and $26,000,
          net of
          the allowance for collectibility of $128,000 and $128,000,
          respectively.
  **4.**
                **Technology
                    License Agreement**
  In
          December 2005, the Company entered into a License Agreement with Surgica
          Corporation (“Surgica”), a medical device company that develops, manufactures
          and markets embolization products. Embolization is a minimally invasive
          procedure, generally performed by interventional radiologists, used to
          treat
          uterine fibroids, liver cancer and neurovascular malformations. Pursuant
          to the
          License Agreement, the Company acquired exclusive marketing and distribution
          rights to Surgica’s three embolization products, one issued patent, and
          technical and market know-how.
 
 The
          Company capitalized a total of $1,106,000 in connection with this agreement
          based on cash consideration paid in the amount of $385,000, the assumption
          of
          certain liabilities of Surgica totaling $521,000 and indemnification of
          contingent liabilities up to a maximum of $200,000. Under the terms of
          the
          License Agreement, the agreement will continue, unless terminated earlier
          in
          accordance with its terms, for twenty (20) years. The total capitalized
          amount
          is being amortized on a straight line basis over the initial twenty (20)
          year
          term of the License Agreement, with amortization commencing on January
          1, 2006.
          During the year ended December 31, 2006 the Company recorded amortization
          expense of $60,000 related to this agreement.
  In
          March
          2007, the Company determined to discontinue its efforts to further develop
          and
          commercialize the Surgica products and the Company received notification
          from
          Surgica that Surgica was terminating the License Agreement due to alleged
          breaches of the agreement by the Company. Accordingly, the Company recorded
          an
          impairment charge of $1,046,503 at December 31, 2006 to reduce the carrying
          value of the License Agreement to $0. See Note 13.
  **5.**
                **Notes
                    Receivable**
  In
          connection with the Surgica agreements, the Company advanced Surgica a
          total of
          $238,000 for on-going operations in return for Promissory Notes. The Promissory
          Notes are due and payable on January 5, 2008. Interest on the unpaid balance
          of
          the Promissory Notes accrues at the rate of 6.00% per annum, payable annually
          on
          the 5th day of January, from the date of issuance through the date that
          the
          principal of the Promissory Note is paid in full. As of December 31, 2006
          and
          2005, accrued interest receivable pursuant to the Promissory Notes was
          $19,373
          and $5,000, respectively.
 
 F-12
 Based
          on
          the Company's determination to discontinue Surgica product development
          efforts
          and Surgica's termination of the License Agreement, discussed above, and
          the
          resulting uncertainty related to the collectibility of the Promissory Notes
          and
          the related accrued interest receivable, the Company recorded a bad debt
          expense
          and a related allowance in the amount of $257,133 in order to reduce the
          carrying value of the Promissory Notes to $0 at December 31, 2006.
 
 **6.**
                **Contracts
                    Receivable**
  Under
          an
          existing Supply and Services agreement with Spine Wave Corporation, the
          Company
          provides various research and development services for Spine Wave including
          the
          production of product used in Spine Wave’s clinical trials. These services are
          billed upon the completion of various agreed upon work products. On December
          31,
          2005, the Company had an outstanding Spine Wave invoice in the amount of
          $114,000. This invoice was paid in January 2006. During the 2006 fiscal
          year
          Spine Waves transferred production services to a third party and the Company
          ceased performing these services.
  **7.**
                **Investment,
                    at cost**
  As
          a
          component of our license and services and supply agreements with Spine
          Wave,
          Inc. we received certain equity incentives. During 2006 we exercised an
          option
          to purchase 1 million shares of Spine Wave common stock at $0.50 per share.
          These shares are included in our assets at cost of $500,000 at December
          31,
          2006.
 
 During
          the fourth quarter of 2006 we received 400,000 shares of Spine Wave, Inc.’s
          common stock pursuant to the agreements. Acquisition of these shares required
          no
          funds, but we recorded the shares at their stated repurchase price of $20,000,
          which was recognized as a non-monetary gain. All of the Spine Waves shares
          owned
          by the Company serve as collateral for a currently outstanding loan. See
          Note 9
          below.
  **8.**
                **Accrued
                    Expenses**
  Accrued
          expenses consist of the following:
  **December
                    31,****2006**
                
                **2005**Payroll
                    and employee benefits
                
                $
                94,000
                
                $
                146,000Accounting
                    and professional fees
                
                
                25,000
                
                
                -Accrued
                    interest
                
                
                147,000
                
                
                -Property
                    tax
                
                
                21,000
                
                
                31,000Insurance
                    premium financing
                
                
                39,000Indemnification
                    obligation
                
                
                61,000
                
                
                200,000Warrant
                    derivative liability
                
                
                36,000
                
                
                -Other
                
                
                -
                
                
                4,000$
                423,000
                
                $
                381,000
 
 **9.**
                **Secured
                    Notes Payable, Related
                    Party**
  On
          July
          2, 2004, the Company issued notes with detachable warrants payable to several
          of
          its current shareholders in exchange for $150,000 in cash. The notes became
          due
          on March 31, 2005 with accrued interest at a rate of 10% per annum. The
          detachable warrants were for the purchase of 60,000 shares of the Company’s
          common stock at $0.37 per share. The warrants have a term of three years
          and
          became exercisable upon issue. The Company allocated the investment proceeds
          to
          the debt and warrants based on their relative fair values. The relative
          fair
          value of the warrants was determined to be $13,730, which was recorded
          as debt
          discount, a reduction of the carrying amount of the debt. This amount was
          amortized to interest expense during 2004 based on the original term of
          the
          debt. The fair value of the warrants was determined using the Black-Scholes
          model. The Black-Scholes calculation incorporated the following assumptions:
          0%
          dividend yield, 138% volatility, 1.98% average risk-free interest rate,
          a
          three-year life and an underlying common stock value of $0.33 per share.
          These
          notes plus accumulated interest were paid in full in on March 31,
          2005.
 
 F-13
 On
          August
          2, 2004, the Company issued a note with detachable warrants payable to
          one of
          its current shareholders in exchange for $250,000 in cash. The note became
          due
          on March 31, 2005 with accrued interest at a rate of 10% per annum. The
          detachable warrants were for the purchase of 100,000 shares of the Company’s
          common stock at $0.37 per share. The warrants have a term of three years
          and
          became exercisable upon issue. The Company allocated the investment proceeds
          to
          the debt and warrants based on their relative fair values. The relative
          fair
          value of the warrants was determined to be $23,995, which was recorded
          as debt
          discount, a reduction of the carrying amount of the debt. This amount was
          amortized to interest during 2004 based on the original term of the debt.
          The
          fair value of the warrants was determined using the Black-Scholes model.
          The
          Black-Scholes calculation incorporated the following assumptions: 0% dividend
          yield, 133% volatility, 1.98% average risk-free interest rate, a three-year
          life
          and an underlying common stock value of $0.35 per share. This note and
          accumulated interest was converted into common stock and warrants in the
          equity
          transaction completed on April 1, 2005.
 
 On
          August
          19, 2004, the Company issued a note with detachable warrants payable to
          one of
          its current shareholders in exchange for $250,000 in cash. The note became
          due
          on March 31, 2005 with accrued interest at a rate of 10% per annum. The
          detachable warrants were for the purchase of 100,000 shares of the Company’s
          common stock at $0.45 per share. The warrants have a term of three years
          and
          became exercisable upon issue. The Company allocated the investment proceeds
          to
          the debt and warrants based on their relative fair values. The relative
          fair
          value of the warrants was determined to be $34,000, which was recorded
          as debt
          discount, a reduction of the carrying amount of the debt. This amount was
          amortized to interest during 2004 based on the original term of the debt.
          The
          fair value of the warrants was determined using the Black-Scholes model.
          The
          Black-Scholes calculation incorporated the following assumptions: 0% dividend
          yield, 140% volatility, 1.98% average risk-free interest rate, a three-year
          life
          and an underlying common stock value of $0.52 per share. This note and
          accumulated interest was converted into common stock and warrants in the
          equity
          transaction completed on April 1, 2005.
 
 On
          September 9, 2004, the Company issued a note with detachable warrants payable
          to
          one of its current shareholders in exchange for $250,000 in cash. The note
          became due on March 31, 2005 with accrued interest at a rate of 10% per
          annum.
          The detachable warrants were for the purchase of 100,000 shares of the
          Company’s
          common stock at $0.45 per share. The warrants have a term of three years
          and
          became exercisable upon issue. The Company allocated the investment proceeds
          to
          the debt and warrants based on their relative fair values. The relative
          fair
          value of the warrants was determined to be $40,000, which was recorded
          as debt
          discount, a reduction of the carrying amount of the debt. This amount was
          amortized to interest expense during 2004 based on the original term of
          the
          debt. The fair value of the warrants was determined using the Black-Scholes
          model. The Black-Scholes calculation incorporated the following assumptions:
          0%
          dividend yield, 141% volatility, 1.98% average risk-free interest rate,
          a
          three-year life and an underlying common stock value of $0.67 per share.
          This
          note and accumulated interest was converted into common stock and warrants
          in
          the equity transaction completed on April 1, 2005.
 
 On
          December 22, 2004, the Company issued a note with detachable warrants payable
          to
          one of its current shareholders in exchange for $150,000 in cash. The note
          became due on March 22, 2005 with accrued interest at a rate of 10% per
          annum.
          The detachable warrants were for the purchase of 60,000 shares of the Company’s
          common stock at $0.50 per share. The warrants have a term of three years
          and
          became exercisable upon issue. The Company allocated the investment proceeds
          to
          the debt and warrants based on their relative fair values. The relative
          fair
          value of the warrants was determined to be $19,000, which was recorded
          as debt
          discount, a reduction of the carrying amount of the debt. This amount was
          amortized to interest expense over the term of the debt. The fair value
          of the
          warrants was determined using the Black-Scholes model. The Black-Scholes
          calculation incorporated the following assumptions: 0% dividend yield,
          127%
          volatility, 1.98% average risk-free interest rate, a three-year life and
          an
          underlying common stock value of $0.50 per share. For the quarter ended
          March
          31,2005, debt discount of $17,000 was amortized to interest expense. This
          note
          and accumulated interest was converted into common stock and warrants in
          the
          equity transaction completed on April 1, 2005.
 
 F-14
 On
          January 4, 2005, the Company issued a note with detachable warrants payable
          to
          one of its current shareholders in exchange for $100,000 in cash. The note
          plus
          accrued interest at a rate of 10% per annum were originally due on April
          4,
          2005. The detachable warrants were for the purchase of 40,000 shares of
          the
          Company’s common stock at $0.62 per share. The warrants have a term of three
          years and became exercisable upon issue. The Company allocated the investment
          proceeds to the debt and warrants based on their relative fair values.
          The
          relative fair value of the warrants was determined to be $16,000, which
          was
          recorded as debt discount, a reduction of the carrying amount of the debt.
          This
          amount is being amortized to interest expense over the term of the debt.
          The
          fair value of the warrants was based on the Black-Scholes model. The
          Black-Scholes calculation incorporated the following assumptions: 0% dividend
          yield, 128% volatility, 2.37% average risk-free interest rate, a three-year
          life
          and an underlying common stock value of $0.62 per share. For the quarter
          ended
          March 31, 2005, debt discount of $16,000 was amortized to interest expense.
          This
          note and accumulated interest was converted into common stock and warrants
          in
          the equity transaction completed on April 1, 2005.
 
 On
          February 28, 2005, the Company issued a note with detachable warrants payable
          to
          one of its current shareholders in exchange for $160,000 in cash. The note
          plus
          accrued interest at a rate of 10% per annum were originally due on April
          4,
          2005. The detachable warrants were for the purchase of 64,000 shares of
          the
          Company’s common stock at $0.60 per share. The warrants have a term of three
          years and became exercisable upon issue. The Company allocated the investment
          proceeds to the debt and warrants based on their relative fair values.
          The
          relative fair value of the warrants was determined to be $24,000, which
          was
          recorded as debt discount, a reduction of the carrying amount of the debt.
          This
          amount is being amortized to interest expense over the term of the debt.
          The
          fair value of the warrants was based on the Black-Scholes model.
 
 The
          Black-Scholes calculation incorporated the following assumptions: 0% dividend
          yield, 124% volatility, 2.58% average risk-free interest rate, a three-year
          life
          and an underlying common stock value of $0.60 per share. For the quarter
          ended
          March 31, 2005, debt discount of $24,000 was amortized to interest expense.
          This
          note and accumulated interest was converted into common stock and warrants
          in
          the equity transaction completed on April 1, 2005.
 
 On
          April
          13, 2006, an accredited investor loaned $1,000,000 (the “Loan”) to the Company
          ($500,000 in cash and an additional $500,000 deposited with an escrow agent
          as a
          line of credit) represented by a note (the “Note”) issued by the Company to the
          investor in the principal amount of $1,000,000 (the “Principal”). The Note was
          originally due on July 7, 2006 (the “Maturity Date”) and bears annual interest
          at the rate of 8% payable on the Maturity Date. It is secured, in accordance
          with the terms of a security agreement (the “Security Agreement”), by a
          continuing security interest in and a general lien upon (i) 1,000,000 shares
          of
          Spine Wave, Inc. common stock owned by the Company; (ii) a warrant to purchase
          1,000,000 shares of Spine Wave, Inc. common stock owned by the Company
          which has
          since been exercised; and (iii) all U.S. patents owned by the Company.
          The Note
          and the Security Agreement are both dated April 13, 2006. As consideration
          for
          the Loan the Company granted a warrant to the investor to purchase an aggregate
          of 500,000 shares of the Company’s common stock at an exercise price of $0.30
          per share. The investor’s counsel acts as the escrow agent and now serves as our
          outside general counsel.
 
 The
          Note
          has been amended five times so that Principal is now $4.8 Million and the
          Maturity Date is now August 10, 2007. At December 31, 2006, the outstanding
          indebtedness subject to the Note and Security Agreement was $3,461,516
          and
          accrued interest payable was $112,000.
 
 Pursuant
          to the terms of the Security Agreement, the Company entered into a patent
          security agreement, an escrow agreement, patent assignment, and a registration
          rights agreement, each dated as of April 13, 2006. According to the terms of the
          Security Agreement, the Company entered into the Escrow Agreement with
          an escrow
          agent for the investor. The Escrow Agreement provides for the disbursement
          of
          the funds held in escrow for application to Company expenses at the sole
          discretion of the investor’s designee. The Escrow Agreement terminates upon the
          event that the amount borrowed is paid in full and no event of default
          has
          occurred.
 
 F-15
 **10.**
                **Notes
                    Payable**
  On
          December 19, 2005, in connection with the Surgica License Agreement, the
          Company
          assumed several notes payable agreements. The notes bear interest at rates
          ranging from 6% to 10%, and mature at various dates through January 2009.
          As of
          December 31, 2006 the current and long term note balances were $147,000
          and
          $372,000, respectively. Future long-term maturities on the assumed notes
          are as
          follows:
  **Year
                    Ending**
                  **December
                    31,**
                
                **Notes
                    Payable**
                  **Maturities**2007
                
                $
                147,0002008
                
                
                272,0002009
                
                
                100,000Total
                    maturities
                
                $
                519,000
 
 Based
          on
          the termination of the Surgica License Agreement in March 2007 the Company
          believes that it will be relieved of its liability for the assumed notes
          payable. However, until a final settlement agreement is reached between
          the Company and Surgica with respect to the disposition of the notes, the
          Company will continue to carry the notes on its balance sheet.
  **11.**
                **Stockholders’
                    Equity**
  **Convertible
          Preferred Stock**
 
 On
          March
          25 and May 12, 2003, we raised a total of $3,255,000 (less expenses) from
          the
          sale of 32,550 shares of our Series I Convertible Preferred Stock (“Series I
          Stock”) priced at $100 per share, with warrants to purchase an aggregate of
          2,582,669 shares of common stock to a small group of institutional and
          accredited investors. Each share of Series I Stock is convertible at any
          time at
          the election of the holder into approximately 181 shares of common stock
          at a
          conversion price of $0.55 per share, subject to certain anti-dilution
          adjustments. In connection with this transaction, we recorded non-cash
“imputed
          dividend” of $1,928,000 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 I Stock received two common stock warrants. One warrant
          was
          exercisable at any time for approximately 27 shares of common stock at
          an
          exercise price of $0.88 per share, and expired 18 months after the close
          of the
          offering; the other warrant was exercisable at any time for approximately
          18
          shares of common stock at an exercise price of $1.65 per share, and expires
          48
          months after the close of the offering. In connection with the issuance
          of the
          Series I Stock, additional warrants to purchase 819,543 shares of common
          stock
          at an exercise price of $0.65 per share, expired 18 months after the close
          of
          the offering were issued, as well as warrants to purchase 204,998 shares
          of
          common stock at an exercise price of $0.58 per share, warrants to purchase
          27,340 shares of common stock at an exercise price of $0.68 per share,
          warrants
          to purchase 30,748 shares of common stock at an exercise price of $0.92
          per
          share and warrants to purchase 20,500 shares of common stock at an exercise
          price of $1.73 per share, each expiring 5 years after the close of the
          offering.
          During 2005, 16,500 shares of Series I Stock with a carrying value of
          $1,650,000 were converted into 2,999,998 shares of common stock. At
          December 31, 2006, there were 14,000 shares of Series I Stock
          outstanding.
 
 We
          engaged no underwriters 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(the “Securities Act”), and met
          the requirements of Rule 506 of Regulation D promulgated under the Securities
          Act.
 
 On
          July
          24, 2001, the Company had a private placement of 12,182 shares of Series
          H
          Convertible Preferred Stock (“Series H 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 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. We engaged no underwriters
          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, and met the requirements of Rule 506 of Regulation D promulgated
          under the Securities Act.
 
 F-16
 Each
          share of Series H Stock also received two common stock warrants. One warrant
          was
          exercisable at any time for 15 shares of common stock at an exercise price
          of
          $1.50 per share, and expired approximately 12 months after the close of t he
          offering; the other warrant was exercisable at any time for 10 shares of
          common
          stock at an exercise price of $2.00 per share, and expired approximately
          24
          months after the close of the offering. At December 31, 2006, there were
          12,181
          shares of Series H Stock outstanding.
 
 On
          August
          16, 1999, the Company received $1,775,000 for 17,750 shares of Series G
          Convertible Preferred Stock (“Series G 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 Stock, for a total of
          $2,100,000. Each share of Series G 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 anti-dilution adjustments. Each share
          of
          Series G 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. During both 2005 and 2006, 400 shares of Series G stock
          with a carrying value of $40,000 were converted into 80,000 shares of
          common stock. At December 31, 2006, there were 11,700 shares of Series
          G Stock outstanding.
 
 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. As of December
          31,
          2006, the accumulated dividends were approximately $2,627,000. 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 and F Stock have a liquidation preference
          of $100 per share plus accumulated dividends. At December 31, 2006, there
          were
          1,344 and 26,420 shares of Series D and Series F Stock outstanding,
          respectively.
 
 Series
          D,
          F, and H Convertible Preferred Stock have been designated as non-voting
          stock.
 
 On
          April
          1, 2005, the Company completed the initial closing related to a Securities
          Purchase Agreement with a group of individual and institutional investors
          for
          the private placement of shares of the Company’s common stock at a price of
          $0.33 per share. At the initial closing, the Company sold an aggregate
          of
          12,728,269 shares to the initial investors for an aggregate purchase price
          of
          $4,200,000, including approximately $1,200,000 of converted short-term
          promissory notes and accumulated interest previously issued by the Company
          to
          certain of the initial investors. As part of the transaction, the Company
          also
          issued to the initial investors warrants that entitle the holders to purchase
          an
          aggregate of 6,364,132 shares of Common Stock at an exercise price of $0.50
          per
          share. The warrants expire on April 1, 2008.
 
 On
          or
          about April 15, 2005, the Company, in a final closing pursuant to the Securities
          Purchase Agreement, sold an aggregate of 10,827,955 shares to additional
          investors for an aggregate purchase price of $3,573,000. As part of the
          transaction, the Company also issued to the investors warrants that entitle
          the
          holders to purchase an aggregate of 5,413,976 shares of Common Stock at
          an
          exercise price of $0.50 per share.
 
 For
          the
          entire private placement offering, including the Initial Closing on April
          1,
          2005 and the Subsequent Closing, the Company issued a total of 23,556,224
          shares
          of common stock at price of $0.33 per share, for aggregate total proceeds
          of
          $7,774,000 (including approximately $1,200,000 of converted short-term
          promissory bridge notes previously issued by the Company to certain of
          the
          Initial Investors), together with warrants for the purchase of an aggregate
          of
          approximately 11,778,108 shares of common stock at an exercise price of
          $0.50
          per share.
 
 F-17
 The
          Company incurred aggregate selling fees of approximately $1,109,000, of
          which
          $509,000 was paid in cash and $608,000 was paid by issuing warrants to
          purchase
          751,088 shares of the Company’s Common Stock at an exercise price of $0.55 per
          share exercisable at any time and expiring approximately 5 years from the
          date
          of issuance. The fair value of the warrants was estimated by management
          using
          the Black-Scholes option-pricing model.
 
 On
          April
          22, 2005 the Company agreed to issue a warrant to purchase an aggregate
          of
          2,000,000 shares of the Company’s common stock to William N. Plamondon, III, a
          director of the Company who earlier in the month was appointed to serve
          as the
          Company’s Chief Executive Officer. Mr. Plamondon now also serves as the
          Company’s Chief Financial Officer. The warrant was immediately exercisable at an
          exercise price of $0.67 per share (closing market price of date of grant),
          and
          expires three years from the date of grant. In connection with the issuance
          of
          the warrant, the Company recorded a non-cash expense of $1,245,000 during
          the
          quarter ended June 30, 2005 based on a Black-Scholes model valuation, and
          a
          corresponding increase to additional paid in capital.
 
 **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 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 who are
          members of the Compensation Committee. The Company’s Board of Directors may
          modify the Plan at any time. During 2005, a total of 14,742 shares were
          purchased under the Plan at prices ranging from $0.20 to $0.55. During
          2006 a
          total of 17,796 shares were purchased under the Plan at an average price
          of
          $0.18. There are no additional shares available for purchase under the
          Plan.
  F-18
 **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 2003, the 1996 Plan was amended to increase the number of options
          available for grant to 1,750,000, and the annual award to each Director
          to
          80,000. Such grants of options to purchase 80,000 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
          Compensation Committee administers the 1996 Plan. At December 31, 2006,
          1,829,950 options to purchase common stock have been granted under the
          1996 Plan
          with 1,829,950 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. In April 2003, the plan was amended to increase the number
          of
          options available for grant to 9,000,000. The options will expire ten years
          from
          their respective dates of grant. Options become exercisable ratably over
          periods
          of up to three 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, 2006, options to purchase 7,823,082 shares of common stock had been
          granted under the 2002 Plan with 7,550,733 options exercisable.
 
 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, 2006, 815,000 options to
          purchase common stock had been granted under the 1992 Plan with 747,823
          options exercisable.
 
 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, 2006, 302,500 options to purchase common stock have
          been
          granted under the 1989 Plan with 302,500 options exercisable.
 
 Since
          inception, the Company has granted non-qualified options outside the option
          plans to employees, directors and consultants. At December 31, 2006, 1,684,050
          options to purchase common stock have been granted and all are
          exercisable.
 
 The
          compensation cost that was charged to expense for these plans was $1,507,000
          and
          $-0- for the years ended December 31, 2006 and 2005, respectively.
 
 F-19
 The
          fair
          value of each option award is estimated on the date of grant using the
          Black
          Scholes option valuation model that uses the assumptions noted in the following
          table. Because lattice-based option valuation models incorporate ranges
          of
          assumptions for inputs, those ranges are disclosed. Expected volatilities
          are
          based on historical volatility of the Company’s stock. The Company has never had
          any options exercised since inception of the plan. No terminations are
          estimated
          in the model due to lack of historical data. The expected term of options
          granted is derived from the output of the option valuation model and represents
          the period of time that options granted are expected to be outstanding;
          the
          range given below results from certain groups of employees exhibiting different
          behavior. The risk-free rate for periods within the contractual life of
          the
          option is based on the U.S. Treasury yield curve in effect at the time
          of
          grant.
  **2006**Expected
                    volatility
                
                
                90
                %Weighted-average
                    volatility
                
                
                90
                %Expected
                    dividends
                
                $
                0.00Expected
                    term (in years)
                
                
                3.6Risk-free
                    interest rate
                
                
                5.1
                %
 
 During
          2006, the company granted certain of its employees and directors options to
          purchase 330,000 shares of the Company’s common stock. The options are
          exercisable for 10 years from the date of grant and have exercise prices
          ranging
          from $0.20 to $0.25 per share, which equaled the fair market value on the
          date
          of grant. The options vest ratably from the date of grant for the remaining
          36
          months.
 
 Stock
          option activity for the year ended December 31, 2006 and 2005 is as follows:
 
 Options
                  Outstanding
                
                Weighted
                    Average
                  Exercise
                    Price
                
                Weighted
                    AverageRemaining
                  Contractual
                    Term (Years)
                
                Aggregate
                  Intrinsic
                    ValueOutstanding
                    at December 31, 2004
                
                
                11,888,500
                
                $
                0.72
                
                
                
                
                $
                ---Issued
                
                
                1,003,600
                
                
                0.58
                
                
                
                
                
                ---Cancelled
                
                
                (100,000
                )
                
                (0.63
                )
                
                
                
                
                ---Exercised
                
                
                (154,018
                )
                
                0.57
                
                
                
                
                
                ---Outstanding
                    at December 31, 2005
                
                
                12,638,082
                
                
                0.72
                
                
                7.9
                
                
                ---Issued
                
                
                330,000
                
                
                0.20
                
                
                
                
                
                ---Cancelled
                
                
                (513,500
                )
                
                (1.83
                )
                
                
                
                
                ---Exercised
                
                
                ---
                
                
                ---
                
                
                
                
                
                ---Outstanding
                    at December 31, 2006
                
                
                12,454,582
                
                $
                0.66
                
                
                6.5
                
                
                ---Exercisable
                    at December 31, 2006
                
                
                12,115,056
                
                $
                0.66
                
                
                6.4
                
                $
                ---
 
 **Warrants
          Activity for the Period and Summary of Outstanding Warrants**
 
 During
          the year ended December 31, 2005 the board of directors approved the issuance
          of
          warrants to purchase an aggregate of 15,582,499 of the Company’s common stock.
          Such warrants are exercisable at prices ranging from $0.37 to $0.67 per
          share
          and expire at various times through April 2009.
 During
            2006 a warrant, which expires on April 2009, to purchase 500,000 shares
            of the
            Company’s common stock at an exercise price of $0.30 per share was issued in
            conjunction with the secured note payable in April 2006. (See Note
            9.)
  In
              January 2005, certain holders of warrants issued in conjunction with
              the sale of
              Series G convertible preferred stock exercised their warrants to purchase
              common
              stock. These warrants were due to expire on January 31, 2005. The exercise
              price
              of such warrants was $0.55 per share. As an incentive to exercise the
              warrant
              early the Company offered to reduce the exercise price of the warrants
              to $0.33
              per share and offered each holder the issuance of a new warrant, for
              a similar
              number of shares, at an exercise price of $0.50 per share. As a result,
              the
              Company raised $282,000. The newly issued warrants were to expire on
              the last
              day of January 2006. Prior to the expiration date, the Board of Directors
              extended the expiration date to January 31, 2007. In connection with
              the
              repricing in January 2005, and issuance of additional warrants to the
              investors,
              the Company recorded an imputed dividend in the amount of $482,000
              in
              2005 to reflect the additional benefit created for these
              investors.
 
 In
              March
              2004, certain holders of warrants exercised their warrants to purchase
              common
              stock. These warrants were due to expire at the end of March 2004.
              The exercise
              prices of such warrants were $0.40 and $0.55 per share. As an incentive
              to
              exercise the warrants early the Company offered to reduce the exercise
              price of
              the warrants to $0.25 per share and offered each holder the issuance
              of a new
              warrant, for a similar number of shares, at an exercise price of $0.55
              per
              share. As a result, the Company raised $246,000. The newly issued warrants
              were
              to expire on the last day of January 2005. Prior to the expiration
              date, the
              Board of Directors extended the expiration date to January 31, 2007.
              In
              connection with the repricing of warrants and the issuance of new warrants
              to
              the investors, the Company recorded an imputed dividend in the amount
              of
              $304,000 to reflect the additional benefit created for these
              investors.
 In
            January 2004, certain holders of warrants issued in conjunction with
            the sale of
            the Company’s Series G convertible preferred stock exercised their warrants to
            purchase 855,303 shares of the Company’s common stock. These warrants were due
            to expire on January 31, 2005. The exercise price of such warrants was
            $0.55
            per share. In order to induce the warrant holders to exercise their
            warrants prior to the expiration date, the Company offered to
            reduce the exercise price of the warrants from $0.55 to $0.33 per share
            and
            offered each warrant holder a new warrant, for the same number of shares
            of the
            Company’s common stock, at an exercise price of $0.50 per share. As a result,
            the Company raised $282,000. The newly issued warrants were set to expire
            January 31, 2006. In connection with the repricing and issuance of additional
            warrants to the investors, the Company recorded an imputed dividend of
            $482,000
            during the first quarter of 2005 to reflect the additional benefit created
            for
            such investors. The newly issued warrants’ expiration date was extended from
            January 31, 2006 to January
            31, 2007. The Company recorded an imputed dividend of $89,000 in the
            quarter
            ending March 31, 2006 toreflect the additional benefit created for the
            investors.
  F-20


During
      the year ended December 31, 2005 certain warrant holders exercised warrants
      to
      purchase 905,000 of the Company’s common stock for an aggregate of
      $282,000.  No warrants were exercised during 2006.




A
          summary
          of warrant activity for 2006 and 2005 is as follows:
  Number
                    of
                  Warrants
                  Outstanding
                    and
                  Exercisable
                
                Weighted-
                  Average
                  Exercise
                  PriceOutstanding,
                    December 31, 2004
                
                
                2,080,995
                
                $
                0.78Granted
                
                
                15,582,499
                
                $
                0.52Exercised
                
                
                (905,000
                )
                $
                0.33Expired
                
                
                (80,000
                )
                $
                0.33Outstanding,
                    December 31, 2005
                
                
                16,678,494
                
                $
                0.56Granted
                
                
                500,000
                
                $
                0.25Exercised
                
                
                --
                
                $
                --Expired
                
                
                --
                
                $
                --Outstanding,
                    December 31, 2006
                
                
                17,178,494
                
                $
                0.55
  At
          December 31, 2006, the weighted-average remaining contractual life of the
          warrants was approximately 25 months.
  **12.**
                **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.
  **13.**
                **Commitments
                    and Contingencies**
  **Lease
          Agreement**
 
 The
          Company leases its office and research facilities totaling 27,000 square
          feet
          under an operating lease, which expires on April 30, 2008. The facilities
          lease
          is subject to an annual escalation based upon the Consumer Price Index
          in 2004
          and an adjustment of one hundred two percent (102%) of the previous year’s rent
          annually from 2005 through 2008. 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**
                  **December
                    31,**
                
                **Operating
                    Leases**2007
                
                $
                680,0002008
                
                
                228,000Total
                    minimum operating lease payments
                
                $
                908,000
  F-21
 The
          Company sub-leases 6,183 square feet of its office and research facilities
          under
          a month-to-month arrangement for $13,000 per month plus utilities. Rent
          expense,
          net of sub-lease income, was approximately $446,000 and $536,000 for
          the years ended December 31, 2006 and 2005, respectively. Rental income
          was
          approximately $157,000 and $157,000 for the years ended December 31, 2006
          and
          2005, respectively.
 
 **Indemnification
          Against Claims related to License Agreement**
 
 In
          connection with the Technology License Agreement entered into with Surgica
          Corporation (See Note 4), the Company agreed to indemnify Surgica for up
          to
          $200,000 in connection with claims by the Sapphire Group LLC (“Sapphire”) for
          fees owed pursuant to an Engagement Letter entered into between Surgica
          and the
          Sapphire, as a result of agreements entered into between Surgica and the
          Company. A former Director of the Company is a principal of the
          Sapphire.
 
 On
          December 21, 2006, we satisfied Surgica’s obligation with Sapphire in exchange
          for 400,000 shares of the Company’s common stock. We estimated the value of
          these shares at approximately $61,000 and recognized a gain on the
          extinguishment of the indemnification agreement of $139,000 during the
          fourth quarter of 2006.
  **Agreements
            with Surgica Corporation**
  ***Technology
          License Agreement***
 As
            discussed in Note 4, the Company entered into a technology license agreement
            with Surgica (“Technology License Agreement”) pursuant to which the Company
            obtained exclusive marketing and distribution rights to Surgica’s
            products.
  ***Asset
          Purchase Option Agreement***
 
 On
          December 19, 2005 the Company closed an Asset Purchase Option Agreement
          (“Option
          Agreement”) that had been entered into with Surgica on November 23, 2005. Under
          the terms of the Option Agreement, the Company had the right to acquire
          substantially all of the assets of Surgica for 2,000,000 shares of the
          Company’s
          common stock, and additional shares of the Company’s stock (“ Earn-out Shares”),
          based on the future sales performance of Surgica’s products during the first
          quarter of 2007. The number of Earn-out Shares, if any, was to be determined
          in
          part on the price per share of the Company’s common stock based on the 90 day
          prior average price as of April 1, 2007. The Option Agreement was exercisable,
          at our sole discretion, for a term of up to two years. The Option Agreement
          Closing was subject to a number of conditions, including approval of the
          Option
          Agreement by a majority of the holders Surgica’s common stock and preferred
          stock voting as a single class, with the preferred voting on an “as converted”
basis. In March 2007 the Option Agreement was terminated in connection with
          the terminiation of the Surgica License Agreement. See Note 4.
 
 ***Supply
          and Services Agreement***
 
 On
          December 19, 2005 the Company entered into a Supply
          and Services Agreement (“Supply
          Agreement”) with Surgica. Under the terms of the Supply Agreement, Surgica was
          obligated to provide product development and manufacturing services to
          the
          Company, and the Company was obligated to fund monthly operating costs
          of
          Surgica up to amounts specified in Supply Agreement, purchase product for
          sale
          and for clinical use at prices specified in the Supply Agreement. Pursuant
          to
          the terms of the Supply Agreement, the Company was obligated to fund annual
          operating costs of Surgica of up to approximately $800,000 during 2006.
          Thereafter, the Company’s obligation to fund Surgica’s operating costs was
          subject to a future determination to be made based on mutually agreed upon
          operating budgets. In March, 2007 the Supply and Services Agreement was
          terminated in connection with the termination of the Surgica License Agreement.
          See Note 4.
  In
          March
          2007, the Company received notification from Surgica’s legal counsel alleging
          that the Company had breached the Technology License Agreement and the
          Supply
          Agreement, and based thereon, Surgica was terminating these agreements.
          In
          connection with its allegations, Surgica demanded that the Company reassign
          the
          510K Clearances, as defined in the Technology License Agreement, back to
          Surgica. The Company does not believe it has breached these agreements,
          nor that
          they are obligated to reassign the 510K Clearances back to Surgica.
 As
            discussed in Notes 4 and 5, the Company recorded impairment charges at
            December
            31, 2006 related to the capitalized costs of the Technology License Agreement
            and notes receivable entered into in connection with the Surgica Agreements
            of
            $1,046,503 and $257,133, respectively, in order to reduce the carrying
            value of
            these assets to $0. Additional costs may be incurred by the Company in
            connection with the resolution this matter with Surgica, and there is
            a
            possibility that litigation between the two companies may occur. In the
            event
            that litigation in this matter does transpire, the Company intends to
            vigorously
            defend it position and to seek the recovery of costs and other amounts
            expended
            pursuant to the Surgica Agreements.
  **Other
          Collaborative Development and License Agreements**
  ***Spine
          Wave, Inc.*** In April
          2001, the Company entered into agreements with Spine Wave, Inc. 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. The shares of founding common stock were subject to a vesting
          schedule;
          however, Spine Wave’s right to repurchase unvested shares terminated in 2002
          upon their merger with VERTx, Inc. Royalties from the sale or sublicensing
          of
          licensed products will be determined in the future based on the gross margin
          (sales revenue less the cost of goods) realized by Spine Wave from the
          sale of
          the products.
 
 F-22
 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.
 
 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. As noted above, the Company is no longer providing
          production services. 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 years ended December 31, 2006 and 2005 the
          Company received $433,000 and $611,000, 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 four year warrant , which has
          been
          exercised, to purchase 1,000,000 shares of Spine Wave common stock at an
          exercise price of $0.50 per share, and 400,000 shares of common stock value
          which has been valued at $20,000 which have been issued. The performance
          goals
          consisted of: (i) completion of certain studies for filing an investigational
          device exemption application (100,000 shares); (ii) completion of additional
          studies for filing of the investigational device exemption and provision
          of
          inventory for the pilot clinical study (150,000 shares); and (iii) completion
          of
          certain manufacturing arrangements, and production of certain quantities
          of
          product (150,000 shares).
  In
          October 2003, a second amendment to Supply and Services Agreement was executed.
          The amendment further defined the cost basis for reimbursement of services
          by
          Spine Wave.
 
 ***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 did not incur any research and development costs associated with
          its
          support. As a result of the arrangement, the Company recognized approximately
          $333,000 in deferred license fee revenue for years ended December 31, 2000,
          2001
          and 2002. Subsequently, Femcare notified the Company that it was closing
          its
          urology business and ceasing all product development efforts pertaining
          to the
          licensed technology, and in July 2005, both parties mutually agreed to
          terminate
          the license agreement and discharged each other from any claims, obligations,
          liabilities, or other causes of action.
 
 ***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 variety of new products for industrial markets. In
          October
          2002, the license agreement was amended to provide Genencor with an additional
          one-year option to initiate development of products in the field of non-medical
          personal care. In March 2005, the license was amended to fully incorporate
          the
          field of personal care products into the license. As a result of the agreements,
          Genencor may use our patented protein polymer design and production technology,
          in combination with Genencor's extensive gene expression, protein design,
          and
          large-scale manufacturing technology, to design and develop new products
          with
          improved performance properties for defined industrial fields and the field
          of
          non-medical personal care products.
 
 F-23
 
 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 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. In March 2005 we received
          a
          second license milestone payment of $250,000 from Genencor for Genencor’s
          initiation of a product development project based on technology licensed
          from
          us.
 
 In
          connection with the license agreement, Genencor was issued two warrants,
          each
          convertible by formula into 500,000
          shares of our common stock. Both warrants have subsequently expired.
 
 As
          a
          result of the collaboration, in 2000 we recognized an aggregate of $750,000
          in license fee revenue (less the issuance of warrants to purchase 1 million
          shares of our common stock valued at $319,000) through December 31, 2006,
          of
          which $100,000 was recognized as revenue during 2006. The agreement terminates
          on the date of expiration of the last remaining patent.
 
 On
          October 9, 2006, our license agreement with Genencor was amended. The amendment
          essentially provided for (i) the immediate funding of $100,000 payment
          under the
          existing agreement, (ii) modification of the royalty percentage from a
          variable
          rate concept to a single rate of 2% of Genecor's net revenues earned from
          the
          product sales subject to the license, (iii) a $100,000 payment in January,
          2007
          and (iv) modification of the milestone payments earned under the agreement.
          As
          amended ,we are entitled to a milestone payment of $250,000 when a product
          attains aggregate sales of $5.0 million. We are entitled to a single milestone
          payment for each product.
 
 **14.**
                **Income
                    Taxes**
  At
          December 31, 2006, the Company had net operating loss carry-forwards of
          approximately $48,904,000 for federal income tax purposes, which may be
          applied
          against future income, if any, and began expiring in 2007. In addition,
          the
          Company had California net operating loss carry-forwards of approximately
          $18,179,000, which will begin expiring in 2007. The difference between
          the tax
          loss carry-forwards for federal and California purposes is attributable
          to the
          capitalization of research and development expenses for California tax
          purposes,
          certain limitation in the utilization of California loss carry-forwards,
          and the
          expiration of certain California tax loss carry-forwards.
 
 The
          Company also has federal and California research and development tax credit
          carry-forwards of approximately $2,004,000 and $1,156,000, respectively,
          which
          will begin expiring in 2007 unless previously utilized. The Company also
          has
          California Manufacturers’ Investment Credit carry-forward of approximately
          $62,000.
 
 Some
          of
          the carry-forward benefits may be subject to limitations imposed by the
          Internal
          Revenue Code. The Company believes these limitations will not prevent
          carry-forward benefits from being realized.
 
 The
          expected income tax benefit, computed based on the Company’s pre-tax loss and
          the statutory Federal income tax rate, is reconciled to the actual tax
          provision
          reflected in the accompanying consolidated financial statements as
          follows:
  F-24
  **2006**
                
                **2005**Expected
                    federal income tax benefit
                
                $
                (2,690,000
                )
                $
                (1,980,000
                )Expected
                    state income tax benefit, net of federal benefit
                
                
                (462,000
                )
                
                (340,000
                )Increase
                    in valuation allowance
                
                
                2,114,000
                
                
                1,392,000Expiration
                    of net operating losses & credits
                
                
                699,000
                
                
                1,124,000Stock
                    options
                
                
                491,000
                
                
                -Business
                    credits
                
                
                (204,000
                )
                
                (176,000
                )Other
                
                
                52,000
                
                
                (20,000
                )Provision
                    for income taxes
                
                $
                -
                
                $
                -
 
 Significant
          components of the Company’s deferred tax assets as of December 31, 2006 are
          shown below. A valuation allowance of $22,440,000 has been recognized to
          offset
          the deferred tax assets as realization of such assets is uncertain.
  **2006**
                
                **2005**Deferred
                    tax assets:Net
                    operating loss carry-forwards
                
                $
                17,688,000
                
                $
                16,807,000Federal
                    & state tax credits
                
                
                2,807,000
                
                
                2,992,000Allowances
                
                
                145,800
                
                
                -Stock
                    based compensation/warrants
                
                
                615,400
                
                
                -Amortization/impairment
                    of license
                
                
                360,000
                
                
                -Basis
                    difference fixed assets
                
                
                783,000
                
                
                -Other,
                    net
                
                
                40,800
                
                
                527,000Total
                    deferred tax assets
                
                
                22,440,000
                
                
                20,326,000Valuation
                    allowance for deferred tax assets
                
                
                (22,440,000
                )
                
                (20,326,000
                )Net
                    deferred tax assets
                
                $
                -
                
                $
                -
  During
          the year ended December 31, 2006, the valuation allowance increased by
          approximately $2,114,000.
 
 **15.**
                **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, 2006, and 2005 the Company had not made a
          contribution to the 401(k) Savings Plan.
 
 F-25


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


None.




**Item
                8A.**
            **Controls
                And Procedures**


Disclosure
        Controls and Procedures
  The
        Company ,
        under
        the supervision and with the participation of its
        management, including its Chief
        Executive Officer (the principal executive officer) and the principal financial
        officer, evaluated the
        effectiveness of the design and operation of its disclosure controls and procedures as
        of the
        end of the period covered by this report. Based
        on
        that evaluation, and
        taking into consideration the material weaknesses identified in the letter
        from
        the Company’s auditor as discussed below, the Chief
        Executive Officer and the Principal Financial Officer concluded
        that ,
        as of
        the end of the period covered by this report, the Company’s disclosure controls and procedures were  not
        effective for the purposes of recording, processing, summarizing and timely
        reporting of material
        information relating to the Company required to be included in its periodic
        reports .
  We
        received a letter dated March 24, 2006 from Peterson & Co., LLP, our prior
        auditors, addressed to the Chairman of the Audit Committee of our Board of
        Directors in connection with the audit of our financial statements as of
        December 31, 2005, which identified certain matters involving internal control
        and our operations that Peterson considered to be significant deficiencies
        or
        material weaknesses under the standards of the Public Company Accounting
        Oversight Board. These material weaknesses were:
 
 (1)
              inadequate
                  segregation of duties in the areas of approving invoices and initiating
                  wire transfers;
 
 (2)
              insufficient
                  personnel resources and technical accounting expertise within the
                  accounting function to resolve non-routine or complex accounting
                  matters;
 
 (3)
              ineffective
                  controls over period end financial close and reporting processes;
                  and
 
 (4)
              inadequate
                  procedures for appropriately identifying, assessing and applying
                  accounting principles.
  Our
        management and our Audit Committee discussed this letter among them and
        discussed it with Peterson, and agreed to let Peterson discuss it fully with
        Squar Milner Peterson.
 
 We
        have
        effected certain changes to improve our controls over all cash disbursements,
        including:
 
 1.
              Weekly
                  forecasting of cash receipts and disbursements reviewed and approved
                  by a
                  senior officer;
 
 2.
              Approval
                  by senior officers of all disbursements;
                  and
 
 3.
              Approval
                  by senior officers of all purchase orders and
                  invoices.
 .
 We
        have
        retained the services, on a third party basis, of a person experienced in
        financial supervision matters with sufficient experience to:
 
 1.
              Oversee
                  the daily accounting function, including cash receipts and disbursements,
                  billing, payroll and month end bookkeeping
                  processes;
  2.
              Identify
                  and resolve non-routine or complex accounting
                  matters;
  3.
              Control
                  period end financial closing and reporting processes;
                  and
 
 4.
              Identify,
                  assess and apply accounting principles.
 
 We
        will
        continue to monitor and evaluate the effectiveness of our disclosure controls
        and procedures and our internal controls over financial reporting on an ongoing
        basis and are committed to taking further action and implementing additional
        improvements, as necessary and as funds allow.
 
 We
        notified the members of our Audit Committee of the facts set forth in this
        report, including the appointment of Squar Milner Peterson as the successor
        to Peterson as our independent registered auditor and no member has disapproved
        of this appointment.
 
 Internal
        Control Over Financial Reporting
  Other
        than noted above, there have been no
        changes in our internal control over financial reporting identified in
        connection with the evaluation required by paragraph (d) of Rules 13a-15
        or 15d-15 under the Exchange
        Act that occurred during our last fiscal quarter that has materially affected,
        or is reasonably likely to materially affect our internal control over financial
        reporting.




**Item
                8B.**
            **Other
                Information**


**PART
      III**




Items
      9,
      10, 11, 12 and 14 are incorporated by reference from the Company’s definitive
      Proxy Statement to be filed by the Company with the Commission.




**Item
                13.**
            **Exhibits**


The
      following documents are included or incorporated by reference:




Exhibit
                Number
            Description10.1
                (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.10.7
                (3)
            Securities
                Purchase Agreement related to the sale of the Company’s Series D Preferred
                Stock.10.8
                (4)
            1996
                Non-Employee Directors’ Stock Option Plan.10.9
                (5)
            Stockholder
                Protection Agreement, dated August 22, 1997, between the Company
                and
                Continental Stock Transfer & Trust Company as rights
                agent.10.10
                (6)
            Employee
                Stock Purchase Plan, together with Form of Stock Purchase
                Agreement.10.11
                (7)
            Lease,
                with rider and exhibits, dated April 13, 1998, between the Company
                and
                Sycamore/San Diego Investors.10.12
                (8)
            First
                Amendment to Stockholder Protection Agreement dated April 24, 1998,
                between the Company and Continental Stock Transfer & Trust Company as
                rights agent.10.13
                (9)
            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.10.14
                (10)
            Securities
                Purchase Agreement related to the sale of the Company’s Series G
                Convertible Preferred Stock.10.15
                (10)
            Second
                Amendment to Stockholder Protection Agreement, dated July 26, 1999
                between
                the Company and Continental Stock Transfer and Trust Company as rights
                agent.10.16
                (11)**
            License
                and Development Agreement dated as of January 26, 2000 between the
                Company
                and Prospectivepiercing Limited, to be known as Femcare Urology
                Limited.10.17
                (11)**
            Supply
                Agreement dated as of January 26, 2000 between the Company and Femcare
                Urology Limited.10.18
                (11)**
            Escrow
                Agreement dated as of January 26, 2000 between the Company and Femcare
                Urology Limited.


21




10.19
                (11)
            License
                Agreement dated as of February 18, 2000 between the Company and Sanyo
                Chemical Industries, Ltd.10.20
                (12)**
            License
                Agreement dated December 21, 2000 between the Company and Genencor
                International, Inc.10.21
                (12)
            Form
                of Warrant to Purchase Common Stock issued in connection with License
                Agreement between the Company and Genencor International,
                Inc.10.22
                (13)
            Securities
                Purchase Agreement related to the sale of the Company’s Series H Preferred
                Stock.10.23
                (15)**
            Founder
                Stock Purchase Agreement dated April 12, 2001 between the Company
                and
                Spine Wave Inc.


10.24
                (15)**
            License
                Agreement dated April 12, 2001 between the Company and Spine Wave,
                Inc.10.25
                (15)**
            Escrow
                Agreement dated April 12, 2001 between the Company and Spine Wave,
                Inc.10.26
                (15)**
            Supply
                and Services Agreement dated April 12, 2001 between the Company and
                Spine
                Wave, Inc.10.27
                (16)**
            Amendment
                No. 1 to Supply and Services Agreement dated February 12, 2002 between
                the
                Company and Spine Wave, Inc.10.28
                (16)**
            Stock
                Purchase and Vesting Agreement dated March 21, 2002 between the Company
                and Spine Wave, Inc.10.29
                (14)
            Warrant
                to Purchase Shares of Common Stock of Spine Wave, Inc. issued to
                the
                Company.10.30
                (17)
            First
                Amendment to the License Agreement dated October 1, 2002 between
                the
                Company and Genencor International, Inc.10.31
                (17)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                J.
                Thomas Parmeter.10.32
                (17)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                John E.
                Flowers.10.33
                (17)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                Joseph
                Cappello.10.34
                (17)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                Franco
                A. Ferrari.10.35
                (18)
            2002
                Stock Option Plan, and forms of Incentive Stock Option Agreement
                and
                Non-Statutory Stock Option Agreement.10.36
                (19)**
            Amendment
                No. 2 to Supply and Services Agreement dated October 1, 2003 between
                the
                Company and Spine Wave, Inc.10.37
                (20)
            Securities
                Purchase Agreement, dated as of March 31, 2005, by and among the
                Company
                and certain investors.10.38
                (20)
            Form
                of Warrant to Purchase Shares of Common Stock of the Company in connection
                with Securities Purchase Agreement dated as of March 31,
                2005.10.39
                (21)
            Form
                of Warrant to Purchase Shares of Common Stock of the Company issued
                to
                William N. Plamondon, III.10.44
                (22)
            Irrevocable
                Proxy, dated as of November 23, 2005, executed by Louis R. Matson
                in favor
                of the Company.10.40
                **
            Asset
                Purchase Option Agreement, dated as of November 23, 2005, by and
                between
                the Company and Surgica Corporation.10.41
                **
            License
                Agreement, dated as of December 19, 2005, between the Company and
                Surgica
                Corporation.





22




10.42
                **
            Supply
                and Services Agreement, dated as of December 19, 2005, between the
                Company
                and Surgica Corporation.10.43
                **
            Voting
                Agreement, dated as of November 23, 2005, between the Company and
                Louis R.
                Matson.14.1
                (23)
            Code
                of Conduct.31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a
                14(a)/15d 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            Certification
                of Principal Financial Officer pursuant to Securities Exchange Act
                Rules
                13a 14(a)/15d 14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            Certification
              of
              Principal Finacial Officer pursuant to U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of
              2002.





(1)
            Incorporated
                by reference to the Company's Registration Statement on Form S-1
                (No.
                33-43875), SEC File No. 033-43875, filed with the Commission on November
                12, 1991, as amended by Amendments Nos. 1, File No. 033-43875, 2,
                SEC File
                No. 033-43875, 3, SEC File No. 033-43875, and 4, SEC File No. 033-43875,
                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-KSB for the fiscal year
                ended December 31, 1992, SEC File No. 000-19724, as filed with the
                Commission on March 31, 1993.





(3)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 1995, SEC File No. 000-19724, as filed with the Commission
                on October 25, 1995.





(4)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1996, SEC File No. 000-19724, as filed with the
                Commission on March 27, 1997.





(5)
            Incorporated
                by reference to Registrant’s Current Report on Form 8-K, SEC File No.
                000-19724, as filed with the Commission on August 27,
                1997.





23




(6)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1997, SEC File No. 000-19724, as filed with the
                Commission on April 15, 1998.





(7)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                March 31, 1998, SEC File No. 000-19724, as filed with the Commission
                on
                May 15, 1998.





(8)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the Quarter ended
                June 30, 1998, SEC File No. 000-19724, as filed with the Commission
                on
                August 14, 1998.





(9)
            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.





(10)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 1999, SEC File No. 000-19724, as filed with the Commission
                on November 12, 1999.





(11)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1999, SEC File No. 000-19724, as filed with the
                Commission on March 24, 2000.





(12)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2000, SEC File No. 000-19724, as filed with the
                Commission on February 22, 2001.





(13)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 2001, SEC File No. 000-19724, as filed with the Commission
                on November 14, 2001.





(14)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 2002, SEC File No. 000-19724, as filed with the Commission
                on November 13, 2002.





(15)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB/A for the fiscal year
                ended December 31, 2001, SEC File No. 000-19724, as filed with the
                Commission on March 5, 2003.


24




(16)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB/A for the period ended
                September 30, 2002, SEC File No. 000-19724, as filed with the Commission
                on March 5, 2003.





(17)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2002, SEC File No. 000-19724, as filed with the
                Commission on March 28, 2003.





(18)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the period ended
                March 31, 2003, SEC File No. 000-19724, as filed with the Commission
                on
                May 14, 2003.





(19)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2003, SEC File No. 000-19724, as filed with the
                Commission on March 28, 2003.




(20)
            Incorporated
                by reference to Registrant’s Current Report on Form 8-K, SEC File No.
                000-19724, as filed with the Commission on April 7,
                2005.





(21)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                June 30, 2005, SEC File No. 000-19724, as filed with the Commission
                on
                August 17, 2005.





(22)
            Incorporated
                by reference to Registrant's Current Report on Form 8-K, SEC File
                No.
                000-19724, as filed with the Commission on December 22,
                2005.





(23)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2004, SEC File No. 000-19724, as filed with the
                Commission on March 31, 2005.





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


**Item
                      14.**
                    **Principal
                        Accountant Fees and
                        Services**
 Peterson
                & Co., LLP was appointed to audit the financial statements of Protein
                Polymer Technologies, Inc. for the year ending December 31, 2005 and to
                report the results of their audit to the Audit Committee of the Board
                of
                Directors. On November 29, 2006 we filed a Form 8-K indicating that on November
                22, 2006 we
                were informed by Peterson & Co., LLP (“Peterson”) that Peterson has
                consummated a merger with Squar, Milner, Miranda & Williamson, LLP (“Squar
                Milner”) who is also registered with the Public Company Accounting Oversight
                Board (United
                States). The name of the post-merger firm is Squar, Milner, Peterson,
                Miranda
& Williamson, LLP (“Squar Milner Peterson”).
 During
                the years ended December 31, 2006 and 2005, Squar, Milner, Peterson,
                Miranda
& Williamson, LLP provided various audit and non-audit services to
                us as
                follows:
 
 a. *Audit
                Fees* :
                Aggregate fees billed for professional services rendered for the
                audit of our
                annual financial statements during the years ended December 31, 2006
                and 2005
                for and for review of our financial statements included in our quarterly
                reports
                on Form 10-QSB for those years were approximately $105,626 and $82,474,
                respectively.
 
 b. *Audit-Related
                Fees* :
                No fees were billed for assurance and related services reasonably
                related to the
                performance of the audit or review of our financial statements and
                not reported
                under “Audit Fees” above in the fiscal years ended December 31, 2006 and
                December 31, 2005.
 
 c. *Tax
                Fees* .
                Aggregate fees billed for tax services were approximately $3,465
                and $3,360 in
                the fiscal years ended December 31, 2006 and December 31, 2005, respectively.
                These fees were primarily for compliance fees for the preparation
                of tax
                returns, assistance with tax planning strategies and tax advice.
 
 d. *All
                Other Fees* :
                Aggregate fees billed for services other than those described above
                were
                approximately $-0- and $20,012 in the fiscal years ended December
                31, 2006 and
                December 31, 2005, respectively. These fees were primarily for review
                of
                registration statements and issuance of consents.
 
 The
                Audit Committee approved in advance or ratified each of the major
                professional
                services provided by Squar, Milner, Peterson, Miranda & Williamson, LLP. The
                Audit Committee has considered the nature and amount of the fees
                billed by
                Peterson & Company, LLP and believes that the provision of the services for
                activities Squar, Milner, Peterson, Miranda & Williamson, LLP unrelated to
                the audit is compatible with maintaining the independence of Squar,
                Milner,
                Peterson, Miranda & Williamson, LLP.


25


**SIGNATURES**




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




PROTEIN
                POLYMER TECHNOLOGIES, INC.May
                4, 2007
            By:
            /S/
                WILLIAM N. PLAMONDON, IIIWilliam
                N. Plamondon, IIIChief
                Executive Officer


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.




Signature
            
            Capacity
            
            Date/S/
                WILLIAM N. PLAMONDON, III
              William
                N. Plamondon, III
            
            Chief
                Executive Officer
              (Principal
                Executive Officer and Principal Financial Officer)
            
            May
                4,
                2007/S/
                ALLAN FARBER
              Allan
                Farber
            
            Director
            
            May
                  4,
                  2007/S/
                KERRY L. KUHN
              Kerry
                L. Kuhn, M.D.
            
            Director
            
            May
                  4,
                  2007/S/
                RICHARD ADELSON
              Richard
                Adelson
            
            Director
            
            May
                  4,
                  2007/S/
                JAMES B. MCCARTHY
              James
                B. McCarthy
            
            Director
            
            May
                  4,
                  2007




26




**EXHIBIT
      INDEX**




10.1A
            Amendment
              No.5 to Secured Promisory Note issued to Matthew J. Szulik dated, April
              10, 2007.




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





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





32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





32.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
                as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                2002.





27