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                                  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, 2003


                                       OR

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


                      from                        to
                           ----------------------     --------------------------


                         Commission file number 0-19724



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


                   Delaware                              33-0311631
       (State or Other Jurisdiction of                  (IRS Employer
       Incorporation or Organization)                 Identification No.)


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


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

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


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


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

Yes   X            No
   --------          --------


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


The issuer's revenues for the most recent fiscal year were $1,617,318.


The aggregate market value of the voting common stock held by  non-affiliates of
the issuer on March 10, 2004 was $14,930,630.  Stock held by directors, officers
and shareholders  owning 5% or more of the outstanding common stock (as reported
on Schedules 13D and 13G) were excluded as they may be deemed  affiliates.  This
determination  of  affiliate  status is not a conclusive  determination  for any
other purpose.


The number of shares of the  registrant's  common stock  outstanding as of March
10, 2004 was 37,100,857.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

Definitive  Proxy  Statement to be filed with the Commission no later than April
29, 2004 with respect to the registrant's 2004 Annual Meeting of Stockholders.

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

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                       PROTEIN POLYMER TECHNOLOGIES, INC.

                                   FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS

                                                                        Page No.


PART I.....................................................................    2

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

  Item 2.  Description of Property.........................................   15

  Item 3.  Legal Proceedings...............................................   15

  Item 4.  Submission of Matters to a Vote of Security Holders.............   15


PART II....................................................................   16

  Item 5.  Market for Common Equity, Related Stockholder Matters and Small
           Business Issuer Purchases of Equity Securities..................   16

  Item 6.  Management's Discussion and Analysis............................   18

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

  Item 8.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure............................................   24

  Item 8A. Controls and Procedures.........................................   24

PART III...................................................................   24

  Item 9.  Directors, Executive Officers; Compliance with Section 16(a) of
           the Exchange Act................................................   24

  Item 10. Executive Compensation..........................................   24

  Item 11. Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters.................................   24

  Item 12. Certain Relationships and Related Transactions..................   24

  Item 13. Exhibits and Reports on Form 8-K................................   24

  Item 14. Principal Accountant Fees and Services..........................   24

  Signatures...............................................................   31


                                       1
<PAGE>

                                     PART I

Item 1.        Business

Forward Looking Statements

        Certain statements contained or incorporated by reference in this Annual
Report on Form 10-KSB constitute "forward-looking statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995. Such  forward-looking
statements  involve  known and unknown  risks,  uncertainties  and other factors
which may cause actual results,  performance or achievements of the company,  or
industry  results,   to  be  materially   different  from  any  future  results,
performance or achievements expressed or implied by forward-looking  statements.
Such risks and uncertainties include, among others, history of operating losses,
raising  adequate  capital  for  continuing  operations,  early stage of product
development,  scientific and technical  uncertainties,  competitive products and
approaches,  reliance upon  collaborative  partnership  agreements  and funding,
regulatory   testing  and  approvals,   patent   protection   uncertainties  and
manufacturing  scale-up  and  required  qualifications.  While these  statements
represent  management's current judgment and expectations for the company,  such
risks and uncertainties could cause actual results to differ materially from any
future results  suggested herein. We undertake no obligation to release publicly
the results of any  revisions  to these  forward-looking  statements  to reflect
events or circumstances arising after the date hereof.

Company Background

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

        o      soft tissue augmentation;

        o      tissue adhesives and sealants;

        o      wound healing support; and

        o      drug delivery devices.

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

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

        We estimate that more than 2.5 million women begin to experience  stress
urinary  incontinence  in the United States each year. In most untreated  cases,
the problem becomes  progressively  more pronounced.  Due to limited efficacy or
invasiveness  of  current  treatments,  only a  small  proportion  of the  women
experiencing stress urinary incontinence are clinically treated, relying instead
on pads and plugs and the like that only address the

                                       2
<PAGE>

symptoms.  In  contrast,  our product is injected,  typically  in an  outpatient
procedure,  into  urethral  tissue  at the base of the  bladder  forming a solid
implant that provides  support to the muscles  controlling the flow of urine. We
believe that our product,  if approved,  will prove to be easy for the physician
to use, offer enduring effectiveness, and avoid most of the other limitations of
urethral bulking products on the market or in development.

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

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

        We estimate that  approximately  500,000  cosmetic  tissue  augmentation
procedures using injected materials (e.g.  collagen,  fat) were performed in the
U.S in 2001, representing about one-half of the worldwide market. With a product
demonstrating greater durability than currently available materials,  we believe
the number of procedures could grow dramatically.

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

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

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

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

                                       3
<PAGE>

clinical testing,  regulatory approvals,  and  commercialization.  We expect our
work with Spine  Wave will lead to a product  for  spinal  disc  repair in human
clinical testing during 2004.

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

        Our cash balance as of December 31, 2003 was $1,085,000. We believe this
amount in  combination  with  accounts  receivable  and  continuing  contractual
commitments is sufficient to meet our anticipated capital  requirements  through
May 2004.  Substantial additional capital resources will be required to fund our
research,  development,  manufacturing and business development  activities.  We
believe there may be a number of  alternatives  available to meet the continuing
capital  requirements of our operations,  such as  collaborative  agreements and
public or private  financings.  We are currently in  discussions  with potential
financing sources and  collaborative  partners and funding in the form of equity
investments,  license  fees,  milestone  payments  or research  and  development
payments  could  be  generated.  There  can be no  assurance  that  any of these
fundings will be consummated in the timeframes needed for continuing  operations
or on terms  favorable to us. If adequate  funds are not  available,  we will be
required to  significantly  curtail our operating plans and would likely have to
sell or license out significant  portions of our technology,  and possibly cease
operations.  (See the Liquidity and Capital  Resources  section of  Management's
Discussion and Analysis for further discussion.)

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

Technology

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

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

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

                                       4
<PAGE>

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

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

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

        We have demonstrated an ability to create materials that:

        o combine  properties of different proteins found in nature;

        o reproduce and  amplify  selected  activities  of  natural  proteins;

        o eliminate undesired  properties of natural proteins;  and

        o incorporate  synthetic properties via chemical modifications.

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

Fundamental Protein Polymers

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

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

        We have also created protein polymers based on repeating blocks of amino
acids  found in two  other  classes  of  structural  proteins  found in  nature:
collagen  and keratin.  Collagen is the  principal  structural  component of the
body, found in some shape or form in virtually every tissue,  ranging from shock
absorbing cartilage to light

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transmitting corneas.  Keratin is a major component in hair, nails and skin. The
development  of  materials  based on  these  polymers  is at an  early  stage of
research.

Product Candidates and Anticipated Markets

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

        All of our product  candidates are subject to pre-clinical  and clinical
testing  requirements  for  obtaining  FDA's  marketing  approval.   The  actual
development of product  candidates,  if any, will depend on a number of factors,
including the  availability  of funds  required to research,  develop,  test and
obtain  necessary  regulatory  approvals;  the anticipated  time to market;  the
potential  revenues and margins that may be generated if a product  candidate is
successfully  developed and commercialized;  and the Company's assessment of the
potential market acceptance of a product candidate.

        Soft Tissue Augmentation

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

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

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

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

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

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<PAGE>

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

        In August 1999,  we obtained the FDA's  approval of our  investigational
device  exemption  to begin  human  clinical  testing of a product  based on our
technology  for the treatment of female stress  urinary  incontinence.  We began
pilot  clinical  testing of the product's  safety and efficacy in December 1999.
Through our partner, Femcare, European clinical trials were initiated at the end
of 2001. We currently project expanding into a multi-site pivotal clinical study
in 2005, to the extent resources are available.

        In November 2000, we obtained the FDA's approval of our  investigational
device  exemption  to begin  human  clinical  testing of a product  based on our
technology  for use in cosmetic and  reconstructive  surgery  applications.  The
product is injected into or under the skin for the  correction of dermal contour
deficiencies (facial lines,  wrinkles,  scars, etc.) caused by aging or disease.
We began pilot  clinical  testing of the product's  safety and efficacy in April
2001. We currently project expanding into a multi-site pivotal clinical study in
2005, to the extent resources are available.

        Tissue Adhesives and Sealants

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

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

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

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

        Our  tissue  adhesive  technology  combines a protein  polymer  designed
specifically  to  react  in  a  highly  efficient  manner  under   physiological
conditions  with  multiple  classes  of  cross-linking  agents.  These two fluid
components are mixed just prior to their delivery to the treatment  site,  which
can be accomplished through a fine gauge needle. The material then rapidly cures
to a tough,  elastic  hydrogel that  strongly  adheres to  surrounding  tissues.
Chemical  cross-linking  of the protein  polymer allows for the development of a
hydrogel with much more

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<PAGE>

robust mechanical properties than can be achieved with the protein polymer alone
(i.e.,  in  comparison  to our bulking  agents).  By varying  components  of the
formulation,  including the type of  cross-linker  used,  the  properties of the
final product are tailored to particular  clinical needs (e.g. flow  properties,
set-up speed, adhesive strength, resorption rate).

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

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

        We are currently  conducting  preclinical  evaluations of the use of our
adhesive  technology  formulated  as  a  surgical  sealant  for  cardiovascular,
pulmonary and gastrointestinal  procedures. In these types of applications,  the
use of sutures and staples for closing the wound may permit leaks of air, in the
case of pulmonary (lung) surgery, and fluids, particularly blood in any surgery,
and also  gastrointestinal  (GI)  fluids in the case of surgery on the colon (GI
tract).  In such surgeries,  the use of an effective sealant -- as an adjunct to
sutures or  staples -- to prevent  leaks  could  reduce  hospitalization  stays,
reduce  post-operative  pain and complications,  and lower associated  mortality
rates.  We are  seeking  to  establish  additional  partnerships  to pursue  the
commercial development of such products.

        Wound Healing Support

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

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

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

        Controlled Release Drug Delivery

        Oral delivery of drugs is the most  preferred  route of  administration.
However,  for many drugs this is not  possible  and  alternative  drug  delivery
routes are required.  Alternative routes include  transdermal,  mucosal,  and by
implantation or injection.  For implantation or injection, it is often desirable
to extend the  availability  of the drug in order to minimize  the  frequency of
these invasive procedures. A few materials have been commercialized which act as
depots for a drug when  implanted or injected,  releasing  the drug over periods
ranging from one

                                       8
<PAGE>

month to several years.  Other  material and drug  combinations
are being  developed by third  parties.  We believe that the properties of these
materials for such  applications  can be  substantially  improved  upon,  making
available the use of depot systems for a wider range of drugs and applications.

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

Manufacturing, Marketing and Distribution

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

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

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

Research and Development

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

Collaborative and License Agreements

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

                                       9
<PAGE>

arrangements with selected  corporate  partners with specific  resources that we
believe complement our business strategies and goals.

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

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

Other Agreements

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

Intense Competition

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

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

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

Patents and Trade Secrets

        We  are  aggressively   pursuing  domestic  and   international   patent
protection  for  our   technology,   making  claim  to  an  extensive  range  of
recombinantly  prepared  structural  and functional  proteins,  the DNA encoding

                                       10
<PAGE>

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

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

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

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

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

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

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

                                       11
<PAGE>

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

        In almost all cases, we file for patents in Europe and Japan. Currently,
we  maintain  thirteen  issued  foreign  patents,  and  twelve  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(R) trademark and our SmartPlastic(R) trademark for
ProNectin  F  Activated  Cultureware  to  Sanyo  Chemical  Industries,  Ltd.  in
connection with the sale to Sanyo of our cell culture business in February 2000.
We intend to protect and promote all of our trademarks  and, where  appropriate,
will seek federal registration of our trademarks.

Regulatory Matters

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

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

                                       12
<PAGE>

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

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

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

Product Liability and Absence of Insurance

        Our business may expose us to potential product liability risks whenever
human  clinical  testing  is  performed,  or upon  the  use of any  commercially
marketed  medical  product.  Prior to beginning  human  clinical  testing of our
investigational  devices,  we  procured  product  liability  insurance.  We  are
maintaining  this  insurance,  expanding the coverage as  appropriate in concert
with the clinical use of our products. There can be no assurance,  however, that
we will be able to continue to obtain such insurance on acceptable terms or that
such insurance will provide adequate coverage against potential  liabilities.  A
successful  product  liability  claim or  series  of  claims  could  result in a
material adverse effect on our business.

                                       13
<PAGE>

Executive Officers of the Registrant

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

J. Thomas Parmeter             64        Chairman of the Board of Directors,
                                         President and Chief Executive Officer

Joseph Cappello, Ph.D.         47        Vice President, Research and
                                         Development, Chief Technical Officer
                                         and Director, Clinical Research

Philip J. Davis                74        Corporate Secretary

Franco A. Ferrari, Ph.D.       52        Vice President, Laboratory Operations
                                         and Polymer Production and Director,
                                         Molecular Genetics

John E. Flowers                47        Vice President, Planning and Operations

Janis Y. Neves                 53        Director, Finance and Administration,
                                         Treasurer and Assistant Secretary


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

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

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

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

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

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

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

                                       14
<PAGE>

Employees

       As of March 7, 2004,  we had 18  full-time  employees,  of whom four have
employment  contracts  with our  company  and three hold Ph.D.  degrees.  We are
highly dependent on the services of our executive  officers and scientists.  The
loss of the  services  of any one of these  individuals  would  have a  material
adverse effect on the  achievement of our development  objectives,  our business
opportunities  and  prospects.  The  recruitment  and  retention  of  additional
qualified  management and scientific  personnel is also critical to our success.
There can be no  assurance  that we will be able to attract and retain  required
personnel on  acceptable  terms,  due to the  competition  for such  experienced
personnel from other biotechnology,  pharmaceutical, medical device and chemical
companies, universities and non-profit research institutions.

Item 2.        Properties

       We do not own any real  property.  We lease  approximately  27,000 square
feet in San Diego,  California  from Del Mar  Partnership.  The leased  property
includes our administrative  offices, which encompass approximately 4,000 square
feet, and our laboratory facilities, which encompass approximately 15,000 square
feet.  The current  annual  rent for this space is  approximately  $620,000.  We
currently  sublease  at cost an  additional  6,000  square  feet of  office  and
laboratory space in our present facility.  The master lease expires in May 2008.
The sublease  originally  expired at the end of January  2003,  but is currently
continuing on a month-to-month basis. We believe that our current facilities are
adequate to meet our needs until the end of 2005.

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 2003.

                                       15
<PAGE>

                                     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.

       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
                                      ------------
                  2003             High         Low
                  ----             ----         ---
                First Quarter    $0.980        $0.600
                Second Quarter    0.800         0.550
                Third Quarter     0.600         0.410
                Fourth Quarter    0.560         0.420

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



       As of March 26, 2004, we had  approximately 164 shareholders of record of
our common stock; we estimate we had approximately  1,500 beneficial holders. We
have never paid cash  dividends  on our common  stock.  We  currently  intend to
retain earnings,  if any, for use in the operation and expansion of our business
and therefore do not anticipate paying any cash dividends on our common stock in
the foreseeable future.

Equity Compensation Plan Information

       The  following  table  provides  information  as  of  December  31,  2003
regarding  equity   compensation   plans  (including   individual   compensation
arrangements) under which our equity securities are authorized for issuance.

                                       16
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                                                 Number of securities
                                                                                  remaining available
                                Number of Securities                              for future issuance
                                  to be issued upon       Weighted-average           under equity
                                     exercise of          exercise price of       compensation plans
        Plan Category           outstanding options,    outstanding options,     (excluding securities
                                 warrants and rights     warrants and rights      reflected in column
                                                                                          (a))
------------------------------- ---------------------- ------------------------ ------------------------
                                       (a)                      (b)                       (c)
<S>                                   <C>                      <C>                     <C>
Equity Compensation Plans
approved by security holders
   Stock Option Plans(1)              8,267,950                $0.788                  4,171,550
   Employee   Stock   Purchase              -                    -                        59,661
   Plan(2)
Equity Compensation Plans not
approved by security holders(3)       1,324,050                $0.596                     n/a
--------------------------------------------------------------------------------------------------------
</TABLE>


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

Recent Sales of Unregistered Securities

        In June 2003,  certain  holders of warrants  exercised their warrants to
purchase  common stock,  these  warrants were due to expire in August 2003.  The
exercise prices of such warrants were $0.40 and $0.10 per share. As an incentive
to exercise the warrant early the Company  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  $353,500.  The newly issued  warrants
expired on March 26, 2004.

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

                                       17
<PAGE>

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

Forward Looking Statements

       Certain statements  contained or incorporated by reference in this Annual
Report on Form 10-KSB constitute "forward-looking statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995. Such  forward-looking
statements  involve  known and unknown  risks,  uncertainties  and other factors
which may cause actual results,  performance or achievements of the company,  or
industry  results,   to  be  materially   different  from  any  future  results,
performance or achievements expressed or implied by forward-looking  statements.
Such risks and uncertainties include, among others, history of operating losses,
raising  adequate  capital  for  continuing  operations,  early stage of product
development,  scientific and technical  uncertainties,  competitive products and
approaches,  reliance upon  collaborative  partnership  agreements  and funding,
regulatory   testing  and  approvals,   patent   protection   uncertainties  and
manufacturing  scale-up  and  required  qualifications.  While these  statements
represent  management's current judgment and expectations for the company,  such
risks and uncertainties could cause actual results to differ materially from any
future results  suggested herein. We undertake no obligation to release publicly
the results of any  revisions  to these  forward-looking  statements  to reflect
events or circumstances arising after the date hereof.

General Overview

        Protein Polymer Technologies, Inc., is a development-stage biotechnology
company engaged in the research, development, production and clinical testing of
medical  products  based on materials  created from our patented  technology  to
produce  proteins of unique  design.  Since 1992,  we have focused  primarily on
developing  technology  and  products to be used for soft  tissue  augmentation,
tissue adhesives and sealants; wound healing support; and drug delivery devices.
We  have  been  unprofitable  to  date,  and  as of  December  31,  2003  had an
accumulated deficit of $(47,473,000).

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

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

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

                                       18
<PAGE>

Significant Collaborative Agreements

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

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

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

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

        In March 2002, we executed  additional  agreements  with Spine Wave that
expanded our contractual research and development relationship, and that offered
us  additional  equity  incentives  in the form of Spine Wave  common  stock and
warrants.  Under the amended  supply and  services  agreement,  we, on behalf of
Spine Wave, are proceeding with pre-clinical safety and performance studies of a
product  for  spinal  disc  repair  to  support   Spine  Wave's   filing  of  an
investigational  device  exemption  with the FDA to obtain  approval to initiate
human  clinical  testing.  During the  subsequent  period  leading to regulatory
marketing  approval,  our  contractual  responsibilities  include  the supply of
product  to  be  used  in  clinical   testing  and  preparation  for  commercial
manufacturing operations.  Research and development services performed for Spine
Wave are reimbursed  including both direct costs and associated  overhead costs.
Spine Wave is  responsible  for  clinical  testing,  regulatory  approvals,  and
commercialization.  For the year ended  December  31, 2003 and for the period of
project inception to date we received  $1,584,000 and $4,461,000,  respectively,
in contract revenue from Spine Wave which represents the reimbursement of direct
costs plus overhead costs  allocated to the research and  development  resources
used in performing the collaborative activities.

        Additional  equity  incentives  offered in conjunction with the expanded
supply and services  agreement of March 17, 2002 consist of a three year warrant
to purchase  1,000,000 shares of Spine Wave common stock at an exercise price of
$0.50 per share  (recently  issued Spine Wave preferred stock was also priced at
$0.55 per share),  and 400,000  shares of common stock valued at $0.05 per share
subject to repurchase at cost until each of three performance goals is achieved.
The  performance  goals consist of: (i) completion of certain studies for filing
an  investigational   device  exemption   application  (100,000  shares);   (ii)
completion  of  additional  studies  for  filing of the  investigational  device
exemption  and  provision of inventory  for the pilot  clinical  study  (150,000
shares);  and  (iii)  completion  of  certain  manufacturing  arrangements,  and
production of certain quantities of product (150,000 shares). As of December 31,
2003, the first of the three performance goals had been met.

        In  October  2003,  we  executed  a second  amendment  to the supply and
services  agreement  with Spine Wave.  The  amendment,  effective  for one year,
extended Spine Wave's right to certain  research and development  services,  and
further defined the cost basis for  reimbursement of services  provided by us to
Spine Wave.

                                       19
<PAGE>

Significant License Agreements

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

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

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

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

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

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

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

                                       20
<PAGE>

Research and Development

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

        Our product for the treatment of female stress urinary  incontinence  is
in pilot human clinical testing.  Due to the rate of patient enrollment,  we now
project  beginning pivotal clinical testing during 2005. We expect these trials,
including  patient  follow-up,  will  take  approximately  24  months,  and  the
subsequent  Food and  Drug  Administration  review  of our  pre-market  approval
submission  may take an additional 12 months.  Assuming this schedule is met and
the product is  approved,  U.S.  sales of the product are  projected to begin in
2007.  Commercial  manufacturing  process  development  and  completion  of  the
clinical trials are estimated to cost approximately $10 million.  Femcare, Ltd.,
our  licensee  for this  product in Europe and  Australia,  has  advised us that
commercialization  of the product in Europe  potentially  can occur at least one
year in advance of U.S. commercialization.

        Our tissue  augmentation  product for use in cosmetic and reconstructive
surgery  applications is in pilot human clinical  testing.  We recently obtained
FDA approval to expand the pilot  clinical  study to obtain  additional  data in
support of our  application to begin a pivotal  clinical  study.  We now project
beginning  pivotal  clinical  testing  during  2005.  We  expect  these  trials,
including  patient  follow-up,  will  take  approximately  15  months,  and  the
subsequent  Food and  Drug  Administration  review  of our  pre-market  approval
submission may take up to an additional 12 months. Assuming this schedule is met
and the product is approved,  U.S.  sales are  projected  to begin in 2007.  Our
estimate for the pivotal clinical trial has been updated and is now projected to
cost approximately $3.2 million. This product is based on the same manufacturing
technology  as  our  product  for  the   treatment  of  female  stress   urinary
incontinence,  and thus, the incremental  cost of  manufacturing  development is
estimated to be approximately $0.1 million.

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

        Our spinal disc repair product being  developed for our licensee,  Spine
Wave, Inc., is in pre-clinical  testing. The timing of this project is under the
control of Spine Wave.  Under our contract with Spine Wave,  we are  responsible
for  development of the  formulated  product,  its  manufacturing  process,  and
product production for both clinical trials and commercialization. Spine Wave is
responsible for funding all expenses associated with these activities.  Contract
revenue  received  from Spine Wave is  approximately  equal to our cost  (direct
project costs plus allocated  laboratory and corporate overhead expenses) of the
work performed. Total research and development costs for the year ended December
31,  2003 and for the  period of  project  inception  to date are  approximately
$1,584,000 and $4,461,000 respectively.

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

                                       21
<PAGE>

Results of Operations

       Contract and Licensing  Revenue.  We received  $1,597,000 in contract and
licensing revenue for the year ended December 31, 2003 as compared to $3,011,000
for the year ended  December 31, 2002,  and $783,000 for the year ended December
31, 2001.  Contract revenue for the past year primarily  represents  payments of
$1,584,000  from  Spine  Wave,  for  materials  and  services  provided  in  the
development of an adhesive  product for the repair of spinal discs.  We received
$2,427,000  and  $450,000 in contract  revenue  from Spine Wave in 2002 and 2001
respectively.  We received no licensing  revenue in 2003.  Licensing  revenue in
2002 primarily  represents the amortized  portion of an up-front license payment
of $1 million  (being  recognized  ratably  over a period of three  years)  from
Femcare  for the  commercial  rights to our  incontinence  product in Europe and
Australia,  and a license  milestone  payment  of  $250,000  from  Genencor  for
Genencor's  initiation  of a product  development  project  based on  technology
licensed from us.  Licensing  revenue in 2001  comprised  the amortized  license
payments from Femcare.

       Interest Income.  Interest income was $20,000 for the year ended December
31, 2003, as compared to $7,000 for 2002 and $41,000 for 2001. The  year-to-year
variability resulted from the amount and timing of the receipt of equity capital
and the amounts of excess cash available for investment.

       Research and Development Expenses.  Research and development expenses for
the year ended  December 31, 2003 were  $2,360,000,  compared to $2,699,000  for
2002, and $2,611,000 in 2001. The  fluctuations  are primarily due to variations
in clinical  testing and  regulatory  consulting  costs.  The cost of conducting
human clinical  testing began in December 1999 for our product for the treatment
of stress urinary incontinence,  and in 2001 for our tissue augmentation product
for use in cosmetic and  reconstuctive  surgery.  Other related expenses include
those for expanded manufacturing capacity and manufacturing process development,
quality assurance efforts, and outside testing services.  We expect our research
and development  expenses will increase in the future,  to the extent additional
capital  is  obtained,  due to the  expansion  of  product-directed  development
efforts including  preclinical  development of our surgical sealants,  increased
human clinical testing, increased manufacturing  requirements,  increased use of
outside testing services,  and increased  research and development  services for
Spine Wave.

       Selling,  General  and  Administrative  Expenses.  Selling,  general  and
administrative expenses for the year ended December 31, 2003 were $1,451,000, as
compared to $1,336,000 for 2002, and $1,366,000 in 2001. Although these expenses
have been fairly  consistent  over the past three years,  we did experience some
increases  during 2003 in these 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.

        Operating  Losses.  For the year ended  December 31, 2003, we recorded a
net loss applicable to common shareholders of $3,844,000, or $0.11 per share, as
compared to $1,294,000,  or $0.05 per share for 2002, and  $3,424,000,  or $0.16
per share for 2001.  The  difference  in the net losses and the losses per share
between 2003 and 2002,  and 2001, is primarily due to differences in license and
contract  fees  received from  collaborative  partners,  and in 2003 an "imputed
dividend"  expense  associated  with the sale of preferred  stock. In connection
with the sale of Series I Convertible  Preferred Stock in March and May 2003, we
recorded a non-cash "imputed dividend" expense of $1,373,247 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.  The 2003, 2002 and
2001 losses and per share  calculations  also  include  $278,000  of  undeclared
dividends in each year with respect to our preferred stock.

       We expect  to incur  increasing  operating  losses  for the next  several
years, to the extent additional capital is obtained, based upon the continuation
of the development and testing of our product for the treatment of female stress
urinary  incontinence  and our  product  for the  correction  of dermal  contour
deficiencies,  the

                                       22
<PAGE>

associated FDA approval process,  and the tissue adhesives  program,  as well as
expected  increases in our other  research and  development,  manufacturing  and
business  development  activities.  Our results depend in part on our ability to
establish  strategic   alliances  and  generate  contract  revenues,   increased
research,  development  and  manufacturing  efforts,  pre-clinical  and clinical
product  testing  and  commercialization  expenditures,  expenses  incurred  for
regulatory  compliance and patent  prosecution,  and other factors.  Our results
will also fluctuate from period to period due to timing differences.

Inflation

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

Liquidity and Capital Resources

       As of December 31, 2003, we had cash,  cash  equivalents  and  short-term
investments totaling  $1,085,000,  as compared to $734,000 at December 31, 2002.
As of December  31,  2003,  we had working  capital of  $1,192,000,  compared to
$189,000 at December 31, 2002.

       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, 2003 or December 31, 2002. For the year ended December 31, 2003,
our cash expenditures for capital equipment and leasehold  improvements  totaled
$90,058,  compared  with  $32,000 for the same period in the prior year.  To the
extent  capital is available,  we  anticipate  that these  expenditures  will be
increased in 2003 for laboratory  renovations and additional  equipment required
to meet  the  FDA's  applicable  Quality  System  regulation  as we scale up our
manufacturing  operations  to meet product  requirements  for expanded  clinical
testing. We may enter into capital equipment lease arrangements in the future if
available at appropriate rates and terms.

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

                                       23
<PAGE>

Item 7.        Financial Statements


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

<TABLE>
<CAPTION>
        Description                                                                    Page
        -----------                                                                    ----

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

        Balance Sheets at December 31, 2003 and 2002...................................F-3

        Statements of Operations for the years ended December 31, 2003, 2002
        and 2001 and the period July 6, 1988 (inception) to December 31, 2003..........F-4

        Statements of Stockholders Equity for the period July 6, 1988 (inception)
        to December 31, 2003...........................................................F-5

        Statements of Cash Flows for the years ended December 31, 2003, 2002
        and 2001 and the period July 6, 1988 (inception) to December 31, 2003..........F-8

        Notes to Financial Statements..................................................F-10
</TABLE>

                                       F-1

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


Board of Directors and Stockholders

Protein Polymer Technologies, Inc.

We have audited the accompanying balance sheets of Protein Polymer Technologies,
Inc. (a  Development  Stage  Company) as of December 31, 2003 and 2002,  and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years then ended and for the period July 6, 1988 (inception) to December
31, 2003.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Protein Polymer  Technologies,
Inc. (a  Development  Stage  Company) as of December 31, 2003 and 2002,  and the
results  of its  operations  and its cash flows for the years then ended and for
the period July 6, 1988  (inception)  to December  31, 2003 in  conformity  with
accounting principles generally accepted in the United States of America.

As  discussed  in  Note  1  to  the  financial   statements,   Protein   Polymer
Technologies, Inc. (a Development Stage Company) has reported accumulated losses
during the development  stage aggregating  ($47,473,000) and without  additional
financing,  lacks sufficient working capital to fund operations beyond May 2004,
which raises substantial doubt about its ability to continue as a going concern.
Management's  plans  as to  these  matters  are  described  in Note 1.  The 2003
financial  statements  do not include any  adjustments  to reflect the  possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.

                                                             PETERSON & CO., LLP


March 8, 2004


                                      F-2
<PAGE>
                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                            2003           2002
                                                                       -------------------------------
<S>                                                                    <C>              <C>
Assets
Current assets:
  Cash and cash equivalents                                            $    1,085,314   $    733,978
  Contracts receivable                                                        252,026              -
  Rent receivable                                                             184,527              -
  Prepaid expenses                                                             25,799         30,619
  Other current assets                                                              -            154
                                                                       -------------------------------
Total current assets                                                        1,547,666        764,751

Deposits                                                                       29,679         29,679
Equipment and leasehold improvements, net                                     114,411         80,928
                                                                       -------------------------------

                                                                       $    1,691,756   $    875,358
                                                                       ===============================

Liabilities and stockholders' equity (deficit)
Current liabilities:
  Accounts payable                                                     $      168,659   $    389,109
  Accrued expenses                                                            162,609        162,244
  Deferred rent                                                                24,111         24,111
                                                                       -------------------------------
Total current liabilities                                                     355,379        575,464

Long-term portion deferred rent                                                     -         24,111

Commitments (Notes 5 and 7)

Stockholders' equity:
  Convertible Preferred Stock, $.01 par value, 5,000,000 shares
  authorized, 86,095 and 76,120 shares issued and outstanding at
  December 31, 2003 and 2002, respectively - liquidation
    preference of $8,609,500 and $7,612,000 at December 31, 2003
    and December 31, 2002, respectively                                     8,064,917      7,266,780
  Common stock, $.01 par value, 120,000,000 shares authorized,
    36,830,857 and 29,731,535 shares issued and outstanding at
    December 31, 2003 and 2002, respectively                                  368,319        297,327
  Additional paid-in capital                                               40,376,185     36,618,235
  Deficit accumulated during development stage                            (47,473,044)   (43,906,559)
                                                                       -------------------------------
Total stockholders' equity                                                  1,336,377        275,783
                                                                       -------------------------------

                                                                       $    1,691,756   $    875,358
                                                                       ===============================
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>
                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                            Statements of Operations



<TABLE>
<CAPTION>
                                                                                      For the period
                                                                                       July 6, 1988
                                                                                      (inception) to
                                                Years ended December 31,               December 31,
                                          2003             2002            2001            2003
                                    ------------------------------------------------------------------
<S>                                 <C>              <C>              <C>             <C>
Revenues:
  Contract and licensing revenue    $    1,597,415   $    3,010,571   $     783,334   $  10,856,001
  Interest income, net                      19,903            6,810          40,778       1,266,850
  Product and other income                       -            1,500           5,950         694,779
                                    ------------------------------------------------------------------
Total revenues                           1,617,318        3,018,881         830,062      12,817,630

Expenses:
  Research and development               2,359,643        2,698,733       2,611,317      34,745,748
  Selling, general and
  administrative                         1,450,914        1,336,306       1,365,574      20,223,295
                                    ------------------------------------------------------------------
Total expenses                           3,810,557        4,035,039       3,976,891      54,969,043
                                    ------------------------------------------------------------------

Net loss                                (2,193,239)      (1,016,158)     (3,146,829)    (42,151,413)

Undeclared and/or paid dividends on
  preferred stock                        1,650,886          277,639         277,639       7,723,457
                                    ------------------------------------------------------------------

Net loss applicable to common
  shareholders                      $   (3,844,125)  $   (1,293,797)  $  (3,424,468)  $ (49,874,870)
                                    ==================================================================

Net loss per common share - basic
  and diluted                       $         (.11)  $         (.05) $         (.16)
                                    ==================================================

Shares used in computing net loss
  per common share - basic and
  diluted                               34,362,427       27,659,838      20,964,233
                                    ==================================================
</TABLE>


See accompanying notes.

                                      F-4
<PAGE>
                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 2003



<TABLE>
<CAPTION>


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


<CAPTION>


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

</TABLE>


                                      F-5
<PAGE>


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

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 2003


<TABLE>
<CAPTION>


                                                                                Common stock              Preferred stock
                                                                       ---------------------------------------------------------
                                                                           Shares         Amount       Shares         Amount
                                                                       -----------------------------------------------------------
<S>                                                                       <C>            <C>                          <C>
  Exercise of common stock warrants at $1.25 per share                      932,060      $    9,330            -      $        -
  Exercise of common stock warrants at $2.50 per share, net of
    issuance costs                                                          322,663           3,226            -               -
  Exercise of common stock warrants at $1.00 per share                       25,000             250            -               -
  Exercise of common stock options                                          136,000           1,360            -               -
  Stock repurchases                                                         (16,320)           (163)           -               -
  Net loss                                                                        -               -            -               -
                                                                       -----------------------------------------------------------
Balance at December 31, 1996                                              7,233,228          72,333       49,187       4,764,745
  Issuance of common stock at $2.50 per share, net of issuance costs      1,904,000          19,040            -               -
  Exercise of common stock options                                           28,000             280            -               -
  Issuance of common stock under stock purchase plan                         15,036             151            -               -
  Conversion of Series D preferred stock into common stock                1,032,537          10,325      (20,973)     (2,097,342)
  Series D dividends paid in common stock                                   207,921           2,079            -               -
  Net loss                                                                        -               -            -               -
                                                                       -----------------------------------------------------------
Balance at December 31, 1997                                             10,420,722         104,208       28,214       2,667,403
  Issuance of common stock under stock purchase plan                         36,715             368            -               -
  Exercise of common stock options                                           12,000             120            -               -
  Issuance of common stock at $1.60 per share, net of issuance costs         23,439             234            -               -
  Issuance of Series E preferred stock, net of issuance costs                     -               -       54,438       5,277,813
  Grant of stock to finder                                                   64,000             640            -               -
  Conversion of Series D and E preferred stock into common stock            270,364           2,704       (3,450)       (344,990)
  Net Loss                                                                        -               -            -               -
                                                                       -----------------------------------------------------------
Balance at December 31, 1998                                             10,827,240         108,274       79,202       7,600,226
  Issuance of common stock under stock purchase plan                         19,429             194            -               -
  Issuance of common stock and warrants for services rendered and
     debt issued                                                             16,941             180            -               -
  Issuance of Series G preferred stock, net of issuance costs                     -               -       21,000       2,074,596
  Conversion of Series E preferred stock into common stock                  731,000           7,310       (9,138)       (913,750)
  Exercise of common stock and Series E warrants at $.50 per share        1,848,900          18,489            -               -
  Net Loss and comprehensive loss                                                 -               -            -               -
                                                                       -----------------------------------------------------------
Balance at December 31, 1999                                             13,443,510         134,447       91,064       8,761,072
  Issuance of common stock under stock purchase plan                        287,303           2,873            -               -
  Issuance of warrants and stock options for services rendered                    -               -            -               -
  Exercise of common stock options                                           85,500             855            -               -
  Exercise of common stock warrants at $.50 per share                     4,215,000          42,150            -               -
  Conversion of Series E preferred stock into common stock                  879,000           8,790      (10,988)     (1,098,800)
  Net Loss and comprehensive loss                                                 -               -            -               -
                                                                       -----------------------------------------------------------
Balance at December 31, 2000                                             18,910,313      $  189,115      80,076     $  7,662,272


<CAPTION>


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

See accompanying notes


                                      F-6
<PAGE>


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

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 2003


<TABLE>
<CAPTION>


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

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

  Issuance of Series I preferred stock, net of issuance costs                       -               -       32,550       2,889,650
  Conversion of Series E preferred stock into common stock                  4,175,000          41,750      (20,875)     (1,921,513)
  Conversion of Series G preferred stock into common stock                     30,000             300         (150)        (15,000)
  Conversion of Series I preferred stock into common stock                    281,818           2,818       (1,550)       (155,000)
  Exercise of common stock warrants at $.10 and $.40 per share              2,590,000          25,900            -               -
  Issuance of common stock under stock purchase plan                           20,504             204            -               -
  Exercise of common stock options                                              2,000              20            -               -
  Net Loss and comprehensive loss                                                   -               -            -               -
                                                                       -------------------------------------------------------------
Balance at December 31, 2003                                               36,830,857    $    368,319       86,095    $  8,064,917
                                                                       =============================================================


<CAPTION>


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

  Conversion of Series E preferred stock into common stock                    638,600               -            -               -
  Conversion of Series G preferred stock into common stock                    558,600               -            -               -
  Exercise of common stock warrants, net of associated costs                1,601,950               -            -       1,664,550
  Issuance of common stock under stock purchase plan                           15,103               -            -          15,577
  Exercise of common stock options                                              9,805               -            -          10,090
  Net Loss and comprehensive loss                                                   -      (1,016,158)           -      (1,016,158)
                                                                       -------------------------------------------------------------
Balance at December 31, 2002                                            $  36,618,235   $ (43,906,559)   $       -         275,783
  Issuance of Series I preferred stock, net of issuance costs               1,373,246      (1,373,246)           -       2,889,650
  Conversion of Series E preferred stock into common stock                  1,879,763               -            -               -
  Conversion of Series G preferred stock into common stock                     14,700               -            -               -
  Conversion of Series I preferred stock into common stock                    152,182               -            -               -
  Exercise of common stock warrants at $.10 and $.40 per share                327,600               -            -         353,500
  Issuance of common stock under stock purchase plan                            9,879               -            -          10,083
  Exercise of common stock options                                                580               -            -             600
  Net Loss and comprehensive loss                                                   -      (2,193,239)           -      (2,193,239)
                                                                       -------------------------------------------------------------
Balance at December 31, 2003                                            $  40,376,185   $ (47,473,044)   $       -    $  1,336,377
                                                                       =============================================================
See accompanying notes.
</TABLE>

                                      F-7
<PAGE>
                       Protein Polymer Technologies, Inc.
                          (A Development Stage Company)

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                  For the period
                                                                                                   July 6, 1988
                                                                                                  (inception) to
                                                        Years ended December 31,                   December 31,
                                                   2003              2002              2001             2003
                                            ----------------------------------------------------------------------
<S>                                         <C>               <C>               <C>               <C>
Operating activities
Net loss                                    $   (2,193,239)   $   (1,016,158)   $   (3,146,829)   $  (42,151,413)
Adjustments to reconcile net loss to net
  cash used for operating activities:
    Stock and warrants issued for services
       rendered and debt interest                        -                 -             1,836           472,676
    Depreciation and amortization                   56,576           155,885           154,601         2,414,960
    Write-off of purchased technology                    -                 -                 -           503,500
    Changes in assets and liabilities:
      Deposits                                           -                 -            41,498           (29,679)
      Notes receivable from officers                     -                 -           140,000                 -
      Other current assets                        (431,579)           26,747            (2,340)         (462,352)
      Accounts payable                            (220,450)           32,167           149,961           168,659
      Accrued employee benefits                     19,677            (6,273)           49,330           132,391
      Other accrued expenses                       (19,313)            6,133            (4,020)           30,218
      Deferred revenue                                   -          (333,333)         (333,334)                -
      Deferred rent                                (24,111)          (24,111)          (23,858)           24,111
                                            ----------------------------------------------------------------------
 Net cash used for operating activities         (2,812,439)       (1,158,943)       (2,973,155)      (38,896,929)

Investing activities
Purchase of technology                                   -                 -                 -          (570,000)
Purchase of equipment and improvements             (90,058)          (31,566)         (109,593)       (2,087,344)
Purchases of short-term investments                      -                 -                 -       (16,161,667)
Sales of short-term investments                          -                 -                 -        16,161,667
                                            ----------------------------------------------------------------------
Net cash used for investing activities             (90,058)          (31,566)         (109,593)       (2,657,344)

Financing activities

Net proceeds from issuance of common stock         364,183         1,690,216         1,257,629        23,220,259

Net proceeds from issuance of preferred
  stock                                          2,889,650                 -         1,218,258        18,398,068
Net proceeds from convertible notes and
  detachable warrants                                    -                 -                 -         1,068,457
Payments on capital lease obligations                    -                 -           (25,088)         (288,770)
Payment on note payable                                  -                 -                 -          (242,750)
Proceeds from note payable                               -                 -                 -           484,323
                                            ----------------------------------------------------------------------
Net cash provided by financing activities        3,253,833         1,690,216         2,450,799        42,639,587
                                            ----------------------------------------------------------------------

Net increase (decrease) in cash and cash
  equivalents                                      351,336           499,707          (631,949)        1,085,314
Cash and cash equivalents at beginning of
  the period                                       733,978           234,271           866,220                -
                                            ----------------------------------------------------------------------

Cash and cash equivalents at end of the
  period                                    $    1,085,314    $      733,978    $      234,271    $    1,085,314
                                            ======================================================================
</TABLE>

                                      F-8
<PAGE>


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

                            Statements of Cash Flows



<TABLE>
<CAPTION>
                                                                                                     July 6, 1988
                                                                                                    (inception) to
                                                        Years ended December 31,                     December 31,
                                                   2003                2002                2001          2003
                                            ----------------------------------------------------------------------
<S>                                         <C>               <C>               <C>               <C>
Supplemental disclosures of cash flow
  information
Equipment purchased by capital leases       $            -    $            -    $            -    $      288,772
Interest paid                                          758             2,170            19,490           147,533
Imputed dividend on Series E stock                       -                 -                 -         3,266,250
Conversion of Series D preferred stock to
  common stock                                           -                 -                 -         2,142,332
Conversion of Series E preferred stock to
   common stock                                  1,921,513           643,750           400,000         5,277,813
Conversion of Series G preferred stock to
   common stock                                     15,000           570,000                 -           585,000
Conversion of Series I preferred stock to
   common stock                                    155,000                 -                 -           155,000
Series D stock issued for Series C stock                 -                 -                 -         2,073,925
Series C dividends paid with Series D stock              -                 -                 -           253,875
Series D dividends paid with common stock                -                 -                 -           422,341
</TABLE>


See accompanying notes.

                                       F-9
<PAGE>


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

                          Notes to Financial Statements


1.  Organization and Significant Accounting Policies

Organization and business activities

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

Liquidity

As of December 31, 2003, the Company had cash,  cash  equivalents and short-term
investments totaling $1,085,000 as compared to $734,000 at December 31, 2002. As
of December 31, 2003, the Company had a working  capital of $1,192,000  compared
to a working capital of $189,000 at December 31, 2002.

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

Cash and cash equivalents

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


                                      F-10
<PAGE>


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

                          Notes to Financial Statements



1.  Organization and Significant Accounting Policies (continued)

Equipment and Leasehold Improvements

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

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.

Significant Collaborative Agreements

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


                                      F-11
<PAGE>


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

                          Notes to Financial Statements



1.  Organization and Significant Accounting Policies (continued)

Spine Wave,  Inc. In April 2001, the Company  entered into agreements with Spine
Wave, Inc. 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.

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

In March 2002, the Company executed additional  agreements with Spine Wave, Inc.
that expanded its contractual  research and development  relationship,  and that
offered  the  Company  additional  equity  incentives  in the form of Spine Wave
common stock and warrants.  Under the amended supply and services agreement, the
Company,  on behalf of Spine Wave, is proceeding  with  pre-clinical  safety and
performance  studies of a product for spinal disc repair to support Spine Wave's
filing of an investigational device exemption with the FDA to obtain approval to
initiate  human  clinical  testing.  During  the  subsequent  period  leading to
regulatory  marketing  approval,  the  Company's  contractual   responsibilities
include the supply of product to be used in clinical testing and preparation for
commercial manufacturing operations. Research and development services performed
for Spine  Wave are  reimbursed  including  both  direct  costs  and  associated
overhead  costs.  Spine Wave is  responsible  for clinical  testing,  regulatory
approvals,  and commercialization.  For the year ended December 31, 2003 and for
the period of project  inception  to date the Company  received  $1,584,000  and
$4,461,000,  respectively,  in contract revenue from Spine Wave which represents
the  reimbursement of direct costs plus overhead costs allocated to the research
and development resources used in performing the collaborative activities.

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


                                      F-12
<PAGE>


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

                          Notes to Financial Statements



1.   Organization and Significant Accounting Policies (continued)

of certain quantities of product (150,000 shares).  As of December 31, 2003, the
first of the three performance goals had been met.

In October  2003,  a second  amendment  to Supply  and  Services  Agreement  was
executed. The amendment,  effective for one year, extended Spine Wave's right to
certain  research and development  services,  and further defined the cost basis
for reimbursement of services by Spine Wave.

 Significant License Agreements

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

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

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

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


                                      F-13
<PAGE>


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

                          Notes to Financial Statements



1.  Organization and Significant Accounting Policies (continued)

the determined at a later date. In addition,  the Company is entitled to receive
up to $5 million in milestone payments associated with Genencor's achievement of
various industrial  product  development  milestones  incorporating the licensed
technology.  There is no limitation on the amount of milestone  payments Company
can receive from Genencor for  Genencor's  product  development  in the field of
non-medical  personal care  products.  In December  2002 the Company  received a
license milestone payment of $250,000 from Genencor for Genencor's initiation of
a product development project based on technology licensed from the Company.

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

Accounting for Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation", encourages but does not
require  companies  to  record   compensation  cost  for  stock-based   employee
compensation  plans at fair  value  (See SFAS 148 below  under  Recently  Issued
Accounting  Pronouncements).  The  Company has chosen to continue to account for
stock-based   compensation  using  the  intrinsic  value  method  prescribed  in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations.  Accordingly,  compensation cost for
stock  options is measured as the excess,  if any, of the quoted market price of
the  Company's  stock at the date of the grant over the amount an employee  must
pay to acquire the stock. Had  compensation  cost for the Company's stock option
awards  been  determined  based  upon  the  fair  value  at the  grant  date and
recognized  on a  straight-line  basis  over  the  related  vesting  period,  in
accordance  with the  provisions  of SFAS No. 123,  the  Company's  net loss and
earnings per share would have been reduced to the proforma  amount  indicated on
the following page:


                                      F-14
<PAGE>


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

                          Notes to Financial Statements



1.  Organization and Significant Accounting Policies (continued)


<TABLE>
<CAPTION>
                                                        2003            2002            2001
                                                 --------------- ---------------  --------------
<S>                                              <C>             <C>              <C>
    Net loss as reported                         $ (3,844,125)   $ (1,293,797)    $ (3,424,468)

    Deduct: Total stock-based employee
    compensation expense determined under fair
    value based method for all awards, net of
    related tax effects                              (454,620)       (162,883)       (127,583)
                                                 --------------- ---------------  --------------
    Pro forma net loss                           $ (4,298,745)   $ (1,456,680)    $ (3,552,051)
                                                 =============== ===============  ==============


    Earnings per share:
          Basic - as reported                       $ (0.11)        $ (0.05)        $ (0.16)
          Basic - pro forma                         $ (0.13)        $ (0.05)        $ (0.17)
</TABLE>

The fair value was estimated using the following weighted-average assumptions: a
risk free  interest  rate of 3.77% for 2003,  3.9% for 2002 and 5.0% for 2001; a
volatility  factor of the expected market price of the Company's common stock of
124% for 2003 214% for 2002, and 23% for 2001; expected option lives of 10 years
for 2003,  10 years for 2002, 5 years for 2001;  and no dividend  yields for all
years.

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

The pro forma effect on net loss for 2003,  2002 and 2001 is not  representative
of the pro forma  effect on net loss in future  years  because  it does not take
into consideration pro forma compensation  expense from option grants made prior
to 1995.

The Company accounts for stock options granted to consultants in accordance with
Emerging  Issues  Task  Force,  or EITF,  Issue  96-18,  "Accounting  for Equity
Instruments  that are  Issued  to  Other  Than  Employees  for  Acquiring  or in
Conjunction with Selling Goods or Services.

Net loss per common share

Basic  earnings per share is  calculated  using the  weighted-average  number of
outstanding  common  shares  during the period.  Diluted  earnings  per share is
calculated using the  weighted-average  number of outstanding  common shares and
dilutive common equivalent shares  outstanding  during the period,  using either
the as-if


                                      F-15
<PAGE>


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

                          Notes to Financial Statements



1.  Organization and Significant Accounting Policies (continued)

-converted method for convertible  notes and convertible  preferred stock or the
treasury stock method for options and warrants.

The net loss per common share for the years ended  December  31, 2003,  2002 and
2001 is  based  on the  weighted  average  number  of  shares  of  common  stock
outstanding during the periods. Potentially dilutive securities include options,
warrants and convertible preferred stock; however, such securities have not been
included in the  calculation of the net loss per common share as their effect is
antidilutive.  Since this is the case, there is no difference  between the basic
and dilutive net loss per common share for any of the periods presented and none
of the  prior  periods  were  required  to be  restated.  For  purposes  of this
calculation,  net loss in 2003,  2002 and 2001 has been adjusted for 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.

Income Taxes

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

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

Reclassification

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


                                      F-16
<PAGE>


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

                          Notes to Financial Statements



1.  Organization and Significant Accounting Policies (continued)

Recently issued accounting pronouncements

In December  2002,  the FASB issued  SFAS No. 148,  "Accounting  for Stock Based
Compensation  - Transition and  Disclosure,  and amendment of FASB Statement No.
123."  SFAS No.  148  amends  SFAS No.  123 to  provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  employee  compensation.  In addition,  SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  As the Company still uses the guidance under APB Opinion 25 to account
for stock based compensation,  the adoption of SFAS 148 will not have a material
effect on the Company's financial statements.

2.  Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                    2003           2002
                                                              --------------------------------
<S>                                                           <C>             <C>
          Laboratory equipment                                $   1,349,000    $  1,803,000
          Office equipment                                           94,000         177,000
          Leasehold improvements                                    306,000         306,000
                                                              --------------------------------
                                                                  1,749,000       2,286,000
          Less accumulated depreciation and amortization         (1,635,000)     (2,205,000)
                                                              --------------------------------
                                                              $     114,000    $     81,000
                                                              ================================
</TABLE>


Depreciation  expense was $57,000 and $156,000 for the years ended December 2003
and 2002,  respectively.  During the year ended  December 31, 2003,  the Company
wrote-off  fully  depreciated  assets in the  amount of  $626,000  for assets no
longer in service.

3.  Rent Receivable

The Company  subleases  6,183 square feet of its office and research  facilities
under a month to month  arrangement for $13,108 per month.  Since December 2002,
the sub-lessee  has not been able to make monthly rental  payments due to a lack
of  funding.  At  December  31,  2003,  the  amount due from the  sub-lessee  is
$184,527.  Based on the  sub-lessee's  expectation  to receive  funding by April
2004, the Company believes that this amount is fully collectible and, therefore,
no reserve has been provided.


                                      F-17
<PAGE>


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

                          Notes to Financial Statements



4.  Accrued Expenses

Accrued expenses consist of the following:

                                                        December 31,
                                                   2003           2002
                                             ---------------------------------
           Payroll and employee benefits          $132,000        $113,000
           Legal and professional fees              22,000          31,000
           Property Tax                              9,000          11,000
           Other                                         -           7,000
                                             ---------------------------------
              Accrued expenses                    $163,000        $162,000
                                             =================================

5.  Stockholders' Equity

Convertible Preferred Stock

On March 25 and May 12, 2003, we raised $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  a  non-cash
"imputed  dividend" expense of $1,373,247 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 is
exercisable  at any time for 27 shares of common  stock at an exercise  price of
$0.88 per share,  and  expires 18 months  after the close of the  offering;  the
other  warrant is  exercisable  at any time for 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, expiring 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.

No  underwriters  were  engaged  by us in  connection  with such  issuance  and,
accordingly,  no  underwriting  discounts were paid. The offering is exempt from
registration  under Section 4(2) of the  Securities Act of 1933, as amended (the
"Securities  Act"),  and  met  the  requirements  of Rule  506 of  Regulation  D
promulgated under the Securities Act.


                                      F-18
<PAGE>


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

                          Notes to Financial Statements



5.  Stockholders' Equity (continued)

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

Each  share  of  Series H  Preferred  Stock  is  convertible  at any time at the
election of the holder into 133.33 shares of common stock at a conversion  price
of  $0.75  per  share,  subject  to  certain   anti-dilution   adjustments.   No
underwriters  were engaged by the Company in connection  with such issuance and,
accordingly,  no underwriting  discounts were paid. The offering was exempt from
registration  under Section 4(2) of the  Securities Act of 1933, as amended (the
"Securities  Act"),  and  met  the  requirements  of Rule  506 of  Regulation  D
promulgated under the Securities Act.

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

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

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

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

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


                                      F-19
<PAGE>


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

                          Notes to Financial Statements



5.  Stockholders' Equity (continued)

$3,266,250 in order to account for the difference  between the fair market value
of the common stock and the conversion  price of the preferred stock into common
stock.

Each share of Series E Stock was  convertible at any time at the election of the
holder into 80 shares of common stock at a conversion  price of $1.25 per share,
subject to certain antidilution adjustments.  In March 2003, the Company offered
the  holders  of  Series  E  Convertible  Preferred  Stock  a  reduction  in the
conversion  price to $0.50 per share with the provision  that all holders of the
Series E Convertible  Preferred stock agree to convert.  As a result, all of the
shares of Series E Convertible Preferred Stock were converted into common stock.

Each share of Series E Stock received two common stock warrants.  One warrant is
exercisable  at any time for 40 shares of common  stock at an exercise  price of
$2.50 per share,  and  expired  approximately  18 months  after the close of the
offering;  the other warrant was exercisable at any time for 20 shares of common
stock at an  exercise  price of $5.00 per share,  and expired  approximately  36
months  after the close of the  offering.  In addition,  an 18 month  warrant to
acquire  200,000  common  shares  exercisable  at $2.50 per share and a 36 month
warrant to acquire  100,000  common shares  exercisable  at $5.00 per share were
issued  as a finder  and  document  review  fee paid to a lead  investor.  These
warrants have now expired.  An 18 month warrant to acquire  32,000 common shares
exercisable  at $2.50 per share,  a 24 month  warrant to acquire  16,000  common
shares  exercisable  at $5.00 per  share,  and 5 year  warrants  to  acquire  an
aggregate of 25,200 common shares  exercisable at $2.50 per share were issued to
certain persons for service as finders in relation to the private placement. The
18 month and 24 month warrants have now expired.

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

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

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


                                      F-20
<PAGE>


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

                          Notes to Financial Statements



5.  Stockholders' Equity (continued)

Exercise and Exchange of Warrants

In June 2003,  certain holders of warrants  exercised their warrants to purchase
common stock,  these  warrants  were due to expire in August 2003.  The exercise
prices of such  warrants  were $0.40 and $0.10 per  share.  As an  incentive  to
exercise the warrant early the Company 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 $353,500.  The newly issued warrants will
expire on March 26, 2004.

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

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

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

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. The Company's
Board of  Directors  may modify the Plan at any time.  During  2003,  a total of
20,504  shares were  purchased  under the Plan at prices  ranging  from $0.44 to
$0.55.  The value of shares  issued under the Plan as  calculated  in accordance
with Statement 123 is not  significant  and is not included in the following pro
forma information.


                                      F-21
<PAGE>


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

                          Notes to Financial Statements



5.  Stockholders' Equity (continued)

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
Board of Directors (or a designated committee of the Board) administers the 1996
Plan. At December 31, 2003,  729,950  options to purchase common stock have been
granted under the 1996 Plan with 729,950 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, 2003,  5,848,500  options to purchase common stock had been granted
under the 2002 plan with no options exercisable yet.

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,  2003,  options to purchase
969,400 shares of common stock were 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, 2003, options for 302,500 shares were exercisable.

Since  inception,  the  Company has granted  non-qualified  options  outside the
option plans to  employees,  directors  and  consultants.  At December 31, 2003,
options for 724,050 shares were exercisable.


                                      F-22
<PAGE>


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

                          Notes to Financial Statements



5.  Stockholders' Equity (continued)

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


<TABLE>
<CAPTION>


                                                   Years ended December 31,
                          ---------------------------------------------------------------------------------
                                   2003                      2002                          2001
                          ------------------------  --------------------------  ---------------------------
                                         Weighted                    Weighted                    Weighted
                                         Average                     Average                     Average
                                         Exercise                    Exercise                    Exercise
                            Options       Price        Options        Price       Options         Price
                          -------------  ---------  --------------  ----------  -------------  ------------
<S>                         <C>            <C>         <C>             <C>        <C>            <C>
 Outstanding - beginning
        of year             2,605,500      $0.90       2,124,000       $1.09      1,917,000      $1.22

     Granted                6,988,500      $0.71         692,500       $0.35        521,500      $0.70
     Exercised                 (2,000)     $0.30         (28,500)      $0.35         (3,500)     $0.47
     Forfeited/Expired              -        -          (182,500)      $1.05       (311,500)     $1.21
                          -------------  ---------  --------------  ----------  -------------  ------------

 Outstanding - end of year  9,592,000      $0.76       2,605,500       $0.90      2,124,000      $1.09
                          =============  =========  ==============  ==========  =============  ============

 Exercisable - end of year  2,725,900      $0.91       1,936,000       $1.01      1,568,300      $1.23
                          =============  =========  ==============  ==========  =============  ============
</TABLE>

The exercise prices for options outstanding as of December 31, 2003 range from
$0.22 to $3.75. The weighted average remaining contractual life of these options
is approximately 8.42 years.

6.  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.

7   Commitments

The Company  leases its office and research  facilities  totaling  27,000 square
feet under an operating  lease,  which expires in May 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


                                      F-23
<PAGE>


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

                          Notes to Financial Statements



7.  Commitments (continued)

rent in the accompanying  balance sheet  represents the difference  between rent
expense accrued and amounts paid under the lease agreement.

Annual future minimum operating lease payments are as follows:

                             Year Ending                     Operating
                            December 31,                       Leases
                            ------------                 ----------------

                               2004                          $ 656,000
                               2005                            673,000
                               2006                            686,000
                               2007                            699,000
                               2008                            713,000
                                                         ----------------
             Total minimum operating lease payments        $3,427,000
                                                         ================

Rent  expense,  net of rental  income,  was  approximately  $478,000,  $457,000,
$380,000,  and $5,320,000  for the years ended December 31, 2003,  2002 and 2001
and  for  the  period  July 6,  1988  (inception)  through  December  31,  2003,
respectively. Rental income was approximately $157,000, $163,000 and 219,000 for
the years ended December 31, 2003, 2002 and 2001,  respectively and $604,000 for
the period July 6, 1988 (inception) through December 31, 2003.

8.  Income Taxes

At December  31,  2003,  the Company had net  operating  loss  carryforwards  of
approximately  $38,996,036 for federal income tax purposes, which may be applied
against future income, if any, and will begin expiring in 2004 unless previously
utilized.   In  addition,   the  Company  had   California  net  operating  loss
carryforwards of approximately  $15,252,124,  which will begin expiring in 2004.
The  difference  between the tax loss  carryforwards  for federal and California
purposes is  attributable  to the  capitalization  of research  and  development
expenses for California tax purposes,  certain limitations in the utilization of
California loss carryforwards, and the expiration of certain California tax loss
carryforwards.

The Company also has federal and California  research and development tax credit
carryforwards of approximately $1,600,497 and $887,403, respectively, which will
begin expiring in 2004 unless previously utilized.

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


                                      F-24
<PAGE>


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

                          Notes to Financial Statements



8.  Income Taxes (continued)

Significant  components of the Company's  deferred tax assets as of December 31,
2003 are shown below. A valuation  allowance of $16,931,000  has been recognized
to offset the deferred tax assets as realization of such assets is uncertain.

                                                     2003            2002
                                                --------------------------------
       Deferred tax assets:
       Net operating loss carryforwards          $ 14,526,000    $ 13,628,000
       Research and development credits             2,177,000       1,973,000
       Other, net                                     228,000         234,000
                                                --------------------------------
       Total deferred tax assets                   16,931,000      15,835,000
       Valuation allowance for deferred           (16,931,000)    (15,835,000)
       tax assets                               --------------------------------
       Net deferred tax assets                   $           -    $          -
                                                ================================

9.  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, 2003, the Company had
not made a contribution to the 401(k) Savings Plan.


                                      F-25
<PAGE>

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

               None.

Item 8A.       Controls and Procedures

Disclosure Controls and Procedures

Based on their  evaluation,  as of the end of the period  covered by this annual
report,  the  Company's  principal  executive  officer and  principal  financial
officer have concluded that the Company's disclosure controls and procedures (as
defined in Rules  13a-15(e) or 15d-15(e)  under the  Securities  Exchange Act of
1934 ("Exchange Act")) are effective based on their evaluation of these controls
and  procedures  required by  paragraph  (b) of Rules 13a-15 or 15d-15 under the
Exchange Act.

Internal Control Over Financial Reporting

There were no changes in the Company's 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 the  Company's
fourth fiscal quarter that has materially  affected,  or is reasonably likely to
materially affect, the Company's internal control over financial reporting.


                                    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  no
later than April 29, 2004.


Item 13.       Exhibits and Reports on Form 8-K

(a)    Exhibits

       The following documents are included or incorporated by reference:


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

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

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

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

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

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

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

        3.1.6 (21)    Certificate of Designation of Series I Convertible
                      Preferred Stock.

                                       24
<PAGE>

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

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

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

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

        10.4 (1)      Form of Consulting Agreement.

        10.5 (1)      Form of Indemnification Agreement.

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       25
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       26
<PAGE>

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

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

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

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

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

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

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

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

        10.45 (20)    Employment  Agreement,  dated  as of  December  31,  2002,
                      between the Company and Joseph Cappello.

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

        10.47 (21)    Securities  Purchase  Agreement  related  to the  sale  of
                      Series I Preferred Stock as of March 25, 2003.

        10.48 (21)    Form of Series I First Warrant.

        10.49 (21)    Form of Series I Second Warrant.

        10.50 (21)    Form of $0.65 Warrant  issued in connection  with Series I
                      Preferred Stock.

        10.51 (21)    Form of $0.58 Warrant  issued in connection  with Series I
                      Preferred Stock.

        10.52 (21)    Form of $0.68 Warrant  issued in connection  with Series I
                      Preferred Stock.

        10.53 (21)    Form of $0.92 Warrant  issued in connection  with Series I
                      Preferred Stock.

        10.54 (21)    Form of $1.73 Warrant  issued in connection  with Series I
                      Preferred Stock.

        10.55 (21)    2002  Stock  Option  Plan,  and forms of  Incentive  Stock
                      Option Agreement and Non-Statutory Stock Option Agreement.

        10.56 (22)    Amended and Restated Securities Purchase Agreement related
                      to the sale of Series I  Preferred  Stock  dated as of May
                      12, 2003.

                                       27
<PAGE>

        10.57 (22)    Form of  $0.55  warrant  issued  in  connection  with  the
                      exchange of warrants.

        10.58**       Amendment  No. 2 to Supply and  Services  Agreement  dated
                      October 1, 2003 between the Company and Spine Wave, Inc.

        23.1          Consent of Peterson & Co., Independent Auditors.

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

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

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


                                       28
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       29
<PAGE>

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

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

    (20)   Incorporated by reference to  Registrant's  report on Form 10-KSB for
           the fiscal year ended  December 31, 2002 as filed with the Commission
           on March 28, 2003.

    (21)   Incorporated by reference to  Registrant's  report on Form 10-QSB for
           the period ended March 31, 2003 as filed with the  Commission  on May
           14, 2003.

    (22)   Incorporated by reference to  Registrant's  report on Form 10-QSB for
           the period ended June 30, 2003 as filed with the Commission on August
           14, 2003.

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

(b)        Reports on Form 8-K.

           On November 13, 2003, the  Registrant  filed a Current Report on Form
           8-K announcing the Registrant's  financial  results for the quarterly
           period ended September 30, 2003.

                                       30
<PAGE>

                                    SIGNATURE


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


                                            PROTEIN POLYMER TECHNOLOGIES, INC.


March 30, 2004               By          /s/  J. THOMAS PARMETER
                                         -----------------------
                                            J. Thomas Parmeter
                                            Chairman of the Board, Chief
                                            Executive Officer, President


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


Signature                     Capacity                                Date

/s/  J. Thomas Parmeter       Chairman of the Board, Chief        March 30, 2004
-----------------------
J. Thomas Parmeter            Executive Officer, President
                              (Principal Executive Officer)

/s/  Janis Y. Neves           Director of Finance, Controller,    March 30, 2004
-------------------
Janis Y. Neves                and Secretary
                              (Principal Financial Officer)

/s/  Phillip M. Berman        Director                            March 30, 2004
----------------------
Phillip Berman

/s/  Edward G. Cape           Director                            March 30, 2004
-------------------
Edward G. Cape, Ph.D.

/s/  Philip J. Davis          Director                            March 30, 2004
--------------------
Philip J. Davis

/s/  Edward J. Hartnett       Director                            March 30, 2004
-----------------------
Edward J. Hartnett

/s/  Kerry L. Kuhn            Director                            March 30, 2004
------------------
Kerry L. Kuhn, M.D.

/s/  George R. Walker         Director                            March 30, 2004
---------------------
George R. Walker

                                       31
<PAGE>

                                  EXHIBIT INDEX


        10.58**   Amendment No. 2 to Supply and Services Agreement dated October
                  1, 2003 between the Company and Spine Wave, Inc.

        23.1      Consent of Peterson & Co., Independent Auditors.

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

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

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

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