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

                                 AMENDMENT NO. 1
                                  FORM 10-KSB/A

(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, 2004

                                       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 $457,016.

The aggregate market value of the voting common stock held by  non-affiliates of
the issuer on March 28, 2005 was $31,524,218.  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
28, 2005 was 41,847,261.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

Definitive  Proxy  Statement to be filed with the Commission no later than April
30, 2005 with respect to the registrant's 2005 Annual Meeting of Stockholders.

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



<PAGE>



                                EXPLANATORY NOTE

Protein  Polymer  Technologies,  Inc.  is  filing  this  Amendment  No.  1  (the
"Amendment")  to its Annual  Report on Form  10-KSB  for the  fiscal  year ended
December 31, 2004, as filed with the Securities and Exchange Commission on March
31, 2005 (the "Annual  Report") to amend and restate Item 7 to the Annual Report
due to the following:

    o    Reissuance of Report of Independent Registered Public Accounting Firm

    o    Correction of typographical  errors on the Balance Sheet and Statements
         of Stockholders' Equity as of December 31, 2004

    o    Revision to Note 1 to Financial Statements

    o    Inclusion of Note 10 to Financial Statements

The  complete  text of Item 7 is  included  in this  Amendment  pursuant to Rule
12b-15  promulgated  under the Securities  Exchange Act of 1934, as amended (the
"Exchange Act").  The consent of the independent  registered  public  accounting
firm with respect to the  financial  statements  contained in this  Amendment is
attached to this Amendment as Exhibit 23.1.

In addition,  the Amendment  includes the  certifications  required  pursuant to
Rules  13a-14(a)/15d-14(a)  and Rules  13a-14(b)/15d-14(b)  of the Exchange Act,
which have been  re-executed and re-filed as of the date of this Amendment.  The
certifications of our Chief Executive Officer (principal  executive officer) and
Director of Finance,  Controller  (principal  financial officer) are attached to
this Amendment as Exhibits 31.1, 31.2 and 32.1.

With the exception of the amended and restated financial information relative to
(i) the  removal of the Going  Concern and  Liquidity  section of Note 1 and the
inclusion of Note 10, Subsequent  Events,  to Financial  Statements and (ii) the
correction of the above-listed typographical errors, this Amendment continues to
speak as of the date of the Annual Report and we have not updated the disclosure
contained  herein to reflect  events that have occurred  since the filing of the
Annual Report.



                                       1


<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 Independent Registered Public Accounting Firm........................ F-2

       Balance Sheets at December 31, 2004 and 2003................................... F-3

       Statements of Operations for the years ended December 31, 2004 and 2003
          and the period July 6, 1988 (inception) to December 31, 2004................ F-4

       Statements of Stockholders Equity for the period July 6, 1988 (inception)
          to December 31, 2004........................................................ F-5

       Statements of Cash Flows for the years ended December 31, 2004 and 2003
          and the period July 6, 1988 (inception) to December 31, 2004................ F-8

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







                                      F-1
<PAGE>







             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------



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) (the  "Company") as of December 31, 2004 and
2003, 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,  2004.   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 audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  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, 2004 and 2003,  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, 2004, in  conformity  with
accounting principles generally accepted in the United States of America.




                                                         /s/ PETERSON & CO., LLP
San Diego, California
February 28, 2005, except for
Note 10, as to which the date
is May 13, 2005




                                      F-2
<PAGE>



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

                                 Balance Sheets
<TABLE>
<CAPTION>
                                                                               December 31,
                                                                           2004           2003
                                                                      -------------------------------
<S>                                                                   <C>            <C>
Assets
Current assets:
  Cash and cash equivalents                                           $       82,222 $    1,085,314
  Contracts receivable                                                             -        252,026
  Current portion of rent receivable                                          60,000        184,527
  Prepaid expenses                                                            12,770         25,799
                                                                      -------------------------------
Total current assets                                                         154,992      1,547,666

Deposits                                                                      29,679         29,679
Rent receivable, net of current portion and reserve of $157,296 and
     $0 at 2004 and 2003 respectively                                        104,527              -
Equipment and leasehold improvements, net                                     84,580        114,411
                                                                      -------------------------------
                                                                      $      373,778 $    1,691,756
                                                                      ===============================

Liabilities and stockholders' equity (deficit)
Current liabilities:
  Accounts payable                                                    $      315,357 $      168,659
  Deposits payable                                                            33,000              -
  Notes payable, related party                                             1,032,842              -
  Accrued expenses                                                           201,910        162,609
  Deferred revenue                                                           102,784              -
   Deferred rent                                                                   -         24,111
                                                                      -------------------------------
Total current liabilities                                                  1,685,893        355,379


Commitments (Notes 5 and 7)
Stockholders' equity:
  Convertible Preferred Stock, $.01 par value, 5,000,000 shares
    authorized, 82,945 and 86,095 shares issued and outstanding at
    December 31, 2004 and 2003, respectively - liquidation
    preference of $8,294,500 and $8,609,500 at December 31, 2004
    and December 31, 2003, respectively                                    7,749,917      8,064,917
  Common stock, $.01 par value, 120,000,000 shares authorized,
    39,651,123 and 36,830,857 shares issued and outstanding at
    December 31, 2004 and 2003, respectively                                 396,523        368,319
  Additional paid-in capital                                              43,278,106     41,587,518
  Deficit accumulated during development stage                           (52,736,661)   (48,684,377)
                                                                      -------------------------------
Total stockholders' equity (deficit)                                      (1,312,115)     1,336,377
                                                                      -------------------------------

                                                                      $      373,778 $    1,691,756
                                                                      ===============================
</TABLE>

The accompanying notes are an integral part of these financial statements.




                                      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,
                                            -------------------------------------------------
                                                  2004            2003            2004
                                            -------------------------------------------------
<S>                                         <C>             <C>             <C>
        Revenues:
          Contract and licensing revenue    $      453,038  $    1,597,415  $   11,309,039
          Interest income, net                       3,973          19,903       1,270,823
          Product and other income                       5               -         694,784
                                            -------------------------------------------------
        Total revenues                             457,016       1,617,318      13,274,646

        Expenses:
          Research and development               2,283,820       2,359,643      37,029,568
          Selling, general and                   1,738,401       1,450,914      21,961,696
          administrative
                                            -------------------------------------------------
        Total expenses                           4,022,221       3,810,557      58,991,264
                                            -------------------------------------------------

        Net loss                                (3,565,205)     (2,193,239)    (45,716,618)

        Undeclared and/or paid dividends on
          preferred stock                          764,718       2,862,219       9,699,508
                                            -------------------------------------------------

        Net loss applicable to common
          shareholders                      $   (4,329,923) $   (5,055,458) $  (55,416,126)
                                            =================================================

        Net loss per common share - basic
          and diluted                       $         (.11) $         (.15)
                                            =================================

        Shares used in computing net loss
          per common share - basic and
          diluted                               38,212,119      34,362,427
                                            =================================
</TABLE>


The accompanying notes are an integral part of these financial statements.





                                      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, 2004



<TABLE>
<CAPTION>

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


<CAPTION>


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

</TABLE>


The accompanying notes are an integral part of these financial statements.


                                      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, 2004


<TABLE>
<CAPTION>

                                                                                       Common stock            Preferred stock
                                                                                ----------------------------------------------------
                                                                                     Shares      Amount      Shares       Amount
                                                                                ----------------------------------------------------
<S>                                                                             <C>           <C>           <C>        <C>
 Exercise of common stock warrants at $1.25 per share                                 932,960  $     9,330          -  $          -
 Exercise of common stock warrants at $2.50 per share, net of
   issuance costs                                                                     322,663        3,226          -             -
 Exercise of common stock warrants at $1.00 per share                                  25,000          250          -             -
 Exercise of common stock options                                                     136,000        1,360          -             -
 Stock repurchases                                                                    (16,320)        (163)         -             -
 Net loss                                                                                   -            -          -             -
                                                                                ----------------------------------------------------
Balance at December 31, 1996                                                        7,233,228       72,333     49,187     4,764,745
 Issuance of common stock at $2.50 per share, net of issuance costs                 1,904,000       19,040          -             -
 Exercise of common stock options                                                      28,000          280          -             -
 Issuance of common stock under stock purchase plan                                    15,036          151          -             -
 Conversion of Series D preferred stock into common stock                           1,032,537       10,325    (20,973)   (2,097,342)
 Series D dividends paid in common stock                                              207,921        2,079          -             -
 Net loss                                                                                   -            -          -             -
                                                                                ----------------------------------------------------
Balance at December 31, 1997                                                       10,420,722      104,208     28,214     2,667,403
 Issuance of common stock under stock purchase plan                                    36,715          368          -             -
 Exercise of common stock options                                                      12,000          120          -             -
 Issuance of common stock at $1.60 per share, net of issuance costs                    23,439          234          -             -
 Issuance of Series E preferred stock, net of issuance costs                                -            -     54,438     5,277,813
 Grant of stock to finder                                                              64,000          640          -             -
 Conversion of Series D and E preferred stock into common stock                       270,364        2,704     (3,450)     (344,990)
 Net Loss                                                                                   -            -          -             -
                                                                                ----------------------------------------------------
Balance at December 31, 1998                                                       10,827,240      108,274     79,202     7,600,226
 Issuance of common stock under stock purchase plan                                    19,429          194          -             -
 Issuance of common stock and warrants for services rendered and
   debt issued                                                                         16,941          180          -             -
 Issuance of Series G preferred stock, net of issuance costs                                -            -     21,000     2,074,596
 Conversion of Series E preferred stock into common stock                             731,000        7,310     (9,138)     (913,750)
 Exercise of common stock and Series E warrants at $.50 per share                   1,848,900       18,489          -             -
 Net Loss and comprehensive loss                                                            -            -          -             -
                                                                                ----------------------------------------------------
Balance at December 31, 1999                                                       13,443,510      134,447     91,064     8,761,072
 Issuance of common stock under stock purchase plan                                   287,303        2,873          -             -
 Issuance of warrants and stock options for services rendered                               -            -          -             -
 Exercise of common stock options                                                      85,500          855          -             -
 Exercise of common stock warrants at $.50 per share                                4,215,000       42,150          -             -
 Conversion of Series E preferred stock into common stock                             879,000        8,790    (10,988)   (1,098,800)
 Net Loss and comprehensive loss                                                            -            -          -             -
                                                                                ----------------------------------------------------
Balance at December 31, 2000                                                       18,910,313  $   189,115     80,076  $  7,662,272


<CAPTION>


                                                                                                 Deficit    Receivables
                                                                                               accumulated   from sales
                                                                                                  during     of common     Total
                                                                                  Additional    development   common    Stockholder
                                                                                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>


The accompanying notes are an integral part of these financial statements.


                                       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, 2004


<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          -             -
 Imputed dividend associated with issuance of warrants                                      -            -          -             -
 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
  Conversion of Series G preferred stock into common stock                            530,000        5,300     (2,650)     (265,000)
  Conversion of Series I preferred stock into common stock                             90,909          909       (500)      (50,000)

  Exercise of Series G warrants at $.25 per share                                   2,075,312       20,753          -             -
  Financing related fees                                                                    -            -          -             -
  Warrants issued in connection with notes payable                                          -            -          -             -
  Imputed dividend associated with repricing and issuance of warrants                       -            -          -             -
  Issuance of common stock under stock purchase plan                                   20,545          207          -             -
  Exercise of common stock options                                                    103,500        1,035          -             -
  Net Loss and comprehensive loss                                                           -            -          -             -
                                                                                ----------------------------------------------------
Balance at December 31, 2004                                                       39,651,123  $   396,523     82,945  $  7,749,917
                                                                                ====================================================


<CAPTION>


                                                                                                 Deficit    Receivables
                                                                                               accumulated   from sales
                                                                                                  during     of common     Total
                                                                                  Additional    development   common    Stockholder
                                                                                paid-in capital    stage       stock      equity
                                                                                ----------------------------------------------------

<S>                                                                             <C>           <C>           <C>        <C>
 Issuance of Series H preferred stock, net of issuance costs                                -             -         -     1,218,258
 Issuance of common stock under stock purchase plan                                     9,836             -         -         9,984
 Issuance of stock options for services rendered                                        1,834             -         -         1,834
 Exercise of common stock options                                                       1,610             -         -         1,645
 Exercise of common stock warrants at $.50 per share                                1,221,080             -         -     1,246,000
 Conversion of Series E preferred stock into common stock                             396,800             -         -             -
 Net Loss and comprehensive loss                                                            -    (3,146,829)        -    (3,146,829)
                                                                                ----------------------------------------------------
Balance at December 31, 2001                                                    $  33,794,177  $(42,890,401) $      -      (398,276)
 Conversion of Series E preferred stock into common stock                             638,600             -         -             -
 Conversion of Series G preferred stock into common stock                             558,600             -         -             -
 Exercise of common stock warrants, net of associated costs                         1,601,950             -         -     1,664,550
 Issuance of common stock under stock purchase plan                                    15,103             -         -        15,577
 Exercise of common stock options                                                       9,805             -         -        10,090
 Net Loss and comprehensive loss                                                            -    (1,016,158)        -    (1,016,158)
                                                                                ----------------------------------------------------
Balance at December 31, 2002                                                    $  36,618,235  $(43,906,559) $      -       275,783
 Issuance of Series I preferred stock, net of issuance costs                        1,928,237    (1,928,237)        -     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
 Imputed dividend associated with issuance of warrants                                656,342      (656,342)        -             -
 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                                                    $  41,587,518  $(48,684,377) $      -     1,336,377
  Conversion of Series G preferred stock into common stock                            259,700             -         -             -
  Conversion of Series I preferred stock into common stock                             49,091             -         -             -

  Exercise of Series G warrants at $.25 per share                                     770,653             -         -       791,406
  Financing related fees                                                              (50,000)            -         -       (50,000)
  Warrants issued in connection with notes payable                                    132,499             -         -       132,499
  Imputed dividend associated with repricing and issuance of warrants                 487,079      (487,079)        -             -
  Issuance of common stock under stock purchase plan                                    7,606             -         -         7,813
  Exercise of common stock options                                                     33,960             -         -        34,995
  Net Loss and comprehensive loss                                                           -    (3,565,205)        -    (3,565,205)
                                                                                ----------------------------------------------------
Balance at December 31, 2004                                                    $  43,278,106  $(52,736,661) $      -  $ (1,312,115)
                                                                                ====================================================
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                       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,
                                                              2004            2003            2004
                                                        -------------------------------------------------
<S>                                                     <C>             <C>             <C>
     Operating activities
     Net loss                                           $   (3,565,205) $   (2,193,239) $  (45,716,618)
     Adjustments  to reconcile net loss to net cash used
       for operating activities:
         Stock and warrants issued for services
            rendered and debt interest                               -               -         472,676
         Depreciation and amortization                          31,350          56,576       2,446,310
         Amortization of discounts on notes payable            115,342               -         115,342
         Write-off of purchased technology                           -               -         503,500
         Changes in assets and liabilities:
           Contracts receivable                                184,527        (252,026)              -
           Rent receivable                                      87,499        (184,527)       (164,527)
           Prepaid expenses                                     13,029           4,974         (12,770)
           Deposits                                                  -               -         (29,679)
           Accounts payable                                    146,698        (220,450)        315,357
           Deposits payable                                     33,000               -          33,000
           Accrued expenses                                     39,301             364         201,910
           Deferred revenue                                    102,784               -         102,784
           Deferred rent                                       (24,111)        (24,111)              -
                                                        -------------------------------------------------
      Net cash used for operating activities                (2,835,786)     (2,812,439)    (41,732,715)

     Investing activities
     Purchase of technology                                          -               -        (570,000)
     Purchase of equipment and improvements                     (1,518)        (90,058)     (2,088,862)
     Purchases of short-term investments                             -               -     (16,161,667)
     Sales of short-term investments                                 -               -      16,161,667
                                                        -------------------------------------------------
     Net cash used for investing activities                     (1,518)        (90,058)     (2,658,862)

     Financing activities
     Net proceeds from issuance of common stock                784,212         364,183      24,004,471
     Net proceeds from issuance of preferred stock                   -       2,889,650      18,398,068
     Net proceeds from convertible  notes and detachable             -               -       1,068,457
       warrants
     Net proceeds from issuance of debt - related party      1,050,000               -       1,050,000
     Payments on capital lease obligations                           -               -        (288,770)
     Payment on note payable                                         -               -        (242,750)
     Proceeds from note payable                                      -               -         484,323
                                                        -------------------------------------------------
     Net cash provided by financing activities               1,834,212       3,253,833      44,473,799
                                                        -------------------------------------------------

     Net   increase   (decrease)   in  cash   and   cash    (1,003,092)        351,336          82,222
       equivalents
     Cash  and  cash  equivalents  at  beginning  of the     1,085,314         733,978               -
       period
                                                        -------------------------------------------------
     Cash and cash equivalents at end of the period     $       82,222  $    1,085,314  $       82,222
                                                        =================================================
</TABLE>

The accompanying notes are an integral part of these financial statements



                                      F-8
<PAGE>



<TABLE>
<CAPTION>
                                                                                       For the period
                                                                                        July 6, 1988
                                                                                       (inception) to
                                                          Years ended December 31,      December 31,
                                                            2004            2003            2004
                                                      -------------------------------------------------
<S>                                                   <C>             <C>             <C>
     Supplemental disclosures of cash flow information
     Equipment purchased by capital leases            $            -  $            -  $      288,772
     Interest paid                                             3,661             758         151,194
     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       5,277,813
     Conversion of Series G preferred stock to
        common stock                                         265,000          15,000         850,000
     Imputed dividend on Series I stock                            -       1,928,237       1,928,237
     Imputed dividend on warrants issued and repriced        487,079         656,342       1,143,421
     Conversion of Series I preferred stock to
        common stock                                          50,000         155,000         205,000
     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>


The accompanying notes are an integral part of these financial statements





                                      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.

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>



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  three  to  seven  years,   using  the
straight-line method.  Leasehold  improvements are amortized over the shorter of
the lease term or life of the asset.

Impairment of Long-Lived Assets

Long-lived  assets  and  certain  identifiable   intangibles  are  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amount  may not be  recoverable.  If the fair  value is less  than the
carrying  amount of the asset,  a loss is recognized  for the  difference.  Fair
value is  determined  based  on  market  quotes,  if  available,  or is based on
valuation techniques.

Revenue and Expense Recognition

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

Significant Collaborative Research and License 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.

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.



                                      F-11
<PAGE>



1.   Organization and Significant Accounting Policies (continued)


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, 2004 and for
the  period of project  inception  to date the  Company  received  $457,000  and
$4,918,000,  respectively,  in contract revenue from Spine Wave which represents
the  reimbursement of direct costs plus overhead costs allocated to the research
and development resources used in performing the collaborative activities.

Additional equity incentives offered in conjunction with the expanded supply and
services  agreement of March 17, 2002 consist of a four year warrant to purchase
1,000,000  shares of Spine Wave common  stock at an exercise  price of $0.50 per
share,  and 400,000  shares of common stock 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, 2004, the first two
of the three performance goals had been met.

In October  2003,  a second  amendment  to Supply  and  Services  Agreement  was
executed.  The amendment  further  defined the cost basis for  reimbursement  of
services by Spine Wave.

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 did not
incur any research  and  development  costs  associated  with its support.  As a
result of the  arrangement,  the Company  recognized  approximately  $333,000 in
deferred  license fee revenue for years ended December 31, 2000,  2001 and 2002.
Subsequently,  Femcare  notified  the  Company  that it was  closing its urology
business and ceasing all product  development efforts pertaining to the licensed
technology. The

Company is in discussions with Femcare  regarding the termination of the license
agreement.



                                      F-12
<PAGE>



1.  Organization and Significant Accounting Policies (continued)

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

In connection with the license agreement, Genencor was issued two warrants, each
convertible by formula into $500,000 of our common stock.  The first warrant has
expired.  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 123R 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 for awards
from 2001 through 2004 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 loss per share for 2004 and 2003 would have been  increased  to the
proforma amounts indicated below:



                                      F-13
<PAGE>



1.  Organization and Significant Accounting Policies (continued)



<PAGE>



<TABLE>
<CAPTION>
                                                                   2004             2003
                                                            --------------   ---------------
<S>                                                         <C>              <C>
           Net loss as applicable to common shareholders    $ (4,329,923)    $ (5,055,458)

           Deduct: Total stock-based employee
           compensation expense determined under fair
           value based method for all awards, net of
           related tax effects                                                   (454,620)
                                                              (1,961,688)
                                                            --------------   ---------------
           Pro forma net loss                               $ (6,291,611)    $ (5,510,078)
                                                            ==============   ===============

           Earnings per share:
                 Basic - as reported                           $ (0.11)         $ (0.15)
                 Basic - pro forma                             $ (0.16)         $ (0.16)
</TABLE>

The fair value was estimated using the following weighted-average assumptions: a
risk free  interest  rate of 3.50% for 2004 and  3.77%  for 2003;  a  volatility
factor of the expected  market price of the  Company's  common stock of 128% for
2004 and 124% for 2003,  expected option lives of 10 years for 2004 and 10 years
for 2003, 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 2004 and 2003 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-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, 2004 and 2003 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 2004 and 2003 has been adjusted for accumulated and/or
paid dividends on the preferred stock.



                                      F-14
<PAGE>



1.  Organization and Significant Accounting Policies (continued)

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.

Recently issued accounting pronouncements

In December  2004,  the  Financial  Accounting  Standards  Board issued SFAS No.
123(R), "Share-Based Payment". SFAS No. 123(R) replaces SFAS No. 123 "Accounting
for Stock-Based  Compensation",  and supersedes APB Opinion No. 25,  "Accounting
for Stock Issued to  Employees".  SFAS No. 123(R)  requires  compensation  costs
related to share-based  payment  transactions  to be recognized in the financial
statements over the period that an employee provides service in exchange for the
award.  SFAS No. 123(R) is effective for period  beginning  after June 15, 2005.
The Company plans to adopt SFAS No. 123(R) on July 1, 2005, the beginning of its
third  fiscal  quarter.  SFAS  123(R)  eliminates  the  alternative  to use  the
intrinsic value method of accounting that was provided in SFAS 123 as originally
issued.  In accordance  with SFAS No. 148, the Company has been  disclosing  the
impact on net income and earnings per share had the fair value based method been
adopted.

If the fair value method had been adopted, net loss for 2004 and 2003 would have
been increased by $1,961,688 and $454,620,  respectively, than reported and loss
per share would have increased  approximately  $0.05 and $0.01 in 2004 and 2003,
respectively.

2.  Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:



                                      F-15
<PAGE>



2.  Equipment and Leasehold Improvements (continued)

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                          2004           2003
                                                                    -------------------------------
<S>                                                                 <C>             <C>
          Laboratory equipment                                      $   1,184,000   $   1,349,000
          Office equipment                                                200,000          94,000
          Leasehold improvements                                          306,000         306,000
                                                                    -------------------------------
                                                                        1,690,000       1,749,000
          Less accumulated depreciation and amortization               (1,605,000)     (1,635,000)
                                                                    -------------------------------
                                                                    $      85,000   $     114,000
                                                                    ===============================
</TABLE>

Depreciation  expense was $31,000 and $57,000 for the years ended  December 2004
and 2003,  respectively.  During the year ended  December 31, 2004,  the Company
wrote-off fully depreciated assets in the amount of $61,000 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 $13,000 per month plus  utilities.  From
December 2002 until July 2004,  the sublessee was unable to make monthly  rental
payments due to a lack of funding.  In August 2004 the sublessee  resumed making
rental payments and as of September 2004 an additional  $5000 per month is being
paid as  credit  against  previous  rental  obligations.  Obligations  under the
sublease are secured by certain listed  property and equipment of the sublessee.
At  December  31,  2004 and  2003 the  amount  past due from the  sub-lessee  is
$264,000 and $185,000, net of reserve of $157,000 and $0, respectively.

4.  Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          2004            2003
                                                                     -------------------------------
<S>                                                                    <C>             <C>
          Payroll and employee benefits                                $    125,000    $    132,000
          Legal and professional fees                                       31,000          22,000
          Accrued interest                                                  35,000               -
          Property tax                                                       8,000           9,000
          Other                                                              3,000               -
                                                                     -------------------------------
                                                                       $    202,000    $    163,000
                                                                     ===============================
</TABLE>

5.  Stockholders' Equity

Convertible Preferred Stock

On March 25 and May 12, 2003,  we raised a total of $3,255,000  (less  expenses)
from the sale of  32,550  shares of our  Series I  Convertible  Preferred  Stock
("Series I Stock")  priced at $100 per  share,  with  warrants  to  purchase  an
aggregate of 2,582,669  shares of common stock to a small group of institutional
and  accredited  investors.  Each share of Series I Stock is  convertible at any
time at the election of the holder into approximately 181 shares of common stock
at a  conversion  price of $0.55 per share,  subject  to  certain  anti-dilution
adjustments.  In connection with this transaction, we recorded non-cash "imputed
dividend" of $1,928,237 in order to account for the difference  between the fair
market value of the common stock and the conversion price of the preferred stock
into common stock.

Each share of Series I Stock received two common stock warrants. One warrant was
exercisable  at any time for



                                      F-16
<PAGE>



approximately 27 shares of common stock at an exercise price of $0.88 per share,
and expired 18 months  after the close of the  offering;  the other  warrant was
exercisable  at any time for  approximately  18  shares  of  common  stock at an
exercise price of $1.65 per share,  and expires 48 months after the close of the
offering.  In  connection  with the  issuance of the Series I Stock,  additional
warrants  to purchase  819,543  shares of common  stock at an exercise  price of
$0.65 per share,  expired 18 months after the close of the offering were issued,
as well as warrants to purchase  204,998  shares of common  stock at an exercise
price of $0.58 per share,  warrants to purchase 27,340 shares of common stock at
an exercise  price of $0.68 per share,  warrants to  purchase  30,748  shares of
common  stock at an exercise  price of $0.92 per share and  warrants to purchase
20,500  shares of common  stock at an  exercise  price of $1.73 per share,  each
expiring 5 years after the close of the offering.

No  underwriters  were  engaged  by us 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.

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  was  exercisable  at any time for 15 shares of common  stock at an
exercise price of $1.50 per share, and expired approximately 12 months after the
close of the  offering;  the other  warrant was  exercisable  at any time for 10
shares of common  stock at an  exercise  price of $2.00 per share,  and  expired
approximately 24 months after the close of the offering.

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

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

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



                                      F-17
<PAGE>



5.  Stockholders' Equity (continued)

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

Each share of Series E Stock 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-18
<PAGE>



5.  Stockholders' Equity (continued)

Exercise and Exchange of Warrants

In October 2004,  certain holders of warrants issued in conjunction with sale of
Series I Convertible  Preferred Stock of the Company exercised their warrants to
purchase common stock. Certain of such warrants were due to expire at the end of
September  2004, but the Company  extended the exercise  period of such warrants
until the end of October 2004. The exercise prices of such warrants were between
$0.58 and $1.73 per share. As an incentive to exercise the warrants  early,  the
Company  reduced the exercise  price to $0.50 per share for all of such warrants
to the extent such warrants were  exercised on or before  October 29, 2004. As a
result,  the Company  raised  $545,156.  In  connection  with the  repricing  of
warrants  to the  investors,  the Company  recorded  an imputed  dividend in the
amount  of  $183,212  to  reflect  the  additional  benefit  created  for  these
investors.

In March 2004,  certain holders of warrants exercised their warrants to purchase
common stock.  These  warrants were due to expire at the end of March 2004.  The
exercise prices of such warrants were $0.40 and $0.55 per share. As an incentive
to exercise the warrants early the Company  offered to reduce the exercise price
of the warrants to $0.25 per share and offered each holder the issuance of a new
warrant,  for a similar  number of  shares,  at an  exercise  price of $0.55 per
share. As a result, the Company raised $246,250.  The newly issued warrants will
expire on the last day of January  2005.  In  connection  with the  repricing of
warrants and the issuance of new warrants to the investors, the Company recorded
an imputed dividend in the amount of $303,867 to reflect the additional  benefit
created for these investors.

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,  through  the  exercise of
2,590,000  previously  outstanding  warrants,  and issued 2,590,000 new warrants
that  expired on March 26,  2004,  to the  extent  they were not  exercised.  In
connection  with the  issuance  of new  warrants to the  investors,  the Company
recorded an imputed dividend in the amount of $656,342 to reflect the additional
benefit created for these investors.

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).




                                      F-19
<PAGE>



5.  Stockholders' Equity (continued)

Notes Payable, related party

On July 2, 2004, the Company issued notes with  detachable  warrants  payable to
several of its current  shareholders in exchange for $150,000 in cash. The notes
become  due on March 31,  2005 with  interest  at a rate of 10% per  annum.  The
detachable  warrants  were for the  purchase of 60,000  shares of the  Company's
common  stock at $0.37 per share.  The  warrants  have a term of three years and
become exercisable upon issue. The Company allocated the investment  proceeds to
the debt and warrants  based on their  relative  fair values.  The relative fair
value of the warrants was  determined to be $13,730,  which was recorded as debt
discount,  a reduction of the carrying  amount of the debt. This amount is being
amortized to interest  expense over the term of the debt.  The fair value of the
warrants was based on the  Black-Scholes  model. The  Black-Scholes  calculation
incorporated  the following  assumptions:  0% dividend yield,  138%  volatility,
1.98%  average  risk-free  interest  rate, a three-year  life and an  underlying
common  stock value of $0.33 per share.  For the year ended  December  31, 2004,
debt discount of $13,730 was amortized to interest expense.

On August 2, 2004, the Company issued a note with detachable warrants payable to
one of its current  shareholders  in  exchange  for  $250,000 in cash.  The note
becomes  due on March 31,  2005 with  interest  at a rate of 10% per annum.  The
detachable  warrants  were for the purchase of 100,000  shares of the  Company's
common  stock at $0.37 per share.  The  warrants  have a term of three years and
become exercisable upon issue.. The Company allocated the investment proceeds to
the debt and warrants  based on their  relative  fair values.  The relative fair
value of the warrants was  determined to be $23,995,  which was recorded as debt
discount,  a reduction of the carrying  amount of the debt. This amount is being
amortized to interest  expense over the term of the debt.  The fair value of the
warrants was based on the  Black-Scholes  model. The  Black-Scholes  calculation
incorporated  the following  assumptions:  0% dividend yield,  133%  volatility,
1.98%  average  risk-free  interest  rate, a three-year  life and an  underlying
common  stock value of $0.35 per share.  For the year ended  December  31, 2004,
debt discount of $23,995 was amortized to interest expense.

On August 19, 2004, the Company issued a note with detachable  warrants  payable
to one of its current  shareholders  in exchange for $250,000 in cash.  The note
becomes  due on March  31,  2005 with  interest  at rate of 10% per  annum.  The
detachable  warrants  were for the purchase of 100,000  shares of the  Company's
common  stock at $0.45 per share.  The  warrants  have a term of three years and
become exercisable upon issue. The Company allocated the investment  proceeds to
the debt and warrants  based on their  relative  fair values.  The relative fair
value of the warrants was  determined to be $33,802,  which was recorded as debt
discount,  a reduction of the carrying  amount of the debt. This amount is being
amortized to interest  expense over the term of the debt.  The fair value of the
warrants was based on the  Black-Scholes  model. The  Black-Scholes  calculation
incorporated  the following  assumptions:  0% dividend yield,  140%  volatility,
1.98%  average  risk-free  interest  rate, a three-year  life and an  underlying
common  stock value of $0.52 per share.  For the year ended  December  31, 2004,
debt discount of $33,802 was amortized to interest expense.

On September 9, 2004, the Company issued a note with detachable warrants payable
to one of its current  shareholders  in exchange for $250,000 in cash.  The note
becones  due on March 31,  2005 with  interest  at a rate of 10% per annum.  The
detachable  warrants  were for the purchase of 100,000  shares of the  Company's
common  stock at $0.45 per share.  The  warrants  have a term of three years and
become exercisable upon issue. The Company allocated the investment  proceeds to
the debt and warrants  based on their  relative  fair values.  The relative fair
value of the warrants was  determined to be $41,949,  which was recorded as debt
discount,  a reduction of the carrying  amount of the debt. This amount is being
amortized to interest  expense over the term of the debt.  The fair value of the
warrants was based on the  Black-Scholes  model. The  Black-Scholes  calculation
incorporated  the following  assumptions:  0% dividend yield,  141%  volatility,
1.98%  average  risk-free  interest  rate, a three-year  life and an  underlying
common  stock value of $0.67 per share.  For the year ended  December  31, 2004,
debt discount of $41,949 was amortized to interest expense.



                                      F-20
<PAGE>



5.  Stockholders' Equity (continued)

On December 22, 2004, the Company issued a note with detachable warrants payable
to one of its current  shareholders  in exchange for $150,000 in cash.  The note
has a three month term with interest at a rate of 10% per annum.  The detachable
warrants were for the purchase of 60,000 shares of the Company's common stock at
$0.50 per share. The warrants have a term of three years and become  exercisable
upon  issue.  The  Company  allocated  the  investment  proceeds to the debt and
warrants  based on their  relative  fair values.  The relative fair value of the
warrants was determined to be $19,065,  which was recorded as debt  discount,  a
reduction of the carrying  amount of the debt. This amount is being amortized to
interest  expense over the term of the debt.  The fair value of the warrants was
based on the Black-Scholes model. The Black-Scholes calculation incorporated the
following  assumptions:  0%  dividend  yield,  127%  volatility,  1.98%  average
risk-free  interest rate, a three-year life and an underlying common stock value
of $0.50 per share.  For the year ended  December  31,  2004,  debt  discount of
$1,906 was amortized to interest expense.

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  2004,  a total of
20,545  shares were  purchased  under the Plan at prices  ranging  from $0.36 to
$0.47.  The value of shares  issued under the Plan as  calculated  in accordance
with Statement 123 is not  significant  and is not included in the following pro
forma information.

Stock Options

In June 1996, the Company adopted the 1996  Non-Employee  Directors Stock Option
Plan ("1996 Plan"),  which provides for the granting of nonqualified  options to
purchase up to 250,000  shares of common stock to  directors of the Company.  In
April  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, 2004, 1,129,950 options to purchase common stock have been
granted under the 1996 Plan with 1,129,950 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, 2004,  7,348,500  options to purchase common stock had been granted
under the 2002 Plan with 3,693,243 options exercisable.




                                      F-21
<PAGE>



5.  Stockholders' Equity (continued)

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, 2004,  1,383,500  options to
purchase  common stock had been granted under the 1992 Plan with  1,121,000 with
options exercisable.

The Company adopted the 1989 Stock Option Plan,  which provided for the issuance
of incentive and  non-statutory  stock options for the purchase of up to 500,000
shares of common stock to key employees and certain other individuals.  The 1989
Stock Option Plan expired as of March 17, 1999. The options  granted will expire
ten years  from their  respective  dates of grant.  Options  granted in the plan
became  exercisable  ratably  over  periods of up to five years from the date of
grant. At December 31, 2004,  302,500 options to purchase common stock have been
granted under the 1989 Plan with 302,500 options exercisable.

Since  inception,  the  Company has granted  non-qualified  options  outside the
option plans to  employees,  directors  and  consultants.  At December 31, 2004,
1,724,000  options to  purchase  common  stock have been  granted  with  901,834
options exercisable.

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

<TABLE>
<CAPTION>
                                                  Years ended December 31
                          ----------------------------------------------------------------------
                                   2004                     2003                  2002
                          ----------------------------------------------------------------------
                                      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                  9,592,000    $0.91     2,605,500     $0.90    2,124,000    $1.09

     Granted                2,400,000    $0.57     6,988,500     $0.71      692,500    $0.35
     Exercised               (103,500)   $0.34        (2,000)    $0.30      (28,500)   $0.35
     Forfeited/Expired              -      -               -       -       (182,500)   $1.05
                          ----------------------------------------------------------------------

 Outstanding - end of year 11,888,500    $0.11     9,592,000     $0.76    2,605,500    $0.90
                          ======================================================================

 Exercisable - end of year  7,148,527    $0.76     2,725,900     $0.91    1,936,000    $1.01
                          ======================================================================
</TABLE>

The exercise  prices for options  outstanding as of December 31, 2004 range from
$0.22 to $3.75. The weighted average remaining contractual life of these options
is approximately 7.80 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.



                                      F-22
<PAGE>

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 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 Leases
                             December 31,
                            --------------                    -----------------

                                2005                               669,000
                                2006                               682,000
                                2007                               695,000
                                2008                               233,000
                                                              -----------------
              Total minimum operating lease payments          $2,279,000
                                                              =================

Rent  expense,  net of rental  income,  was  approximately  $567,000,  $478,000,
$457,000,  and $5,887,000  for the years ended December 31, 2004,  2003 and 2002
and  for  the  period  July 6,  1988  (inception)  through  December  31,  2004,
respectively.  Rental income was approximately $66,000, $157,000 and 163,000 for
the years ended December 31, 2004, 2003 and 2002,  respectively and $656,000 for
the period July 6, 1988 (inception) through December 31, 2004.

8.  Income Taxes

At December  31,  2004,  the Company had net  operating  loss  carryforwards  of
approximately  $42,054,282 for federal income tax purposes, which may be applied
against future income, if any, and will begin expiring in 2005 unless previously
utilized.   In  addition,   the  Company  had   California  net  operating  loss
carryforwards of approximately  $15,361,557,  which will begin expiring in 2005.
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 $1,723,011 and $930,061, respectively, which will
begin expiring in 2005 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-23
<PAGE>



8.  Income Taxes, continued

Significant  components of the Company's  deferred tax assets as of December 31,
2004 are shown below. A valuation  allowance of $18,934,292  has been recognized
to offset the deferred tax assets as realization of such assets is uncertain.

<TABLE>
<CAPTION>
                                                                 2004            2003
                                                           ---------------------------------
<S>                                                          <C>             <C>
          Deferred tax assets:
           Net operating loss carryforwards                  $ 16,077,000    $ 14,526,000
           Federal & state tax credits                          2,715,000       2,177,000
           Other, net                                             142,000         228,000
                                                           ---------------------------------
           Total deferred tax assets                           18,934,000      16,931,000
           Valuation allowance for deferred tax assets        (18,934,000)     (16,931,000)
                                                           ---------------------------------
           Net deferred tax assets                         $             -   $            -
                                                           =================================
</TABLE>

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, 2004, the Company had
not made a contribution to the 401(k) Savings Plan.

10.  Subsequent Events

On April 1,  2005,  the  Company  completed  the  initial  closing  related to a
Securities  Purchase  Agreement,  with a  group  of  accredited  individual  and
institutional  investors  for the private  placement of shares of the  Company's
common stock at a price of $0.33 per share. At the initial closing,  the Company
sold an aggregate of 12,728,269 shares to the initial investors for an aggregate
purchase price of $4,200,331,  including  approximately  $1,200,000 of converted
short-term  promissory notes and accumulated  interest  previously issued by the
Company to certain of the initial  investors.  As part of the  transaction,  the
Company also issued to the initial  investors  warrants that entitle the holders
to purchase an  aggregate  of  6,364,132  shares of Common  Stock at an exercise
price of $0.50 per share. The warrants expire on April 1, 2008.

On or about April 15, 2005, the Company, in a final closing pursuant to the
Securities Purchase Agreement, sold an aggregate of 10,827,955 shares to
additional investors for an aggregate purchase price of $3,573,225. As part of
the transaction, the Company also issued to the investors warrants that entitle
the holders to purchase an aggregate of 5,413,976 shares of Common Stock at an
exercise price of $0.50 per share.


For the entire private placement offering, including the Initial Closing on
April 1, 2005 and the Subsequent Closing, the Company issued a total of
23,556,224 shares of common stock at price of $0.33 per share, for aggregate
total proceeds of $7,773,556 (including approximately $1,200,000 of converted
short-term promissory bridge notes previously issued by the Company to certain
of the Initial Investors), together with warrants for the purchase of an
aggregate of approximately 11,778,108 shares of common stock at an exercise
price of $0.50 per share.

The sales and issuances of the securities under the Purchase Agreement to the
investors were exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering. The
Company relied upon the representations made by the investors pursuant to the
Purchase Agreement in determining that such exemptions were available. No
underwriting discounts or commissions were paid by the Company in connection
with these transactions. The Company has agreed to file a registration statement
registering these securities with the Securities and Exchange Commission, and to
attempt to achieve effectiveness of such registration within 120 days of April
15, 2005, the date of the final closing under the Securities Purchase Agreement.
Failing to do so would result in a cash penalty to the Company of approximately
five percent per annum, calculated and applied on a daily basis.

The Company incurred aggregate selling fees of approximately $535,000 and issued
to placement agents warrants to acquire 751,088 shares of common stock at an
exercise price of $0.55 per share exercisable at any time and expiring
approximately 5 years after issuance.


                                      F-24


<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.

May 18, 2005                             By:  /s/ J. Thomas Parmeter
                                            ---------------------------------
                                              J. Thomas Parmeter
                                              Chairman of the Board


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

<TABLE>
<CAPTION>

Signature                                    Capacity                                           Date
---------                                    --------                                           ----
<S>                                          <C>                                                <C>
/s/ J. Thomas Parmeter                       Chairman of the Board                              May 17, 2005
------------------------------------------
J. Thomas Parmeter


/s/ William N. Plamondon III                 Chief Executive Officer and Director               May 18, 2005
------------------------------------------   (Principal Executive Officer)
William N. Plamondon III


/s/ Janis Y. Neves                           Director of Finance, Controller and Corporate      May 18, 2005
------------------------------------------   Secretary
Janis Y. Neves                               (Principal Financial and Accounting Officer)


/s/ Donald S. Kaplan                         President, Chief Operating Officer and Director    May 13, 2005
------------------------------------------
Donald S. Kaplan


/s/ Edward G. Cape                           Director                                           May 13, 2005
------------------------------------------
Edward G. Cape


/s/ Kerry L. Kuhn                            Director                                           May 18, 2005
------------------------------------------
Kerry L. Kuhn


/s/ Steven M. Lamon                          Director                                           May 18, 2005
------------------------------------------
Steven M. Lamon


/s/ Steve Peltzman                           Director                                           May 14, 2005
------------------------------------------
Steve Peltzman


/s/ James B. McCarthy                        Director                                           May 13, 2005
------------------------------------------
James B. McCarthy

</TABLE>



<PAGE>




                                  EXHIBIT INDEX



 23.1   Consent of Peterson & Co. LLP, Independent  Registered Public Accounting
        Firm.

 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.