**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




(Mark
      One)


x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              
              For
                the fiscal year ended December 31, 2007ORo
            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 in its charter)




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


10655
      Sorrento Valley Road, San Diego, CA 92121


(Address
      of principal executive offices) (Zip Code)




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




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




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


Common
      Stock


(Title
      of
      Class)





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




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 o




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




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




The
      issuer’s revenues for the most recent fiscal year were $287,000.




The
      aggregate market value of the voting common equity held by non-affiliates
      computed by reference to the price at which the common equity sold, or the
      average bid and asked price of such common equity, as of June 29, 2007, the
      last
      business day of the issuer’s most recently completed second fiscal quarter, was
      $8,005,394. Stock held by directors, officers, and shareholders owning 5% or
      more of the outstanding common equity (as reported on Schedules 13D and 13G)
      were excluded as they may be deemed affiliates. This determination of affiliate
      status is not a conclusive determination for any other purpose. The number
      of
      shares of the registrant’s common equity outstanding as of May 6, 2008 was
      94,884,453.





DOCUMENTS
      INCORPORATED BY REFERENCE:




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




Definitive
      Proxy Statement to be filed with the Commission with respect to the registrant’s
      2008 Annual Meeting of Stockholders.




Transitional
      Small Business Disclosure Format: Yes o  No x









**PROTEIN
      POLYMER TECHNOLOGIES, INC.**




**FORM
      10-KSB**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2007**




**TABLE
      OF CONTENTS**




**Page****PART
                I**Item
                1.
            Business
            2Item
                2.
            Properties
            14Item
                3.
            Legal
                Proceedings
            14Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            14**PART
                II**Item
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            15Item
                6.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16Item
                7.
            Financial
                Statements
            F-1Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            25Item
                8A.
            Controls
                And Procedures
            25Item
                8B.
            Other
                Information
            27**PART
                III**Item
                13.
            Exhibits
            27Signatures
            
            33




1





**Item
                1.**
            **Business**




**Forward
      Looking Statements**




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




**Company
      and Technology Background**




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




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




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




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




2


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




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





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




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


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




**Fundamental
      Protein Polymers**




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


3


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




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




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




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




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





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




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




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


4


Surgical
      Tissue Sealants (STS): Certain
      tissue adhesives and sealants that seek to avoid the limitations of sutures,
      staples, pins and screws have been developed and marketed for a number of years
      outside the United States by other parties. In the United States, approved
      products have fallen into several categories. DermaBond® (not our trademark), a
      synthetic cyanoacrylate adhesive, is approved for topical application to close
      skin incisions and lacerations. Cyanoacrylate adhesives set fast and have high
      strength, but form brittle plastics that do not resorb. This limitation
      restricts their use to bonding the outer surfaces of skin together. Tisseel®
(not our trademark), a fibrin sealant, is approved for use as an adjunct to
      hemostasis in surgery. Fibrin sealants have excellent hemostatic properties,
      but
      are derived from human and/or animal blood products, set slowly, have low
      strength, and lose their strength rapidly.





A
      third
      category of tissue adhesives combines natural proteins such as collagen or
      albumin with synthetic cross-linking agents such as gluraraldehyde. Such
      products were originally marketed in Europe for limited, life-threatening
      indications and the FDA approved one such product, BioGlue® (not our trademark),
      in 2001 for use as an adjunct to sutures and staples in open surgery to repair
      large arteries. The aldehyde cross-linking agents employed in such products
      (i.e., glutaraldehyde, formaldehyde) are known to cause adverse tissue
      reactions. DuraSeal® (not our trademark), a sealant product composed of a
      synthetic polymer called polyethylene glycol, is a relatively weak sealant
      approved for use in neurosurgery. To date, none of the products available in
      the
      U.S. for use inside the body have found widespread acceptance among surgeons,
      for reasons ranging from their lack of performance based on properties such
      as
      adhesiveness, flexibility, and resorption rate, complexity of use, or concerns
      about the perceived benefit to risk.





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





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





Sealant
      Performance/Properties





·
            Sets
                quickly to an adhesive hydrogel.·
            Adheres
                well to tissue, seals gas and fluid
                leaks.


·
            Minimal
                material swelling.·
            Resorbable
                and non-resorbable formulations.


·
            Two
                absorption rates.·
            Reduces
                post-operative adhesions.




5





Our
      tissue adhesive technology combines a silk-elastin polymer designed specifically
      to react with a biocompatible cross-linking agent under physiological
      conditions. Two fluid components are mixed just prior to their delivery to
      the
      treatment site, which can be accomplished through a fine gauge needle and in spray
      form. The material then rapidly cures to a tough, elastic hydrogel that strongly
      adheres to surrounding tissues.





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





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





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





**Manufacturing,
      Marketing and Distribution**





Preclinical
      and clinical testing of potential medical device products, where the results
      will be submitted to the FDA, requires compliance with the FDA’s Good Laboratory
      Practices (“GLP”) and other Quality System Regulations (“QSR”). We implemented
      polymer production and quality control procedures and made certain facilities
      renovations to operate in conformance with FDA requirements in our current
      facilities. However, the lease on these facilities expired on April 30, 2008
      and, as of the date hereof, we have not obtained alternate facilities. See
“Item
      2. Properties” below. Accordingly, we cannot assure that our polymer production
      capacity will be sufficient in the future to satisfy applicable regulatory
      requirements and/or supply our development programs with the required quality
      and quantity of materials needed for feasibility and preclinical testing and
      initial (“pilot”) clinical testing. We will require additional manufacturing
      capacity to expand beyond initial clinical trials.




We
      are
      considering several methods for increasing production of our biomedical product
      candidates to meet pivotal clinical trial and commercial requirements. For
      example, we may establish external contract manufacturing arrangements for
      needed quantities of materials. However, we cannot assure that such
      arrangements, if desired, could be entered into or maintained on acceptable
      terms, if at all, or that the existence or maintenance of such arrangements
      would not adversely affect our margins or our ability to comply with applicable
      governmental regulations. The actual method or combination of methods that
      we
      may ultimately pursue will depend on a number of factors, including
      availability, cost and our assessment of the ability of such production methods
      to meet our commercial objectives.


6


**Research
      and Development**




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




Our
      tissue augmentation products, our surgical adhesive and sealant formulations,
      and our wound healing matrices all provide platforms for drug delivery
      applications, serving as controlled release drug depots. The protein polymer
      materials we have developed exhibit exceptional biocompatibility, provide for
      control over rates of resorption, and are fabricated using aqueous solvent
      systems at ambient temperatures — attributes that can be critical in maintaining
      the activity of the drug, particularly protein-based drugs emerging from the
      biotechnology industry. This program is in the preclinical research
      stage.





**Collaborative
      and License Agreements**




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




Spine
      Wave, Inc.





Low
      back
      pain is the leading cause for healthcare expenditures in the United States,
      resulting in more than $50 billion in direct and indirect medical expense,
      and
      products used to treat it are the fastest growing major segment of the
      orthopedic industry, with a market of $2.1 billion in revenues and a growth
      rate
      of more than 25% annually, according to a February 2000 Viscogliosi Bros.,
      LLC.,
      Spine Industry Analysis Series report. The leading surgical treatments for
      spine
      include spinal fusions, discectomies, and laminectomies, but the market for
      disc
      replacement and repair is expected to grow more rapidly than other treatments
      as
      new products are approved over the next five years.





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





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


7


Currently,
      there are no satisfactory minimally invasive surgical treatments available
      for
      chronic low back pain due to damaged or deteriorated discs. In extreme cases,
      a
      spinal fusion may be performed to limit the mobility of the joint. In other
      cases, the disk maybe removed and an artificial disk implanted. However, these
      procedures require invasive surgeries, and in some cases they result in
      restricted mobility, leading to further degeneration of the spine.





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





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





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





Genencor
      International, Inc .




In
      December 2000, we signed a broad-based, worldwide exclusive license agreement
      with Genencor International, Inc. (hereafter “Genencor”) enabling Genencor,
      potentially, to develop a variety of new products for industrial markets. In
      October 2002, the license agreement was amended to provide Genencor with an
      additional one-year option to initiate development in the field of non-medical
      personal care products.




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




In
      return
      for the licensed rights, Genencor paid the Company an up-front license fee
      of
      $750,000, and will pay royalties on the sale of any products commercialized
      by
      Genencor under the agreement. The licensed technology was transferred to
      Genencor upon execution of the license agreement without any further product
      development obligation on our part. Future royalties on the net sales of
      products incorporating the technology under license and developed by Genencor
      will be calculated based on a royalty rate to be determined at a later date.
      In
      addition, we are entitled to receive up to $5 million in milestone payments
      associated with Genencor’s achievement of various industrial product development
      milestones incorporating the licensed technology. In March 2005 we received
      a
      second license milestone payment of $250,000 from Genencor for Genencor’s
      initiation of a product development project based on technology licensed from
      us.


8


In
      connection with the license agreement, Genencor was issued two warrants, each
      convertible by formula into 500,000 shares of our common stock. Both warrants
      have subsequently expired. The agreement terminates on the date of expiration
      of
      the last remaining patent.




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




**Other
      Agreements**




We
      are
      discussing other potential collaboration agreements with prospective marketing
      partners. We cannot assure that we will continue such discussions or if we
      will
      be able to establish such agreements at all, or do so in a timely manner and
      on
      reasonable terms, or that such agreements will lead to successful product
      development and commercialization. From time to time, we are party to certain
      agreements for the evaluation of materials regarding biomedical applications
      of
      our products, polymers and technology, including applications in areas other
      than those identified as product candidates above. These agreements provide,
      or
      are intended to provide, for the evaluation of product feasibility. We cannot
      assure that we will continue to be able to establish such agreements at all,
      or
      do so in a timely manner and on reasonable terms, or that such agreements will
      lead to joint product development and commercialization agreements.




**Intense
      Competition**




The
      principal anticipated commercial uses of our biomaterials are as components
      of
      end-use products for biomedical and other specialty applications. End-use
      products using or incorporating our biomaterials would compete with other
      products that rely on the use of alternative materials.




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


9


The
      primary elements of competition in the biomedical and surgical repair products
      market are




o
            performance,o
            cost,


o
            safety,o
            reliability,


o
            convenience,
                ando
            commercial
                production capabilities.





We
      believe that our ability to compete in this market will be enhanced by the
      breadth of our issued patent claims, our other pending patent applications,
      our
      early entry into the field and our experience in protein
      engineering.




**Patents
      and Trade Secrets**




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




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




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




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




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


10


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




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





Although
      we believe our existing issued patent claims provide a competitive advantage,
      we
      cannot assure that the scope of our patent protection is or will be adequate
      to
      protect our technology or that the validity of any patent issued will be upheld
      in the future. Additionally, with respect to our pending applications, we cannot
      assure that any patents will be issued, or that, if issued, they will provide
      substantial protection or be of commercial benefit to us.




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




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




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


11


**Regulatory
      Matters**




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




Extensive
      preclinical and clinical testing and pre-market approval from the FDA is
      required for new medical devices, drugs or vaccines, which is generally a costly
      and time-consuming process. To support the development of such products, we
      are
      required to be in compliance with many of the FDA’s regulations to conduct
      testing in support of product approvals; in particular, compliance with the
      FDA’s Good Laboratory Practices (GLP) and applicable Quality System Regulations
      (QSR). Where we have conducted such testing, our company may choose to file
      product approval submissions ourselves or for our partners.





We
      cannot
      assure that we, or our customers, will be able to obtain or maintain the
      necessary approvals from the FDA or corresponding international regulatory
      authorities. Our anticipated business could be adversely affected if we are
      unable to obtain and maintain these approvals and/or comply with these
      regulations. To the extent we manufacture medical devices, or a component
      material supplied to a medical device manufacturer, we will be required to
      conform commercial manufacturing operations to the FDA’s QSR requirements. We
      would also be required to register our facility with the FDA as an establishment
      involved in the manufacture of medical devices. QSR requirements are rigorous,
      and there can be no assurance that compliance could be obtained in a timely
      manner and without the expenditure of substantial resources, if at all.
      International quality system requirements, (e.g., ISO 13485 issued by the
      International Organization for Standardization) is the quality model used by
      medical product manufacturers and is required for the sale of medical devices
      in
      Europe. ISO 13485 standards are similar to the FDA’s QSR.




Our
      research, development and production activities are, or may be, subject to
      various federal and state laws and regulations relating to environmental quality
      and the use, discharge, storage, transportation and disposal of toxic and
      hazardous substances. Our future activities may be subject to regulation under
      the Toxic Substances Control Act, which requires us to obtain pre-manufacturing
      approval for any new “chemical material” we produce for commercial use that does
      not fall within the FDA’s regulatory jurisdiction. We believe we are currently
      in substantial compliance with all applicable laws and regulations. Although
      we
      intend to use our best efforts to comply with all environmental laws and
      regulations in the future, we cannot assure that we will be able to fully comply
      with such laws, or that full compliance will not require substantial capital
      expenditures.




**Product
      Liability and Absence of Insurance**




Our
      business may expose us to potential product liability risks whenever human
      clinical testing is performed, or upon the use of any commercially marketed
      medical product. Prior to beginning human clinical testing of our
      investigational devices, we procured product liability insurance. Prior to
      shipping the products, we obtained the applicable product liability insurance.
      We are maintaining the insurance, expanding the coverage as appropriate in
      concert with the development and use of our products. We cannot assure, however,
      that we will be able to continue to obtain such insurance on acceptable terms
      or
      that such insurance will provide adequate coverage against potential
      liabilities. A successful product liability claim or series of claims could
      result in a material adverse effect on our business.


12


**Executive
      Officers of the Registrant**


Name
            
            Age
            
            Position with the CompanyJames
                B. McCarthy, M.B.A., J.D.
            
            56
            
            Interim
                Chief Executive Officer, Interim President and Interim Principal
                Accounting OfficerJoseph
                Cappello, Ph.D.
            
            51
            
            Vice
                President, Research and Development, Chief Technical Officer and
                Director,
                Clinical ResearchFranco
                A. Ferrari, Ph.D.
            
            56
            
            Vice
                President, Laboratory Operations and Polymer Production and Director,
                Molecular Genetics




Mr.
      McCarthy is our Interim Chief Executive Officer, Interim President, and Interim
      Principal Accounting Officer, positions he has held since October, 2007. Mr.
      McCarthy has served as a director since April 2005. Mr. McCarthy also serves
      as
      the Chairman and Chief Executive Officer of Gemini Consulting Group, Inc.,
      a
      health care consulting firm, a position he has held since 1991. Mr. McCarthy
      also serves as Board Chairman for Sirigen, Inc., and as a member of the Board
      of
      Directors for Hinsdale Bank and Trust Company, and JMAR
      Technologies.





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




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




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




**Employees**




As
      of
      December 31, 2007, we had 13 full-time employees, of whom two hold Ph.D.
      degrees. We are highly dependent on the services of our executive officers
      and
      scientists. The loss of the services of any one of these individuals would
      have
      a material adverse effect on the achievement of our development objectives,
      our
      business opportunities and prospects. The recruitment and retention of
      additional qualified management and scientific personnel is also critical to
      our
      success. We cannot assure that we will be able to attract and retain required
      personnel on acceptable terms, due to the competition for such experienced
      personnel from other biotechnology, pharmaceutical, medical device and chemical
      companies, universities and non-profit research institutions. As of April 30,
      2008, we had reduced our staff to two full-time employees, both of whom hold
      Ph.D. degrees.


13





**Item
                2.**
            **Properties**


We
      do not
      own any real property. We lease approximately 27,000 square feet of office
      and
      laboratory space in San Diego. The leased property includes our administrative
      offices, which encompass approximately 4,000 square feet, and our laboratory
      facilities, which encompass approximately 23,000 square feet. The current annual
      rent for this space is approximately $680,000. This lease expired on April
      30,
      2008 and our Board has determined not to renew it. We are currently exploring
      arrangements to relocate our administrative offices and outsource our laboratory
      and production facilities. In the interim, we will continue to occupy our
      current facilities on a month-to-month basis. As of the date hereof we have
      not
      obtained any agreement to either relocate our administrative offices or
      outsource our laboratory and production facilities. If we are unable to do
      so in
      a timely manner and/or on terms acceptable to us, our business will be
      materially adversely affected.





We
      previously subleased 6,000 square feet of office and laboratory space in our
      current facility to a third party, offsetting our rental expense.  This
      sublease ended as of April 30, 2008. At December 31, 2007 and April 30, 2008,
      rent receivable was $-0- and $-0- respectively, net of an allowance for
      collectibility of $147,000 and $205,000, respectively. This is further described
      in Note 3 to the financial statements.




**Item
                3.**
            **Legal
                Proceedings**


None.




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


No
      matter
      was submitted to a vote of security holders during the fourth quarter of
      2007.


14


**PART
      II**




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


*NASDAQ
      Delisting*




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





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




**Trade Prices****High**
            
            **Low****2007**First
                Quarter
            
            $
            0.18
            
            $
            0.12Second
                Quarter
            
            
            0.19
            
            
            0.10Third
                Quarter
            
            
            0.21
            
            
            0.12Fourth
                Quarter
            
            
            0.16
            
            
            0.06**2006**First
                Quarter
            
            $
            0.33
            
            $
            0.19Second
                Quarter
            
            
            0.28
            
            
            0.15Third
                Quarter
            
            
            0.21
            
            
            0.12Fourth
                Quarter
            
            
            0.23
            
            
            0.12




As
      of
      December 31, 2007, we had approximately 175 shareholders of record of our common
      stock; we estimate we had approximately 1,584 beneficial holders as of that
      date. We have never paid cash dividends on our common stock. We currently intend
      to retain earnings, if any, for use in the operation and expansion of our
      business and therefore do not anticipate paying any cash dividends on our common
      stock in the foreseeable future




*Recent
      Sales of Unregistered Securities*





During
      the last quarter of 2007, we received an aggregate of $570,000 for the purchase
      of 5,913,028 common shares. The shares to these purchases were issued in the
      first quarter of 2008. Reference is made to Liquidity and Capital resources
      under Management’s Discussion and Analysis of Financial Condition and Results of
      Operations for information relating to these sales. The sales were made pursuant
      to the exemption form the registration provisions of the Securities Act of
      1933
      provided by Section 4 (2) thereof.


15


*Equity
      Compensation Plan Information*




The
      following table provides information as of December 31, 2007 regarding equity
      compensation plans (including individual compensation arrangements) under which
      our equity securities are authorized for issuance.





**Plan
                Category**
            
            **Number of**
              **securities**
              **to be issued upon**
              **exercise of**
              **outstanding**
              **options, warrants**
              **and**
              **rights**
            
            **Weighted-average**
              **exercise price of**
              **outstanding**
              **options, warrants**
              **and rights**
            
            **Number of**
              **securities**
              **remaining**
              **available for**
              **future issuance**
              **under equity**
              **compensation**
              **plans (excluding**
              **securities**
              **reflected in**
              **column (a))****(a)**
            
            **(b)**
            
            **(c)****Equity
                Compensation Plans approved by security holders**Stock
                Option Plans1
            
            
            10,173,162
            
            $
            0.646
            
            
            1,711,268Employee
                Stock Purchase Plan2
            
            
            —
            
            
            —
            
            
            —**Equity
                Compensation Plans not approved by security holders****3**
            
            
            1,324,324
            
            $
            0.712
            
            
            n/a





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




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


**Forward
      Looking Statements**




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


16


**General
      Overview**




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




**Results
      of Operations**





**Operating
      Results for the Year Ended December 31, 2007 as compared to the
      2006**





*Contract
      and Licensing Revenue* .
      We
      earned $287,000 in contract and licensing revenue for the year ended December
      31, 2007 as compared to $533,000 for the year ended December 31, 2006. During
      the first quarter of 2007 revenues included $100,000 in licensing fess from
      our contractual relationship with Genencor International. Future payments
      arising from the Genencor agreement, if any, are subject to future
      commercialization of products. Contract revenue for 2007 was earned by providing
      for materials and services in collaborative research and development contracts
      with our clients.





*Research
      and Development Expenses* .
      Research and development expenses for the year ended December 31, 2007 were
      $2,503,000, compared to $3,692,000 for 2006. The decline from 2006 resulted
      from
      significantly reduced activity levels in 2007 of clinical testing and regulatory
      consulting costs. Additionally, we only funded one month’s operating expenses
      for Surgica Corporation in 2007 as the result of our determination in March
      2007
      to discontinue our efforts to develop and commercialize the Surgica products.
      We
      expect our research and development expenses will increase in the future, to
      the
      extent additional capital is obtained, due to the planned expansion of
      product-directed development efforts including preclinical development of our
      surgical sealants.





*Selling,
      General and Administrative Expenses* .
      Selling, general and administrative expenses for the year ended December 31,
      2007 were $809,000, as compared to $4,759,000 for 2006. During 2007, all
      non-essential administrative staff positions were eliminated and all non-mission
      sensitive expenses were reviewed and either eliminated or reduced. To the extent
      possible, we continue to concentrate on controlling costs reflected in reduced
      travel, office supplies, and payroll. We expect our selling, general and
      administrative expenses will increase in the future, to the extent additional
      capital is obtained, consistent with supporting our planned increase in research
      and development efforts and as business development, patent, legal and investor
      relations activities require.





The
      following discusses items which were incurred in each year that are
      non-recurring or of particular significance. During 2006 we recognized non-cash
      charges aggregating $1,507,000 as the result of adopting SFAS No. 123 (revised
      2004) “Share Based Payment” for stock options. Additionally, we recorded an
      impairment charge to the previously recorded license agreement of $1,047,000
      and
      an allowance for bad debts related to the notes receivable based on the
      termination of our license agreement with Surgica. As the result of settling
      a
      contingent obligation for $200,000 with the Sapphire Group that we settled
      with
      the issuance of 400,000 shares of our common stock, we recognized a gain of
      $139,000. During 2007 we made significant changes in the operating structure
      of
      the Company in order to reduce non-core functions and focus our efforts on
      basic
      revenue and scientific results.


17


*Interest
      Expense.* Interest
      expense increased significantly from $221,000 in 2006 to $442,000 in 2007.
      This
      increase was the direct result of obtaining $2,414,000 of new debt financing
      from a stockholder to sustain our operations in 2007, which increased the
      outstanding principal balance of this debt financing to $5,876,000 as of
      December 31, 2007.





*Gain
      on Settlement of Accounts Payable.* During
      the first quarter 2007, management negotiated a settlement agreement with a
      certain creditor that relieved the Company of the obligation to pay previously
      accrued expenses totaling approximately $269,000 in exchange for a cash payment
      of $75,000. The settlement resulted in a gain of $194,000 that is included
      in
      the accompanying statement of operations for the year ended December 31, 2007.





*Operating
      Losses* .
      For the
      year ended December 31, 2007, we recorded a net loss applicable to common
      shareholders of $3,538,000 or $0.05 per share, as compared to a loss of
      $8,245,000 or $0.12 per share for 2006. The differences in the net losses are
      as
      discussed in detail previously. The undeclared or imputed dividends decreased
      as
      the result of non-cash imputed dividends that resulted from extending the term
      of certain warrants in 2006. The average numbers of shares outstanding increased
      by approximately 400,000 since additional shares were issued during the first
      quarter of 2007 in connection with the settlement of an indemnification
      obligation agreement with Sapphire Group, LLC.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2007, we had cash and cash equivalents totaling $22,000, as
      compared to $73,000 at December 31, 2006. As of December 31, 2007, we had a
      working capital deficit of $7,862,000 compared to working capital of $4,946,000
      at December 31, 2006.





We
      do not
      have any off balance sheet financing activities and do not have any special
      purpose entities. We had no long-term capital lease obligations as of December
      31, 2007 or December 31, 2006. For the year ended December 31, 2007, our cash
      expenditures for capital equipment and leasehold improvements totaled $0,
      compared with $37,000 for the same period in the prior year. We do not
      anticipate that these expenditures will be increased in 2008. We may enter
      into
      capital equipment lease arrangements in the future if available at appropriate
      rates and terms.





Our
      existing available cash and cash equivalents as of December 31, 2007, and
      continuing contractual commitments, are insufficient to meet our anticipated
      funding requirements. Substantial additional capital resources are required
      to
      fund continuing expenditures related to our operating, research, development,
      manufacturing and business development activities. As discussed in Note 8 to
      the
      financial statements, the Company entered into a common stock purchase agreement
      (hereafter “SPA”) in September 2007 and has raised $570,000 as of December 31,
      2007, as a result of that SPA.  Pursuant to the SPA, which has been our
      only source of external financing since September 2007, the investors purchase
      shares of our common stock at the closing price of the stock on the day the
      investment is made. In addition, we issued a five-year warrant to each investor
      to purchase the same number of shares as those purchased by such investor at
      110% of the price at which the shares are purchased. As of November 28, 2007,
      the SPA was amended so that warrants issued on and after that date are
      exercisable at 100% of the price at which the shares are purchased. We have
      also
      granted the investors demand and piggy-back registration rights covering the
      shares purchased and the sharers issuable upon exercise of the warrants. Prior
      to the SPA, required funding was provided to us through a note payable agreement
      (known as the Szulik Loan) by Matthew Szulik, one of our stockholders. This
      loan
      was outlined in previous filings and is further described in Note 6 to the
      financial statements. As with the Escrow Agreement relating to the Szulik Loan,
      the Stock Purchase Agreement provides that TAG Virgin Islands, Inc. (hereafter
      “TAG”), as agent for the equity investors, will advise the Board as to which of
      the Company’s expenses will be paid with the funds invested by these investors.


18


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





This
      funding was arranged by TAG, a registered investment advisor which advises
      a
      number of our stockholders in investment decisions, including decisions about
      whether to invest in our stock. These clients include Messrs, Adelson and Farber
      and Dr. Kuhn, who are members of our Board of Directors, and Mr. Szulik and
      Redec & Associates, LLC. Based upon our stock records and data supplied to
      us by our stockholders, we believe that clients of TAG beneficially owned
      approximately 55.1% of our common stock, prior to the stock purchases subject
      to
      the Stock Purchase Agreement of September 27, 2007. TAG has discretionary
      authority to vote or dispose of the shares of our common stock held in its
      client accounts and, therefore, may be deemed to be the beneficial owner of
      such
      shares in accordance with the Commission's Rules. TAG has informed us that
      James
      Tagliaferri is the natural person at TAG with such discretionary authority.
      TAG
      expressly disclaims beneficial ownership of any shares owned by its clients.




We
      believe our existing available cash and cash equivalents as of December 31,
      2007, in combination with continuing contractual commitments will not be
      sufficient to meet our anticipated capital requirements during
      2008. We are unable to pay certain vendors in a timely manner and remain over
      90
      days past due with certain critical vendors, such as outside laboratories and
      law firms. We currently owe our former chief executive officer's firm, R. I.
      Heller & Co., LLC, $175,000 for his services. Additionally, we are currently
      outsourcing administrative and accounting functions as a result of cutbacks
      necessitated by insufficient monetary resources. We are attempting to remedy
      this problem. Our ability to continue operating is dependent on the receipt
      of
      additional funding and substantial additional capital resources will be required
      to fund continuing expenditures related to our research, development,
      manufacturing and business development activities. If adequate funds are not
      available, we will be required to significantly curtail our operating plans
      and
      most likely cease operations. We are still in discussions with other potential
      financing sources and collaborative partners, and are seeking additional funding
      in the form of equity investments, license fees, loans, milestone payments
      or
      research and development payments. We cannot assure that any of these other
      sources of funding will be consummated in the timeframes needed for continuing
      operations or on terms favorable to us, if at all.





**Inflation**





To
      date,
      we believe that inflation and changing prices have not had a material impact
      on
      our continuing operations. However, we have experienced increased general and
      product liability insurance costs over the past two years, and these increases
      are expected to continue for the foreseeable future.





**Risk
      Factors**





Please
      read the following risk factors that can affect our business.





*If
      we
      continue to incur operating losses, we may be unable to continue our operations,
      if we are unable to raise additional operating capital, at planned levels and
      be
      forced to curtail or cease our operations.*





We
      have
      incurred operating losses since our inception in 1988, and will continue to
      do
      so for at least several more years. As of December 31, 2007, our accumulated
      deficit was approximately $70,268,000 and we have continued to incur losses
      since that date. The losses have resulted principally from expenses of research
      and development and to a lesser extent, from general and administrative
      expenses. If these losses continue, they could cause the value of our stock
      to
      decline.





19





We
      believe our existing available cash, cash equivalents and accounts receivable,
      in combination with anticipated contract research payments and revenues received
      from the transfer of clinical testing materials, will not be sufficient to
      meet
      our anticipated capital requirements during 2008. Substantial additional capital
      resources will be required to fund continuing expenditures related to our
      research, development, manufacturing and business development activities. If
      we
      do not raise adequate funds, we will be required to significantly curtail or
      cease our operations, and may have to sell or license out significant portions
      of our technology or potential products.





We
      believe there may be a number of alternatives to meeting the continuing capital
      requirements of our operations, including additional collaborative agreements
      and public or private financings. However, these alternatives may not be
      consummated in the necessary time frames needed for continuing operations or
      on
      terms favorable to us, if at all. From April, 2006 to September 2007, one of
      our
      stockholders provided financing to us to support our operations (see references
      to Szulik loan). As of January 9, 2008, we issued a new note in the principal
      amount of $6,415,000. This note replaced the previous note and included the
      then
      $5,876,000 outstanding principal balance plus the then $539,000 outstanding
      in
      accrued interest on the old note. In September 2007, the Company entered into
      a
      stock purchase agreement that has been used to fund operations since that time.
      Our business and financial condition will be materially adversely affected
      in
      the event that future funding through the stock purchase agreement fails to
      materialize.





*Our
      year end audited financial statements contain a “going concern” explanatory
      paragraph. Our inability to continue as a going concern would require a
      restatement of assets and liabilities on a liquidation basis, which would differ
      materially and adversely from the going concern basis on which our financial
      statements included in this report have been prepared* **.**




Our
      consolidated financial statements for the year ended December 31, 2007 included
      herein have been prepared on the basis of accounting principles applicable
      to a
      going concern.  Our auditors’ report on the consolidated financial
      statements contained herein includes an additional explanatory paragraph
      following the opinion paragraph on our ability to continue as a going
      concern.  A note to these consolidated financial statements describes the
      reasons why there is substantial doubt about our ability to continue as a going
      concern and our plans to address this issue.  Our December 31, 2007
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.  Our inability to continue as
      a going concern would require a restatement of assets and liabilities on a
      liquidation basis, which would differ materially and adversely from the going
      concern basis on which our consolidated financial statements have been
      prepared.  See, “Part II. Item 6. *Management's
      Discussion and Analysis of Financial Condition and Results of Operations;
      Liquidity and Capital Resources.”*





*If
      we
      fail to establish and manage strategic partnerships, we may be prevented from
      developing potential products or the time required for commercializing potential
      products may be increased.*





Our
      principal strategy is to enter into partnerships or licensing arrangements
      with
      medical or pharmaceutical companies with appropriate marketing and distribution
      capabilities to reduce the time and costs for developing and commercializing
      our
      potential products. We may not be able to establish additional strategic
      partnerships or licensing arrangements, or, if available, they may not be on
      terms and conditions favorable to our business. Additionally, these arrangements
      generally may be terminated under various circumstances, including termination
      at the discretion of the strategic partner without cause or without prior
      notice. Termination of the arrangements could seriously harm our business and
      financial condition. Furthermore, our strategy may lead to multiple alliances
      regarding different product opportunities that are active at the same time.
      We
      may not be able to successfully manage multiple arrangements in various stages
      of development.


20


We
      are
      discussing other potential collaboration agreements with prospective marketing
      partners. Furthermore, from time to time, we are party to certain materials
      evaluation agreements regarding biomedical applications of our products,
      polymers and technology, including applications in areas other than those
      identified as product candidates above. These agreements provide, or are
      intended to provide, for the evaluation of product feasibility. We may not
      be
      able to establish these agreements at all or do so in a timely manner and on
      reasonable terms. In addition, these agreements may not lead to successful
      product development and commercialization.





*We
      may not be able to produce commercially acceptable products because our
      technology is unproven. If we cannot prove our technology, we will not succeed
      in commercializing our products.*





Our
      technological strategy of designing and producing unique products based on
      genetically engineered proteins that do not have a harmful effect on biological
      systems, such as the human body, is commercially unproven. The process of
      developing products and achieving regulatory approvals is time consuming and
      prone to delays. We have completed only a few products that require
      collaboration and marketing partners, and have not generated any significant
      revenues from product sales.





The
      products we are currently pursuing will require substantial further development,
      testing and regulatory approvals. Our research and development activities may
      not be successful and as such, we may not be able to produce commercially
      acceptable products.





*We
      must prove our products' effectiveness in clinical trials. If we are unable
      to
      successfully complete clinical trials, we may not be able to produce marketable
      products.*





Before
      obtaining regulatory clearance for the commercial sale of any of our products,
      we must demonstrate through preclinical studies and clinical trials that the
      potential product is safe and effective for use in humans for each particular
      use. Due to the inherent difficulties associated with clinical trials, we cannot
      guarantee that:


o
            we
                will be able to complete the clinical trials successfully, if at
                all;





o
            we
                will be able to demonstrate the safety and efficacy necessary to
                obtain
                the requisite regulatory approvals of product candidates;
                or





o
            the
                product candidates will result in marketable
                products.





*The
      biomedical and surgical repair industry involves intense competition and rapid
      technological changes. Our business may suffer if our competitors develop
      superior technology.*





We
      operate in the biomedical and surgical repair markets that involve intense
      competition. Our competitors in those markets include major pharmaceutical,
      surgical product, chemical and specialized biopolymer companies, many of which
      have financial, technical, research and development and marketing resources
      significantly greater than ours. Our biomaterials are used primarily in the
      manufacture of end-use products for medical applications that compete with
      other
      products that rely on the use of alternative materials or components. As a
      result, we compete with diverse, complex and numerous rapidly changing
      technologies. We believe that our ability to compete will be enhanced by the
      breadth of our issued patent claims, our other pending patent applications
      and
      our experience in protein engineering. However, we currently do not have the
      resources to compete commercially without the use of collaborative agreements
      with third parties.




21




Our
      product technology competes for corporate development and marketing partnership
      opportunities with numerous other biotechnology companies, research institutes,
      academic institutions and established pharmaceutical
      companies. We also face competition from academic institutions and other public
      and private research organizations that are conducting research and seeking
      patent protection, and may commercialize products on their own or through joint
      ventures. Although most of our competitors depend on technology other than
      protein engineering for developing products, we believe that several university
      laboratories are currently conducting research into similar protein engineering
      technology. Our competitors may succeed in developing products based on our
      technology or other technologies that are more effective than the ones we are
      developing, or that would render our technology and products obsolete and
      non-competitive, which may harm our business.





*We
      have not developed a process to manufacture our products on a commercially
      viable scale. We will lose potential revenues if we cannot manufacture products
      on a commercial scale* .





To
      date,
      we have manufactured only limited amounts of our biomedical products for
      internal testing, initial human clinical testing and, in certain cases,
      evaluation and testing by corporate partners and other third parties. To obtain
      manufacturing approvals from the FDA for the development and commercialization
      of certain biomedical products, we would be required to upgrade our
      manufacturing facilities.





We
      have
      not yet developed a process to manufacture our products on a commercial scale
      and may not be able to, or have another party on our behalf, develop a process
      at a cost or in quantities necessary to become commercially viable. We may
      need
      to evaluate alternative methods to produce commercial quantities of our
      products. We may not be able to successfully assess the ability of other
      production methods or establish contract-manufacturing arrangements to meet
      commercial objectives.





*Our
      business is subject to substantial regulation and may be harmed if we are unable
      to comply with the applicable laws.*





Regulation
      by governmental authorities in the United States and other countries affects
      the
      success of products resulting from biotechnological research. Our current
      operations and products are, and anticipated products and operations will be,
      subject to substantial regulation by a variety of local, state, federal and
      foreign agencies, particularly those products and operations related to
      biomedical applications. A few examples of the laws that govern our products
      and
      operations are:





o
            FDA’s
                Good Laboratory Practices;o
            FDA
                Quality System Regulations;o
            Food,
                Drug & Cosmetic Act, as amended; ando
            Occupational
                Safety and Health Act;





Compliance
      with the applicable laws and regulations is a costly and time-consuming process.
      We believe we are currently in substantial compliance with the laws and
      regulations applicable to our current operations. Although we intend to use
      our
      best efforts to comply with all applicable laws and regulations in the future,
      we may not be able to fully comply with the laws and regulations and as such,
      our business operations would be seriously harmed.





*Our
      business may be harmed if we are not able to retain key
      employees.*





As
      of
      December 31, 2007, we had 13 full-time employees, none of whom have employment
      contracts with us, and two of whom hold Ph.D. degrees. Our success will depend
      largely upon the efforts of our scientists and certain of our executive officers
      who understand our technology and business objectives. The loss of the services
      of any one of these individuals would seriously harm our business opportunities
      and prospects. Our success also depends on the retention of scientific
      personnel. We may not be able to attract and
      retain required personnel on acceptable terms, due to the competition for
      experienced personnel from other biotechnology, pharmaceutical and chemical
      companies, universities and non-profit research institutions. We do not maintain
      "key-man" or similar life insurance policies with respect to these persons
      to
      compensate us in the event of their deaths, which may harm our business. As
      of
      April 30, 2008, we had reduced staff to two full-time employees, both of whom
      hold Ph.D. degrees.




22




*We
      may be sued for product liability and may not have sufficient protection under
      our insurance policies.*





We
      may
      face product liability claims with respect to our technology or products either
      directly or through our strategic partners. We may also be exposed to potential
      product liability risks whenever human clinical testing is performed or upon
      the
      use of any commercially marketed medical product. We believe that our prior
      sales of SmartPlastic(R), ProNectin (R) F and ProNectin(R) L products do not
      pose any material product liability risk. To our knowledge no product liability
      claims have ever been made against us. Before initiating human clinical testing
      of our technology, we procured product liability insurance that is limited
      to
      coverage of $1,000,000 per occurrence and in the aggregate $5 million. If
      plaintiffs succeed in their claims against us, if any, and if the coverage
      under
      our insurance policies is insufficient, our business would be seriously
      harmed.





*If
      we
      are unable to protect our proprietary technology, we may not be able to compete
      as effectively.*





We
      have
      28 United States patents, 14 foreign patents, and six additional United States
      patent applications are pending. We have not yet marketed, sold or developed
      our
      products outside the United States, except for limited amounts of ProNectin(R)
      F, ProNectin(R) L and SmartPlastic(R) cell culture products. The patent position
      of biotechnology companies, such as ours, is highly uncertain and involves
      complex legal, scientific and factual questions. For example:




o
            patents
                issued to us may be challenged, invalidated or
                circumvented;





o
            patents
                may not issue from any of our pending patent applications or, if
                issued,
                may not be sufficiently broad to protect our technology and products
                or
                provide us with any proprietary protection or competitive
                advantage;





o
            our
                competitors may have filed patent applications or may have obtained
                patents and other proprietary rights relating to products or processes
                similar to and competitive with ours. The scope and validity of such
                patents may not be known or the extent to which we may be required
                to
                obtain licenses under these patents or other proprietary rights.
                If
                required, we may not be able to obtain any licenses on acceptable
                terms,
                if at all;





o
            certain
                foreign intellectual property laws may not be as protective as those
                of
                the United States; or





o
            we
                may enter into collaborative research and development arrangements
                with
                our strategic partners that may result in the development of new
                technologies or products, but may also get us involved in a dispute
                over
                the ownership of rights to any technology or products that may be
                so
                developed.




23


*If
      we
      are unable to obtain patent protection, enforce our patent rights or maintain
      trade secrets and other protection for our products and technology, our business
      may be seriously harmed.*





We
      also
      seek to protect our intellectual property in part by confidentiality agreements
      with our employees and consultants. These agreements may be breached or
      terminated. We may not have an adequate remedy for any breach, and our trade
      secrets may otherwise become known or independently discovered by competitors,
      which would harm our business.





*Our
      common stock was delisted from the NASDAQ and will be difficult to
      sell.*





Our
      common stock was delisted from the NASDAQ Small Cap Market on September 20,
      1999, and now trades on the OTC Bulletin Board. As a consequence of the
      delisting, it is more difficult to dispose of, or to obtain accurate quotations
      as to the market value of, our common stock. In addition, the delisting made
      our
      common stock substantially less attractive as collateral for margin and purpose
      loans, for investment by financial institutions under their internal policies
      or
      state investment laws, or as consideration in future capital raising
      transactions.





Our
      common stock is also subject to regulation as a "penny stock." The Securities
      and Exchange Commission has adopted regulations that generally define "penny
      stock" to be any equity security that has a market price or exercise price
      less
      than $5.00 per share, subject to certain exceptions, including listing on the
      NASDAQ Small Cap Market. For transactions covered by the penny stock rules,
      the
      broker-dealer must consider the suitability of the purchaser, receive the
      purchaser's written consent before the purchase, deliver a risk disclosure
      document before the purchase and disclose the commission payable for the
      purchase. Additionally, if the broker-dealer is the sole market maker, the
      broker-dealer must disclose this fact and the broker-dealer's presumed control
      over the market. Finally, monthly statements must be sent disclosing recent
      price information for the penny stock held in the account and information on
      the
      limited market in penny stocks.





The
      requirements of the penny stock rules restrict the ability to sell our common
      stock in the secondary market and the price at which our common stock can be
      sold. Since our common stock was delisted from the NASDAQ Small Cap Market,
      we
      have seen a decline in our average daily trading volume, and as a result, the
      trading price of our common stock has experienced wide
      fluctuations.




*Our
      facilities lease expired on April 30, 2008, and if we are unable to find
      alternative facilities, our business will be materially adversely
      affected*





We
      are
      currently exploring arrangements to relocate our administrative offices and
      outsource our laboratory and production facilities. In the interim, we will
      continue to occupy our current facilities on a month-to-month basis. As of
      the
      date hereof we have not obtained any agreement to either relocate our
      administrative offices or outsource our laboratory and production facilities.
      If
      we are unable to do so in a timely manner and/or on terms acceptable to us,
      our
      business will be materially adversely affected.


24





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




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




Description
            PageReport
                of Independent Registered Public Accounting Firm
            F-2Balance
                Sheets at December 31, 2007 and 2006
            F-3Statements
                of Operations for the years ended December 31, 2007 and
                2006
            F-4Statements
                of Stockholders’ Deficit for the years ended December 31, 2007 and
                2006
            F-5Statements
                of Cash Flows for the years ended December 31, 2007 and
                2006
            F-6Notes
                to Financial Statements
            F-7


F-1





REPORT OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Stockholders of


Protein
      Polymer Technologies, Inc.





We
      have
      audited the accompanying balance sheets of Protein Polymer Technologies, Inc.
      (the “Company”) as of December 31, 2007 and 2006, and the related statements of
      operations, stockholders' deficit, and cash flows for the years then ended.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Protein Polymer Technologies,
      Inc.
      as of December 31, 2007 and 2006, and the results of its operations and its
      cash
      flows for the years then ended, in conformity with accounting principles
      generally accepted in the United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has reported recurring losses from operations through
      December 31, 2007, has a significant accumulated deficit, and has a significant
      working capital deficit at December 31, 2007. These factors raise substantial
      doubt about the Company’s ability to continue as a going concern. Management’s
      plans as to these matters are described in Note 1. The accompanying financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.








/s/
      SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP




San
      Diego, California


May
      09,
      2008




F-2


Protein
      Polymer Technologies, Inc.


Balance
      Sheets





December 31,2007
            
            2006AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            21,936
            
            $
            73,495Contract
                receivable
            
            
            -
            
            
            21,068Rent
                receivable, net of reserve of $147,150 and $128,273 at December 31,
                2007
                and 2006, respectively
            
            
            -
            
            
            39,527Prepaid
                expenses and other current assets
            
            
            33,419
            
            
            49,940Total
                current assets
            
            
            55,355
            
            
            184,030Deposits
            
            
            29,679
            
            
            29,679Equipment
                and leasehold improvements, net
            
            
            128,100
            
            
            228,475Investment
            
            
            520,000
            
            
            520,000Total
                assets
            
            $
            733,134
            
            $
            962,184Liabilities
                and stockholders' deficitCurrent
                liabilities:Accounts
                payable
            
            $
            827,626
            
            $
            1,098,820Accrued
                liabilities
            
            
            794,312
            
            
            431,550Secured
                note payable - related party
            
            
            5,876,000
            
            
            3,461,516Current
                maturities of notes payable
            
            
            419,071
            
            
            146,697Total
                current liabilities
            
            
            7,917,009
            
            
            5,138,583Notes
                payable, net of current maturities
            
            
            100,000
            
            
            372,374Deferred
                rent, net of current portion
            
            
            -
            
            
            4,449Total
                liabilities
            
            
            8,017,009
            
            
            5,515,406Commitments
                and contingencies (Note 10)Stockholders'
                deficit:Convertible
                preferred stock, $0.01 par value; 5,000,000 shares authorized; 65,645
                shares issued and outstanding at December 31, 2007 and 2006 - liquidation
                preference of $9,464,500 and $9,191,500 at December 31, 2007 and
                2006,
                respectively.
            
            
            6,019,917
            
            
            6,019,917Common
                stock, $0.01 par value; 1,000,000,000 and 120,000,000 shares authorized
                at
                December 31, 2007, and 2006, respectively; 73,722,232 and 67,409,204
                shares issued and outstanding at December 31, 2007 and 2006,
                respectively
            
            
            737,222
            
            
            674,092Additional
                paid-in capital
            
            
            56,227,221
            
            
            55,760,511Accumulated
                deficit
            
            
            (70,268,235
            )
            
            (67,007,742
            )Total
                stockholders' deficit
            
            
            (7,283,875
            )
            
            (4,553,222
            )Total
                liabilities and stockholders’ deficit
            
            $
            733,134
            
            $
            962,184




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


F-3


Protein
      Polymer Technologies, Inc.


Statements
      of Operations





Years ended December 31,2007
            
            2006Revenues:Contract
                revenue
            
            $
            287,118
            
            $
            533,301Product
                and other income
            
            
            -
            
            
            71,551Total
                revenues
            
            
            287,118
            
            
            604,852Operating
                Expenses:Research
                and development
            
            
            2,503,035
            
            
            3,692,091Selling,
                general and administrative
            
            
            809,446
            
            
            4,758,970Total
                expenses
            
            
            3,312,481
            
            
            8,451,061Loss
                from operations
            
            
            (3,025,363
            )
            
            (7,846,209
            )Other
                income (expense):Interest
                and other income
            
            
            21,513
            
            
            50,417Interest
                expense
            
            
            (442,235
            )
            
            (221,472
            )Gain
                on extinguishment of indemnification obligation
            
            
            -
            
            
            138,933Gain
                on settlement of accounts payable
            
            
            193,917
            
            
            -Total
                other expense
            
            
            (226,805
            )
            
            (32,122
            )Net
                loss
            
            
            (3,252,168
            )
            
            (7,878,331
            )Undeclared
                and imputed and/or paid dividends on preferred stock
            
            
            285,976
            
            
            366,589Net
                loss applicable to common shareholders
            
            $
            (3,538,144
            )
            $
            (8,244,920
            )Basic
                and diluted net loss per common share
            
            $
            (0.05
            )
            $
            (0.12
            )Shares
                used in computing basic and diluted net loss per common
                share
            
            
            67,737,971
            
            
            67,370,405




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




F-4


Protein
      Polymer Technologies, Inc.


Statements
      of Stockholders' Deficit




TotalAdditional
            
            
            
            Stockholders'Common Stock
            
            Preferred Stock
            
            Paid-in
            
            Accumulated
            
            equityShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit
            
            (deficit)Balance
                at December 31, 2005
            
            
            67,311,408
            
            $
            673,114
            
            
            66,045
            
            $
            6,059,917
            
            $
            54,122,011
            
            $
            (59,040,461
            )
            $
            1,814,581Conversion
                of Series G preferred stock into common stock
            
            
            80,000
            
            
            800
            
            
            (400
            )
            
            (40,000
            )
            
            39,200
            
            
            –
            
            
            –Share
                based compensation expense
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            1,507,350
            
            
            –
            
            
            1,507,350Imputed
                dividend on extension of warrant
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            88,950
            
            
            (88,950
            )
            
            –Issuance
                of common stock under stock purchase plan
            
            
            17,796
            
            
            178
            
            
            –
            
            
            –
            
            
            3,000
            
            
            –
            
            
            3,178Net
                loss
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            (7,878,331
            )
            
            (7,878,331
            )Balance
                at December 31, 2006
            
            
            67,409,204
            
            
            674,092
            
            
            65,645
            
            
            6,019,917
            
            
            55,760,511
            
            
            (67,007,742
            )
            
            (4,553,222
            )Share
                based compensation expense
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            (109,552
            )
            
            –
            
            
            (109,552
            )Imputed
                dividend on extension of warrant
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            8,325
            
            
            (8,325
            )
            
            –Issuance
                of common stock for dispute settlement
            
            
            400,000
            
            
            4,000
            
            
            –
            
            
            –
            
            
            57,067
            
            
            –
            
            
            61,067Issuance
                of common stock pursuant to stock purchase agreement
            
            
            5,913,028
            
            
            59,130
            
            
            –
            
            
            –
            
            
            510,870
            
            
            –
            
            
            570,000Net
                loss
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            (3,252,168
            )
            
            (3,252,168
            )Balance
                at December 31, 2007
            
            
            73,722,232
            
            $
            737,222
            
            
            65,645
            
            $
            6,019,917
            
            $
            56,227,221
            
            $
            (70,268,235
            )
            $
            (7,283,875
            )




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


F-5


Protein
      Polymer Technologies, Inc.


Statements
      of Cash Flows





Years ended December 31,2007
            
            2006**Operating
                activities**Net
                loss
            
            $
            (3,252,168
            )
            $
            (7,878,331
            )Adjustments
                to reconcile net loss to net cash used for operating
                activities:Provision
                for impairment of note receivable
            
            
            -
            
            
            257,133Provision
                impairment of license agreement
            
            
            -
            
            
            1,046,503Gain
                on extinguishment of indemnification obligation
            
            
            -
            
            
            (138,933
            )Gain
                on settlement of accounts payable
            
            
            (193,917
            )Depreciation
                and amortization
            
            
            100,375
            
            
            161,145Share-based
                compensation expense
            
            
            (109,552
            )
            
            1,507,350Non-cash
                gain on stock received
            
            
            -
            
            
            (20,000
            )Amortization
                of loan fees
            
            
            -
            
            
            69,608Other
                income
            
            
            (21,368
            )
            
            (33,528
            )**Changes
                in operating assets and liabilities:**Contracts
                receivable
            
            
            21,068
            
            
            92,724Rent
                receivable
            
            
            39,527
            
            
            75,000Prepaid
                expenses and other current assets
            
            
            16,521
            
            
            (31,749
            )Accounts
                payable
            
            
            (210,127
            )
            
            678,148Accrued
                liabilities
            
            
            578,047
            
            
            144,446Deferred
                rent
            
            
            (4,449
            )
            
            4,449**Net
                cash used for operating activities**
            
            
            (3,036,043
            )
            
            (4,066,035
            )**Investing
                activities**Purchase
                of equipment and improvements
            
            
            -
            
            
            (36,912
            )Purchase
                of common stock of Spinewave, Inc.
            
            
            -
            
            
            (500,000
            )**Net
                cash used for investing activities**
            
            
            -
            
            
            (536,912
            )**Financing
                activities**Net
                proceeds from subscriptions to purchase common stock
            
            
            570,000
            
            
            3,178Proceeds
                from issuance of debt - related party
            
            
            2,414,484
            
            
            3,461,516**Net
                cash provided by financing activities**
            
            
            2,984,484
            
            
            3,464,694**Net
                decrease in cash and cash equivalents**
            
            
            (51,559
            )
            
            (1,138,253
            )Cash
                and cash equivalents at beginning of the period
            
            
            73,495
            
            
            1,211,748**Cash
                and cash equivalents at end of the period**
            
            $
            21,936
            
            $
            73,495**Supplemental
                disclosures of cash flow information**Interest
                paid
            
            $
            5,263
            
            $
            5,253**Non
                cash investing and financing activity**Imputed
                dividend on extension of warrants
            
            $
            8,325
            
            $
            88,950Conversion
                of Series G preferred stock to common stock
            
            $
            -
            
            $
            40,000




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


F-6


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements





**1.**
            **Organization
                and Significant Accounting
                Policies**




**Organization
      and business activities**





Protein
      Polymer Technologies, Inc. (the “Company”) is a biotechnology company focused on
      the design, clinical development, and commercialization of genetically
      engineered protein polymers for a variety of biomedical and specialty materials
      applications. The Company was incorporated in Delaware on July 6,
      1988.





**Going
      Concern and Liquidity**





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. For the year ended December 31, 2007, the
      Company incurred a net loss of approximately $3,252,000 and at December 31,
      2007, the Company had a working capital deficit of approximately $7,862,000.
      Our
      cash and cash equivalents as of December 31, 2007 were approximately $22,000
      and, in combination with anticipated additional contract and license payments,
      are insufficient to meet our on-going capital requirements.





Since
      April 2006 the Company has relied primarily on borrowings pursuant to a note
      payable from a related party for capital needed to fund its operations and
      working capital requirements (see Note 6). The maturity of the note reflecting
      these borrowings is September 1, 2008. There is no assurance this maturity
      date
      will be extended if required by the Company. As of the end of September 2007
      additional borrowings under the Company’s existing debt financing provided by a
      related party are unavailable and the lender continues to hold essentially
      all
      of the Company’s assets as collateral.





Since
      September 27, 2007, required operating capital has been obtained through
      proceeds totaling $570,000 from sales of common stock pursuant to a Stock
      Purchase Agreement entered into on that date. See Notes 8 and 13.





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





**Cash
      and Cash Equivalents**





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




F-7


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (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.





**Stock-Based
      Compensation**





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





Under
      the
      modified prospective approach, SFAS No. 123R applies to new awards and to awards
      that were outstanding on January 1, 2006 that are subsequently modified,
      repurchased or cancelled. Under the modified prospective approach, compensation
      cost recognized during the years ended December 31, 2007 and 2006, includes
      compensation cost for all share-based payments granted prior to, but not yet
      vested on, January 1, 2006, based on the grant-date fair value estimated in
      accordance with the pro forma provisions of SFAS No. 123, *Share-Based
      Payment* (“SFAS
      No. 123”), and compensation cost for all share-based payments granted subsequent
      to January 1, 2006, based on the grant-date fair value estimated in accordance
      with the provisions of SFAS No. 123R. Periods prior to January 1, 2006 were
      not
      restated to reflect the impact of adopting the new standard.




F-8


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**Fair
      Value Measurement**





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





**Investments**





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




**Net
      Loss per Common Share**





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





Excluded
      from diluted loss per common share as of December 31, 2007 and 2006 were
      41,214,734 and 19,730,678 shares, respectively, issuable upon conversion of
      convertible preferred stock, and options and warrants to purchase 33,268,706
      and
      29,633,076 shares of common stock, respectively, because the effect would be
      anti-dilutive.  For purposes of this calculation, net loss in 2007 and 2006
      has been adjusted for imputed, accumulated and/or paid dividends on the
      preferred stock.





**Use
      of Estimates**





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




F-9


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**Revenue
      Concentration**





During
      the year ended December 31, 2007, the Company had contract research agreements
      with four customers that accounted for 35%; 24%; 17%; and 16% of the contract
      research revenues, respectively, earned by the Company. During the year ended
      December 31, 2006, the Company had contract research agreements with two
      customers that accounted for 81% and 19% of the contract research revenues,
      respectively, earned by the Company and one customer that accounted for 100%
      of
      the product sales earned by the Company.




**Income
      Taxes**





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





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





**Reclassification**





Certain
      reclassifications have been made to the financial statements of the prior year
      in order to conform to the current year presentation. These reclassifications
      had no effect on previously reported results of operations or accumulated
      deficit.





**Recently** I **ssued
      Accounting Pronouncements**





In
      February 2006, the Financial Accounting Standards Board (“FASB”) released
      Statement of Financial Accounting Standard (“SFAS”) No.  155, *Accounting
      for Certain Hybrid Financial Instruments,* ("SFAS No. 155"). SFAS No. 155 is an amendment of SFAS No.  133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and
      SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* .
      SFAS No. 155 establishes, among other items, the accounting for certain
      derivative instruments embedded within other types of financial instruments;
      and, eliminates a restriction on the passive derivative instruments that a
      qualifying special-purpose entity may hold. Effective for the Company beginning
      January 1, 2007, SFAS No. 155 did not have an impact on the Company's
      financial position, results of operations or cash flows.





In
      March 2006, the FASB released SFAS No. 156, *Accounting
      for Servicing of Financial Assets, an amendment of SFAS Statement No. 140,* ("SFAS No.
      156"). SFAS No. 156 amends SFAS No. 140 to require that all separately
      recognized servicing assets and liabilities in accordance with SFAS No. 140
      be initially measured at fair value, if practicable. Furthermore, this standard
      permits, but does not require, fair value measurement for separately recognized
      servicing assets and liabilities in subsequent reporting periods. SFAS No.
      156 was also effective for the Company beginning January 1, 2007; however,
      the standard did not have an impact on the Company's financial position, results
      of operation or cash flows.


F-10


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,* (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in tax positions and
      requires that a Company recognize in its financial statements the impact of
      a
      tax position, if that position is more likely than not of being sustained upon
      audit by the relevant taxing authority, based on the technical merits of the
      position. Additionally, FIN 48 provides guidance on derecognition, measurement
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. The provisions of FIN 48 are effective for fiscal
      years beginning after December 15, 2006. The adoption of FIN 48 on January
      1,
      2007 did not have an impact on the Company’s financial position, results of
      operations, or cash flows.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“ SFAS No.
      157”). SFAS No.
      157
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. This Statement focuses on
      creating consistency and comparability in fair value measurements. SFAS No.
      157
      is effective for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. 
      The Company is currently evaluating the impact of adopting SFAS No. 157 on
      our
      financial statements.





In
      September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (“SAB
      108”) to require registrants to quantify financial statement misstatements that
      have been accumulating in their financial statements for years and to correct
      them, if material, without restating. Under the provisions of SAB 108, financial
      statement misstatements are to be quantified and evaluated for materiality
      using
      both balance sheet and income statement approaches. SAB 108 was effective for
      fiscal years ending after November 15, 2006. The adoption of SAB 108 did not
      have a material impact on our financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities—including an
      amendment of FASB Statement No. 115* (“SFAS
      No. 159”), which permits entities to choose to measure many financial
      instruments and certain other items at fair value. The fair value option
      established by this Statement permits all entities to choose to measure eligible
      items at fair value at specified election dates. A business entity shall report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings at each subsequent reporting date. Adoption is required
      for
      fiscal years beginning after November 15, 2007. Early adoption is permitted
      as of the beginning of a fiscal year that begins on or before November 15,
      2007, provided the entity also elects to apply the provisions of SFAS
      No. 159.  The Company is currently evaluating the expected effect of
      SFAS No. 159 on its consolidated financial statements and is currently not
      yet in a position to determine such effects.





In
      December 2007, the FASB issued SFAS No. 141 (revised), *Business
      Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) changes the accounting for business
      combinations including the measurement of acquirer shares issued in
      consideration for a business combination, the recognition of contingent
      consideration, the accounting for pre-acquisition gain and loss contingencies,
      the recognition of capitalized in-process research and development, the
      accounting for acquisition-related restructuring cost accruals, the treatment
      of
      acquisition related transaction costs and the recognition of changes in the
      acquirer’s income tax valuation allowance. The Company is required to adopt SFAS
      No. 141(R) no later than January 1, 2009. The Company has not yet determined
      the
      impact SFAS No. 141(R) may have on its financial position, results of operations
      or cash flows.


F-11


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





In
      December 2007, the FASB issued SFAS No. 160, *Non-controlling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51* (“SFAS No. 160”). SFAS No. 160 changes the accounting for non-controlling
      (minority) interests in consolidated financial statements including the
      requirements to classify non-controlling interests as a component of
      consolidated stockholders’ equity, and the elimination of “minority interest”
accounting in results of operations with earnings attributable to
      non-controlling interests reported as part of consolidated earnings.
      Additionally, SFAS No. 160 revises the accounting for both increases and
      decreases in a parent’s controlling ownership interest. The Company must adopt
      SFAS No. 160 no later than January 1, 2009. The Company has not yet determined
      the impact SFAS No. 160 may have on its financial position, results of
      operations or cash flows.





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities – an amendment of FASB
      Statement No. 133* (“SFAS No. 161”), as amended and interpreted, which requires enhanced
      disclosures about an entity’s derivative and hedging activities and thereby
      improves the transparency of financial reporting. Disclosing the fair values
      of
      derivative instruments and their gains and losses in a tabular format provides
      a
      more complete picture of the location in an entity’s financial statements of
      both the derivative positions existing at period end and the effect of using
      derivatives during the reporting period. Entities are required to provide
      enhanced disclosures about (a) how and why an entity uses derivative
      instruments, (b) how derivative instruments and related hedged items are
      accounted for under Statement 133 and its related interpretations, and (c)
      how
      derivative instruments and related hedged items affect an entity’s financial
      position, financial performance, and cash flows. SFAS No. 161 is effective
      for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008. Early adoption is permitted. The Company does not expect
      SFAS
      No. 161 to have a material impact on its financial statements.





**2.**
            **Equipment
                and Leasehold Improvements**





Equipment
      and leasehold improvements consist approximately of the following:




**December 31,****2007**
            
            **2006**Laboratory
                equipment
            
            $
            1,378,000
            
            $
            1,378,000Office
                equipment
            
            
            220,000
            
            
            220,000Leasehold
                improvements
            
            
            360,000
            
            
            360,0001,958,000
            
            
            1,958,000Less
                accumulated depreciation and amortization
            
            
            (1,830,000
            )
            
            (1,730,000
            )$
            128,000
            
            $
            228,000




Depreciation
      expense was $100,000 and $101,000 for the years ended December 2007 and 2006,
      respectively.





**3.**
            **Rent
                Receivable**




Through
      April 30, 2008, the Company subleased 6,183 square feet of its office and
      research facilities under a month-to-month arrangement for $13,000 per month
      plus utilities. Obligations under the sublease are secured by certain listed
      property and equipment of the sub-lessee. At December 31, 2007 and 2006, rent
      receivable was $-0- and $40,000 respectively, net of an allowance for
      collectibility of $147,000 and $128,000, respectively. As of April 30, 2008,
      rent receivable was $-0-, net of an allowance for collectibility of $205,000.
      See Note 13.


F-12


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**4.**
            **Investment**




In
      April
      2001, the Company entered into agreements with Spine Wave, Inc. (“Spine Wave”)
      to develop and commercialize an injectable protein-based formulation for the
      repair of spinal discs damaged either by injury or aging. As consideration
      for
      entering into an exclusive, worldwide license agreement with Spine Wave, the
      Company received one million shares of common stock in Spine Wave in 2001.
      During 2006 we exercised an option to purchase an additional 1,000,000 shares
      of
      Spine Wave common stock at $0.50 per share. These shares are included in our
      assets at cost of $500,000 at December 31, 2006.





During
      the fourth quarter of 2006 we received 400,000 shares of Spine Wave’s common
      stock pursuant to the agreements. Acquisition of these shares required no funds,
      but we recorded the shares at their stated repurchase price of $20,000, which
      was recognized as a non-monetary gain. Two million of the Spine Wave shares
      owned by the Company serve as collateral for a currently outstanding loan.
      See
      Note 6.





**5.**
            **Accrued
                Liabilities**




Accrued
      liabilities consist approximately of the following:




**December 31,****2007**
            
            **2006**Payroll
                and employee benefits
            
            $
            82,000
            
            $
            94,000Accounting
                and professional fees
            
            
            23,000
            
            
            25,000Accrued
                interest
            
            
            585,000
            
            
            147,000Property
                tax
            
            
            -
            
            
            21,000Insurance
                premium financing
            
            
            22,000
            
            
            39,000Indemnification
                obligation
            
            
            -
            
            
            61,000Directors
                fees
            
            
            60,000
            
            
            -Other
            
            
            22,000
            
            
            45,000$
            794,000
            
            $
            432,000




F-13


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**6.**
            **Secured
                Notes Payable – Related
                Party**





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





Pursuant
      to the terms of the Security Agreement, the Company entered into a patent
      security agreement, an escrow agreement, a patent assignment, and a registration
      rights agreement, each dated as of April 13, 2006. According to the terms of
      the
      Security Agreement, the Company entered into the Escrow Agreement with an escrow
      agent for the shareholder. The Escrow Agreement provides for the disbursement
      of
      the funds held in escrow for application to Company expenses at the sole
      discretion of the shareholder’s designee. The Escrow Agreement terminates upon
      the event that the amount borrowed is paid in full and no event of default
      has
      occurred.





As
      consideration for the Loan, the Company granted a warrant to the shareholder
      to
      purchase an aggregate of 500,000 shares of the Company’s common stock at an
      exercise price of $0.30 per share. The shareholder’s counsel acts as the escrow
      agent and now serves as our outside general counsel.





The
      4/13/06 Note has been amended seven times so that as of December 31, 2007,
      the
      outstanding Principal balance was $5,876,000 and the Maturity Date was January
      10, 2008. At December 31, 2007, the outstanding indebtedness subject to the
      Note
      and Security Agreement was $5,876,000 and accrued interest payable was $528,000.
      In January 2008, the outstanding principal and accrued interest owed pursuant
      to
      the 4/13/06 Note were replaced with a new note payable agreement, and
      the related warrant’s exercise price was reduced to $0.061 per share. See Note
      13.





**7.**
            **Notes
                Payable**




In
      December 2005, in connection with a license agreement with Surgica Corporation,
      the Company assumed several notes payable agreements. The notes bear interest
      at
      rates ranging from 6% to 10%, and mature at various dates through January 2009.
      As of December 31, 2007 the current and long term note balances were $419,000
      and $100,000, respectively. Future maturities on the assumed notes are as
      follows:




**Year Ending**
              **December 31,**
            
            **Notes**
              **Payable**
              **Maturities**2008
            
            419,0002009
            
            100,000Total
                maturities
            
            $
            519,000





Based
      on
      the termination of the license agreement with Surgica in March 2007, and
      Surgica’s subsequent filing for protection under Chapter 7 of the U.S.
      Bankruptcy laws, the Company believes that it will be relieved of its liability
      for the assumed notes payable. However, until a final determination is made
      with
      respect to the disposition of the notes, the Company will continue to carry
      the
      notes on its balance sheet.




F-14


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**8.**
            **Stockholders’
                Deficit**





**Common
      Stock**





On
      September 20, 2007 at the Company’s Annual Meeting of Stockholders the
      stockholders approved amending the Company’s certificate of incorporation to
      increase the number of authorized shares of common stock from 120,000,000 to
      1,000,000,000.





During
      the quarter ended March 31, 2007, the Company issued 400,000 shares of common
      stock valued at $61,067 in connection with the settlement of an indemnification
      agreement accrued by the Company at December 31, 2006.





The
      Company’s Board of Directors agreed to the terms of a Stock Purchase Agreement
      (“SPA”) and a Registration Rights Agreement (“RRA”), each dated as of September
      27, 2007, with TAG Virgin Islands, Inc.(“TAG”), as agent for certain purchasers
      of the Company’s common stock. TAG is a registered investment advisor and
      advises a number of our stockholders, including certain members of our Board
      of
      Directors, in investment decisions, including decisions about whether to invest
      in our stock. Based upon our stock records and data supplied to us by our
      stockholders, we believe that clients of TAG beneficially owned approximately
      55.1% of our common stock, prior to the stock purchases subject to the
      SPA. The SPA essentially provides for the Company selling, from time to
      time, shares of its common stock, par value $0.01, to the purchasers at a
      purchase price determined as the closing price of the stock on sale date. As
      a
      component of the purchase of the common stock, the purchaser also will receive
      a
      warrant to purchase the same number of shares of common stock in the future.
      Each warrant expires in five years from the date of purchase and is exercisable
      at a per share price, subject to certain anti-dilution provisions, equal to
      110%
      of the purchase price paid by the purchase. As of November 28, 2007, the SPA
      was
      amended so that on and after that date the warrants are exercisable at 100%
      of
      the price of the shares that are purchased. The SPA can be terminated at any
      time by TAG. The purchasers have certain registration rights, as provided by
      the
      RRA, to require the Company, at its cost, to file an effective registration
      statement with the Securities and Exchange Commission.





Between
      September 27, 2007 and December 31, 2007, the Company received an aggregate
      of
      $570,000 in subscriptions for the purchase of 5,913,028 shares of common stock
      and 5,913,028 warrants, subject to the terms of the SPA and RRA.


F-15


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**Convertible
      Preferred Stock**





*Series
      D and Series F 10% Cumulative Preferred Stock*





At
      December 31, 2007 and 2006 there were a total of 1,344 shares of Series D 10%
      Cumulative Convertible Preferred Stock (“Series D Stock) and 26,420 shares of
      Series F 10% Cumulative Convertible Preferred Stock (“Series F Stock)
      outstanding. Each share of Series D and F Stock earns a cumulative dividend
      at
      the annual rate of $10 per share, payable if and when declared by the Company’s
      Board of Directors, in the form of cash, common stock or any combination
      thereof. As of December 31, 2007, the accumulated dividends were approximately
      $2,900,000. The Series D and F Stock are convertible into common stock after
      two
      years from the date of issuance at the holder’s option. The conversion price at
      the time of conversion is the lesser of $3.75 or the market price. The Series
      D
      and F Stock are redeemable at the Company’s option after four years from the
      date of issuance. Automatic conversion of all of the Series D and F Stock will
      occur if: (a) the Company completes a public offering of common stock at a
      price
      of $2.50 or higher; or (b) the holders of a majority thereof elect to convert.
      The Company has the option to demand conversion of the Series D and F Stock
      if
      the average market price of its common stock equals or exceeds $5.00 per share
      over a period of twenty business days. The Series D Stock has a liquidation
      preference of $100 per share plus accumulated dividends, which is senior to
      any
      outstanding share of Series F Stock, Series G Convertible Preferred Stock,
      Series H Convertible Preferred Stock or common stock. The Series F Stock has
      a
      liquidation preference of $100 per share plus accumulated dividends, which
      is
      senior to any outstanding share of Series G Convertible Preferred Stock, Series
      H Convertible Preferred Stock or common stock. The Series D and Series F Stock
      have been designated as non-voting stock.





*Series
      G Convertible Preferred Stock*





At
      December 31, 2007 and 2006 there were a total of 11,700 shares of Series G
      Convertible Preferred Stock (“Series G Stock) outstanding. Each share of Series
      G Stock can be converted at any time by the holder into common stock at a price
      of $0.50 per share, subject to certain anti-dilution adjustments. The Series
      G
      Stock is redeemable, in whole or in part at the Company’s option, at any time,
      at a redemption price of $100 per share, provided that the Company has
      sufficient funds available to redeem those shares of Series G Stock being
      redeemed. Automatic conversion of all of the Series G Stock will occur if:
      (a)
      the Company completes a public offering of common stock at a price of $2.50
      or
      higher in which the minimum offering is for at least $10 million; or (b) the
      holders of a majority thereof elect to convert. The Series G Stock has a
      liquidation preference of $100 per share, which is senior to any outstanding
      shares of common stock. Holders of Series G Stock are entitled to receive
      dividends, when and as declared by the Board of Directors, provided however,
      that no such dividends shall be declared or paid on the Series G Stock until
      the
      preferential cumulative dividends on the Series D and Series F Preferred Stock
      have been first fully paid or declared and set apart.




*Series
      H Convertible Preferred Stock*





At
      December 31, 2007 and 2006 there were a total of 12,181 shares of Series H
      Convertible Preferred Stock (“Series H Stock) outstanding. Each share of Series
      H Stock is convertible at any time at the election of the holder into 133.33
      shares of common stock at a conversion price of $0.75 per share, subject to
      certain anti-dilution adjustments. Automatic conversion of all of the Series
      H
      Stock will occur if: (a) the Company completes a public offering of common
      stock
      at a price of $5.00 or higher in which the minimum offering is for at least
      $10
      million; or (b) the holders of a majority thereof elect to convert. The Series
      H
      Stock has a liquidation preference, which is senior to any outstanding Series
      G
      Preferred Stock or common stock, of $100 per share. Holders of Series H Stock
      are entitled to receive dividends, when and as declared by the Board of
      Directors, provided however, that no such dividends shall be declared or paid
      on
      the Series H Stock until the preferential cumulative dividends on the Series
      D
      and Series F Preferred Stock have been first fully paid or declared and set
      apart. The Series H Stock has been designated as non-voting.




F-16


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





*Series
      I Convertible Preferred Stock*





At
      December 31, 2007 and 2006 there were a total of 14,000 shares of Series I
      Convertible Preferred Stock (“Series I Stock) outstanding. 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. Automatic conversion of
      all
      of the Series H Stock will occur if: (a) the Company completes a public offering
      of common stock at a price of $3.00 or higher in which the minimum offering
      is
      for at least $10 million; or (b) the holders of a majority thereof elect to
      convert. The Series I Stock has a liquidation preference, which is senior to
      any
      other outstanding series of preferred stock or common stock, of $100 per share.
      Holders of Series I Stock are entitled to receive dividends, when and as
      declared by the Board of Directors, provided however, that no such dividends
      shall be declared or paid on the Series I Stock until the preferential
      cumulative dividends on the Series D and Series F Preferred Stock have been
      first fully paid or declared and set apart.





**Employee
      Stock Purchase Plan**





In
      September 1996 the Company established the Protein Polymer Technologies, Inc.,
      Employee Stock Purchase Plan (“Plan”). The Plan commenced January 2, 1997, and
      allows for offering periods of up to two years with quarterly purchase dates
      occurring the last business day of each quarter. The purchase price per share
      is
      generally calculated at 85% of the lower of the fair market value on an eligible
      employee’s entry date or the quarterly purchase date. The maximum number of
      shares available for issuance under the Plan is 500,000; an eligible employee
      may purchase up to 5,000 shares per quarter. The Plan Administrator consists
      of
      a committee of at least two non-employee directors of the Company who are
      members of the Compensation Committee. The Company’s Board of Directors may
      modify the Plan at any time. During 2006 a total of 17,796 shares were purchased
      under the Plan at an average price of $0.18. During 2007 no shares were
      purchased under the plan. There are no additional shares available for purchase
      under the Plan.




**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 becomes exercisable ratably over periods of up to three years
      from the date of grant. As of December, 31, 2007, the annual award to each
      Director of 80,000 stock options had not been issued. In addition, the Board
      in
      their annual Proxy Statement dated August 17, 2007 stated its intent to issue
      shares valued at $10,000 each to Messrs. Kuhn and McCarthy as payment for
      outstanding directors fees for 2006. As of December 31, 2007, these shares
      had
      not been issued. The Company’s Compensation Committee administers the 1996 Plan.
      At December 31, 2007, 1,819,950 options to purchase common stock had been
      granted under the 1996 Plan with 1,668,863 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, 2007, options to purchase 7,288,732 shares of common stock had
      been
      granted under the 2002 Plan with 7,245,000 options
      exercisable.


F-17


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (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, 2007, 761,980 options to
      purchase common stock had been granted under the 1992 Plan with 761,980
      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, 2007, 302,500 options to purchase common stock had 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, 2007, 1,324,324
      options to purchase common stock have been granted and all are exercisable.





The
      compensation cost that was charged to expense for these plans was a gain of
      $110,000 and a charge of $1,507,000 for the years ended December 31, 2007 and
      2006, respectively.




The
      fair
      value of each option award is estimated on the date of grant using the Black
      Scholes option valuation model that uses the assumptions noted in the following
      table. Because lattice-based option valuation models incorporate ranges of
      assumptions for inputs, those ranges are disclosed. Expected volatilities are
      based on historical volatility of the Company’s stock No terminations are
      estimated in the model due to lack of historical data. The expected term of
      options granted is derived from the output of the option valuation model and
      represents the period of time that options granted are expected to be
      outstanding; the range given below results from certain groups of employees
      exhibiting different behavior. The risk-free rate for periods within the
      contractual life of the option is based on the U.S. Treasury yield curve in
      effect at the time of grant.





The
      fair
      values of stock options granted in 2006 were estimated using the Black-Scholes
      model. Expected volatility is based on the historical volatilities of the
      Company's common stock. The expected life of employee stock options is
      determined using historical data of employee exercises and represents the period
      of time that stock options are expected to be outstanding. The risk free
      interest rate is based on U.S. Treasury constant maturity for the expected
      life
      of the stock option. The following assumptions were used in the Black-Scholes
      model related to stock option grants in 2006:




**2006**Expected
                volatility
            
            
            90
            %Weighted-average
                volatility
            
            
            90
            %Expected
                dividends
            
            $
            0.00Expected
                term (in years)
            
            
            3.6Risk-free
                interest rate
            
            
            5.1
            %





The
      Company did not grant options during the year ended December 31,
      2007.


F-18


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





Stock
      option activity for the year ended December 31, 2007 and 2006 is as follows:





Options
              Outstanding
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
              (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at December 31, 2005
            
            
            12,638,082
            
            $
            0.72
            
            
            
            
            $
            —Issued
            
            
            330,000
            
            
            0.20
            
            
            
            
            
            —Cancelled
            
            
            (513,500
            )
            
            (1.83
            )
            
            
            
            
            —Exercised
            
            
            -
            
            
            -
            
            
            
            
            
            —Outstanding
                at December 31, 2006
            
            
            12,454,582
            
            
            0.66
            
            
            6.5
            
            
            —Issued
            
            
            -
            
            
            -
            
            
            
            
            
            —Cancelled
            
            
            (957,096
            )
            
            0.52
            
            
            
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            
            
            
            —Outstanding
                at December 31, 2007
            
            
            11,497,486
            
            $
            0.65
            
            
            5.3
            
            
            —Exercisable
                at December 31, 2007
            
            
            11,302,667
            
            $
            0.66
            
            
            5.3
            
            $
            —





**Warrant
      Activity for the Period and Summary of Outstanding Warrants**





The
      Company has reserved for issuance, out of currently authorized and unissued
      shares of common stock, shares underlying outstanding warrants to purchase
      common stock. Upon exercise of the warrants, shares of common stock will be
      issued out of currently authorized and unissued shares.





During
      the year ended December 31, 2005 the Board of Directors approved the issuance
      of
      warrants to purchase an aggregate of 15,582,499 of the Company’s common stock.
      Such warrants are exercisable at prices ranging from $0.37 to $0.67 per share
      and expire at various times through April 2009.





During
      2006 a warrant, which expires on April 2009, to purchase 500,000 shares of
      the
      Company’s common stock at an exercise price of $0.30 per share was issued in
      conjunction with the secured note payable in April 2006 (See Note 6). In January
      2008, the exercise price was reduced to $0.061 (See Note 13).





During
      the last quarter of 2007, the Company granted warrants to purchase an aggregate
      of 5,913,028 of the Company’s common stock pursuant to the terms of a Stock
      Purchase Agreement dated September 27, 2007. Such warrants are exercisable
      at
      prices ranging from $0.15 to $0.06 per share and expire at various times through
      December 2012.





No
      warrants were exercised during 2007.





Warrants
      scheduled to expire on January 31, 2007 for 465,000 shares were extended by
      the
      Board of Directors to January 31, 2008. The Company recorded an imputed dividend
      of approximately $8,000 during the year ended December 31, 2007 to reflect
      additional benefit created for the preferred stockholders in connection
      with the extension.


F-19


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





A
      summary
      of warrant activity for 2007 and 2006 is as follows:




Number
                of
              Warrants
              Outstanding
              and
              Exercisable
            
            Weighted-
              Average
              Exercise
              PriceOutstanding,
                December 31, 2005
            
            
            16,678,494
            
            $
            0.56Granted
            
            
            500,000
            
            $
            0.25Exercised
            
            
            —
            
            $
            —Expired
            
            
            —
            
            $
            —Outstanding,
                December 31, 2006
            
            
            17,178,494
            
            $
            0.55Granted
            
            
            5,913,028
            
            $
            0.10Exercised
            
            
            —
            
            $
            —Expired
            
            
            1,320,302
            
            $
            0.92Outstanding,
                December 31, 2007
            
            
            21,771,220
            
            $
            0.41




At
      December 31, 2007, the weighted-average remaining contractual life of the
      warrants was approximately 2.2 years.





**9.**
            **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-20


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)




**10.**
            **Commitments
                and Contingencies**




**Lease
      Agreement**





The
      Company leased its office and research facilities totaling 27,000 square feet
      under an operating lease, which expired on April 30, 2008. The facilities lease
      was 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 provided for deferred rent payments;
      however, for financial purposes rent expense is recorded on a straight-line
      basis over the term of the lease. Accordingly, deferred rent in the accompanying
      balance sheet represents the difference between rent expense accrued and amounts
      paid under the lease agreement.





Annual
      future minimum operating lease payments are as follows:




**Year
                Ending**
              **December
                31,**
            
            **Operating**
              **Leases**2008
            
            $
            228,000Total
                minimum operating lease payments
            
            $
            228,000




Through
      April 30, 2008, the Company subleased 6,183 square feet of its office and
      research facilities under a month-to-month arrangement for $13,000 per month
      plus utilities. Rent expense, net of sublease income, was approximately
      $527,000 and $446,000 for the years ended December 31, 2007 and 2006,
      respectively. Rental income was approximately $145,000 and $157,000 for the
      years ended December 31, 2007 and 2006, respectively. See Note 13.





**Agreements
      with Surgica Corporation**




***Technology
      License Agreement***





The
      Company entered into a technology license agreement with Surgica Corporation
      in
      December 2005 (“Technology License Agreement”) pursuant to which the Company
      obtained exclusive marketing and distribution rights to Surgica’s products. The
      Company recorded impairment charges at December 31, 2006 related to the
      capitalized costs of the Technology License Agreement and notes receivable
      entered into in connection with the Surgica Agreements of $1,046,503 and
      $257,133, respectively, in order to reduce the carrying value of these assets
      to
      $-0- as of December 31, 2006.




***Supply
      and Services Agreement***




In
      March
      2007, the Company received notification from Surgica’s legal counsel alleging
      that the Company had breached the Technology License Agreement and the Supply
      Agreement, and based thereon, Surgica was terminating these agreements. The
      Company does not believe it has breached these agreements. Subsequently, Surgica
      filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy laws.
      At
      this time, the final discharge has not been received but court documents dated
      August 22, 2007 indicate that the bankruptcy will be considered a ‘no asset’
case, thus no recovery is anticipated.




***Notes
      Payable***





See
      Note
      7.


F-21


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**Other
      Collaborative Development and License Agreements**




***Spine
      Wave, Inc.***





In
      April
      2001, the Company entered into agreements with Spine Wave, Inc. to develop
      and
      commercialize an injectable protein-based formulation for the repair of spinal
      discs damaged either by injury or aging. As consideration for entering into
      an
      exclusive, worldwide license agreement with Spine Wave, the Company received
      one
      million shares of the founding common stock in Spine Wave. 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.





The
      Company’s contractual research and development relationship with Spine Wave
      offered the Company additional equity incentives (March, 2002) in the form
      of
      Spine Wave common stock and warrants. For the years ended December 31, 2007
      and
      2006 the Company received $50,000 and $433,000, respectively, in revenue
      from Spine Wave which represents the reimbursement of direct costs plus overhead
      costs allocated to the research and development resources used in performing
      collaborative activities.





The
      additional equity incentives offered in conjunction with the supply and services
      agreement of March 17, 2002 consist of a four year warrant, which was exercised
      in 2006, 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 which was valued
      at
      $20,000 when issued.





***Genencor
      International, Inc.*** In
      December 2000, the Company signed a broad-based, worldwide, exclusive license
      agreement with Genencor International, Inc. (“Genencor”) enabling Genencor to
      potentially develop a variety of new products for industrial markets. In October
      2002, the license agreement was amended to provide Genencor with an additional
      one-year option to initiate development of products in the field of non-medical
      personal care. In March 2005, the license was amended to fully incorporate
      the
      field of personal care products into the license. As a result of the agreements,
      Genencor may use our patented protein polymer design and production technology,
      in combination with Genencor's extensive gene expression, protein design, and
      large-scale manufacturing technology, to design and develop new products with
      improved performance properties for defined industrial fields and the field
      of
      non-medical personal care products.





In
      return
      for the licensed rights, Genencor paid the Company an up-front license fee
      of
      $750,000, and will pay royalties on the sale of any products commercialized
      by
      Genencor under the agreement. The licensed technology was transferred to
      Genencor upon execution of the license agreement without any further product
      development obligation on our part. Future royalties on the net sales of
      products incorporating the technology under license and developed by Genencor
      will be calculated based on a royalty rate to be determined at a later date.
      In
      addition, we are entitled to receive up to $5 million in milestone payments
      associated with Genencor’s achievement of various industrial product development
      milestones incorporating the licensed technology. To date, the Company has
      received two license milestone payments from Genencor for Genencor’s initiation
      of a product development project based on technology licensed from us.





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


F-22


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**11.**
            **Income
                Taxes**




In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,* (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in tax positions and
      requires that a Company recognize in its financial statements the impact of
      a
      tax position, if that position is more likely than not of being sustained upon
      audit by the relevant taxing authority, based on the technical merits of the
      position. Additionally, FIN 48 provides guidance on derecognition, measurement
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. The provisions of FIN 48 are effective for fiscal
      years beginning after December 15, 2006.





The
      Company adopted the provisions of FIN 48 on January 1, 2007, and commenced
      analyzing filing positions in all of the federal and state jurisdictions where
      it was required to file income tax returns, as well as all open tax years in
      these jurisdictions.  As a result of adoption, the Company has recorded no
      additional tax liability.





As
      of
      December 31, 2007, the Company has not yet completed its analysis of the
      deferred tax assets for net operating losses of $17.7 million and research
      and
      development credits of $3.0 million generated in years prior to 2007, and net
      operating losses of $1.5 million and research and development credits of
      $116,000 generated in 2007.   As such, these amounts and the
      offsetting valuation allowance have been removed from the Company’s deferred tax
      assets.





Due
      to
      the existence of the valuation allowance, future changes in our unrecognized
      tax
      benefits will not impact the Company’s effective tax rate.





The
      Company is subject to taxation in the U.S. and state jurisdictions. The
      Company’s tax years for 2002 and forward are subject to examination by the U.S.
      and California tax authorities due to the carry-forward of unutilized net
      operating losses and research and development credits. The Company is currently
      not under examination by any taxing authorities.





The
      Company’s practice is to recognize interest and/or penalties related to income
      tax matters in income tax expense. During the twelve months ended December
      31,
      2007, the Company did not recognize any interest or penalties. Upon adoption
      of
      FIN 48 on January 1, 2007, the Company did not record any interest or
      penalties.





The
      adoption of FIN 48 did not impact the Company’s financial condition, results of
      operations or cash flows.  At December 31, 2007, the Company had net
      deferred tax assets of $1.8 million. The Company’s deferred tax assets are
      primarily composed of stock-based compensation/warrants expense, impairment
      of
      licenses, and basis differences in fixed assets. Due to uncertainties
      surrounding the Company’s ability to generate future taxable income to realize
      these assets, a full valuation has been established to offset the net deferred
      tax asset. Additionally, the future utilization of the company’s net operating
      loss to offset future taxable income may be subject to an annual limitation,
      pursuant to Internal Revenue Code Section 382, as a result of ownership changes
      that may have occurred previously or that could occur in the future.  The
      Company has not yet determined whether such an ownership change has occurred.
      Additionally, the Company has not performed a comprehensive review of the
      components of its research and development credit. Until this analysis and
      review have been completed, the Company has removed the deferred tax assets
      associated with these carry-forwards from its deferred tax asset schedule and
      has recorded a corresponding decrease to its valuation allowance. Once the
      appropriate analysis and review of these matters are completed, the Company
      plans to update its unrecognized tax benefits under FIN 48. At this time,
      the Company cannot estimate how much the unrecognized tax benefit may change,
      if
      any.


F-23


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





Significant
      components of the Company’s deferred tax assets as of December 31, 2007 and 2006
      are shown below. A valuation allowance of $1,819,000 and $22,440,000 has been
      recognized to offset the deferred tax assets as of December 31, 2007 and 2006,
      respectively, as realization of such assets is uncertain.





**2007**
            
            **2006**Deferred
                tax assets:Net
                operating loss carry-forwards
            
            $
            -
            
            $
            17,688,000Federal
                & state tax credits
            
            
            -
            
            
            2,807,000Allowances
            
            
            161,000
            
            
            145,800Stock-based
                compensation/warrants
            
            
            509,000
            
            
            615,400Amortization/impairment
                of license
            
            
            334,000
            
            
            360,000Basis
                difference fixed assets
            
            
            790,000
            
            
            783,000Other,
                net
            
            
            25,000
            
            
            40,800Total
                deferred tax assets
            
            
            1,819,000
            
            
            22,440,000Valuation
                allowance for deferred tax assets
            
            
            (1,819,000
            )
            
            (22,440,000
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





The
      provision for income tax on earnings subject to income taxes differs from the
      statutory federal income tax rate at December 31, 2007 and 2006, due to the
      following:





**2007**
            
            **2006**Expected
                federal income tax benefit
            
            $
            (1,105,900
            )
            $
            (2,690,000
            )Expected
                state income tax benefit, net of federal benefit
            
            
            (181,600
            )
            
            (462,000
            )Decrease
                in valuation allowance
            
            
            171,500
            
            
            2,114,000Expiration
                of net operating losses & credits
            
            
            1,069,100
            
            
            699,000Stock
                options
            
            
            53,900
            
            
            491,000Business
                credits
            
            
            -
            
            
            (204,000
            )Other
            
            
            (7,000
            )
            
            52,000Provision
                for income taxes
            
            $
            -
            
            $
            -





(1)
      The
      removal of the valuation allowance related to the net operating losses and
      research and development credits is not included in the increase in the
      valuation allowance. See above for explanation.





At
      December 31, 2007, the Company had federal and California tax net operating
      loss carry-forwards of approximately $49.5 million and $21.7 million,
      respectively.  The federal and California tax loss carry-forwards will
      begin to expire in 2008 and 2012, respectively, unless previously
      utilized.





The
      Company also had federal and California research and development tax credit
      carry-forwards of approximately $2.0 million and $1.2 million, respectively.
      The
      federal credit carry-forward will begin to expire in 2008 unless previously
      utilized. The Company also has California Manufacturers’ Investment Credit
      carry-forward of approximately $62,000. The California credits do not
      expire.




Pursuant
      to Internal Revenue Code Sections 382 and 383, use of the Company’s net
      operating loss carry-forwards may be limited if a cumulative change in ownership
      of more than 50% occurs within a three-year period.


F-24


Protein
      Polymer Technologies, Inc.


Notes
      to
      Financial Statements (Continued)





**12.**
            **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. During the year ended December 31, 2007, and 2006, the
      Company did not make a contribution to the 401(k) Savings Plan.





**13.**
            **Subsequent
                Events**





Between
      January 1, 2008 and April 30, 2008, the Company received proceeds of $1,120,000
      for the purchase of 21,162,221 shares of common stock and 21,162,221 warrants
      pursuant to the stock purchase agreement dated September 27, 2007.





As
      of
      January 9, 2008, the Company replaced the 4/13/06 Note discussed in Note 6
      by
      issuing a new note (the “1/09/08 Note”) in the principal amount of $6,415,000.
      This amount included the then $5,876,000 outstanding balance plus the then
      outstanding $539,000 of accrued interest on the 4/13/06 Note. The 1/09/08 Note
      bears annual interest at the rate 8%, the same as did the 4/13/06 Note, and
      matures on September 1, 2008. The 1/9/08 Note is secured in the same manner
      as
      was the 4/13/06 Note. As consideration for the lender agreeing to accept the
      1/09/08 Note as payment for the 4/13/06 Note, the Company issued the lender
      three-year warrants to purchase an aggregate of 2,438,000 shares of the
      Company’s common stock at $0.061 per share and lowered the exercise price of the
      4/13/06 Warrant from $0.30 per share to $0.061 per share.





Additional
      developments during the period January 1, 2008 through April 30, 2008 include
      the following:





·
            Our
                facilities lease had expired. We are currently exploring arrangements
                to
                relocate our administrative offices and outsource our laboratory
                and
                production facilities. In the interim, we will continue to occupy
                our
                current facilities on a month-to-month
                basis.





·
            We
                had reduced staff to two full-time employees, both of whom hold Ph.D.
                degrees.





·
            Our
                sub-lessee owed us approximately $205,000 for accrued unpaid rent,
                and we
                had delivered notice to the Sublessee to pay the unpaid rent within
                3 days
                or quit the premises.




F-25





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


None.




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


**Evaluation
      of Disclosure Controls**





As
      of
      December 31, 2007, Company management, with the participation of the Company's
      Interim Chief Executive Officer and Interim Principal Financial Officer,
      evaluated the effectiveness of the Company's disclosure controls and procedures
      as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as
      amended (the “Exchange Act”). Based on this evaluation, the Company's Interim
      Chief Executive Officer and Interim Principal Financial Officer, who is the
      same
      person, concluded that as of December 31, 2007, the Company's disclosure
      controls and procedures were not effective for the purposes of recording,
      processing, summarizing and timely reporting of material information relating
      to
      the Company required to be included in its periodic reports.





For
      the
      reasons discussed in “Management’s Report on Internal Control over Financial
      Reporting” below, Company management, including the Interim Chief Executive
      Officer and Interim Principal Financial Officer concluded that, as of
      December 31, 2007, the Company’s internal control over financial reporting
      was not effective due to material weaknesses in internal control.
      Notwithstanding the identified control deficiencies, Management has concluded
      that the consolidated financial statements included in this annual report
      present fairly, in all material respects, the Company’s financial position,
      results of operations, and cash flows for the periods presented in conformity
      with accounting principles generally accepted in the United States.





**Changes
      in Internal Control over Financial Reporting**





Other
      than the changes described in “Management's Report on Internal Control Over
      Financial Reporting” below, there were no changes in the Company’s internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Exchange Act) that occurred during the quarter ended December 31, 2007, that
      have materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.





**Management’s
      Report on Internal Control Over Financial Reporting**





Company
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rule 13a-15(f) under the
      Securities Exchange Act of 1934. The Company’s internal control over financial
      reporting is designed to provide reasonable assurance to the Company’s
      management and Board of Directors regarding the reliability of financial
      reporting and the preparation and fair presentation of financial statements
      for
      external purposes in accordance with generally accepted accounting
      principles.





A
      Company’s internal control over financial reporting includes those policies and
      procedures that (i) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the company; (ii) provide reasonable assurance that transactions
      are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the company are being made only in accordance with
      authorizations of management and directors of the company; and (iii) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the company’s assets that could have a
      material effect on the financial statements.




25


The
      effectiveness of any system of internal control over financial reporting is
      subject to inherent limitations, including the exercise of judgment in
      designing, implementing, operating and evaluating the controls and procedures.
      Because of these inherent limitations, internal control over financial reporting
      cannot provide absolute assurance regarding the reliability of financial
      reporting and may not prevent or detect misstatements. Also, projections of
      any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may
      deteriorate.




Company
      management, with the participation of the Interim Chief Executive Officer and
      the Interim Principal Financial Officer, assessed the effectiveness of the
      Company’s internal control over financial reporting as of December 31, 2007. In
      making this assessment, Management used the criteria set forth by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
      Control – Integrated Framework. Based on this assessment, management, with
      the participation of the Interim Chief Executive Officer and Interim Principal
      Financial Officer, believes that, as of December 31, 2007, the Company’s
      internal control over financial reporting was not effective based on those
      criteria.




Specifically,
      Company management identified certain matters involving internal control and
      the
      Company’s operations that it considered to be material weaknesses under the
      standards of the Public Company Accounting Oversight Board (PCAOB),
      including:





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





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


o
            Controls
                over managerial override;


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


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


o
            Controls
                related to risk assessment.





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


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


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


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


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





Company
      management is taking steps to remediate these weaknesses in the Company’s
      internal control environment, including:





·
            Working
                with the Board of Directors to recruit an independent financial expert
                who
                will formalize roles and responsibilities over the Company’s internal
                controls over financial reporting for the Board and Management.


·
            Implementing
                a formal process to manage its internal controls over financial reporting
                as part of its efforts to become compliant with Section 404 of the
                Sarbanes-Oxley Act. Management has retained the services of a third-party
                consulting firm to assist Company management with compliance with
                Section
                404 of the Sarbanes-Oxley Act of 2002 (SOX);
                and


·
            Retaining
                the services of a third-party consulting firm with sufficient expertise
                to
                assist Company management with:


26




o
            Overseeing
              the daily accounting function, including cash receipts and disbursements,
              billing, payroll, and month-end bookkeeping
              processes; o
            Identifying
                and resolving non-routine or complex accounting
                matters;


o
            Controlling
                period-end financial closing and reporting processes;
                and


o
            Identifying,
                assessing, and applying accounting
                principles.


o
            Formalizing
                its accounting policies and procedures, including defined roles and
                responsibilities and required managerial reviews and
                approvals,





Company
      management will continue to monitor and evaluate the effectiveness of our
      disclosure controls and procedures and our internal controls over financial
      reporting on an ongoing basis and are committed to taking further action and
      implementing additional improvements, as necessary and as funds
      allow.





Note:
      This 10-K does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management’s report
      in this 10-KSB.





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


None





**PART
      III**




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




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





The
      following documents are included or incorporated by reference:





Exhibit Number
            
            Description3.1.1
                (1)
            
            Certificate
                of Incorporation of the Company, as amended through September 30,
                1995.3.1.2
                (26)
            
            Amendment
                to the Certificate of Incorporation, dated September 20,
                2007.3.2
                (2)
            
            Bylaws
                of the Company, as amended through December 31, 1998.4.1
                (26)
            
            Registration
                Rights Agreement between the Company and TAG Virgin Islands, Inc.,
                as
                Agent for the Purchasers named therein, dated as of September 27,
                2007.10.1
                (3)
            
            1989
                Stock Option Plan, together with forms of Incentive Stock Option
                Agreement
                and Nonstatutory Option Agreement.10.2
                (4)
            
            1992
                Stock Option Plan of the Company, together with forms of Incentive
                Stock
                Option Agreement and Nonstatutory Option Agreement.10.3
                (3)
            
            Form
                of Employee’s Proprietary Information and Inventions
                Agreement.10.4
                (3)
            
            Form
                of Consulting Agreement.10.5
                (3)
            
            Form
                of Indemnification Agreement.10.6
                (4)
            
            License
                Agreement, dated as of April 15, 1992, between the Board of Trustees
                of
                the Leland Stanford Junior University and the Company.10.7
                (5)
            
            Securities
                Purchase Agreement related to the sale of the Company’s Series D Preferred
                Stock.


27





10.8
                (6)
            
            1996
                Non-Employee Directors’ Stock Option Plan.10.9
                (7)
            
            Stockholder
                Protection Agreement, dated August 22, 1997, between the Company
                and
                Continental Stock Transfer & Trust Company as rights
                agent.10.10
                (8)
            
            Employee
                Stock Purchase Plan, together with Form of Stock Purchase
                Agreement.10.11
                (9)
            
            Lease,
                with rider and exhibits, dated April 13, 1998, between the Company
                and
                Sycamore/San Diego Investors.10.12
                (10)
            
            First
                Amendment to Stockholder Protection Agreement dated April 24, 1998,
                between the Company and Continental Stock Transfer & Trust Company as
                rights agent.10.13
                (11)
            
            Letter
                of Agreement dated April 13, 1998 between the Company and Johnson
&
                Johnson Development Corporation for the exchange of up to 27,317
                shares of
                Series D Preferred Stock for a like number of shares of Series F
                Preferred
                Stock.10.14
                (12)
            
            Securities
                Purchase Agreement related to the sale of the Company’s Series G
                Convertible Preferred Stock.10.15
                (12)
            
            Second
                Amendment to Stockholder Protection Agreement, dated July 26, 1999
                between
                the Company and Continental Stock Transfer and Trust Company as rights
                agent.10.16
                (13)**
            
            License
                and Development Agreement dated as of January 26, 2000 between the
                Company
                and Prospectivepiercing Limited, to be known as Femcare Urology
                Limited.10.17
                (13)**
            
            Supply
                Agreement dated as of January 26, 2000 between the Company and Femcare
                Urology Limited.10.18
                (13)**
            
            Escrow
                Agreement dated as of January 26, 2000 between the Company and Femcare
                Urology Limited.10.19
                (13)
            
            License
                Agreement dated as of February 18, 2000 between the Company and Sanyo
                Chemical Industries, Ltd.10.20
                (14)**
            
            License
                Agreement dated December 21, 2000 between the Company and Genencor
                International, Inc.10.21
                (14)
            
            Form
                of Warrant to Purchase Common Stock issued in connection with License
                Agreement between the Company and Genencor International,
                Inc.10.22
                (15)
            
            Securities
                Purchase Agreement related to the sale of the Company’s Series H Preferred
                Stock.10.23
                (17)**
            
            Founder
                Stock Purchase Agreement dated April 12, 2001 between the Company
                and
                Spine Wave Inc.10.24
                (17)**
            
            License
                Agreement dated April 12, 2001 between the Company and Spine Wave,
                Inc.10.25
                (17)**
            
            Escrow
                Agreement dated April 12, 2001 between the Company and Spine Wave,
                Inc.10.26
                (17)**
            
            Supply
                and Services Agreement dated April 12, 2001 between the Company and
                Spine
                Wave, Inc.10.27
                (18)**
            
            Amendment
                No. 1 to Supply and Services Agreement dated February 12, 2002 between
                the
                Company and Spine Wave, Inc.10.28
                (18)**
            
            Stock
                Purchase and Vesting Agreement dated March 21, 2002 between the Company
                and Spine Wave, Inc.10.29
                (16)
            
            Warrant
                to Purchase Shares of Common Stock of Spine Wave, Inc. issued to
                the
                Company.




28





10.30
                (19)
            First
                Amendment to the License Agreement dated October 1, 2002 between
                the
                Company and Genencor International, Inc.10.31
                (19)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                J.
                Thomas Parmeter.10.32
                (19)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                John E.
                Flowers.10.33
                (19)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                Joseph
                Cappello.10.34
                (19)
            Employment
                Agreement, dated as of December 31, 2002, between the Company and
                Franco
                A. Ferrari.10.35
                (20)
            2002
                Stock Option Plan, and forms of Incentive Stock Option Agreement
                and
                Non-Statutory Stock Option Agreement.10.36
                (21)**
            Amendment
                No. 2 to Supply and Services Agreement dated October 1, 2003 between
                the
                Company and Spine Wave, Inc.10.37
                (22)
            Securities
                Purchase Agreement, dated as of March 31, 2005, by and among the
                Company
                and certain investors.10.38
                (22)
            Form
                of Warrant to Purchase Shares of Common Stock of the Company in connection
                with Securities Purchase Agreement dated as of March 31,
                2005.10.39
                (23)
            Form
                of Warrant to Purchase Shares of Common Stock of the Company issued
                to
                William N. Plamondon, III.10.44
                (24)
            Irrevocable
                Proxy, dated as of November 23, 2005, executed by Louis R. Matson
                in favor
                of the Company.10.40
                (25)**
            Asset
                Purchase Option Agreement, dated as of November 23, 2005, by and
                between
                the Company and Surgica Corporation.10.41
                (25)**
            License
                Agreement, dated as of December 19, 2005, between the Company and
                Surgica
                Corporation.10.42
                (25)**
            Supply
                and Services Agreement, dated as of December 19, 2005, between the
                Company
                and Surgica Corporation.10.43
                (25)**
            Voting
                Agreement, dated as of November 23, 2005, between the Company and
                Louis R.
                Matson.10.44
                (26)
            Common
                Stock Purchase Agreement between the Company and TAG Virgin Islands,
                Inc.,
                as Agent for the Purchasers named therein, dated as of September
                27,
                2007.10.45
                (26)
            Amendment
                No. 7 to Secured Promissory Note issued to Matthew J. Szulik, dated
                November 10, 2007.10.46
            Amendment
                1 to the Common Stock Purchase Agreement between the Company and
                TAG
                Virgin Islands, Inc., as Agent for the Purchasers named therein,
                dated as
                of November 28, 2007.10.47
            Secured
                Promissory Note Replacement Agreement, dated as of January 9, 2008,
                between the Company and Matthew J. Szulik.10.48
            Secured
                Promissory Note issued to Matthew J. Szulik, dated as of January
                9,
                2008.10.49
            Form
                of Warrant to Purchase Shares of Common Stock of the Company in connection
                with the Secured Promissory Note issued to Matthew J. Szulik, dated
                as of
                January 9. 2008.14.1
                (27)
            Code
                of Conduct.




29





31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Principal Financial Officer pursuant to Securities Exchange Act
                Rules
                13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
                as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of
                2002.








(1)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 1995, SEC File No. 000-19724, as filed with the Commission
                on October 25, 1995.





(2)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1998, as filed with the Commission on March 5,
                1999.





(3)
            Incorporated
                by reference to the Company's Registration Statement on Form S-1
                (No.
                33-43875), SEC File No. 033-43875, filed with the Commission on November
                12, 1991, as amended by Amendments Nos. 1, File No. 033-43875, 2,
                SEC File
                No. 033-43875, 3, SEC File No. 033-43875, and 4, SEC File No. 033-43875,
                thereto filed on November 25, 1991, December 23, 1991, January 17,
                1992
                and January 21, 1992, respectively.





(4)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1992, SEC File No. 000-19724, as filed with the
                Commission on March 31, 1993.





(5)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 1995, SEC File No. 000-19724, as filed with the Commission
                on October 25, 1995.





(6)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1996, SEC File No. 000-19724, as filed with the
                Commission on March 27, 1997.





(7)
            Incorporated
                by reference to Registrant’s Current Report on Form 8-K, SEC File No.
                000-19724, as filed with the Commission on August 27,
                1997.





(8)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1997, SEC File No. 000-19724, as filed with the
                Commission on April 15, 1998.





(9)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                March 31, 1998, SEC File No. 000-19724, as filed with the Commission
                on
                May 15, 1998.





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





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




30





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





(13)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 1999, SEC File No. 000-19724, as filed with the
                Commission on March 24, 2000.





(14)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2000, SEC File No. 000-19724, as filed with the
                Commission on February 22, 2001.





(15)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 2001, SEC File No. 000-19724, as filed with the Commission
                on November 14, 2001.





(16)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                September 30, 2002, SEC File No. 000-19724, as filed with the Commission
                on November 13, 2002.





(17)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB/A for the fiscal year
                ended December 31, 2001, SEC File No. 000-19724, as filed with the
                Commission on March 5, 2003.




(18)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB/A for the period ended
                September 30, 2002, SEC File No. 000-19724, as filed with the Commission
                on March 5, 2003.





(19)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2002, SEC File No. 000-19724, as filed with the
                Commission on March 28, 2003.





(20)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the period ended
                March 31, 2003, SEC File No. 000-19724, as filed with the Commission
                on
                May 14, 2003.





(21)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2003, SEC File No. 000-19724, as filed with the
                Commission on March 28, 2003.




(22)
            Incorporated
                by reference to Registrant’s Current Report on Form 8-K, SEC File No.
                000-19724, as filed with the Commission on April 7,
                2005.





(23)
            Incorporated
                by reference to Registrant’s Report on Form 10-QSB for the quarter ended
                June 30, 2005, SEC File No. 000-19724, as filed with the Commission
                on
                August 17, 2005.





(24)
            Incorporated
                by reference to Registrant's Current Report on Form 8-K, SEC File
                No.
                000-19724, as filed with the Commission on December 22,
                2005.





(25)
            Incorporated
                by reference to Registrant's Report on Form 10-KSB for the fiscal
                year
                ended December 31, 2005, SEC File No. 000-19724, as filed with the
                Commission on March 31, 2006.





(26)
            Incorporated
                by reference to Registrant's Report on Form 10-QSB for the quarter
                ended
                September 30, 2007, SEC File No. 000-19724, as filed with the Commission
                on November 19, 2007.




31





(27)
            Incorporated
                by reference to Registrant’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2004, SEC File No. 000-19724, as filed with the
                Commission on March 31, 2005.





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




32


**SIGNATURES**




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


PROTEIN
                  POLYMER TECHNOLOGIES, INC.May
                  12, 2008
              By:
              /S/ JAMES B. MCCARTHYJames
                  B. McCarthyInterim
                  Chief Executive Officer




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




Signature
            
            Capacity
            
            Date/S/
                JAMES B. MCCARTHY
              James
                B. McCarthy
            
            Interim
                Chief Executive Officer
              and
                Interim Principal Financial Officer
            
            May
                12, 2008/S/
                ALLAN FARBER
              Allan
                Farber
            
            Director
            
            May
                12, 2008/S/
                KERRY L. KUHN
              Kerry
                L. Kuhn, M.D.
            
            Director
            
            May
                12, 2008/S/
                RICHARD ADELSON
                Richard
                Adelson
            
            Director
            
            May
                12, 2008





/S/
                WILLIAM N. PLAMONDON III
              William
                N. Plamondon III
            
            Director
            
            May
                12, 2008




33


**EXHIBIT
      INDEX**





10.1.1
            Amendment
                1 to the Common Stock Purchase Agreement between the Company and
                TAG
                Virgin Islands, Inc., as Agent for the Purchasers named therein,
                dated as
                of November 28, 2007.





10.1.2
            Secured
                Promissory Note Replacement Agreement, dated as of January 9, 2008,
                between the Company and Matthew J.
                Szulik.





10.1.3
            Secured
                Promissory Note issued to Matthew J. Szulik, dated as of January
                9,
                2008.





10.1.4
            Form
                of Warrant to Purchase Shares of Common Stock of the Company in connection
                with the Secured Promissory Note issued to Matthew J. Szulik, dated
                as of
                January 9, 2008.





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





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





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





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




34