<PAGE>

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934
     For the fiscal year ended December 31, 1999

                                       OR

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the transition period from ____________________ to ___________________

                         Commission file number 0-19724

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

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


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

                    Issuer's Telephone Number: (619) 558-6064

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

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


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes  [X]   No   [_]

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

The issuer's revenues for the most recent fiscal year were $96,000.

The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 22, 2000 was $15,208,769.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 22, 2000, 18,286,510
shares of common stock were outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE:

Definitive Proxy Statement to be filed no later than April 7, 2000 pursuant to
Regulation 14A with respect to the Registrant's 2000 Annual Meeting of
Stockholders (incorporated by reference in Part III).

Transitional Small Business Disclosure Format:    Yes [_]   No [X]

================================================================================
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                       PROTEIN POLYMER TECHNOLOGIES, INC.

                                   FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                TABLE OF CONTENTS




                                                                        Page No.
                                                                        --------


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

     Item 1.    Business..................................................    2

     Item 2.    Properties................................................   18

     Item 3.    Legal Proceedings.........................................   19

     Item 4.    Submission of Matters to a Vote of Security Holders.......   19


PART II...................................................................   20

     Item 5.    Market for Registrant's Common Equity and Related
                Stockholder Matters.......................................   20

     Item 6.    Management's Discussion and Analysis of Financial
                Condition and Results of Operations.......................   24

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

     Item 8.    Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure....................   29


PART III..................................................................   29

     Items 9, 10, 11 and 12 - Incorporated by Reference

     Item 13.   Financial Statements, Exhibits and Reports
                on Form 8-K..............................................   29

     Signatures .........................................................   35

                                       1
<PAGE>

                                     PART I


ITEM 1.  BUSINESS


COMPANY BACKGROUND

         Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or
"the Company"), is a development-stage biotechnology company incorporated on
July 6, 1988 and is engaged in the research, development, production and
clinical testing of medical products based on its proprietary protein-based
biomaterials technology. Since 1992, the Company has focused primarily on
developing materials technology and products to be used in the surgical repair
of tissue: surgical adhesives and sealants; soft tissue augmentation products;
wound healing matrices; drug delivery devices; and surgical adhesion barriers.
The Company has also developed coating technology that can efficiently modify
and improve the surface properties of more traditional biomedical devices. A
common goal is to develop materials that beneficially interact with human cells,
enabling cell growth and the regeneration of tissues with improved outcomes as
compared to current products and practices.

         In December 1999, the Company initiated human clinical testing of its
urethral bulking agent for the treatment of female stress urinary incontinence.
The August 1999 approval by the U.S. Food and Drug Administration ("FDA") of the
Company's Investigational Device Exemption ("IDE") allows PPTI to test the
safety and effectiveness of the incontinence product in women over the age of 40
who have become incontinent due to the shifting of their bladder or the
weakening of the muscle at its base that controls the flow of urine, or both
problems combined. The Company estimates that more than 2.5 million women begin
to experience stress urinary incontinence in the United States each year. In
most untreated cases, the problem becomes progressively more pronounced. Due to
limited efficacy or invasiveness of current treatments, only a small proportion
of the women experiencing stress urinary incontinence are clinically treated,
relying instead on pads and plugs and the like that only address the symptoms.
In contrast, PPTI's product is injected, typically in an out patient procedure,
into urethral tissue at the base of the bladder forming a solid implant that
provides support to the muscles controlling the flow of urine. The Company
believes that its product will prove to be easy for the physician to use, offer
enduring effectiveness, and avoid most of the other limitations of urethral
bulking products on the market or in development.

         The tissue augmentation materials and technology underlying the
incontinence product have the potential to be effective and desirable in a
number of other clinical applications. The Company intends to submit an
additional IDE to the FDA in 2000 to obtain approval to begin human clinical
testing of its dermal bulking agent for use in cosmetic and reconstructive
surgery applications. PPTI began studies to identify its most promising
biomaterial formulations for use in these soft tissue augmentation products in
1996, devoted increasing resources through 1997 and 1998, and has primarily
focused on this program area in 1999 in preparation for human clinical testing.

                                       2
<PAGE>

         In January 2000, PPTI established a strategic alliance with Femcare,
Ltd. ("Femcare") for the commercialization of the incontinence product in Europe
and Australia. In the agreement, Femcare is responsible for clinical testing,
regulatory approval, and product sales and marketing within these territories,
and PPTI is responsible for product manufacturing. Contingent on successful
clinical trials commercialization of the product in Europe is expected to begin
more than a year before approval for marketing the product in the United States
can be obtained. PPTI also is in discussions with several companies regarding
the establishment of strategic alliances for commercializing the incontinence
product in the United States and other markets outside the Femcare territories.

         Between 1994 and 1997, the Company's efforts were focused predominantly
on the development of its surgical adhesive and sealant technology. As part of
this effort, the Company targeted the establishment of a strategic alliance with
a market leader in the field of surgical wound closure products which lead to
the execution of comprehensive license, supply and development agreements in
September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). Ethicon elected to terminate these agreements in
December 1997.

         The Company has demonstrated both the adhesive performance and the
biocompatibility of its product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. PPTI is committed to the commercial development of its adhesive and
sealant technology. Subsequent to the termination of the Ethicon agreement, the
Company has worked to determine the most significant market and product
opportunities for its use. PPTI is seeking to establish new strategic alliances
with leaders in those markets.

         To the extent sufficient resources are available, the Company continues
to research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.

         Through 1999, PPTI marketed specialty use products for in vitro cell
                                                                --------
culture applications including SmartPlastic(R) and ProNectin(R) F Cell
Attachment Factor. ProNectin F was launched commercially in 1991. SmartPlastic
is ProNectin F Activated Cultureware where ProNectin F is presented in ready to
use form on the surfaces of disposable plastic labware for culturing human and
animal cells. SmartPlastic was launched commercially in 1995. In 1998 the
Company discontinued direct sales of its cell culture products, and in February
2000, the Company sold all rights to the use of the technology for in vitro cell
                                                                   --------
culture applications, the product trademarks, and remaining inventory to Sanyo
Chemical Industries, Ltd.

         Prior to 1992, the Company's scientists had successfully demonstrated
the ability to create and produce novel protein polymer materials having
important physical, biological and chemical properties. During this period, most
of the Company's efforts were dedicated to supplying E. I. DuPont de Nemours &
Co. ("DuPont") with materials under contract for its proprietary research and
testing purposes.

                                       3
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         In 1992, the Company raised approximately $8.9 million through its
initial public offering of common stock and redeemable warrants. The Company
used a major portion of these proceeds to generate substantive in vitro
                                                               --------
laboratory evidence and in vivo animal test data demonstrating the
                        -------
biocompatibility and performance of its protein polymers and derived
biomaterials, and to establish a materials science group which has developed
important materials modification and fabrication technology.

         In July 1994, the Company raised approximately $2.1 million from the
sale of its unregistered Series C Preferred Stock to private investors. In
September 1995, the Company raised approximately $2.4 million from the sale of
its unregistered Series D Preferred Stock to the same private investors. Also at
this time these investors exchanged all of their holdings of Series C Preferred
Stock and accumulated dividends into Series D Preferred Stock. In January 1997,
the Company raised approximately $4.6 million from a private placement of the
Company's common stock with a number of institutional and accredited investors.

         In April and May 1998, the Company raised approximately $5.4 million
from the private sale of the Company's Series E Convertible Preferred Stock and
warrants to a small group of institutional and accredited investors. In
connection with this transaction, the Company also issued shares of Series F
Convertible Preferred Stock in exchange for the same number of shares of
outstanding Series D Convertible Preferred Stock.

         During April 1999, the Company received approximately $508,000 from the
exercise of redeemable, publicly traded warrants originally issued as part of
PPTI's Initial Public Offering, and during May 1999 the Company received
approximately $416,000 for the conversion of warrants issued in conjunction with
its private placement of Series E Convertible Preferred Stock. In August and
September of 1999, the Company received approximately $2 million, net of costs,
from a private placement of its Series G Convertible Preferred Stock priced at
$100 per share with warrants to purchase an aggregate of 4,200,000 shares of
common stock to a small group of institutional and accredited investors.

         The Company's cash balance as of December 31, 1999 was $156,000. The
Company believes this amount, in combination with approximately $3.4 million in
revenues and receivables obtained in January and February 2000 from licensing
and R&D agreements, and the exercise of common stock warrants issued in
connection with Series G Convertible Preferred Stock, is sufficient to fund its
operations through January 2001. Beyond this fiscal year, we believe there are a
number of alternatives available to meet our continuing capital requirements.
See the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion.

THE COMPANY'S TECHNOLOGY

         PPTI is 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

                                       4
<PAGE>

and living systems is dynamic. It involves the response of the living system to
the materials (e.g., biocompatibility) and the response of the materials to the
living system (e.g., degradation). The requirements for performance within this
demanding biological environment have been a critical factor in limiting the
myriad of possible metal, polymer, and ceramic compositions to a relatively
small number that to date have been proven useful in medical devices.

         The goal of biomaterials development historically has been to produce
inert materials -- materials that elicit little or no response from the living
system. However, the Company believes 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 targeted for development by PPTI 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. The
Company believes that the successful realization of these properties will
substantially expand the role that artificial devices can play in the prevention
and treatment of human disability and disease, and enable the culture of native
tissues for successful reimplantation.

         Through its proprietary core technology, PPTI produces 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. The
Company has demonstrated that its 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 PPTI's polymers have demonstrated excellent
biocompatibility in a variety of preclinical feasibility studies.

         PPTI's 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. The Company's 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, PPTI's technology
results in the creation of new proteins with unique properties. PPTI has
demonstrated its capability to create materials that:

          .    combine properties of different proteins found in nature;

                                       5
<PAGE>

          .    reproduce and amplify selected activities of natural proteins;

          .    eliminate undesired properties of natural proteins; and

          .    incorporate synthetic properties via chemical modifications.

         This capability is fundamental to PPTI's 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. Similar to what
nature has demonstrated to be essential in creating, maintaining and restoring
the body's functions, PPTI's patented core technology enables messages that
direct activities of cells to be precisely formulated and presented in a
structured environment.

FUNDAMENTAL PROTEIN POLYMERS

         PPTI's 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 lungs and arteries, elastin fibers must expand and contract over
a life time, and can be extended nearly three times their resting length without
damaging their flexibility.

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

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

PRODUCT CANDIDATES AND ANTICIPATED MARKETS

         The Company's technology and materials have the potential to create
products and product applications in a variety of medical and specialty use
markets. The Company's current development efforts are principally focused on
preparations for scale-up and validation of manufacturing processes for its
hydrogel bulking agents for soft tissue augmentation. However,

                                       6
<PAGE>

opportunities for research and development of product candidates for other
medical and specialty use continue to be evaluated, particularly those based on
its tissue adhesive and sealant technology.

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

         Soft Tissue Augmentation

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

         Medical applications include the treatment of stress urinary
incontinence, gastroesophageal reflux, and fecal incontinence, the reversible
blockage of fallopian tubes for birth control, the augmentation of vocal chords,
and the expansion of gingival tissues impacted by periodontal disease. PPTI
believes there is a lack of materials with suitable properties for these
applications, primarily because materials having the required durability in vivo
                                                                         -------
either lack the requisite biocompatibility or the ability to be easily injected.

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

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

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

                                       7
<PAGE>

"top off" the bulking effect with repeated administrations of the product over
time, with substantially increased costs.

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

         In August 1999, the Company obtained the FDA's approval of its
Investigational Device Exemption (IDE) to begin human clinical testing of its
urethral bulking agent for the treatment of female stress urinary incontinence.
The Company began pilot clinical testing of the product's safety and efficacy in
December 1999. The Company projects expanding into a multi-site pivotal clinical
study in the fourth quarter of 2000. To the extent funds are available, the
Company intends to submit an additional IDE to the FDA in 2000 to obtain
approval to begin human clinical testing of its dermal bulking agent for use in
cosmetic and reconstructive surgery applications.

         Surgical Adhesives and Sealants

         Surgeons are master craftsmen. However, instead of working with metal,
wood or plastic, they work with living tissues. Like carpenters, they use saws,
chisels (knives) and drills to take things apart and fit pieces together. But
they only have access to string (sutures) and nails (staples, pins, screws) to
hold things in place. Furthermore, a surgeon's work is complicated by the
biological healing response occurring when tissues are injured.

         As in everyday life, there are many surgical uses for glue where string
and nails just don't work well. They may not be quick or easy enough to use;
they may not be capable of staying in place; they may do more damage than
desired; they and/or the tools to use them may not fit within the available work
space; they may result in fluid or air leaks; or the "fit and finish" or healing
response is just not satisfactory.

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

         A third category of tissue adhesives combines natural proteins such as
collagen or albumin with aldehyde cross-linking agents. Such products are
marketed in Europe for limited life-threatening indications. The aldehyde
cross-linking agents employed (i.e. glutaraldehyde, formaldehyde) in such
products are known to cause adverse tissue reactions. Additional adhesive

                                       8
<PAGE>

and/or sealant products employing other polymer systems and cross-linking agents
are also under development.

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

         In September 1995, the Company entered into a series of agreements with
Ethicon regarding this program. Ethicon elected to terminate these agreements in
December 1997. However, the Company has demonstrated both the adhesive
performance and the biocompatibility of its product formulations in animal
models, including the resorption of the adhesive matrix in conjunction with the
progression of wound healing. Subsequently, the Company has worked to determine
the specific markets and products providing the most significant opportunities
for the use of its adhesive and sealant technology.

         As a result of its evaluations of the medical market needs, the
properties achievable with its technology, and the capabilities of competitive
technologies, PPTI has focused its product development interests on certain
orthopedic applications, particularly those related to the repair of the spinal
disc for the treatment of chronic low back pain. Low back pain is the most
common musculoskeletal disorder in industrialized societies. PPTI is committed
to the commercial development of its adhesive and sealant technology and is
seeking to establish new strategic alliances with market leaders. However, there
can be no assurance that such alliances can be entered into.

         Wound Healing/Tissue Engineering Matrices

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

         The Company has developed protein polymers which it believes may be
useful in the treatment of dermal wounds, particularly chronic wounds such as
decubitous ulcers, where both reconstruction of the ECM and re-establishment of
its function are desired. These polymers, based on key ECM protein sequence
blocks, are biocompatible, fully resorbable and have been processed into gels,
sponges, films and fibrous sheets. The Company believes 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

                                       9
<PAGE>

growth factors. Additionally, such materials may serve as scaffolds for the
ex vivo production of living tissue substitutes.
-------

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

         Controlled Release Drug Delivery

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

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


MANUFACTURING, MARKETING AND DISTRIBUTION

         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"). The Company has implemented, and continues to implement, polymer
production and quality control procedures, and has made certain facilities
renovations to operate in conformance with FDA requirements. The Company
believes its current polymer production capacity is sufficient for supplying its
development programs with the required quality and quantity of materials needed
for feasibility and preclinical testing and initial ("pilot") clinical testing.
To expand beyond initial clinical trials, the Company will require additional
manufacturing capacity.

         The Company is considering several methods for increasing production of
its biomedical and other product candidates to meet clinical and commercial
requirements. For example, the Company may expand its existing facility to
produce needed quantities of materials under FDA's GLP and QSR regulations for
clinical and commercial use. Alternatively, the Company may establish external
contract manufacturing arrangements for needed quantities of materials.

                                       10
<PAGE>

However, there can be no assurance that such arrangements, if desired, could be
entered into or maintained on acceptable terms, if at all, or that the existence
or maintenance of such arrangements would not adversely affect the Company's
margins or its ability to comply with applicable governmental regulations. The
actual method, or combination of methods, that the Company may ultimately pursue
will depend on a number of factors, including availability, cost and the
Company's assessment of the ability of such production methods to meet its
commercial objectives.

         PPTI has entered into an agreement with Femcare for marketing and
distribution of its urethral bulking agent for stress urinary incontinence in
certain countries, if the required regulatory approvals are obtained (see
"Collaborative Agreements). The Company currently expects that its other
biomedical products, if any were commercialized, would be marketed and
distributed by corporate partners. While this arrangement could minimize the
Company's marketing costs and facilitate wider distribution of any biomedical
products it may develop, these arrangements could possibly reduce the Company's
revenues and profits as compared to what would be possible if the Company
directly sold such products.

RESEARCH AND DEVELOPMENT

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

COLLABORATIVE AGREEMENTS

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

         The medical device industry has traditionally licensed from development
stage companies product candidates whose safety and efficacy has been
demonstrated at least in pilot human clinical trials. In December 1999, the
Company began human clinical testing of its urethral bulking agent for the
treatment of female stress urinary incontinence. The Company also intends to
submit an additional IDE to the FDA in 2000 to obtain approval to begin human
clinical testing of its dermal bulking agent for use in cosmetic and
reconstructive surgery applications.

                                       11
<PAGE>

         Femcare, Ltd.

         In January 2000, PPTI announced the formation of a strategic alliance
with Femcare, Ltd. for the commercialization in Europe and Australia of its
urethral bulking agent for treatment of stress urinary incontinence. Femcare is
a British-based developer and international marketer of surgical products for
gynecological and urological applications.

         In the alliance, PPTI will provide Femcare with technical assistance,
and the incontinence product for Femcare's clinical testing and regulatory
approvals in the Femcare territories. Femcare will utilize its existing customer
base and its extensive distribution network as the basis for introducing the
product into Europe and Australia. Currently, Femcare markets its products in 40
countries worldwide. A new Urology division has been created to extend the
company's success in gynecology to urological applications, in particular female
stress urinary incontinence. PPTI receives a $1 million license fee and a
royalty on the revenues generated by Femcare from the sale of the product. PPTI
will be responsible for providing the product to Femcare for commercial sale.

         Other Agreements

         PPTI is discussing other potential collaboration agreements with
prospective marketing partners for both its soft tissue augmentation products
and its tissue adhesive and sealant products. There can be no assurance that the
Company will continue such discussions or 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, the Company is a party to certain materials evaluation
agreements regarding biomedical and specialty use applications of its products,
polymers and technology, including applications in areas other than those
identified as product candidates above. These agreements provide, or are
intended to provide, for the evaluation of product feasibility. There can be no
assurance that the Company 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 PPTI's biomaterials are as
components of end-use products for biomedical and other specialty applications.
End-use products using or incorporating the Company's biomaterials would compete
with other products that rely on the use of alternative materials. For example,
bulking agents for soft tissue augmentation are currently marketed based on
bovine collagen and, outside the U.S., silicone particles. Similarly, all
targeted applications of the Company's potential products will compete with
other products having the same or similar applications.

         The areas of business in which the Company engages and proposes to
engage are characterized by intense competition and rapidly evolving technology.
Competition in the biomedical and surgical repair markets is particularly
significant. The Company's competitors in

                                       12
<PAGE>

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 those of the Company. Academic institutions and other
public and private research organizations are also conducting research and
seeking patent protection, and may commercialize products on their own or
through joint ventures. Most of the Company's competitors depend on synthetic
polymer technology rather than protein engineering for developing products.
However, the Company believes that DuPont and several university laboratories
are currently conducting research into similar protein engineering technology.

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

PATENTS AND TRADE SECRETS

         PPTI is aggressively pursuing domestic and international patent
protection for its technology, making claim to an extensive range of
recombinantly prepared structural and functional proteins, methods for preparing
synthetic repetitive DNA, methods for the production and purification of protein
polymers, end-use products incorporating such materials and methods for their
use.

         The United States Patent and Trademark Office ("USPTO") has issued
fifteen patents to the Company. U.S. Patent 5,235,041 (1993) relates to the
Company's method for purifying structurally ordered recombinant protein
polymers. U.S. Patent 5,243,038 (1993) covers the Company's synthetic DNA
compositions that encode polymers and copolymers comprising the amino acid
"building blocks" of silk and elastin. U.S. Patent 5,496,712 (1996) covers the
Company's family of high molecular weight collagen like polymers and the DNA
sequences encoding them. U.S. Patent 5,514,581 (1996) covers DNA sequences
encoding silk-like structural building blocks with an intervening sequence
coding for the key cell attachment ligand from human fibronectin. One of the
claimed sequences encodes ProNectin F.

         U.S. Patent 5,606,019 (1997) covers the protein compositions comprising
copolymers of the amino acid "building blocks" of silk and elastin. These are
the primary materials used in the Company's current product development efforts.
U.S. Patent 5,641,648 (1997) covers methods by which synthetic genes encoding
protein polymers are created.

         U.S. Patent 5,723,588 (1998) covers molded articles incorporating
biologically active proteins. U.S. Patent 5,760,004 (1998) covers chemical
modification of protein polymers to enhance their water solubility. U.S. Patent
5,770,697 (1998) broadly covers protein polymers incorporating repetitive amino
acid sequences found in naturally occurring proteins. U.S. Patent 5,773,249
(1998) expands the coverage of high molecular weight collagen like polymers.
U.S. Patent 5,773,577 (1998) covers protein polymers that can be cross-linked by
certain enzymes

                                       13
<PAGE>

that naturally occur in the body. U.S. Patent 5,808,012 (1998) expands the
coverage of molded articles to those incorporating chemically active proteins.
U.S. Patent 5,817,303 (1998) covers the use of protein polymers with chemical
cross-linking agents as adhesives and sealants. U.S. Patent 5,830,713 (1998)
expands the coverage of methods by which synthetic genes encoding protein
polymers are created. U.S. Patent 6,018,030 (2000) broadly covers DNA sequences
encoding protein polymers incorporating repetitive amino acid sequences found in
naturally occurring proteins. Additionally, PPTI has nine U.S. patent
applications pending, two of which have been allowed, covering related aspects
of its core technology.

         Although the Company believes its existing issued patent claims may
provide a competitive advantage, there can be no assurance that the scope of the
Company's patent protection is or will be adequate to protect its technology or
that the validity of any patent issued will be upheld in the future.
Additionally, with respect to the Company's allowed and pending applications,
there can be no assurance that any patents will be issued, or that, if issued,
they will provide substantial protection or be of commercial benefit to the
Company. The two patents issued to PPTI in 1993 will expire in 2010, as will one
of the patents issued in 1996. The other patent issued in 1996 will expire in
2013, and the patents issued in 1997 will expire in 2014. The three patents
issued in 1998, which expand the coverage of previously issued patents, will
expire in concert with the original patents. The other five patents issued in
1998 will expire in 2015. The patent issued in 2000 will expire in 2017.

         Generally, for patent applications filed in the U.S. prior to June 8,
1995, the term of the patent will be 17 years from the issue date. Subsequently
filed U.S. patent applications will have a term of 20 years from the date of
filing, consistent with the patent laws in international jurisdictions.

         Although the Company does not currently have any operations outside the
U.S., it anticipates that its potential products will be marketed on a worldwide
basis, with possible manufacturing operations outside the U.S. For example, the
Company has recently established a licensing and distribution agreement with
Femcare Ltd. for the sale of its urethral bulking agents in Europe and
Australia. Accordingly, international patent applications corresponding to the
major U.S. patents and patent applications described above have been filed in
these and other important market jurisdictions. Due to translation costs and
patent office fees, international patents are significantly more expensive to
obtain 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. PPTI carefully considers these factors in consultation with its
patent counsel, as well as the size of the potential markets represented, in
determining the foreign countries in which to file patents.

         In almost all cases, the Company files for patents in Australia,
Canada, Europe and Japan. Currently, PPTI has fourteen issued foreign patents,
and thirty-one pending foreign applications. One of the issued foreign patents
is in Europe and the scope of its claims broadly covers protein polymers having
biological or chemical activity.

                                       14
<PAGE>

         Because of the uncertainty concerning patent protection and the
unavailability of patent protection for certain processes and techniques, PPTI
also relies upon trade secret protection and continuing technological innovation
to maintain its competitive position. Although all of the Company's employees
have signed confidentiality agreements, there can be no assurance that the
Company's proprietary technology will not be independently developed by other
parties, or that secrecy will not be breached. Additionally, the Company is
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. The Company cannot predict
whether it 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 its business, PPTI employs various trademarks and
trade names in packaging and advertising its products. The Company has assigned
the federal registration of its ProNectin(R) trademark and its SmartPlastic(R)
trademark for ProNectin F Activated Cultureware to Sanyo Chemical Industries,
Ltd. in connection with the sale to Sanyo of its cell culture business. The
Company intends to protect and promote all of its trademarks and, where
appropriate, will seek federal registration of its trademarks.

REGULATORY MATTERS

         Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. The Company's 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, the Company's activities are
subject principally to regulation under the Occupational Safety and Health Act
and the Food, Drug and Cosmetic Act.

         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. PPTI is 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") regulations and portions of the FDA's Quality Systems
Regulations ("QSR"). Where PPTI has conducted such testing, the Company may
choose to file product approval submissions itself or maintain with the FDA a
"Master File" containing, among other items, such test results. A Master File
can then be accessed by the FDA in reviewing particular product approval
submissions from companies commercializing products based on PPTI's materials.

         There can be no assurance that the Company or its customers will be
able to obtain or maintain the necessary approvals from the FDA or corresponding
international regulatory authorities, or that the Company will be able to
maintain a Master File in accordance with FDA regulations. In either case, the
Company's anticipated business could be adversely affected. To the extent PPTI
manufactures medical devices, as opposed to a component material supplied to a
medical device manufacturer, it will be required to conform commercial
manufacturing operations

                                       15
<PAGE>

to the FDA's QSR requirements. The Company would also be required to register
its facility with the FDA as an establishment involved in the manufacture of
medical devices. QSR requirements are rigorous, and there can be no assurance
that compliance could be obtained in a timely manner and without the expenditure
of substantial resources, if at all. International quality system requirements,
i.e., ISO 9001 issued by the International Organization for Standardization is
the quality model used by medical product manufacturers, and is required for the
sale of medical devices in Europe. ISO 9001 standards are similar to the FDA's
QSR.

         In August 1999, the Company obtained the FDA's approval of its IDE to
begin human clinical testing of its urethral bulking agent for the treatment of
female stress urinary incontinence. The Company initiated clinical testing in
December 1999. The Company intends to submit an additional IDE to the FDA in
2000 to obtain approval to begin human clinical testing of its dermal bulking
agent for use in cosmetic and reconstructive surgery applications. The Company
has implemented, and continues to implement, polymer production and quality
control procedures, and has made certain facilities renovations, to operate in
conformance with FDA requirements.

         The Company's research, development and production activities are, or
may be, subject to various federal and state laws and regulations relating to
environmental quality and the use, discharge, storage, transportation and
disposal of toxic and hazardous substances. The Company's future activities may
be subject to regulation under the Toxic Substances Control Act, which requires
the Company to obtain pre-manufacturing approval for any new "chemical material"
the Company produces for commercial use that does not fall within the FDA's
regulatory jurisdiction. The Company believes it is currently in substantial
compliance with all such laws and regulations. Although the Company intends to
use its best efforts to comply with all environmental laws and regulations in
the future, there can be no assurance that the Company 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

         PPTI's business may expose it to potential product liability risks
whenever human clinical testing is performed or upon the use of any commercially
marketed medical product. Prior to initiating human clinical testing of its
urethral bulking agent, the Company procured product liability insurance. There
can be no assurance, however, that PPTI 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 the Company.

                                       16
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>

Name                         Age          Position with the Company
----                         ---          -------------------------
<S>                         <C>           <C>

J. Thomas Parmeter           60           Chairman of the Board of Directors,
                                          President and Chief Executive Officer

Joseph Cappello, Ph.D.       43           Vice President, Research and Development,
                                          Chief Technical Officer and Director,
                                          Polymer Research

Philip J. Davis              69           Corporate Secretary

Franco A. Ferrari, Ph.D.     48           Vice President, Laboratory Operations and
                                          Polymer Production and Director, Molecular Genetics

John E. Flowers              43           Vice President, Planning and Operations

Janis Y. Neves               48           Director, Finance and Administration,
                                          Treasurer, and Assistant Secretary
</TABLE>


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

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

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


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

                                       17
<PAGE>

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

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

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

EMPLOYEES

         On June 30, 1999, the Company laid off eighteen employees,
approximately 60% of its work force, as part of a broad cost cutting measure to
preserve cash. In late July, several employees were brought back on the payroll
in order to prevent delays in beginning the clinical testing of the Company's
lead product, scheduled to begin in December, 1999. With the closing of the
Series G Preferred stock offering, several more of the laid off employees were
rehired.

         As of February 29, 2000, PPTI had 19 full-time and one part-time
employee, of whom four hold employment contracts with the Company and three hold
Ph.D. degrees in the chemical or biological sciences. The Company is highly
dependent on the services of its 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 the Company's development objectives, its business
opportunities and prospects. The recruitment and retention of additional
qualified management and scientific personnel is also critical to the Company's
success. There can be no assurance that the Company will be able to attract and
retain required personnel on acceptable terms, due to the competition for such
experienced personnel from other biotechnology, pharmaceutical, medical device
and chemical companies, universities and non-profit research institutions.


ITEM 2.  PROPERTIES

         PPTI does not own any real property. The Company leases approximately
21,000 square feet in San Diego, California from Sycamore/San Diego Investors.
The leased property includes the Company's administrative offices, which
encompass approximately 4,000 square feet, and its laboratory facilities, which
encompass approximately 17,000 square feet. The current annual rent is
approximately $417,000. The lease expires in May 2005.

         The Company believes that its current facilities are adequate to meet
its needs until the end of 2000. The Company retains an option to lease an
additional 7,000 square feet of office and laboratory space in its present
facility and to extend its lease for an additional five years.

                                       18
<PAGE>

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 1999.

                                       19
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

NASDAQ Delisting

         Prior to September 1999, the Company's Common Stock traded on The
Nasdaq Stock Market under the symbol "PPTI". The Company's 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 PPTI common stock, and failure to meet the
minimum net asset requirement of $2 million. The Company's Common Stock is now
traded on the "over-the-counter" NASD Bulletin Board. To access the quotations
for the Company's Common Stock, use the call letters PPTI.OB.

         The trade prices set forth below represent inter-dealer prices without
retail markups, markdowns or commissions.

                                                 Trade Prices
                                        -------------------------------
         1999                             High                    Low
         ----                           -------                 -------
         First Quarter                  $1.531                  $1.063
         Second Quarter                  2.250                   0.875
         Third Quarter                   1.719                   0.750
         Fourth Quarter                  1.250                   0.688

         1998
         ----
         First Quarter                  $1.531                  $1.063
         Second Quarter                  2.250                   0.875
         Third Quarter                   1.719                   0.750
         Fourth Quarter                  1.250                   0.688


         As of March 22, 2000, the Company had approximately 163 shareholders
of record; it estimates it has approximately 1,500 beneficial holders. The
Company has never paid cash dividends on its Common Stock. The Company currently
intends to retain earnings, if any, for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.

Unregistered Offerings

         On August 16, 1999, the Company received $1,775,000 for 17,750 shares
of Series G Convertible Preferred Stock ("Series G Stock") from several
institutional and accredited individual investors following the 10 day
stockholder notification period required by the NASD prior to the sale. On
September 15, 1999, the Company received an additional $325,000 for 3,250 shares
of Series G Stock, for a total of $2,100,000. Each share of Series G Stock was
priced

                                       20
<PAGE>

at $100 per share. Each share can be converted at any time by the holder into
common stock at a price of $0.50 per share, subject to certain antidilution
adjustments. Each share of Series G Preferred Stock also received a common stock
warrant, exercisable for 12 months, that allows the holder to acquire 200 shares
of PPTI common stock at a price of $0.50 per share. The Series G Stock, warrants
and underlying common stock have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements.

         Between April 1 and April 15, 1999, the Company received approximately
$508,000 from the exercise of redeemable, publicly traded, warrants originally
issued as part of PPTI's Initial Public Offering. Following the close of
business on April 15, the remaining unexercised redeemable, publicly traded,
warrants expired. On May 12, 1999, the Company received approximately $416,000
from the exercise of warrants issued in conjunction with the private placement
of the Company's Series E Convertible Preferred Stock ("Series E Stock").

         In April and May of 1998, the Company raised approximately $5.4 million
from the sale of 54,437 shares of the Company's Series E Stock priced at $100
per share, with warrants to purchase an aggregate of 3,266,250 shares of common
stock to a small group of institutional and accredited investors.

         Each share of Series E Stock is convertible at any time at the election
of the holder into 80 shares of common stock at a conversion price of $1.25 per
share, subject to certain antidilution adjustments. No underwriters were engaged
by the Company in connection with such issuance and, accordingly, no
underwriting discounts were paid. The offering is exempt from registration under
Section 4(2) of the Securities Act, and met the requirements of Rule 506 of
Regulation D promulgated under the Securities Act. The Company has registered
the shares of common stock underlying the Series E Stock and the warrants with
the Securities and Exchange Commission.

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

         In connection with the above private placement, the Company issued
26,420 shares of its Series F Convertible Preferred Stock in exchange for the
same number of shares of outstanding Series D Convertible Preferred Stock. The
Company's Series F Convertible Preferred Stock is equivalent to the Company's
Series E Stock with regard to liquidation preferences. All other

                                       21
<PAGE>

terms of the Company's Series F Convertible Preferred Stock remained the same as
the Company's Series D Convertible Preferred Stock.

         On January 7, 1997, the Company received $4,760,000, less expenses of
approximately $140,000, from a private placement of 1,904,000 shares of the
Company's common stock, at $2.50 per share, with a number of accredited
investors. No underwriters were engaged by the Company in connection with such
issuance and, accordingly, no underwriting discounts or commissions were paid.
The issuance was exempt from registration under Section 4(2) of the Securities
Act, and met the requirements of Rule 506 of Regulation D promulgated under the
Securities Act. The Company agreed to register the shares with the Securities
and Exchange Commission promptly after the closing. The registration was
declared effective on January 24, 1997.

         On September 14, 1995, the Company issued 49,187 shares of its Series D
Convertible Preferred Stock and warrants to purchase 500,960 shares of common
stock at $1.25 per share in a private placement to certain accredited investors.
Of this amount, 20,000 shares of Series D Convertible Preferred Stock and
warrants to purchase 400,000 shares of common stock were issued for cash at
$100.00 per share; 21,600 shares of Series D Convertible Preferred Stock were
issued in exchange for all outstanding shares of the Company's Series C
Convertible Preferred Stock and 2,539 shares for accrued and unpaid dividends
thereon; and an additional 5,048 shares of Series D Convertible Preferred Stock
and warrants to purchase 100,960 shares of common stock were issued in exchange
for cancellation of a $500,000 bridge loan and accrued interest thereon. No
underwriters were engaged by the Company in connection with such issuance and,
accordingly, no underwriting discounts or commissions were paid. The issuance
was exempt from registration under Section 4(2) of the Securities Act and met
the requirements of Rule 506 of Regulation D promulgated under the Securities
Act.

         Each share of Series D and Series F Convertible Preferred Stock earns a
cumulative dividend at the annual rate of $10 per share, payable as and when
declared by the Company's Board of Directors in the form of cash, common stock
or any combination thereof. The Series D and F Convertible Preferred Stock is
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 Convertible Preferred Stock is
redeemable at the Company's option after four years from the date of issuance.
Automatic conversion of all of the Series D and F Convertible Preferred 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
Convertible Preferred 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 Convertible Preferred Stock has a liquidation preference of $100 per
share plus accumulated dividends.

         At the time of purchase, the Series D Convertible Preferred
stockholders received warrants to purchase, at an exercise price of $1.25 per
share, twenty shares of the Company's common stock for each share of Series D
Convertible Preferred Stock acquired for cash, or upon conversion of the
outstanding bridge loan and accrued interest thereon, described above. Warrants

                                       22
<PAGE>

to acquire a total of 500,960 shares of common stock were issued. All of these
warrants were exercised during 1996, from which the Company received aggregate
gross proceeds of $626,200. The Series D Convertible Preferred stockholders were
granted certain registration rights relating to their shares of common stock
issuable upon conversion of the Series D Convertible Preferred Stock and upon
the exercise of their warrants.

         In July 1994, the Company received $2,160,000 from a private placement
of the Company's Series C Convertible Preferred Stock with certain accredited
investors, consisting of 21,600 shares at $100.00 per share. No underwriters
were engaged by the Company in connection with such issuance and, accordingly,
no underwriter discounts or commissions were paid. The issuance was exempt from
registration under Section 4(2) of the Securities Act and met the requirements
under Rule 506 of Regulation D promulgated under the Securities Act. As
described above, the investors exchanged 21,600 shares of Series C Convertible
Preferred Stock, plus accrued and unpaid dividends thereon, for 24,139 shares of
Series D Convertible Preferred Stock. There are currently no shares of Series C
Convertible Preferred Stock outstanding.

         In connection with the issuance of the Series C Convertible Preferred
Stock, warrants were also issued to acquire a total of 432,000 shares of the
Company's common stock at a price of $1.25 per share. All of these warrants were
exercised during 1996, from which the Company received aggregate gross proceeds
of $540,000.

         In July 1996, holders of warrants to acquire 322,663 shares of common
stock (all of whom were accredited investors) exercised such warrants at $2.50
per share, resulting in approximately $807,000 in gross proceeds to the Company.
These warrants were originally issued in 1991 in connection with the issuance of
the Company's Series B Convertible Preferred Stock. The issuance upon exercise
of these warrants was exempt from registration under Section 4(2) of the
Securities Act and met the requirements under Rule 506 of Regulation D
promulgated under the Securities Act. The Company agreed to register the resale
of the common stock received upon exercise of these warrants, and the applicable
registration was declared effective on July 19, 1996.

                                       23
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

         CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS
ANNUAL REPORT ON FORM 10-KSB CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, HISTORY OF
OPERATING LOSSES, RAISING ADEQUATE CAPITAL FOR CONTINUING OPERATIONS, EARLY
STAGE OF PRODUCT DEVELOPMENT, SCIENTIFIC AND TECHNICAL UNCERTAINTIES,
COMPETITIVE PRODUCTS AND APPROACHES, RELIANCE UPON COLLABORATIVE PARTNERSHIP
AGREEMENTS AND FUNDING, REGULATORY TESTING AND APPROVALS, PATENT PROTECTION
UNCERTAINTIES AND MANUFACTURING SCALE-UP AND REQUIRED QUALIFICATIONS. WHILE
THESE STATEMENTS REPRESENT MANAGEMENT'S CURRENT JUDGMENT AND EXPECTATIONS FOR
THE COMPANY, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM ANY FUTURE RESULTS SUGGESTED HEREIN. THE COMPANY UNDERTAKES NO
OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE
DATE HEREOF.

GENERAL OVERVIEW

         Incorporated in 1988, Protein Polymer Technologies, Inc. has
concentrated its research and development efforts on establishing a scientific
and technical leadership position in the production and development of unique
protein-based materials. The Company has identified biomedical market and
product opportunities for further research and development that management
believes will exploit the unique properties of the Company's technology to
competitive advantage. The Company has been unprofitable to date, and as of
December 31, 1999 has an accumulated deficit of $37,245,495.

         The Company's product candidates for surgical repair, augmentation and
regeneration of human tissues are in various stages of research and development.
Its more advanced programs are in the areas of bulking agents for soft tissue
augmentation, particularly for use in urethral tissue for the treatment of
female stress incontinence and in dermal tissue for cosmetic and reconstructive
procedures. The Company currently is devoting the majority of its resources to
the development and registration of these products, with the greatest emphasis
on the incontinence product which began human clinical trials in December 1999.
The Company's other advanced product technology is in the area of tissue
adhesives and sealants. Currently the Company's research and development in this
area is focused on the repair of spinal discs for the treatment of lower back
pain. The Company's first commercial products, ProNectin F and SmartPlastic, are
used by biologists and cell culture laboratories, principally to grow mammalian
cells for biomedical research purposes. In February 2000, the Company licensed
the rights for the

                                       24
<PAGE>

manufacture and sale of these products for use in in vitro cell culture,
                                                   -------
including the transfer of all existing inventory, to a third party.

         In 1995, the Company entered into a collaborative relationship with
Ethicon regarding its surgical adhesives and sealants program. Ethicon
terminated the relationship in December 1997 which materially adversely affected
the Company. The Company's strategy with most of its programs is to enter into
collaborative development agreements with major medical product marketing and
distribution companies. Although these relationships, to the extent any are
consummated, may provide significant near-term revenues through up-front
licensing fees, research and development reimbursements and milestone payments,
the Company expects to continue incurring operating losses for the next several
years.

         The Company's cash balance as of December 31, 1999 was $156,000. The
Company believes this amount, in combination with funds received from licensing
and R&D agreements in January and February 2000, and the exercise of the common
stock warrants issued in connection with the Series G Stock in February 2000,
which in total will generate approximately $3.4 million (net of costs) during
the calendar year 2000, is sufficient to fund its operations through January
2001. The Company will continue to attempt to raise additional funds for
continuing operations through private or public offerings and collaborative
agreements (see "Liquidity and Capital Resources" below, and Note 1 of the
Audited Financial Statements for additional information and a description of the
associated risks).

RESULTS OF OPERATIONS

         Interest income was $39,000 for the year ended December 31, 1999, as
compared to $135,000 for 1998 and $187,000 for 1997. The year-to-year
variability resulted from the amount and timing of the receipt of equity capital
and the amounts of excess cash available for investment.

         Product sales for the years ended December 31, 1999 were $54,000,
compared to $71,000 and $77,000 in 1998 and 1997 respectively. Product sales
consist of ProNectin F related product revenues and licensing fees. Sales during
1996 reflected disappointing market interest in the line of ProNectin products;
as a result the Company discontinued related promotional expenditures to
conserve cash. Sales in 1998 and 1999 primarily reflect distributor stocking
orders. The manufacturing and marketing rights and the inventory for this
product line were sold to Sanyo Chemical Industries, Ltd. in February 2000.
Because of previously booked inventory reserves, their was no cost of sales
booked for any product sales in 1999.

         Research and development expenses for the year ended December 31, 1999
were $2,812,000, compared to $4,138,000 in 1998, a decrease of 32%. This
decrease is due primarily to a downsizing of the Company's staff and operational
expenses in June 1999, but also in part to the completion of preclinical testing
and regulatory consulting costs associated with the filing of the Company's
Investigational Device Exemption (IDE) with the U.S. Food and Drug
Administration to begin human trials for the treatment of female stress urinary
incontinence. These latter savings are temporary and will be replaced and
increased by the cost of conducting

                                       25
<PAGE>

human clinical testing which began in December 1999. Other related expenses
include expanded manufacturing capacity and manufacturing process validation,
quality assurance efforts, and outside testing services. The Company expects its
research and development expenses will increase in the future, to the extent
additional capital is obtained, due to the expansion of product-directed
development efforts including human clinical testing, increased manufacturing
requirements, and increased use of outside testing services.

         Selling, general and administrative expenses for the year ended
December 31, 1999 were $1,554,000, as compared to $1,727,000 for 1998, a
decrease of 10%. This decrease was due to the Corporate downsizing in June 1999,
and generally tighter cost management following that period. To the extent
possible, the Company continues to concentrate on controlling costs reflected in
reduced travel, office supplies, and non-regulatory consulting costs. The
Company expects its selling, general and administrative expenses will increase
in the future, to the extent additional capital is obtained, consistent with
supporting its research and development efforts and as business development,
patent, legal and investor relations activities require.

         For the year ended December 31, 1999, the Company recorded a net loss
applicable to common shareholders of $4,535,000, or $.36 per share, as compared
to $9,183,000, or $.88 per share for 1998, and $4,887,000, or $.52 per share for
1997. The difference between 1999 and previous year end results is due primarily
to a non-cash "imputed dividend" expense of $3,266,000 that resulted from the
sale and issuance of the Company's Series E Convertible Preferred Stock during
1998. The 1999, 1998 and 1997 losses and per share calculations also include
$278,000, $278,000, and $433,000, respectively, of undeclared and/or paid
dividends from the Company's Preferred Stock.

         The Company expects to incur increasing operating losses for the next
several years, to the extent additional capital is obtained, based upon the
successful continuation of the tissue augmentation program and product
registration, and the tissue adhesives program, as well as expected increases in
the Company's other research and development, manufacturing and business
development activities. The Company's results depend in part on its ability to
establish strategic alliances and generate contract revenues, increased
research, development and manufacturing efforts, preclinical and clinical
product testing and commercialization expenditures, expenses incurred for
regulatory compliance and patent prosecution, and other factors. The Company's
results will also fluctuate from period to period due to timing differences.

         To date, the Company believes that inflation and changing prices have
not had a material impact on its continuing operations. Based upon the Company's
earnings history, a valuation allowance of $12,867,000 is required to reduce the
Company's net deferred tax assets to the amount realizable.

                                       26
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1999, the Company had cash, cash equivalents and
short-term investments totaling $156,000, as compared to $1,383,000 at December
31, 1998. As of December 31, 1999, the Company had working capital of
$(458,000), compared to $600,000 at December 31, 1998. In April and May of 1999,
the Company realized approximately $924,000 from the exercise of common stock
warrants and in August and September 1999, approximately $2,075,000, net of
expenses, from the private placement of the Company's Series G Convertible
Preferred Stock and warrants. Subsequently, the Company received in January and
February 2000 approximately $1,350,000 (net of costs) in cash and receivables
from licensing and R&D agreements with Femcare, Ltd. for the European and
Australian marketing rights to the stress urinary incontinence bulking product,
with Perkin-Elmer for a research and development project and commercialization
option, and with Sanyo Chemical Industries, Ltd. for the rights to the in vitro
cell culture business. Also in February 2000, the Company received approximately
$2.1 million from the exercise of common stock warrants originally granted as
part of the sale of Series G Convertible Preferred Stock and warrants.

         The Company had long-term capital lease obligations of $25,000 as of
December 31, 1999, compared to an obligation of $106,000 as of December 31,
1998. For the year ended December 31, 1999, the Company's cash expenditures for
capital equipment and leasehold improvements totaled $26,000, compared with
$197,000 for the same period last year. The Company anticipates that these
expenditures will be increased in 2000 as laboratory renovations and additional
equipment required to meet GLP manufacturing regulations and production capacity
as the Company scales up its manufacturing operations to meet product
requirements for clinical testing. The Company anticipates a significant
increase in manufacturing-related equipment and leasehold improvement
expenditures in 2001 due to an increase in need for products for clinical
testing, and anticipated need for additional product manufacturing for European
product sales. The Company may enter into additional capital equipment lease
arrangements in the future if available at appropriate rates and terms.

         The Company believes its existing available cash, cash equivalents and
short-term investments as of February 29, 2000 would be sufficient to meet its
anticipated capital requirements through December 2000. Substantial additional
capital resources will be required to fund continuing expenditures related to
the Company's research, development, manufacturing and business development
activities. The Company believes there may be a number of alternatives available
to meet the continuing capital requirements of its operations, such as
collaborative agreements and public or private financings. During 2000, the
Company expects that the possible exercise of other existing warrants could
result in additional funds for continuing operations. Further, the Company is
currently in preliminary discussions with a number of potential collaborative
partners and, based on the results of various materials evaluations, revenues in
the form of license fees, milestone payments or research and development
reimbursements could be generated. There can be no assurance that any of these
fundings will be consummated in the necessary timeframes needed for continuing
operations or on terms favorable to the Company. If adequate funds are not
available, the Company will be required to significantly curtail its

                                       27
<PAGE>

operating plans and may have to sell or license out significant portions of the
Company's technology or potential products.

YEAR 2000 COMPLIANCE

         The Company's plan to modify its information technology in recognition
of the year 2000 issue has been successfully implemented. The "Year 2000" issue
concerned potential exposure related to the interruption of business practice
and financial misinformation resulting from the application of computer programs
which have been written using two digits, rather than four, to define the
applicable year of business transactions. Based on its assessments to date, the
Company does not expect to incur any further significant costs, or anticipate
any significant problems or uncertainties associated with remaining Year 2000
compliant.

                                       28
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>

    Description                                                                    Page
    -----------                                                                    ----
    <S>                                                                            <C>

    Report of Ernst & Young LLP, Independent Auditors.............................    F-2

    Balance Sheets at December 31, 1999 and 1998..................................    F-3

    Statements of Operations for the years ended December 31, 1999, 1998
       and 1997 and the period July 6, 1988 (inception) to December 31, 1999......    F-4

    Statements of Stockholders Equity for the period July 6, 1988 (inception)
       to December 31, 1999.......................................................    F-5

    Statements of Cash Flows for the years ended December 31, 1999, 1998
       and 1997 and the period July 6, 1988 (inception) to December 31, 1999......    F-7

    Notes to Financial Statements.................................................    F-9
</TABLE>

                                      F-1
<PAGE>

                Report of Ernst & Young LLP, Independent Auditors


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


         We have audited the accompanying balance sheets of Protein Polymer
Technologies, Inc. (a Development Stage Company) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999 and for
the period July 6, 1988 (inception) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Protein Polymer
Technologies, Inc. (a Development Stage Company) at December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999 and for the period July 6, 1988
(inception) to December 31, 1999 in conformity with accounting principles
generally accepted in the United States.




                                       ERNST & YOUNG LLP

San Diego, California
February 29, 2000

                                      F-2
<PAGE>

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

                                 Balance Sheets
<TABLE>
<CAPTION>

                                                                             DECEMBER 31,
                                                                        1999              1998
                                                                  --------------------------------
<S>                                                               <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                      $     155,692      $  1,383,148
   Other current assets                                                  49,266            66,459
                                                                  -------------------------------
Total current assets                                                    204,958         1,449,607
   Deposits                                                              36,177            36,177
   Notes receivable from officers                                       140,000           141,000
   Equipment and leasehold improvements, net                            360,005           598,447
                                                                  -------------------------------
                                                                  $     741,140      $  2,225,231
                                                                  ===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
   Accounts payable                                               $     385,932      $    515,413
   Accrued employee benefits                                             84,335           167,849
   Other accrued expenses                                                17,118            21,574
   Current portion capital lease obligations                             79,593            84,518
   Deferred rent                                                         95,973            60,668
                                                                  -------------------------------
Total current liabilities                                               662,951           850,022

Long-term portion capital lease obligations                              25,088           105,548

Stockholders' equity:
   Convertible Preferred Stock, $.01 par value,
     188,917 shares authorized, 91,065 and
     79,202 shares issued and outstanding at
     December 31, 1999 and 1998, respectively -
     liquidation preference of $9,106,500 and
     $7,480,200 at December 31, 1999 and
     December 31, 1998, respectively                                  8,761,072         7,600,226
   Common stock, $.01 par value, 25,000,000 shares
     authorized, 13,443,510 and 10,827,240 shares
     issued and outstanding at December 31, 1999
     and 1998, respectively                                             134,447           108,274
   Additional paid-in capital                                        28,403,077        26,549,125
   Deficit accumulated during development stage                     (37,245,495)      (32,987,964)
                                                                  -------------------------------
Total stockholders' equity                                               53,101         1,269,661
                                                                  -------------------------------
                                                                  $     741,140      $  2,225,231
                                                                  ===============================
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>

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

                            Statements of Operations
<TABLE>
<CAPTION>
                                                                                               FOR THE PERIOD
                                                                                                JULY 6, 1988
                                                                                               (INCEPTION) TO
                                                          YEARS ENDED DECEMBER 31,               DECEMBER 31,
                                                    1999             1998            1997           1999
                                              ---------------------------------------------------------------
<S>                                           <C>               <C>            <C>             <C>
Revenues:
   Contract revenue                           $      2,320      $    50,000    $    459,510    $   4,357,285
   Interest income, net                             39,343          134,978         186,531        1,120,272
   Product and other income                         54,304           70,846          76,917          684,317
                                              --------------------------------------------------------------
Total revenues                                      95,967          255,824         722,958        6,161,874

Expenses:
   Research and development                      2,799,147        4,167,144       3,188,398       24,754,081
   Selling, general and administrative           1,554,351        1,726,883       1,988,493       14,704,903
                                              --------------------------------------------------------------
Total expenses                                   4,353,498        5,894,027       5,176,891       39,458,984
                                              --------------------------------------------------------------

Net loss                                        (4,257,531)      (5,638,203)     (4,453,933)     (33,297,110)

Undeclared and/or paid dividends on
   preferred stock                                 277,639        3,544,323         432,682        5,239,654
                                              --------------------------------------------------------------

Net loss applicable to common shareholders    $ (4,535,170)    $ (9,182,526)   $ (4,886,615)   $ (38,536,764)
                                              ==============================================================

Net loss per common share - basic and
   diluted                                    $       (.36)    $     (.88)     $       (.52)
                                              =============================================

Shares used in computing net loss per
   common share - basic and diluted             12,570,987       10,484,277       9,487,165
                                              =============================================
</TABLE>



See accompanying notes.

                                      F-4
<PAGE>

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

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 1999
<TABLE>
<CAPTION>
                                                                                          COMMON STOCK            PREFERRED STOCK
                                                                                      SHARES        AMOUNT      SHARES       AMOUNT
                                                                                ----------------------------------------------------
<S>                                                                              <C>           <C>            <C>       <C>
   Issuance of common stock at $.01 per share for cash                                400,000  $      4,000       --    $      --
   Issuance of common stock at $.62 per share for cash and receivables              1,116,245        11,162       --           --
   Receivables from sale of common stock                                                 --            --         --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------

Balance at December 31, 1988                                                        1,516,245        15,162       --           --
   Repayment of receivables from sale of common stock                                    --            --         --           --
   Issuance of common stock at $.62 per share                                         359,136         3,594       --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------

Balance at December 31, 1989                                                        1,875,381        18,756       --           --
   Exercise of common stock options at $.01 per share for cash                         60,000           600       --           --
   Issuance of common stock at $.68 per share for cash and compensation                 5,000            50       --           --
   Common stock repurchased at $.01 per share for cash                                (25,000)         (250)      --           --
   Common stock issued at $.68 per share for cash and compensation                     25,000           250       --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------

Balance at December 31, 1990                                                        1,940,381        19,406       --           --
   Exercise of common stock options at $.68 per share for cash                          5,000            50       --           --
   Exercise of warrants for common stock                                              483,755         4,837       --           --
   Conversion of notes payable to common stock                                        339,230         3,391       --           --
   Conversion of notes payable to preferred stock                                        --            --      278,326        2,783
   Issuance of preferred stock at $2.00 per share for cash, net of
     issuance costs                                                                      --            --      400,000        4,000
   Issuance of warrants for cash                                                         --            --         --           --
   Issuance of warrants in connection with convertible notes payable                     --            --         --           --
   Net loss                                                                              --            --         --           --
                                                                                ---------------------------------------------------

Balance at December 31, 1991                                                        2,768,366        27,684    678,326        6,783
   Initial public offering at $6.50 per unit, net of issuance costs                 1,667,500        16,676       --           --
   Conversion of Series B preferred stock into common stock in connection with
     initial public offering                                                          678,326         6,783     (6,783)        --
   Conversion of Series A preferred stock into common stock at 1.13342 per share      713,733         7,137       --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------

Balance at December 31, 1992                                                        5,827,925        58,280       --           --
   Exercise of common stock options at $.68 per share                                   3,000            30       --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------
Balance at December 31, 1993                                                        5,830,925        58,310       --           --
   Issuance of preferred stock at $100 per share for cash, net of
     issuance costs                                                                      --            --       21,600    2,073,925
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------

Balance at December 31, 1994                                                        5,830,925        58,310     21,600    2,073,925
   Issuance of preferred stock at $100 per share for cash and cancellation of
     bridge loan,  net of issuance costs                                                 --            --       25,000    2,432,150
   Series C dividends paid in Series D preferred stock                                   --            --        2,539      253,875
   Interest paid in Series D preferred stock                                             --            --           48        4,795
   Exercise of common stock options at $.53 per share                                   2,000            20       --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------

Balance at December 31, 1995                                                        5,832,925        58,330     49,187    4,764,745
   Exercise of common stock warrants at $1.25 per share                               932,960         9,330       --           --
   Exercise of common stock warrants at $2.50 per share, net of
     issuance costs                                                                   322,663         3,226       --           --
   Exercise of common stock warrants at $1.00 per share                                25,000           250       --           --
   Exercise of common stock options                                                   136,000         1,360       --           --
   Stock repurchases                                                                  (16,320)         (163)      --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------
Balance at December 31, 1996                                                        7,233,228        72,333     49,187    4,764,745
   Issuance of common stock at $2.50 per share, net of issuance costs               1,904,000        19,040       --           --
   Exercise of common stock options                                                    28,000           280       --           --
   Issuance of common stock under stock purchase plan                                  15,036           151       --           --
   Conversion of Series D preferred stock into common stock                         1,032,537        10,325    (20,973)  (2,097,342)
   Series D dividends paid in common stock                                            207,921         2,079       --           --
   Net loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------
Balance at December 31, 1997                                                       10,420,722  $    104,208     28,214  $ 2,667,403
   Issuance of common stock under stock purchase plan                                  36,715           368       --           --
   Exercise of common stock options                                                    12,000           120       --           --
   Issuance of common stock at $1.60 per share, net of issuance costs                  23,439           234       --           --
   Issuance of Series E preferred stock, net of issuance costs                           --            --       54,438    5,277,813
   Grant of stock to finder                                                            64,000           640       --           --
   Conversion of Series D and E preferred stock into common stock                     270,364         2,704     (3,450)    (344,990)
   Net Loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------
Balance at December 31, 1998                                                       10,827,240  $    108,274     79,202  $ 7,600,226
   Issuance of common stock under stock purchase plan                                  19,429           194       --           --
   Issuance of common stock and warrants for services rendered and
      debt issued                                                                      16,941           180       --           --
   Issuance of Series G preferred stock, net of issuance costs                           --            --       21,000    2,074,596
   Conversion of Series E preferred stock into common stock                           731,000         7,310     (9,138)    (913,750)
   Exercise of common stock and Series E warrants at $.50 per share                 1,848,900        18,489       --           --
   Net Loss                                                                              --            --         --           --
                                                                                ----------------------------------------------------
Balance at December 31, 1999                                                       13,443,510  $    134,447     91,064  $ 8,761,072
                                                                                ====================================================
</TABLE>

                                      F-5
<PAGE>

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

                       Statements of Stockholders' Equity

          For the period July 6, 1988 (inception) to December 31, 1999
<TABLE>
<CAPTION>
                                                                                                  DEFICIT
                                                                                                ACCUMULATED
                                                                                                  DURING     RECEIVABLES   TOTAL
                                                                                  ADDITIONAL    DEVELOPMENT     FROM    STOCKHOLDERS
                                                                                PAID-IN CAPITAL    STAGE        STOCK     EQUITY
                                                                               -----------------------------------------------------
<S>                                                                            <C>           <C>            <C>        <C>
   Issuance of common stock at $.01 per share for cash                         $       --    $       --     $    --     $     4,000
   Issuance of common stock at $.62 per share for cash and receivables              681,838          --          --         693,000
   Receivables from sale of common stock                                               --            --       (86,000)      (86,000)
   Net loss                                                                            --        (322,702)       --        (322,702)
                                                                               ----------------------------------------------------
Balance at December 31, 1988                                                        681,838      (322,702)    (86,000)      288,298
   Repayment of receivables from sale of common stock                                  --            --        86,000        86,000
   Issuance of common stock at $.62 per share                                       219,358          --          --         222,952
   Net loss                                                                            --        (925,080)       --        (925,080)
                                                                               ----------------------------------------------------
Balance at December 31, 1989                                                        901,196    (1,247,782)       --        (327,830)
   Exercise of common stock options at $.01 per share for cash                         --            --          --             600
   Issuance of common stock at $.68 per share for cash and compensation               3,350          --          --           3,400
   Common stock repurchased at $.01 per share for cash                                 --            --          --            (250)
   Common stock issued at $.68 per share for cash and compensation                   16,750          --          --          17,000
   Net loss                                                                            --      (1,501,171)       --      (1,501,171)
                                                                               ----------------------------------------------------
Balance at December 31, 1990                                                        921,296    (2,748,953)       --      (1,808,251)
   Exercise of common stock options at $.68 per share for cash                        3,350          --          --           3,400
   Exercise of warrants for common stock                                            295,493          --          --         300,330
   Conversion of notes payable to common stock                                      508,414          --          --         511,805
   Conversion of notes payable to preferred stock                                   553,869          --          --         556,652
   Issuance of preferred stock at $2.00 per share for cash, net of
     issuance costs                                                                 703,475          --          --         707,475
   Issuance of warrants for cash                                                      3,000          --          --           3,000
   Issuance of warrants in connection with convertible notes payable                 28,000          --          --          28,000
   Net loss                                                                            --      (1,143,119)       --      (1,143,119)
                                                                               ----------------------------------------------------
Balance at December 31, 1991                                                      3,016,897    (3,892,072)       --        (840,708)
   Initial public offering at $6.50 per unit, net of issuance costs               8,911,024          --          --       8,927,700
   Conversion of Series B preferred stock into common stock in connection with
     initial public offering                                                           --            --          --            --
   Conversion of Series A preferred stock into common stock at 1.13342 per
     share                                                                        1,717,065          --          --       1,724,202
   Net loss                                                                            --      (3,481,659)       --      (3,481,659)
                                                                               ----------------------------------------------------
Balance at December 31, 1992                                                     13,644,986    (7,373,731)       --       6,329,535
   Exercise of common stock options at $.68 per share                                 2,010          --          --           2,040
   Net loss                                                                            --      (3,245,436)       --      (3,245,436)
                                                                               ----------------------------------------------------
Balance at December 31, 1993                                                     13,646,996   (10,619,167)       --       3,086,139
   Issuance of preferred stock at $100 per share for cash, net of
     issuance costs                                                                    --            --          --       2,073,925
   Net loss                                                                            --      (3,245,359)       --      (3,245,359)
                                                                               ----------------------------------------------------
Balance at December 31, 1994                                                     13,646,996   (13,864,526)       --       1,914,705
   Issuance of preferred stock at $100 per share for cash and cancellation of
     bridge loan,  net of issuance costs                                               --            --          --       2,432,150
   Series C dividends paid in Series D preferred stock                                 --        (253,875)       --            --
   Interest paid in Series D preferred stock                                           --            --          --           4,795
   Exercise of common stock options at $.53 per share                                 1,040          --          --           1,060
   Net loss                                                                            --      (2,224,404)       --      (2,224,404)
                                                                               ----------------------------------------------------
Balance at December 31, 1995                                                     13,648,036   (16,342,805)       --       2,128,306
   Exercise of common stock warrants at $1.25 per share                        $  1,156,870   $      --     $    --     $ 1,166,200
   Exercise of common stock warrants at $2.50 per share, net of
     issuance costs                                                                 779,413          --          --         782,639
   Exercise of common stock warrants at $1.00 per share                              24,750          --          --          25,000
   Exercise of common stock options                                                  91,650          --          --          93,010
   Stock repurchases                                                                (81,437)         --          --         (81,600)
   Net loss                                                                            --      (2,864,432)       --      (2,864,432)
                                                                               ----------------------------------------------------
Balance at December 31, 1996                                                     15,619,282   (19,207,237)       --       1,249,123
   Issuance of common stock at $2.50 per share, net of issuance costs             4,601,322          --          --       4,620,362
   Exercise of common stock options                                                  20,200          --          --          20,480
   Issuance of common stock under stock purchase plan                                29,950          --          --          30,101
   Conversion of Series D preferred stock into common stock                       2,087,017          --          --            --
   Series D dividends paid in common stock                                          420,262      (422,341)       --            --
   Net loss                                                                            --      (4,453,933)       --      (4,453,933)
                                                                               ----------------------------------------------------
Balance at December 31, 1997                                                   $ 22,778,033  $(24,083,511)  $    --     $ 1,466,133
   Issuance of common stock under stock purchase plan                                38,010          --          --          38,378
   Exercise of common stock options                                                   7,920          --          --           8,040
   Issuance of common stock at $1.60 per share, net of issuance costs                37,266          --          --          37,500
   Issuance of Series E preferred stock, net of issuance costs                    3,266,250    (3,266,250)       --       5,277,813
   Grant of stock to finder                                                          79,360          --          --          80,000
   Conversion of Series D and E preferred stock into common stock                   342,286          --          --            --
   Net Loss                                                                            --      (5,638,203)       --      (5,638,203)
                                                                               ----------------------------------------------------
Balance at December 31, 1998                                                   $ 26,549,125  $(32,987,964)   $   --     $ 1,269,661
   Issuance of common stock under stock purchase plan                                15,111          --          --          15,305
   Issuance of common stock and warrants for services rendered and
      debt issued                                                                    26,440          --          --          26,620
   Issuance of Series G preferred stock, net of issuance costs                         --            --          --       2,074,596
   Conversion of Series E preferred stock into common stock                         906,440          --          --            --
   Exercise of common stock and Series E warrants at $.50 per share                 905,961          --          --         924,450
   Net Loss                                                                            --      (4,257,531)       --      (4,257,531)
                                                                               ----------------------------------------------------
Balance at December 31, 1999                                                   $ 28,403,077  $(37,245,495)   $   --     $    53,101
                                                                               ====================================================
</TABLE>

                             See accompanying notes

                                      F-6
<PAGE>

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

                            Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                                                FOR THE PERIOD
                                                                                                                 JULY 6, 1988
                                                                                                                (INCEPTION) TO
                                                                      YEARS ENDED DECEMBER 31,                     DECEMBER 31,
                                                             1999               1998                1997               1999
                                                       -----------------------------------------------------------------------------
<S>                                                    <C>                 <C>                <C>                 <C>
OPERATING ACTIVITIES
Net loss                                               $    (4,257,531)    $    (5,638,203)   $    (4,453,933)    $   (33,303,029)
Adjustments to reconcile net loss to net cash used
   for operating activities:
     Stock and warrants issued for services                          -                   -                  -                   -
        rendered and debt interest                              26,620              80,000                  -             131,515
     Depreciation and amortization                             264,541             368,577            184,300           1,892,838
     Write-off of purchased technology                               -                   -                  -             503,500
     Changes in assets and liabilities:
       Deposits                                                      -                 440            (14,360)            (36,177)
       Notes receivable from officers                            1,000              12,000           (153,000)           (140,000)
       Other current assets                                     17,193              22,409            (11,613)            (49,266)
       Accounts payable                                       (129,481)             91,819            172,273             385,932
       Accrued employee benefits                               (83,514)             16,018             34,219              84,335
       Other accrued expenses                                   (4,456)            (19,577)           (12,374)             17,118
       Deferred revenue                                              -                   -            (75,000)                  -
       Deferred rent                                            35,305              60,668                  -              95,973
                                                       -----------------------------------------------------------------------------
 Net cash used for operating activities                     (4,130,323)         (5,005,849)        (4,329,488)        (30,417,261)

INVESTING ACTIVITIES
Purchase of technology                                               -                   -                  -            (570,000)
Purchase of equipment and improvements                         (26,099)           (197,460)          (295,778)         (1,810,814)
Purchases of short-term investments                                  -                   -         (4,226,729)        (16,161,667)
Sales of short-term investments                                      -             974,817          4,244,954          16,161,667
                                                       -----------------------------------------------------------------------------
Net cash provided by (used for) investing activities           (26,099)            777,357           (277,553)         (2,380,814)

FINANCING ACTIVITIES
Net proceeds from issuance of warrants and sale of
   common stock                                                939,755              83,918          4,670,943          17,537,666
Net proceeds from issuance of preferred stock                2,074,596           5,277,813                  -          14,290,160
Net proceeds from convertible notes and detachable
   warrants                                                          -                   -                  -           1,068,457
Payments on capital lease obligations                          (85,385)            (75,112)           (23,594)           (184,089)
Payment on note payable                                       (150,000)                  -                  -            (242,750)
Proceeds from note payable                                     150,000                   -                  -             484,323
Deferred offering costs                                              -                   -             17,356                   -
                                                       -----------------------------------------------------------------------------
Net cash provided by financing activities                    2,928,966           5,286,619          4,664,705          32,953,767
Net increase (decrease) in cash and cash equivalents        (1,227,456)          1,058,127             57,664             155,692
Cash and cash equivalents at beginning of the period         1,383,148             325,021            267,357                   -
                                                       -----------------------------------------------------------------------------
Cash and cash equivalents at end of the period         $       155,692     $     1,383,148    $       325,021     $       155,692
                                                       =============================================================================
</TABLE>

                                      F-7
<PAGE>

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

                            Statements of Cash Flows
<TABLE>
<CAPTION>                                                                                                          JULY 6, 1988
                                                                                                                  (INCEPTION) TO
                                                                      YEARS ENDED DECEMBER 31,                     DECEMBER 31,
                                                             1999               1998                1997               1999
                                                       -----------------------------------------------------------------------------
<S>                                                    <C>                 <C>                <C>               <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Equipment purchased by capital leases                  $             -     $             -    $       288,722   $         288,772
Interest paid                                                   19,983              26,692              7,763             117,911
Imputed dividend on Series E Stock                                   -           3,266,250                  -           3,266,250
Conversion of Series D preferred stock to common
   stock                                                             -              44,990          2,097,342           2,142,332
Conversion of Series E preferred stock to                            -                   -                  -                   -
   common stock                                                913,750             300,000                  -           1,213,750
Series D stock issued for Series C Stock                             -                   -                  -           2,073,925
Series C dividends paid with Series D stock                          -                   -                  -             253,875
Series D dividends paid with common stock                            -                   -            422,341             422,341

</TABLE>

See accompanying notes.

                                      F-8
<PAGE>

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

                          Notes to Financial Statements
                                December 31, 1999


1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITIES

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

LIQUIDITY

As of December 31, 1999, the Company had cash, cash equivalents and short-term
investments totaling $156,000. In January and February 2000 the Company received
approximately $1,350,000 in cash and receivables from licensing and R&D
agreements with Femcare, Ltd. for the European and Australian marketing rights
to the stress urinary incontinence bulking product, with Perkin-Elmer for a
research and development project and commercialization option, and with Sanyo
Chemical Industries, Ltd. for the marketing rights, manufacturing technology,
and inventory for the in vitro cell culture business. Also in February 2000, the
Company received approximately $2 million net of costs from the exercise of
common stock warrants originally granted as part of the sale of Series G
Convertible Preferred Stock.

The Company believes its available cash, cash equivalents and short-term
investments would be sufficient to meet its anticipated capital requirements
through January 2001. Prior to the commercialization of its products,
substantial additional capital resources will be required to fund continuing
operations related to the Company's research, development, manufacturing,
clinical testing, and business development activities. The Company believes
there may be a number of alternatives available to meet the continuing capital
requirements of its operations, such as collaborative agreements and public or
private financings. During 2000, the Company expects that the possible exercise
of existing warrants could result in additional funds for continuing operations.
Further, the Company is currently in discussions with a number of potential
collaborative partners and, based on the results of various materials
evaluations, revenues in the form of license fees, milestone payments or
research and development

                                      F-9
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

reimbursements could be generated. There can be no assurance that any of these
fundings will be consummated in the necessary time frames needed for continuing
operations or on terms favorable to the Company. If adequate funds in the future
are not available, the Company will be required to significantly curtail its
operating plans and may have to sell or license out significant portions of the
Company's technology or potential products.


CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash and cash equivalents consist of cash and highly liquid investments which
include debt securities with remaining maturities of three months or less when
acquired. Short-term investments consist primarily of commercial paper, notes
and short-term U.S. Government securities with original maturities beyond three
months and are stated at estimated fair value. Similar items with original
maturities of three months or less are considered cash equivalents. The Company
has established guidelines relative to diversification and maturities that
maintain safety and liquidity. The Company has not experienced any losses on its
short-term investments.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

                                                            DECEMBER 31,
                                                        1999           1998
                                                    --------------------------
Laboratory equipment                                $ 1,626,822   $  1,600,723
Office equipment                                        175,128        175,128
Leasehold improvements                                  297,635        297,635
                                                    --------------------------
                                                      2,099,585      2,073,486
Less accumulated depreciation and amortization       (1,739,580)    (1,475,039
                                                    --------------------------
                                                    $   360,005   $    598,447
                                                    ==========================

                                      F-10
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES

License fees and research and development contract revenues are recorded as
earned based on the performance requirements of the contracts. If the research
and development activities are not successful, the Company is not obligated to
refund payments previously received. Milestone payments are recorded as revenue
when received as they have not been refundable and the Company has no future
performance obligations. Payments received in advance of amounts earned are
recorded as deferred revenue. Research and development costs are expensed as
incurred.

PRODUCT REVENUE RECOGNITION

Sales are recognized upon shipment of products to customers.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company will value the
asset at fair value. While the Company's current and historical operating and
cash flow losses are indicators of impairment, the Company believes the future
cash flows to be received from the long-lived assets will exceed the assets'
carrying value, and accordingly the Company has not recognized any impairment
losses through December 31, 1999.

STOCK OPTIONS

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

                                      F-11
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

NET LOSS PER COMMON SHARE

The Company reports its earnings per share in accordance with SFAS No. 128,
Earnings per Share, which requires the presentation of both basic and diluted
earnings per share on the statements of operations. Basic earnings per share is
calculated based upon weighted-average number of outstanding common shares for
the period. Diluted earnings per share is calculated based upon weighted-average
number of outstanding common shares, plus the effect of dilutive stock options.

The net loss per common share for the years ended December 31, 1999, 1998 and
1997 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities including
options, warrants and convertible preferred stock have not been included in the
calculation of the net loss per common share as their effect is antidilutive.
Consequently, there is no difference between the basic and dilutive net loss per
common share for any of the periods presented and none of the prior periods were
required to be restated. For purposes of this calculation, net loss in 1999,
1998 and 1997 has been adjusted for accumulated and/or paid dividends on the
Preferred Stock.

COMPREHENSIVE INCOME

SFAS No. 130, Reporting Comprehensive Income, requires that the Company
disclose, either in the income statement or in a separate financial statement,
net income as currently reported and other components of comprehensive income.
Comprehensive income is defined as the change in stockholders' equity during a
period resulting from transactions and other events and circumstances from
non-owner sources. For the years ended December 31, 1999, 1998 and 1997 the
Company did not have any components of comprehensive income as defined in SFAS
No. 130.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles 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-12
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


2.  STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series
G Preferred Stock from several institutional and accredited individual investors
following the 10 day stockholder notification period required by the NASD prior
to the sale. On September 15, 1999, the Company received an additional $325,000
for 3,250 shares of Series G Preferred Stock, for total proceeds of $2,100,000.
Each share of Series G Convertible Preferred Stock was priced at $100 per share.
Each share can be converted at any time by the holder into common stock at a
price of $0.50 per share, subject to certain antidilution adjustments. Each
share of Preferred Stock also receives a common stock warrant, exercisable for
12 months, that allows the holder to acquire 200 shares of PPTI common stock at
a price of $0.50 per share.

Between April 1 and April 15, 1999, the Company received approximately $508,000
from the exercise of redeemable, publicly traded, warrants to purchase common
stock originally issued as part of PPTI's initial public offering. Following the
close of business on April 15, the remaining unexercised redeemable, publicly
traded, warrants expired. On May 12, 1999, the Company received approximately
$416,000 from the exercise of warrants to purchase common stock issued in
conjunction with the private placement of the Company's Series E Convertible
Preferred Stock.

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

Each share of Series E Stock is convertible at any time at the election of the
holder into 80 shares of common stock at a conversion price of $1.25 per share,
subject to certain antidilution adjustments. This registration became effective
on October 3, 1998. As of December 31, 1999, 11,650 shares of Series E Stock had
been converted into 932,000 shares of the Company's common stock.

                                      F-13
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


2.  STOCKHOLDERS' EQUITY (continued)

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

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

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

The Series E Stock is convertible, at the option of the holder, into shares of
the Company's common stock, subject to anti-dilution adjustments, and has a
preference in liquidation of $100 per share, but only after any preference is
paid or declared set apart for the Series D Stock. Holders of the Series E Stock
are entitled to receive dividends when and if declared by the Board of
Directors; however, no such dividends will be declared or paid on the Series E
Stock until the preferential cumulative dividends on the Series D and F Stock
have been fully

                                      F-14
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


2. STOCKHOLDERS' EQUITY (continued)

paid or declared and set apart. Automatic conversion of all Series E Stock will
occur if: (a) the Company completes a public offering of common stock at a price
of $7.50 or higher; or (b) the holders of more than 75% of outstanding Series E
Stock elect to convert.

The Series D, E and F Preferred Stock has been designated as non-voting stock.

STOCK OPTION PLANS

In September 1996 the Company established the Protein Polymer Technologies,
Inc., Employee Stock Purchase Plan ("Plan"). The Plan commenced January 2, 1997,
and allows for offering periods of up to two years with quarterly purchase dates
occurring the last business day of each quarter. The purchase price per share is
generally calculated at 85% of the lower of the fair market value on an eligible
employee's entry date or the quarterly purchase date. The maximum number of
shares available for issuance under the Plan is 500,000; an eligible employee
may purchase up to 5,000 shares per quarter. The Plan Administrator consists of
a committee of at least two non-employee directors of the Company. The Board may
modify the Plan at any time. During 1999, a total of 19,429 shares were
purchased under the Plan at prices ranging from $0.79 to $1.06. The value of
shares issued under the Plan as calculated in accordance with Statement 123 is
not significant and is not included in the following pro forma information.

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. Such
grants of options to purchase 5,000 shares of common stock are awarded
automatically on the first business day of June during each calendar year to
every Participating Director then in office, subject to certain adjustments. No
Participating Director is eligible to receive more than one grant per year. The
purchase price of each option is set at the fair market value of the common
stock on the date of grant. Each option has a duration of ten years, and is
vested and exercisable six months after the grant date. The Board (or a
designated committee of the Board) administers the 1996 Plan. At December 31,
1999, 130,000 options to purchase have been granted under the 1996 Plan.

The Company adopted the 1992 Stock Option Plan which provides for the issuance
of incentive and non-statutory stock options for the purchase of up to 1,500,000
shares of common stock to its key employees and certain other individuals. The
options will expire

                                      F-15
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


2. STOCKHOLDERS' EQUITY (continued)

ten years from their respective dates of grant. Options become exercisable
ratably over periods of up to five years from the dates of grant. At December
31, 1999, options to purchase 527,000 shares of common stock were exercisable,
and 212,000 shares were available for future grant.

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. Options granted in the plan
became exercisable ratably over periods of up to five years from the date of
grant. At December 31, 1999, options for 365,000 shares were exercisable.

Since inception, the Company has granted non-qualified options outside the
option plans to  employees, directors and consultants of the Company. At
December 31, 1999, options for 130,000 shares were exercisable.

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

<TABLE>
<CAPTION>
                                                            Years ended December 31,
                                   ----------------------------------------------------------------------------
                                           1999                       1998                        1997
                                   ----------------------   --------------------------    ---------------------
                                                 Weighted                   Weighted                   Weighted
                                                 Average                    Average                    Average
                                                 Exercise                   Exercise                   Exercise
                                   Options        Price        Options       Price        Options       Price
                                   -------       -------       -------      -------       -------       -------
  <S>                             <C>           <C>            <C>          <C>           <C>           <C>
  Outstanding - beginning
    of year                         1,765,000      $1.51       1,540,600      $1.52        1,393,600     $1.38

      Granted                         548,500      $0.44         568,000      $0.99          190,000     $2.34
      Exercised                             -          -         (12,000)    ($0.67)         (28,000)   ($0.73)
      Forfeited/Expired              (315,500)    ($1.40)       (331,600)    ($0.83)         (15,000)   ($0.60)
                                    ---------      -----       ---------      -----          -------     -----
  Outstanding - end of year         1,998,000      $1.23       1,765,000      $1.51        1,540,600     $1.52
                                    =========      =====       =========      =====        =========     =====
  Exercisable - end of year         1,152,000      $1.37       1,093,600      $1.36          916,600     $1.56
                                    =========      =====       =========      =====        =========     =====
</TABLE>



                                      F-16
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999



2.  STOCKHOLDERS' EQUITY (continued)

The exercise prices for options outstanding as of December 31, 1999 range from
$0.22 to $0.84. The weighted average remaining contractual life of these options
is approximately 7.20 years.

STATEMENT 123 PRO FORMA INFORMATION

Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS No. 123, using the Black-Scholes
option pricing model. The fair value was estimated using the following
weighted-average assumptions: a risk free interest rate of 5.50% for 1999, 6.00%
for 1998 and 6.43% for 1997; a volatility factor of the expected market price of
the Company's common stock of 100% for 1999, 89% for 1998 and 102% for 1997;
expected option lives of 5 years for 1999, 5 years for 1998, and 8 years for
1997; and no dividend yields for all years.

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

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

<TABLE>
<CAPTION>
                                                        1999               1998              1997
                                                        ----               ----              ----
  <S>                                              <C>                <C>               <C>
  Net loss as reported                             $  (4,535,170)     $ (9,182,526)     $ (4,886,615)
  Net loss per share as reported                           (0.36)            (0.88)            (0.52)
  Net loss pro forma                                  (4,772,359)       (9,877,344)       (5,188,511)
  Net loss per share pro forma                              (.38)             (.94)            (0.55)
  Weighted average fair value per share
    of options granted during the year             $        0.34      $       0.87      $       1.77
</TABLE>

                                      F-17
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


2.  STOCKHOLDERS' EQUITY (continued)

The pro forma effect on net loss for 1999, 1998 and 1997 is not representative
of the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense from option grants made prior
to 1995.

3.  STOCKHOLDER PROTECTION AGREEMENT

In 1997, the Board of Directors of the Company 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 outstanding shares of the Company's 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.

4.  COMMITMENTS

The Company leases its office and research facilities totaling 21,000 square
feet under an operating lease, which expires in May 2005. The facilities lease
is subject to an annual escalation provision based upon the Consumer Price
Index. The lease provides for deferred rent payments; however, for financial
purposes rent expense is recorded on a straight-line basis over the term of the
lease. Accordingly, deferred rent in the accompanying balance sheet represents
the difference between rent expense accrued and amounts paid under the lease
agreement.

                                      F-18
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


4.  COMMITMENTS (continued)

Annual future minimum operating and capital lease payments are as follows:

<TABLE>
<CAPTION>
                                                                                             Obligations
                                                                     Operating                 Under
                  Year ending December 31,                            Leases               Capital Leases
                  ------------------------                       ---------------          ---------------
    <S>                                                          <C>                      <C>
    2000                                                         $       451,841          $        87,228
    2001                                                                 460,933                   25,651
    2002                                                                 461,782                        -
    2003                                                                 473,200                        -
    2004                                                                 487,396                        -
    Thereafter                                                           164,064                        -
                                                                 ---------------          ---------------
    Total minimum operating and capital lease payments           $     2,499,216                  112,879
                                                                 ===============
    Less amount representing interest                                                              (8,198)
                                                                                          ---------------
    Present value of remaining minimum capital lease payments                                     104,681
    Less amount due in one year                                                                   (79,593)
                                                                                          ---------------
    Long-term portion of obligations under capital leases                                 $        25,088
                                                                                          ===============
</TABLE>


Cost and accumulated depreciation of equipment held under capital leases as of
December 31, 1999 was $279,497 and $149,483, respectively. The carrying amount
of the Company's obligations under its capital lease agreements approximate
their fair value and the implicit interest rate approximates the Company's
borrowing rate.

Rent expense was approximately $417,000, $442,633, $412,000, and $3,637,633 for
the years ended December 31, 1999, 1998 and 1997 and for the period July 6, 1988
(inception) through December 31, 1999, respectively.

5.  INCOME TAXES

At December 31, 1999, the Company had net operating loss carryforwards of
approximately $30,589,000 for federal income tax purposes, which may be applied
against future income, if any, and will begin expiring in 2004 unless previously
utilized. In addition,

                                      F-19
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


5.  INCOME TAXES (continued)

the Company had California net operating loss carryforwards of approximately
$12,249,000. The California tax loss carryforwards continue to expire. The
difference between the tax loss carryforwards for federal and California
purposes is attributable to the capitalization of research and development
expenses for California tax purposes, the required 50% limitation in the
utilization of California loss carryforwards, and the expiration of certain
California tax loss carryforwards.

The Company also has federal and California research and development tax credit
carryforwards of approximately $1,043,000 and $478,000, respectively, which will
begin expiring in 2004 unless previously utilized.

As a result of an ownership change that occurred in January 1992, approximately
$2,700,000 of the Company's federal net operating loss carryforwards will be
subject to an annual limitation regarding utilization against taxable income in
future periods. However, the Company believes that such limitations will not
have a material impact upon the utilization of the carryforwards.

Significant components of the Company's deferred tax assets as of December 31,
1999 are shown below. A valuation allowance of $12,867,000 has been recognized
to offset the deferred tax assets as realization of such assets is uncertain.


                                                      1999            1998
                                                 -------------------------------
Deferred tax assets:
   Net operating loss carryforwards              $  11,410,000      $ 9,899,000
   Research and development credits                  1,354,000        1,122,000
   Other, net                                          103,000          728,000
                                                 -------------------------------
Total deferred tax assets                           12,867,000       11,749,000
Valuation allowance for deferred tax assets        (12,867,000)     (11,749,000)
                                                 -------------------------------
Net deferred tax assets                          $           -      $         -
                                                 ===============================

6.  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

                                      F-20
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


6.  EMPLOYEE BENEFITS PLAN (continued)

Company may provide a discretionary matching contribution. As of December 31,
1999, the Company had not made a contribution to the Savings Plan.

7.  SUBSEQUENT EVENTS

Between January 1 and February 29, 2000, the Company received approximately $3.5
million in cash and receivables from license and development agreements, the
sale of the Company's cell culture business, and the exercise of common stock
warrants.

FEMCARE AGREEMENTS

On January 26, 2000, PPTI and Femcare Ltd. ("Femcare"), headquartered in
Nottingham, Great Britain, executed three related agreements involving the grant
of a license to Femcare to register and market PPTI's urethral bulking agent for
the treatment of female stress urinary incontinence in Europe and Australia. In
addition to the License and Development Agreement, PPTI agreed in a separate
Supply Agreement to provide final product to Femcare, and if unable to do so,
agreed to make the manufacturing methods and materials available to Femcare as
specified in a separate Escrow agreement.

In addition to agreeing to purchase the final product from PPTI for a defined
percentage of the revenues received by Femcare from the sale of the incontinence
product, Femcare agreed to pay PPTI an upfront license fee of $1 million in two
installments and agreed to pay PPTI a royalty on revenues received from the sale
of the incontinence product. The agreements specify the performance benchmarks
and timelines for each party, the definition of yearly minimum royalties and
minimum product purchases, and the methods and procedures for determining
product manufacturing requirements.

The license grant from PPTI to Femcare is for the greater of 20 years or the
date upon which the last patent included within the license grant for the
territories covered expires, subject to meeting various sales requirements, and
is exclusive in the territories covered, subject to certain conditions being
maintained. The parties agreed to cooperate extensively in the clinical testing
and the registration of the product with the appropriate governmental
authorities.

SALE OF IN VITRO CELL CULTURE BUSINESS TO SANYO CHEMICAL INDUSTRIES, LTD.
        --------

On February 18, 2000, PPTI and Sanyo Chemical Industries, Ltd. ("Sanyo"), of
Kyoto, Japan, executed an agreement involving the grant of a royalty-free
license to Sanyo for exclusive worldwide rights to make and sell ProNectin(R) F
and ProNectin(R)L and derivative

                                      F-21
<PAGE>

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

                    Notes to Financial Statements (continued)
                                December 31, 1999


7.  SUBSEQUENT EVENTS (continued)

products for in vitro cell culture and related applications. PPTI will receive
             --------
from Sanyo $355,000 (less associated expenses) for the license, including
assignment of the ProNectin(R) and SmartPlastic(R) trademarks and transfer of
remaining product inventory. The agreement remains in effect until the last
patent included within the license grant expires.


EXERCISE AND EXCHANGE OF SERIES G WARRANTS

During February 2000, holders of warrants issued in connection with the sale of
Series G Preferred Stock exercised their warrants to purchase common stock which
were due to expire in September, 2000. The exercise price was $0.50 per share.
As an inducement to exercise the warrant early, the Company offered each holder
a new one year warrant for a similar number of shares at an exercise price of
$1.50 per share. As a result the Company raised $2.1 million (less offering
expenses). The newly issued warrants will expire on the last day of February
2001.

                                      F-22
<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.



                                    PART III


         Items 9, 10, 11 and 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Commission no
later than April 7, 2000.


ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

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

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


(a)(3)   Exhibits

         The following documents are included or incorporated by reference:


  Exhibit
  Number         Description
  ------         -----------
  3.1 (6)        Certificate of Incorporation of the Company, as amended.

  3.1.1 (13)     Certificate of Designation of Series E Convertible Preferred
                 Stock.

  3.1.2 (13)     Certificate of Designation of Series F Convertible Preferred
                 Stock.

  3.1.3 (14)     Certificate of Designation of Series G Convertible Preferred
                 Stock.

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

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

  10.2 (4)       1992 Stock Option Plan of the Company, together with forms of
                 Incentive Stock Option Agreement and Nonstatutory Option
                 Agreement.

                                       29
<PAGE>

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

  10.4 (1)       Form of Consulting Agreement.

  10.5 (1)       Form of Indemnification Agreement.

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

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

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

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

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

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

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

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

  10.15 (8)      1996 Non-Employee Directors' Stock Option Plan.

                                       30
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

                                       31
<PAGE>

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

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

  10.30          Employment Agreement, dated as of February 17, 2000, between
                 the Company and J. Thomas Parmeter.

  10.31          Employment Agreement, dated as of February 17, 2000, between
                 the Company and John E. Flowers.

  10.32          Employment Agreement, dated as of February 17, 2000, between
                 the Company and Joseph Cappello.

  10.33          Employment Agreement, dated as of February 17, 2000, between
                 the Company and Franco A. Ferrari.

  10.34          License Agreement dated as of February 18, 2000 between the
                 Company and Sanyo Chemical Industries, Ltd.

  23.1           Consent of Ernst & Young LLP, Independent Auditors

  27             Financial Data Schedule

                                       32
<PAGE>

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

(2)      Incorporated by reference to Registrant's Report on Form 10-Q for the
         quarter ended March 31, 1992, as filed with the Commission on May 14,
         1992.

(3)      Incorporated by reference to Registrant's Report on Form 10-Q for the
         quarter ended September 30, 1992, as filed with the Commission on
         November 13, 1992.

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

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

(6)      Incorporated by reference to Registrant's Report on Form 10-Q for the
         quarter ended September 30, 1995, as filed with the Commission on
         October 24, 1995.

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

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

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

(10)     Incorporated by reference to Registrant's Report on Form 10-KSB for the
         fiscal year ended December 31, 1997, as filed with the Commission on
         April 9, 1998.

(11)     Incorporated by reference to Registrant's Report on Form 10-Q for the
         quarter ended March 31, 1998, as filed with the Commission on May 14,
         1998.

(12)     Incorporated by reference to Registrant's Report on Form 10-Q for the
         quarter ended June 30, 1998, as filed with the Commission on August 13,
         1998.

(13)     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
         April 9, 1999.

(14)     Incorporated by reference to Registrant's Report on Form 10-Q for the
         quarter ended September 30, 1999, as filed with the Commission on
         November 1, 1999.

                                       33
<PAGE>

(b)      Reports on Form 8-K.

         On August 17, 1999, the Company filed a Current Report on Form 8-K with
         the Commission. In Item 5 of the report, the Company reported an
         initial private placement of 17,750 shares of the Company's Series G
         Convertible Preferred Stock, and warrants to purchase an aggregate of
         3,550,000 shares of common stock.

         On September 20, 1999, the Company filed a Current Report on Form 8-K
         with the Commission. In Item 5 of the report, the Company reported the
         delisting of the Company's common stock from the NASDAQ Small Cap
         Market. The Company also reported a subsequent closing of a private
         placement of the Company's Series G Convertible Preferred Stock which,
         including the previous closing, was for a total of 21,000 shares and
         warrants to purchase an aggregate of 4,200,000 shares of common stock.

         On January 27, 2000, the Company filed a Current Report on Form 8-K
         with the Commission. In Item 5 of the Report, the Company reported the
         establishment of a strategic partnership with Femcare, Ltd., including
         the execution of a License and Development Agreement, a Supply
         Agreement, and an Escrow Agreement which in combination granted Femcare
         Ltd. the exclusive right to commercialize the Company's urethral
         bulking agents in Europe and Australia.

                                       34
<PAGE>

                                    SIGNATURE


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


                                     PROTEIN POLYMER TECHNOLOGIES, INC.


March 23, 2000                       By /S/  J. THOMAS PARMETER
                                        -----------------------
                                        J. Thomas Parmeter
                                        Chairman of the Board, Chief
                                        Executive Officer, President


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

<TABLE>
<CAPTION>

Signature                           Capacity                          Date
---------                           --------                          ----
<S>                                 <C>                               <C>

/S/  J. THOMAS PARMETER             Chairman of the Board, Chief      March 23, 2000
-----------------------             Executive Officer, President
J. Thomas Parmeter


/S/  JANIS Y. NEVES                 Director of Finance, Controller,  March 23, 2000
-------------------                 and Assistant Secretary
Janis Y. Neves


/S/  RICHARD ADELSON                Director                          March 23, 2000
--------------------
Richard Adelson


/S/  PATRICIA J. CORNELL            Director                          March 23, 2000
------------------------
Patricia J. Cornell


/S/  EDWARD E. DAVID                Director                          March 23, 2000
--------------------
Edward E. David


/S/  PHILIP J. DAVIS                Director                          March 23, 2000
--------------------
Philip J. Davis


/S/  PATRICK A. GERSCHEL            Director                          March 23, 2000
------------------------
Patrick A. Gerschel
</TABLE>

                                       35
<PAGE>

<TABLE>
<CAPTION>

Signature                           Capacity                          Date
---------                           --------                          ----
<S>                                 <C>                               <C>

/S/  EDWARD J. HARTNETT             Director                          March 23, 2000
-----------------------
Edward J. Hartnett


/S/  J. PAUL JONES                  Director                          March 23, 2000
------------------
J. Paul Jones


/S/  GEORGE R. WALKER               Director                          March 23, 2000
---------------------
George R. Walker
</TABLE>

                                       36