10KSB

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, 2005
	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 in its charter)

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

10655 Sorrento Valley Road, San Diego, CA 92121

(Address of principal executive offices) (Zip Code)

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

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

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

Common Stock

(Title of Class)

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

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

Yes  X   No ___

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

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

The issuer’s revenues for the most recent fiscal year were $867,000.

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity sold, or the average bid and asked price of such common equity, as of March 21, 2006 was $13,101,399. Stock held by directors, officers and shareholders owning 5% or more of the outstanding common equity (as reported on Schedules 13D and 13G) were excluded as they may be deemed affiliates. This determination of affiliate status is not a conclusive determination for any other purpose.

The number of shares of the registrant’s common equity outstanding as of March 21, 2006 was 67,311,408.

DOCUMENTS INCORPORATED BY REFERENCE:

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

Definitive Proxy Statement to be filed with the Commission no later than April 30, 2006 with respect to the registrant’s 2006 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format: Yes ___  No  X 

PROTEIN POLYMER TECHNOLOGIES, INC.

FORM 10-KSB

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

TABLE OF CONTENTS

Page

PART I			2
	Item 1.	Business	2
	Item 2.	Properties	15
	Item 3.	Legal Proceedings	15
	Item 4.	Submission of Matters to a Vote of Security Holders	15
PART II			16
	Item 5.	Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities	16
	Item 6.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 7.	Financial Statements	F-1
	Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	25
	Item 8A.	Controls And Procedures	25
	Item 8B.	Other Information	25
PART III			16
	Item 13.	Exhibits	25
	Signatures		31

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PART I

Item 1. Business

Forward Looking Statements

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

Company Background

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

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

Our internal product development efforts are targeted toward a variety of markets based on a common biomaterials platform. These include the development of a urethral bulking agent for the treatment of female stress urinary incontinence, an injectable disc nucleus for the treatment of injured or degenerated spinal discs, and strong and fast-setting, resorbable surgical sealants for use in general and cardiovascular procedures following primary wound closure. Other markets of interest, which are in an earlier stage of development, include those for adhesion barriers, scaffolds for wound healing and tissue engineering, and drug delivery devices. Through a recent license agreement, the Company is developing and commercializing embolization products based on polyvinyl alcohol, a synthetic polymer with a long history of use in medical products. Three of these product are already cleared by the U.S. Food and Drug Administration (FDA) for commercial sale. Embolization products are used to embolize arteries for the treatment of uterine fibroids, hypervascularized tumors, and neurovascular conditions.

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

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

In January 2000, we entered into an agreement with Femcare, Ltd. for the commercialization of our incontinence product in Europe and Australia. In 2004, Femcare notified us that it was going to close its urology business. Subsequently, by mutual agreement, the license to Femcare was terminated.

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The soft tissue augmentation materials technology underlying the incontinence product has the potential to be useful in a number of other clinical applications. In November 2000, the FDA approved our investigational device exemption to begin human clinical testing of a tissue augmentation product based on this technology for use in cosmetic and reconstructive surgery applications. The product is injected into or under the skin for the correction of dermal contour deficiencies (facial lines, wrinkles, scars, etc.). In April 2001, we initiated human clinical testing of the product. Based on a number of factors, including the projected time to market, the competitive environment, the uncertainty of achieving our product design goals, and the expenses associated with the program, we have decided that it is in the best interests of the Company not to continue our independent development efforts for this product.

Between 1994 and 1997, our efforts were focused predominantly on the development of tissue adhesive and sealant technology. We have demonstrated the ability to create products with a broad range of properties. These include formulations that resorb very quickly to those that resorb very slowly and formulations that set very quickly to those that set much slower. The properties required of the product depend on how it is to be used.

In December 2000, we signed a broad-based, worldwide exclusive license agreement with Genencor International, Inc. enabling Genencor to potentially develop a wide variety of new products for industrial markets. In October 2002, the license agreement was amended to provide Genencor with an additional one-year option to initiate development in the field of non-medical personal care products. Subsequently, this option expired. In March 2005 we entered into a further amendment with Genencor to include personal care products in the field of the license agreement.

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

As a result of the agreements we executed, Spine Wave has acquired an exclusive, worldwide license to our technology for use in spinal and other defined orthopedic applications. In return, we received equity in Spine Wave and we will receive royalties on the sale or sublicensing of licensed products, if any. In addition to the license agreement, we agreed in a separate supply and services agreement, to provide Spine Wave with certain research and development services, including supply of materials to Spine Wave for preclinical and clinical testing. Spine Wave is responsible for clinical testing, regulatory approvals, and commercialization. In 2004, Spine Wave’s NuCore™ Injectable Disc Nucleus product based on the licensed technology began human clinical testing in Europe. In February 2006, Spine Wave began human clinical testing in the U. S.

In 2004, we completed feasibility assessments of a surgical sealant formulation for cardiovascular, pulmonary (lung) and gastrointestinal procedures. Preclinical studies are currently being completed to support regulatory approval to begin human clinical testing. We expect to begin a clinical study for one of these indications before the end of 2006.

In December 2005, we entered into agreements with Surgica Corporation, including a license agreement for the exclusive rights to their technology and products, including three FDA-cleared arterial embolization devices. These devices are based on a patented manufacturing process for producing polyvinyl alcohol foam particles. Embolization products are used to treat a variety of medical conditions by blocking blood flow to tissues, damaged blood vessels, vascular malformations and tumors including uterine fibroids. Additionally, we acquired an option to purchase all of the assets of Surgica, entered into a supply and services agreement for Surgica to provide us with, among other services, product for commercial distribution, and had Surgica’s distribution agreement with AngioDynamics, Incorporated assigned to us.

Our cash balance as of December 31, 2005 was $1,212,000. We believe this amount in combination with continuing contractual commitments is sufficient to meet our anticipated capital requirements through the end of March 2006. The Company is currently negotiating the terms of a $1 million bridge loan, although there is no assurance that this loan will be consummated in the time frame needed for continuing operations. If the Company is successful in obtaining the loan, we believe the existing cash in combination with the proceeds of the loan will be sufficient to meet the Company's anticipated capital requirements through the end of May 2006. Substantial additional capital resources will be required to fund our research, development, manufacturing and business development activities. We believe there may be a number of alternatives available to meet the continuing capital requirements of our operations, such as collaborative agreements and public or private financings. We are currently in discussions with potential financing sources and collaborative partners and funding in the form of equity investments, license fees, loans, milestone payments or research and development payments could be generated. There can be no assurance that any of these alternatives will be consummated in the timeframe needed for continuing operations or on terms favorable to us. If adequate funds are not available, we will be required to significantly curtail our operating plans and would likely have to sell or license out significant portions of our technology, and possibly cease operations. (See the Liquidity and Capital Resources section of Management's Discussion and Analysis for further discussion.)

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

Protein Polymer Technology

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

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

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

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

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

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

We have demonstrated an ability to create materials that:

• combine properties of different proteins found in nature;

• reproduce and amplify selected activities of natural proteins;

• eliminate undesired properties of natural proteins; and

• incorporate synthetic properties via chemical modifications.

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

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Fundamental Protein Polymers

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

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

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

Technology Licensed from Surgica Corporation

There are a number of medical conditions where the healing of tissue and the restoration or augmentation of its form and function are not the treatment goals. In these instances, the treatment goal is to kill and ultimately remove tissues that are not functioning correctly and which are creating a significant risk of or causing death and disability to patients. Examples include arteriovenous malformations in the brain, skin or other organs, and hypervascularized tumors, including uterine fibroids. In cases of trauma or otherwise, there are situations where internal blood loss must be stopped quickly, without immediate surgery, if possible.

Interventional radiologists have developed procedures for delivering devices to physically block the flow of blood in vessels, termed embolization. Typically, metal coils or particles made from synthetic polymers are delivered through catheters to the targeted embolization site to initiate a blood clotting reaction. An occlusive mass forms comprising the coil or particles, clotted blood, and ultimately fibrous tissue generated in response to the injury (the embolization procedure). In this use of biomaterials, the role of the biomaterial is to effectively slow or stop the flow of blood by both mechanical blockage and efficient provocation of the clotting reaction, while avoiding toxicity to the surrounding tissue, or interference with the longer-term tissue response to the injury. For over thirty years, particles made from polyvinyl alcohol (“PVA”) foam have been used for embolization. They can be delivered through a catheter and are thrombogenic, causing blood to clot. They do not resorb appreciably over time, are not toxic and are not known to interfere with the long-term tissue response.

The technology we exclusively licensed from Surgica Corporation relates to their proprietary manufacturing methods and compositions of advanced PVA foam embolization particles. Key particle characteristics include their size, shape, density, compressibility and water-association properties (hydrophilicity). Sizes of particles used in an embolization procedure are related to the size of the vessels they are intended to occlude. Coils are typically used in up to medium-sized vessels, being much larger than particles developed to date. The size of particles used is also determined by the internal diameter of the delivery device and the compressibility of the particles. Shape, either irregular (traditional) or spherical, is related to occlusion characteristics and flow characteristics, i.e. the tendency to clog a catheter during the delivery process. Density and water-association properties are related to the ability of the particles to form suitable suspensions in the injection fluid, typically a mixture of imaging contrast agent and saline.

Surgica’s technology enables manufacture of uniform PVA foam particles in both traditional and spherical shapes. The technology also enables the manufacture of larger spheres than has been possible previously and that are highly compressible and resilient, i.e. capable of expanding back towards their original size after delivery.

Products and Markets for Technology Licensed from Surgica Corporation

The three PVA foam embolization products licensed from Surgica are PVA Plus™, MicroStat™ and MaxiStat™. All are FDA-cleared for commercial distribution and are indicated for use in the endovascular management of arteriovenous

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malformations and neoplastic lesions when presurgical devascularization is desirable. PVA Plus has been distributed in the U.S. since 2002 by AngioDynamics, Inc.

Traditional PVA foam embolization particles are irregularly shaped but have long been recognized as safe and effective for their intended use. They are manufactured by forming a sponge with an open porous structure that is chopped or ground into small particles and then sorted and sold in a range of different sizes, ranging from about 50 microns to about 1400 microns although sizes up to 2800 microns are available. Due to the methods used to form both the pores and the particles, the resulting particles do not have a very uniform shape (some being long and narrow and others being short and thick) and also have ragged edges where whole pores in the sponge are divided into more than one particle. These attributes cause them to tend to clump together and they may clog delivery catheters or occlude a vessel at other than the intended site.

The key benefits desired by a physician are procedure effectiveness and ease of preparation and use. PVA Plus was designed to address the limitations of traditional PVA foam embolization products. Based on a patented manufacturing process, more uniform particles are produced. We have recently obtained FDA-clearance to begin distribution of PVA Plus already packaged in a syringe. This eliminates the need for the user to transfer particles from a vial into a syringe prior to hydration.

Embosphere™ spherical particles were cleared by the FDA for commercial distribution in 2000, its spherical shape seeking to minimize the disadvantages of traditional PVA foam particles, primarily their clumping together with associated complications. Spherical particles can also penetrate deeper into the vasculature than traditional particles due to their more consistent size. Embosphere is not based on PVA, and requires a more complex composition to make it thrombogenic, and is a hydrogel rather than a porous foam. Some manufacturers later developed products based on PVA, but in a different form than the traditional PVA foam with its long history of effective clinical use.

These spherical particles are packaged in a pre-hydrated state, typically in a saline solution; they must then be mixed with contrast agent as desired for the specific procedure for which they are to be used. Physicians report some inconveniences with this process. In addition, these products are more expensive to manufacture than dry particles and they have shelf-life limitations.

MicroStat™ spherical foam embolization particles are pre-packaged dry in a convenience kit, offering physicians the means to prepare their embolization injections in a quick, simple, neat and clean manner. Based on Surgica’s patented manufacturing process, the product rapidly hydrates directly in the physician’s preferred delivery fluid, like traditional PVA foam particles.

MaxiStat™ particles offer the advantages of a spherical PVA foam embolization particle as an alternative to small coils for up to medium-sized vessels and are packaged individually, dry in a vial, hydrating almost instantaneously in delivery fluid. Beginning at roughly twice the diameter of other spherical particles, it comes in sizes (hydrated) of 2.5 mm, 3.0 mm, 3.5 mm, and 4.0 mm. MaxiStat is compressible and resilient, enabling delivery of a 4.0 mm particle through a 0.038” guidewire compatible catheter, being compressed to only 25% of its original diameter before expanding towards its original size at the targeted embolization site. The product is provided in a convenient procedure kit to facilitate preparation and delivery.

MaxiStat was designed so that a single particle would be capable of achieving complete and rapid embolization in up to medium-sized vessels, versus the typical use of several to many metal coils. It is intended to act like a plug, rather than a sieve, based on its physical structure.

We are preparing to commercially introduce both MicroStat and MaxiStat, as well as the new convenience packaging for PVA Plus, at the Society for Interventional Radiology annual meeting in the 2nd quarter of 2006.

In 2002, Embosphere was FDA-cleared with new labeled indications of embolizing both hypervascular tumors (e.g., as develop in liver cancer) and symptomatic (painful) uterine fibroids. These indications have driven growth in the embolization market and represent larger market opportunities than the management of arteriovenous malformations. Other manufacturers of spherical particles have obtained clearance for the same labeled indications. We are preparing a 510(k) submission to the FDA to obtain the same labeled indications for PVA Plus, MicroStat and MaxiStat and anticipate FDA-clearance in the 3rd quarter of 2006.

One of the most rapidly growing areas for embolization is the non-surgical treatment of uterine fibroids. Approximately 70% of the projected 275,000 hysterectomies performed to treat uterine fibroids in 2005 would benefit from this minimally invasive procedure. We estimate that a conservative annual market potential for uterine fibroid embolization (“UFE”) could exceed $200 million in the U.S. and $400 million worldwide. Embolic agents are also used in the treatment of

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inoperable liver cancer, a condition which affects approximately 75,000 people in the United States, with an annual market potential of $200 million U.S. and $400 million worldwide.

Product Candidates and Anticipated Markets for Protein Polymer Technology

Our protein polymer technology and materials have the potential to create products useful in a variety of medical markets. Our current development efforts are principally focused on completion of our pilot clinical study for our hydrogel urethral bulking agent, preparations for its scale-up and manufacturing process validation, our work for Spine Wave on a product for spinal disc repair and preclinical development of a new surgical sealant designed to prevent air and fluid leaks following lung, gastrointestinal, and cardiovascular surgery. Opportunities for research and development of product candidates for other medical uses continue to be evaluated.

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

Soft Tissue Augmentation

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

Our bulking agent is unique in that it is soluble in water at room temperature. Thus, it can be easily injected through a 30-gauge needle and is able to rapidly spread 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. Previously, we have shown gels of similar composition to persist at least 18 months in an animal model.

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

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

In August 1999, we obtained the FDA’s approval of our investigational device exemption to begin human clinical testing of a product based on our technology for the treatment of female stress urinary incontinence. We began pilot clinical testing of the product’s safety and efficacy in December 1999. We currently project expanding into a multi-site pivotal clinical study in 2006, to the extent resources are available.

We estimate that more than 2.5 million women begin to experience stress urinary incontinence in the United States each year. In most untreated cases, the problem becomes progressively more pronounced. Due to limited efficacy or invasiveness of current treatments, only a small proportion of the women experiencing stress urinary incontinence are clinically treated, relying instead on pads and plugs and the like that only address the symptoms. In contrast, our product is injected, typically in an outpatient procedure, into urethral tissue at the base of the bladder forming a solid implant that provides support to the muscles controlling the flow of urine. We believe that our product, if approved, will prove to be easy for the physician to use, offer enduring effectiveness and avoid most of the other limitations of urethral bulking products on the market or in development. The Company believes the potential annual market in the U.S. for improved urethral bulking agents could exceed $500 million.

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Tissue Adhesives and Sealants

Certain tissue adhesives and sealants that seek to avoid the limitations of sutures, staples, pins and screws have been developed and marketed for a number of years outside the United States by other parties. In 1998, the FDA approved two such products for certain uses in the U.S. DermaBond™, 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 relatively brittle plastics. These limitations have historically restricted their use primarily to bonding the outer surfaces of skin together. Tisseel™, 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. The FDA approved one such product, BioGlue®, in 2001 for use as an adjunct to sutures and staples in open surgery to repair large arteries. The aldehyde cross-linking agents employed (i.e. glutaraldehyde, formaldehyde) in such products are known to cause adverse tissue reactions. Additional adhesive and/or sealant products employing other polymer systems and cross-linking agents have also been approved in the U.S. or are under development.

Unique features of the tissue adhesive technology we have developed include the combination of high strength, 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. Non-resorbable adhesives or sealants are used where the damaged tissues will not heal. Resorbable adhesives or sealants are used for temporary repairs while the tissue is healing.

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

Our tissue adhesive technology combines a protein polymer designed specifically to react in a highly efficient manner under physiological conditions with multiple classes of cross-linking agents. These two fluid components are mixed just prior to their delivery to the treatment site, which can be accomplished through a fine gauge needle. The material then rapidly cures to a tough, elastic hydrogel that strongly adheres to surrounding tissues. Chemical cross-linking of the protein polymer allows for the development of a hydrogel with much more robust mechanical properties than can be achieved with the protein polymer alone (i.e. in comparison to our bulking agent). By varying components of the formulation, including the type of cross-linker used, the properties of the final product are tailored to particular clinical needs (e.g., flow properties, set-up speed, adhesive strength and resorption rate).

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

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

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

In 2004, we completed feasibility assessments of a surgical sealant formulation for cardiovascular, pulmonary (lung) and gastrointestinal procedures. Preclinical studies are currently being completed to support regulatory approval to begin human clinical testing. We expect to begin a clinical study for one of these indications before the end of 2006, to the extent resources are available. We are seeking to establish additional partnerships to pursue the commercial development of such products.

In these types of applications, the use of sutures and staples for closing the wound may permit leaks of air, in the case of pulmonary surgery, and fluids, particularly blood in any surgery, and also gastrointestinal (GI) fluids in the case of

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surgery on the colon (GI tract). In such surgeries, the use of an effective sealant — as an adjunct to sutures or staples — to prevent leaks could reduce hospitalization stays, reduce post-operative pain and complications, and lower associated mortality rates. We estimate that about 500,000 gastrointestinal, 300,000 lung, and over 1.5 million cardiovascular surgical procedures are performed each year worldwide where the use of a sealant has the opportunity to significantly reduce complications and costs. The Company believes the potential annual market in the U.S. for a tissue sealant used in these applications could exceed $400 million.

Wound Healing Support

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

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

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

Controlled Release Drug Delivery

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

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

We also believe that the Surgica technology and products offer platforms for drug delivery applications. Embolization particles used in the treatment of inoperable liver tumors are currently mixed with chemotherapy drugs in the delivery fluid prior to administration.

Manufacturing, Marketing and Distribution

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

We are considering several methods for increasing production of our biomedical product candidates to meet pivotal clinical trial and commercial requirements. For example, we may expand our existing facility to produce needed quantities of

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

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

PVA Plus, MicroStat and MaxiStat are manufactured by Surgica in their FDA-registered facility in compliance with QSR requirements. The facility has sufficient capacity to meet the projected demand for these products over the next three years. PVA Plus is distributed to the end-use customers by AngioDynamics under a distribution agreement with us. This agreement expires in June 2007. We are currently in discussions with AngioDynamics about extending the agreement and potential distribution of MicroStat and MaxiStat. We are working with Surgica to obtain CE Marks for these products for international distribution. Pending the outcome of the discussions with AngioDynamics, we plan to add additional distributors to market the products worldwide.

Research and Development

Information regarding Company-sponsored research and development activities and contract research and development revenue is set forth below under the heading, “Management’s Discussion and Analysis.”

Collaborative and License Agreements

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

The medical device industry has traditionally licensed from development-stage companies’ product candidates whose safety and efficacy has been demonstrated at least in pilot human clinical trials. In December 1999, we began human clinical testing of our product for the treatment of female stress urinary incontinence. We anticipate beginning human clinical testing of our tissue sealant product before the end of 2006.

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

Other Agreements

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

Intense Competition

The principal anticipated commercial uses of our biomaterials are as components of end-use products for biomedical and other specialty applications. End-use products using or incorporating our biomaterials would compete with other products that rely on the use of alternative materials. For example, bulking agents for soft tissue augmentation are currently

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marketed based on bovine and human collagen, hyaluronic acid, a synthetic polymer and, outside the U.S., silicone particles. Similarly, all targeted applications of our potential products will, and the products licensed from Surgica do, compete with other products having the same or similar applications.

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

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

Patents and Trade Secrets

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

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

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

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

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

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

We have been granted and maintain eight U.S. patents that are not currently central to our product development focus. However, they either do or may support the interests of licensees of our technology or may support our future product development efforts. One of the patents specifically covers DNA encoding a polymer useful for in vitro cell culture, which will expire in 2010. Two of the patents specifically cover collagen-like proteins and the DNA encoding them, both of which will expire in 2013. One of the patents specifically covers a purification method for silk-like proteins, developed for large-

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scale industrial use, which will expire in 2010. Two of the patents specifically cover compositions, formed objects and methods of making such objects, combining traditional thermoplastic resins and proteins providing chemical or biological activity. Both of these patents will expire in 2015. Two of the patents specifically cover our water-insoluble polymers that have been chemically modified to make them water-soluble. The last of these two patents will expire in 2015.

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

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

In almost all cases, we file for patents in Europe and Japan. Currently, we maintain fifteen issued foreign patents, and five pending foreign applications. One of the issued foreign patents is in Europe and the scope of its claims broadly covers protein polymers having functional activity, including those polymers used in our soft tissue augmentation and tissue adhesive products under development. This patent will expire in 2009. Generally, we only maintain foreign patents or applications in Europe and Japan, unless otherwise required due to our license agreements.

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

We have exclusively licensed Surgica’s technology, which includes one issued U.S. patent, which will expire in 2022. It covers compositions of PVA foam particles that are substantially suspended in injectable, biocompatible liquids and methods for producing them. This patent covers both PVA Plus and MicroStat. Surgica has also filed three provisional patent applications related to MicroStat, MaxiStat, and methods of peparing embolization particles for administration.

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

Regulatory Matters

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

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

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testing, our company may choose to file product approval submissions ourselves or maintain with the FDA a “Master File” containing, among other items, such test results. A Master File can then be accessed by the FDA in reviewing particular product approval submissions from companies commercializing products based on our materials.

There can be no assurance that we, or our customers, will be able to obtain or maintain the necessary approvals from the FDA or corresponding international regulatory authorities, or that we will be able to maintain a Master File in accordance with FDA regulations. In either case, our anticipated business could be adversely affected. To the extent we manufacture medical devices, or a component material supplied to a medical device manufacturer, we will be required to conform commercial manufacturing operations to the FDA’s QSR requirements. We would also be required to register our facility with the FDA as an establishment involved in the manufacture of medical devices. QSR requirements are rigorous, and there can be no assurance that compliance could be obtained in a timely manner and without the expenditure of substantial resources, if at all. International quality system requirements, e.g., ISO 13485 issued by the International Organization for Standardization, is the quality model used by medical product manufacturers and is required for the sale of medical devices in Europe. ISO 13485 standards are similar to the FDA’s QSR.

In August 1999, we obtained the FDA’s approval of our investigational device exemption to begin human clinical testing of our product for the treatment of female stress urinary incontinence. We initiated clinical testing of this product in December 1999. We have implemented, and continue to implement, polymer production and quality control procedures, and have made certain facilities renovations, to operate in conformance with FDA requirements.

In February 2006, we obtained FDA-clearance under a 510(k) filing for PVA Plus, MicroStat and MaxiStat in new convenience kits.

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

Product Liability and Absence of Insurance

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

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Executive Officers of the Registrant

Name	Age	Position with the Company
J. Thomas Parmeter, Ph.D.	66	Chairman of the Board of Directors
William N. Plamondon, III	58	Chief Executive Officer
Donald S. Kaplan*	59	President and Chief Operating Officer
Joseph Cappello, Ph.D.	49	Vice President, Research and Development, Chief Technical Officer and Director, Clinical Research
Franco A. Ferrari, Ph.D.	54	Vice President, Laboratory Operations and Polymer Production and Director, Molecular Genetics
John E. Flowers	49	Vice President, Planning and Operations
R. Steven Reitzler	54	Vice President, Regulator Affairs/Quality Assurance
Janis Y. Neves	55	Director, Finance and Administration, Treasurer and Corporate Secretary

Dr. Parmeter has been the Company’s Chairman of the Board of Directors since its inception in July 1988 (and from July 1988 to April 2005 its Chief Executive Officer, from July 1988 to April 2004 its President, and from July 1988 to July 1992, its Chief Financial Officer). From 1982 to November 1987, Dr. Parmeter was President, Chief Executive Officer and, from June 1987 to June 1988, Chairman of the Board of Syntro Corporation.

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

* Dr. Kaplan, who is retiring effective March 31, 2006, has been the Company’s President and Chief Operating Officer since April 2005. Previously, he was the President of Matrix Technology, a start-up medical device company he founded in 2001. From 1996 to 2000, he was an independent consultant in the areas of surgical devices and medical research and manufacturing. From 1980 to 1995, Dr. Kaplan was employed by U.S. Surgical Corporation, initially as Vice President, Materials Science, and from 1992 to 1995 as Senior Vice President, Operations and Technology.

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

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

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

Mr. Reitzler has been the Company’s Vice President of Clinical and Regulatory Affairs, is responsible for strategic and executional oversight for all U.S. clinical and regulatory matters, including filings and interaction with regulatory authorities since September 2005. Prior to joining the Company, Mr. Reitzler served as V.P. Regulatory Affairs and Quality Assurance for INNERCOOL therapies from March 2002 to October 2005 and previously was V.P. Regulatory Affairs and Quality Assurance for NuVasive Incorporated from January 1999 to September 2001.

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Ms. Neves has been the Company’s Director of Finance since November 1998, Controller since January 1990 and Corporate Secretary since June 2004. From July 1988 until January 1990, Ms. Neves was the Company’s Business Office Manager.

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

Employees

As of February 24, 2006, we had 21 full-time employees, of whom four hold Ph.D. degrees. We are highly dependent on the services of our executive officers and scientists. The loss of the services of any one of these individuals would have a material adverse effect on the achievement of our development objectives, our business opportunities and prospects. The recruitment and retention of additional qualified management and scientific personnel is also critical to our success. There can be no assurance that we will be able to attract and retain required personnel on acceptable terms, due to the competition for such experienced personnel from other biotechnology, pharmaceutical, medical device and chemical companies, universities and non-profit research institutions.

Item 2. Properties

We do not own any real property. We lease approximately 33,000 square feet of office and laboratory space in San Diego. The leased property includes our administrative offices, which encompass approximately 4,000 square feet, and our laboratory facilities, which encompass approximately 23,000 square feet. The current annual rent for this space is approximately $694,000. We currently sublease an additional 6,000 square feet of office and laboratory space in our present facility to a third party (“Biopraxis”), offsetting our rental expense annual as of December 31, 2005 by approximately $157,000. The master lease expires in May 2008. The sublease originally expired at the end of January 2003, but is currently continuing on a month-to-month basis. We believe that our current facilities are adequate to meet our needs until the end of 2007.

Item 3. Legal Proceedings

None.

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

No matter was submitted to a vote of security holders during the fourth quarter of 2005.

PART II

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

NASDAQ Delisting

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

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

	Trade Prices
2005	High	Low
First Quarter	$1.250	$0.460
Second Quarter	1.100	0.440
Third Quarter	0.610	0.350
Fourth Quarter	0.400	0.180
2004
First Quarter	$0.550	$0.320
Second Quarter	0.430	0.300
Third Quarter	0.780	0.300
Fourth Quarter	0.720	0.430

As of March 21, 2006, we had approximately 193 shareholders of record of our common stock; we estimate we had approximately 1,500 beneficial holders as of that date. We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Equity Compensation Plan Information

The following table provides information as of December 31, 2005 regarding equity compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity Compensation Plans approved by security holders
Stock Option Plans1	10,954,032	$0.712	1,795,968
Employee Stock Purchase Plan2	–	–	24,374
Equity Compensation Plans not approved by security holders3	1,684,050	$0.732	n/a
1 Includes shares of common stock to be issued upon exercise of stock options granted under the 1989 Employee Stock Option Plan, the 1992 Employee Stock Option Plan, the 2002 Employee Stock Option Plan, and the 1996 Non-employee Director’s Stock Option Plan.
2 Includes shares of common stock available for future issuance under the Employee Stock Purchase Plan.
3 Includes shares of common stock to be issued upon exercise of out-of-plan non-qualified options granted.

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Recent Sales of Unregistered Securities

In January 2005, certain holders of warrants issued in conjunction with the sale of Series G convertible preferred stock exercised their warrants to purchase common stock. These warrants were due to expire on January 31, 2005. The exercise price of such warrants was $0.55 per share. As an incentive to exercise the warrant early the Company offered to reduce the exercise price of the warrants to $0.33 per share and offered each holder the issuance of a new warrant, for a similar number of shares, at an exercise price of $0.50 per share. As a result, the Company raised $282,000. The newly issued warrants were to expire on the last day of January 2006. Prior to the expiration date, the Board of Directors extended the expiration date to January 31, 2007. In connection with the repricing and issuance of additional warrants to the investors, the Company recorded an imputed dividend in the amount of $482,000 to reflect the additional benefit created for these investors.

The issuances of the warrants where exercise was noted above were exempt from registration under Section 4(2) of the Securities Act, as they were issued to accredited investors pursuant to requirements of Rule 506 of Regulation D promulgated under the Securities Act. The Company used the proceeds from such warrant exercises for working capital and general corporate purposes.

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

On or about April 15, 2005, the Company, in a final closing pursuant to the Securities Purchase Agreement, sold an aggregate of 10,827,955 shares to additional investors for an aggregate purchase price of $3,573,000. As part of the transaction, the Company also issued to the investors warrants that entitle the holders to purchase an aggregate of 5,413,976 shares of common stock at an exercise price of $0.50 per share.

For the entire private placement offering, including an initial closing on April 1, 2005 and the final closing, the Company issued a total of 23,556,224 shares of common stock at price of $0.33 per share, for aggregate total proceeds of $7,774,000 (including approximately $1,200,000 of converted short-term promissory bridge notes previously issued by the Company to certain of the Initial Investors), together with warrants for the purchase of an aggregate of approximately 11,778,108 shares of common stock at an exercise price of $0.50 per share.

The sales and issuances of the securities under the Securities Purchase Agreement to the investors were exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The Company relied upon the representations made by the investors pursuant to the Securities Purchase Agreement in determining that such exemptions were available. No underwriting discounts or commissions were paid by the Company in connection with these transactions. In connection with the Securities Purchase Agreement, the Company agreed to file a registration statement registering these securities with the Securities and Exchange Commission, and on June 6, 2005 registration of the shares of common stock became effective.

The Company incurred aggregate selling fees of approximately $1,109,000, of which $501,000 was paid in cash and $608,000 was paid by issuing warrants to purchase 751,088 shares of the Company’s common stock at an exercise price of $0.55 per share exercisable at any time and expiring approximately 5 years from the date of issuance. The fair value of the warrants was estimated by management using the Black-Scholes option-pricing model.

On April 22, 2005 the Company agreed to issue a warrant to purchase an aggregate of 2,000,000 shares of the Company’s common stock to William N. Plamondon, III, a director of the Company who earlier in the month was appointed to serve as the Company’s Chief Executive Officer. The warrant was immediately exercisable at an exercise price of $0.67 per share (closing market price of date of grant), and expires three years from the date of grant. In connection with the issuance of the warrant, the Company recorded a non-cash expense of $1,245,000 during the quarter ended June 30, 2005 based on a Black-Scholes model valuation, and a corresponding increase to additional paid in capital.

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

Forward Looking Statements

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

General Overview

Protein Polymer Technologies, Inc., is a biotechnology company engaged in the research, development, production and clinical testing of medical products based on materials created from our patented technology to produce proteins of unique design. Additionally, we are committed to the acquisition of faster-to-market medical products in certain complementary growth markets. Since 1992, we have focused primarily on developing technology and products to be used for soft tissue augmentation, tissue adhesives and sealants; wound healing support; and drug delivery devices. We recently acquired an exclusive license to three FDA-cleared arterial embolization products and related technology from Surgica Corporation. The transaction also included an option to acquire all of Surgica’s assets (See “Recent Events: Surgica Corporation” below). We have been unprofitable to date, and as of December 31, 2005 had an accumulated deficit of $(59,040,000).

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

Our product candidates for surgical repair, augmentation and regeneration of human tissues are in various stages of research and development. The more advanced programs are bulking agents for soft tissue augmentation, particularly for use in urethral tissue for the treatment of female stress incontinence, tissue adhesive formulations for the repair of spinal discs damaged due to injury or aging, and preclinical development of a new surgical sealant designed to prevent air and fluid leaks following lung, gastrointestinal, and cardiovascular surgery. We currently are devoting the majority of our resources to the development and FDA approval of these products, and to the commercial launch of the three Surgica embolization products.

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

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Recent Events: Surgica Corporation

On July 12, 2005, we entered into a non-binding letter of intent to acquire Surgica Corporation, a medical device company that develops, manufactures and markets embolization products. Embolization is a minimally invasive procedure, generally performed by interventional radiologists, used to treat uterine fibroids, liver cancer and neurovascular malformations. On October 13, 2005 we extended the non-binding letter of intent to December 12, 2005.

On November 23, 2005, we entered into an Asset Purchase Option Agreement, or Option Agreement, with Surgica Corporation pursuant to which we were granted a one-year option (which may be extended by one year at our discretion) to acquire substantially all of Surgica’s assets in exchange for two million shares of our common stock and a potential future incentive issuance of additional common stock based on the future sales performance of Surgica’s products during the first quarter of 2007.

On December 19, 2005, we entered into a license agreement and supply and services agreement with Surgica, pursuant to which we acquired exclusive rights to Surgica’s technology and products. Upon execution and delivery of the license agreement, Surgica transfered to us its PVA Plus™, MaxiStat™, and MicroStat™ 510(k) clearances from the FDA by delivering a duly executed bill of sale and assignment. Other agreements executed concurrently included: (i) the consent of AngioDynamics, Inc. for the assignment by Surgica to us of their distributor agreement, dated as of June 28, 2002; (ii) a voting agreement (and proxy) between us and Louis R. Matson; (iii) an employment agreement between Surgica and Louis R. Matson to expire no later than December 31, 2007; and (iv) a side letter agreement between us and Louis R. Matson representing that, to his actual knowledge, each of the representations and warranties of Surgica set forth in the Option Agreement was true and correct at the date the Option Agreement was executed. The following is a brief summary of the transaction.

Asset Purchase Option Agreement. Under the terms of the Option Agreement, we have the option to acquire substantially all of the assets of Surgica for (i) 2 million shares of our common stock and (ii) a potential earnout payment of additional shares of our common stock based on the future sales performance of Surgica’s products during the first quarter of 2007. The earnout payment of additional shares of our common stock, if any, will be determined in part on the price per share of our common stock based on the 90 day prior average price of our common stock as of April 1, 2007. The option is exercisable, at our sole discretion, for a term of up to two (2) years. Once Surgica is given notice of our intent to exercise the option, the exercise of the option itself will be subject to approval by Surgica’s stockholders. There would be no affect whatsoever if we decided not to exercise the asset purchase option.

License Agreement and Supply and Services Agreement. Under the terms of the license agreement, we acquired exclusive rights to Surgica’s three embolization products, one issued patent, and technical and market know-how in return for (i) the assumption of approximately $522,000 of certain Surgica liabilities, (ii) a cash payment to Surgica of approximately $385,000, and (iii) in connection with the license agreement, the company agreed to indemnify Surgica for up to $200,000 in connection with claims by a third party for fees owed pursuant to an engagement letter entered into between Surgica and the third party as a result of agreements entered into between Surgica and the Company. Under the terms of the supply and services agreement and license agreement, Surgica is obligated to provide its goods and services, including further product development, in exchange for (i) operating payments to Surgica and (ii) a royalty of twenty-five percent (25%) of net profits, if any, on revenues generated by the sale of Surgica products.

Employment Agreement. Under the terms of the Option Agreement, Louis R. Matson and Surgica entered into an employment agreement that provides, among other things, that Louis R. Matson (i) retain the title of President of Surgica; (ii) be paid a specified base salary; and (iii) be employed until December 31, 2007, unless terminated prior to such date. It is currently being contemplated that this employment agreement will be assumed by us or a wholly-owned subsidiary if and when we exercise the option.

Voting Agreement and Proxy. As a condition of the Option Agreement, we entered into a voting agreement pursuant to which Louis R. Matson agreed to vote all shares of Surgica that he may own (i) in favor of the adoption of the Option Agreement; (ii) in favor of adoption of the Asset Purchase Agreement and approval of the acquisition contemplated thereby but only to the extent the option is exercised by the Company; (iii) against any proposal for any acquisition transaction, other than the acquisition, between Surgica and any person other than us and/or a wholly-owned subsidiary; and (iv) against any other action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Surgica under the Option Agreement or Asset Purchase Agreement or which would result in any of the conditions to the consummation of the effectiveness of the option under the Option Agreement or the acquisition under the Asset Purchase Agreement not being fulfilled. Concurrently with the execution of the voting agreement, and pursuant to the voting agreement’s terms, Louis R. Matson delivered to us an irrevocable proxy appointing the Company as the sole and exclusive attorney and proxy of Louis R. Matson, with full power of substitution and resubstitution, to vote and

19

exercise all voting and related rights with respect to all shares of Surgica that he may own in accordance with (ii), (iii), and (iv) above.

Asset Purchase Agreement. Pursuant to the terms of the Option Agreement, we will have up to two years to exercise an option to purchase substantially all of the assets of Surgica in exchange for 2 million shares of our common stock and potential additional shares of our common stock by our to-be-formed, wholly-owned subsidiary which will be subject to a number of conditions precedent, including approval by Surgica’s stockholders. Pursuant to the terms of the Asset Purchase Agreement, the shares will constitute “restricted securities” as that term is defined in Section 144(a)(3) of the Securities Act of 1933, as amended, and will be restricted as to their resale for a period of at least one hundred eighty (180) days from the date the Asset Purchase Agreement is executed.

The additional shares of our common stock will be issued, if at all, only if the average sales per quarter from the operations to be transferred from Surgica to us for the first (1st) and second (2nd) quarters of 2007 are equal to or greater than a predetermined set amount.

Each of the Option Agreement, license agreement, supply and services agreement and Asset Purchase Agreement contain representations and warranties by us and Surgica customary for transactions of this type.

Recent Events: Thuris Corporation

On November 21, 2005, we entered into a non-binding, letter of intent with Thuris Corporation, or Thuris. Thuris is a privately held biopharmaceutical company focused on medical device solutions to aid in drug development and diagnosis of Central Nervous System (CNS) disorders including Mild Cognitive Impairment and Alzheimer’s Disease. Thuris is also developing pharmaceuticals for select CNS orphan and niche indications including ischemia-related conditions, brain inflammation and Huntington’s disease. Under the terms of the letter of intent, a wholly-owned subsidiary formed by us would merge into Thuris which would thereafter be our wholly-owned subsidiary. The stockholders, option holders and warrant holders of Thuris would receive from us, in exchange for their holdings, a number of shares of our common stock, or common stock equivalents, equal to between 30% and 50% of our outstanding capital stock, calculated on a fully diluted basis.

Although the exclusivity period under the letter of intent with Thuris has expired and issues have arisen and continue to arise, we continue to negotiate with Thuris. There can be no assurance that definitive agreements will be entered into or that any transaction with Thuris will be consummated, or, if consummated, that the transaction would be on the terms and conditions set forth in the letter of intent.

Other Significant Collaborative Agreements

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

Spine Wave

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

In connection with the license agreement, we entered into a separate supply and services agreement to provide Spine Wave with a variety of research and development services, and to supply materials to Spine Wave for pre-clinical and clinical testing. Spine Wave, in return, agreed to reimburse us for both our direct costs and the associated overhead costs for the services provided.

In March 2002, we executed additional agreements with Spine Wave that expanded our contractual research and development relationship, and that offered us additional equity incentives in the form of Spine Wave common stock and warrants. Under the amended supply and services agreement, we, on behalf of Spine Wave, conducted pre-clinical safety and performance studies of a product for spinal disc repair to support Spine Wave’s regulatory filings both in the U.S. and abroad to obtain approval to initiate human clinical testing. Our continuing contractual responsibilities include the supply of product to be used in clinical testing. Research and development services performed for Spine Wave are reimbursed including both direct costs and associated overhead costs. Spine Wave is responsible for clinical testing, regulatory approvals, and

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commercialization. For the year ended December 31, 2005 and for the period of project inception to date we received $611,000 and $5,525,000, respectively, in contract revenue from Spine Wave which represents the reimbursement of direct costs plus overhead costs allocated to the research and development resources used in performing the collaborative activities.

Additional equity incentives offered in conjunction with the expanded supply and services agreement of March 17, 2002 consist of a four year warrant (the expiration was recently extended until April 21, 2006, and upon meeting certain conditions would be further extended to September 21, 2006) to purchase 1,000,000 shares of Spine Wave common stock at an exercise price of $0.50 per share (Spine Wave preferred stock issued during this time was priced at $0.55 per share), and 400,000 shares of common stock valued at $0.05 per share subject to repurchase at cost until each of three performance goals is achieved, or until the repurchase option expired. The performance goals consisted of: (i) completion of certain studies for filing an investigational device exemption application (100,000 shares); (ii) completion of additional studies for filing of the investigational device exemption and provision of inventory for the pilot clinical study (150,000 shares); and (iii) completion of certain manufacturing arrangements, and production of certain quantities of product (150,000 shares). Spine Wave’s repurchase option expired on December 31, 2005.

In October 2003, we executed a second amendment to the supply and services agreement with Spine Wave that further defined the cost basis for reimbursement of services provided by us to Spine Wave.

Significant License Agreements

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

Femcare,Ltd.

In January 2000, we entered into an agreement with Femcare, Ltd. (“Femcare”), for the commercialization in Europe and Australia of our product for treatment of stress urinary incontinence. Under the terms of the license agreement, Femcare paid the Company a $1 million non-refundable license fee in exchange for the patented technology and a three year commitment from the Company to provide support to Femcare in its efforts to clinically test our products in Great Britain and to achieve European regulatory approval. We have not incurred any research and development costs associated with our support efforts to date. As a result of the arrangement, we recognized approximately $333,000 in deferred license fee revenue for each of 2000, 2001, and 2002. In 2004, Femcare notified us that it was going to close its urology business, and in July 2005, we mutually agreed to terminate the license agreement and discharged each other from any claims, obligations, liabilities, or other causes of action.

Genencor International, Inc.

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

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

In connection with the license agreement, Genencor was issued two warrants, each convertible by formula into $500,000 of our common stock. Both warrants have subsequently expired. As a result of the collaboration, in 2000 we

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recognized $750,000 in license fee revenue (less the issuance of warrants to purchase $1 million of our common stock valued at $319,000). The agreement terminates on the date of expiration of the last remaining patent.

Research and Development

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

Our product for the treatment of female stress urinary incontinence is in pilot human clinical testing. Due to the rate of patient enrollment, we now project beginning pivotal clinical testing during 2006. We expect these trials, including patient follow-up, will take approximately 24 months, and the subsequent FDA review of our pre-market approval submission may take an additional 12 months. Assuming this schedule is met and the product is approved, U.S. sales of the product are projected to begin in 2009. Commercial manufacturing process development and completion of the clinical trials are estimated to cost approximately $10 million. In 2004, we completed feasibility assessments of a surgical sealant formulation for cardiovascular, pulmonary (lung) and gastrointestinal procedures. Preclinical studies are currently being completed to support regulatory approval to begin human clinical testing. The external cost of completing preclinical testing is estimated to be approximately $750,000. We expect to begin a clinical study for one of these indications before the end of 2006, to the extent resources are available. We are seeking to establish additional partnerships to pursue the commercial development of such products.

In these types of applications, the use of sutures and staples for closing the wound may permit leaks of air, in the case of pulmonary surgery, and fluids, particularly blood in any surgery, and also gastrointestinal (GI) fluids in the case of surgery on the colon (GI tract). In such surgeries, the use of an effective sealant — as an adjunct to sutures or staples — to prevent leaks could reduce hospitalization stays, reduce post-operative pain and complications, and lower associated mortality rates. We estimate that about 500,000 gastrointestinal, 300,000 lung, and over 1.5 million cardiovascular surgical procedures are performed each year worldwide where the use of a sealant has the opportunity to significantly reduce complications and costs.

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

Our spinal disc repair product being developed for our licensee, Spine Wave, Inc., is in clinical testing. The timing of this project is under the control of Spine Wave. Under our contract with Spine Wave, we are responsible for development of the formulated product, its pilot manufacturing process, and product production for clinical trials. Spine Wave is responsible for funding all expenses associated with these activities. Contract revenue received from Spine Wave is approximately equal to our cost (direct project costs plus allocated laboratory and corporate overhead expenses) of the work performed. Total research and development costs for the year ended December 31, 2005 and for the period of project inception to date are approximately $611,000 and $5,525,000 respectively.

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

Results of Operations

Contract and Licensing Revenue. We received $861,000 in contract and licensing revenue for the year ended December 31, 2005 as compared to $453,000 for the year ended December 31, 2004. Contract revenue for the past year primarily represents payments of $611,000 from Spine Wave, for materials and services provided in the development of an adhesive product for the repair of spinal discs. We received $453,000 in contract revenue from Spine Wave in 2004. We received $250,000 in licensing fees from Genencor International in 2005. We received no licensing revenue in 2004.

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Interest Income. Interest income was $41,000 for the year ended December 31, 2005, as compared to $4,000 for 2004. The year-to-year variability resulted from the amount and timing of the receipt of equity capital and the amounts of excess cash available for investment.

Research and Development Expenses. Research and development expenses for the year ended December 31, 2005 were $2,908,000, compared to $2,284,000 for 2004. Other than inflationary increases, the fluctuations are primarily due to variations in clinical testing and regulatory consulting costs. Other related expenses include those for expanded manufacturing capacity and manufacturing process development, quality assurance efforts, and outside testing services. We expect our research and development expenses will increase in the future, to the extent additional capital is obtained, due to the expansion of product-directed development efforts including preclinical development of our surgical sealants, increased human clinical testing, increased manufacturing requirements, increased use of outside testing services, and research and development services for Spine Wave.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2005 were $3,735,000, as compared to $1,735,000 for 2004. This increase in 2005 as compared to 2004 is due primarily to the inclusion of a non-cash expense in the second quarter of 2005 in the amount of $1,245,000 related to the issuance of warrants for services to William N. Plamondon III, the Company’s Chief Executive Officer, and to increased personnel costs in 2005 and legal, accounting, and investor relation costs incurred in connection with the private placements closed in 2005. Although the remainder of these expenses has been fairly consistent over the past two years, we did experience some increases during 2005 in the areas of insurance coverage and legal services. To the extent possible, we continue to concentrate on controlling costs reflected in reduced travel, office supplies, and non-regulatory consulting costs. We expect our selling, general and administrative expenses will increase in the future, to the extent additional capital is obtained, consistent with supporting our research and development efforts and as business development, patent, legal and investor relations activities require.

Operating Losses. For the year ended December 31, 2005, we recorded a net loss applicable to common shareholders of $6,581,000 or $0.11 per share, as compared to $4,330,000 or $0.11 per share for 2004. The difference in the net losses and the losses per share between 2005 and 2004 is primarily due to differences in license and contract fees received from collaborative partners, and in 2005 a non-cash charge of $1,245,000 in connection with a warrant for services issued to William N. Plamondon III, our Chief Executive Officer. The 2005 and 2004 losses and per share calculations also include $278,000 of undeclared dividends in each year with respect to our preferred stock.

We expect to incur increasing operating losses for the next several years, to the extent additional capital is obtained, based upon the continuation of the development and testing of our product for the treatment of female stress urinary incontinence and our product for the correction of dermal contour deficiencies, the associated FDA approval process, and the tissue adhesives program, as well as expected increases in our other research and development, manufacturing and business development activities. Our results depend in part on our ability to establish strategic alliances and generate contract revenues, increased research, development and manufacturing efforts, pre-clinical and clinical product testing and commercialization expenditures, expenses incurred for regulatory compliance and patent prosecution, and other factors. Our results will also fluctuate from period to period due to timing differences.

Inflation

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

Liquidity and Capital Resources

As of December 31, 2005, we had cash, cash equivalents and short-term investments totaling $1,212,000, as compared to $82,000 at December 31, 2004. As of December 31, 2005, we had working capital of $449,000 compared to a working capital deficit of $1,531,000 at December 31, 2004.

We do not have any off balance sheet financing activities and do not have any special purpose entities. We had no long-term capital lease obligations as of December 31, 2005 or December 31, 2004. For the year ended December 31, 2005, our cash expenditures for capital equipment and leasehold improvements totaled $257,000, compared with $1,600 for the same period in the prior year. To the extent capital is available, we anticipate that these expenditures will be increased in 2006 for laboratory renovations and additional equipment required to meet the FDA’s applicable Quality System regulation

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as we scale up our manufacturing operations to meet product requirements for expanded clinical testing. We may enter into capital equipment lease arrangements in the future if available at appropriate rates and terms.

We believe our existing available cash, cash equivalents and short-term investments as of March 13, 2006, in combination with continuing contractual commitments will be sufficient to meet our anticipated capital requirements through the end of March 2006. The Company is currently negotiating the terms of a $1 million bridge loan, although there is no assurance that this loan will be consummated in the time frame needed for continuing operations. If the Company is successful in obtaining the loan, we believe the existing cash in combination with the proceeds of the loan will be sufficient to meet the Company's anticipated capital requirements through the end of May 2006. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. In addition we are pursuing a number of alternatives available to meet the continuing capital requirements of our operations, such as collaborative agreements and public or private financings. Further, we are continuing our reimbursed services to Spine Wave. We are currently in discussions with potential financing sources and collaborative partners, and additional funding in the form of equity investments, license fees, loans, milestone payments or research and development payments could be generated. There can be no assurance that any of these fundings will be consummated in the timeframes needed for continuing operations or on terms favorable to us. If adequate funds are not available, we will be required to significantly curtail our operating plans and would likely have to sell or license out significant portions of our technology, and possibly cease operations.

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Item 7. Financial Statements

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

Description	Page
Report of Independent Registered Public Accounting Firm		F-2
Balance Sheets at December 31, 2005 and 2004		F-3
Statements of Operations for the years ended December 31, 2005 and 2004		F-4
Statements of Stockholders’ Equity for the years ended December 31, 2005 and 2004		F-5
Statements of Cash Flows for the years ended December 31, 2005 and 2004		F-7
Notes to Financial Statements		F-8

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Protein Polymer Technologies, Inc.

We have audited the accompanying balance sheets of Protein Polymer Technologies, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Protein Polymer Technologies, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has reported recurring losses from operations aggregating $59,040,000 that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PETERSON & CO., LLP

San Diego, California

March 24, 2006

F-2

Protein Polymer Technologies, Inc.

Balance Sheets

	December 31,
		2005		2004
Assets
Current assets:
Cash and cash equivalents	$	1,211,748	$	82,222
Contracts receivable		113,792		–
Current portion of rent receivable		88,477		60,000
Prepaid expenses		32,440		12,770
Total current assets		1,446,457		154,992
Deposits		29,679		29,679
Notes receivable		242,884		–
Rent receivable, net of current portion and reserve of $128,273 and $99,796 at 2005 and 2004 respectively		26,050		104,527
Technology license agreement		1,106,435		–
Equipment and leasehold improvements, net		292,778		84,580
	$	3,144,283	$	373,778
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	420,672	$	315,357
Deposits payable		–		33,000
Notes payable, related party		–		1,032,842
Accrued expenses		381,139		201,910
Current maturities of notes payable		195,565		–
Deferred revenue		–		102,784
Total current liabilities		997,376		1,685,893
Notes payable, net of current maturities		323,506		–
Deferred rent		8,820		–
Total liabilities		1,329,702		1,685,893
Commitments (Note 13)
Stockholders’ equity (deficit):
Convertible preferred stock, $.01 par value, 5,000,000 shares authorized, 66,045 and 82,945 shares issued and outstanding at December 31, 2005 and 2004, respectively – liquidation preference of $6,604,500 and $8,294,500 at December 31, 2005 and December 31, 2004, respectively		6,059,917		7,749,917
Common stock, $.01 par value, 120,000,000 shares authorized, 67,311,408 and 39,651,123 shares issued and outstanding at December 31, 2005 and 2004, respectively		673,125		396,523
Additional paid-in capital		54,122,000		43,278,106
Accumulated deficit		(59,040,461)		(52,736,661)
Total stockholders’ equity (deficit)		1,814,581		(1,312,115)
	$	3,144,283	$	373,778

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

F-3

Protein Polymer Technologies, Inc.

Statements of Operations

	Years ended December 31,
		2005		2004
Revenues:
Contract revenue	$	861,188	$	453,038
Product and other income		6,245		5
Total revenues		867,433		453,043
Expenses:
Research and development		2,907,585		2,283,820
Selling, general and administrative		3,735,239		1,734,740
Total expenses		6,642,824		4,018,560
Net loss from operations		(5,775,391)		(3,565,517)
Other income (expense):
Interest income		41,245		3,973
Interest expense		(88,072)		(3,661)
Total other income (expense)		(46,827)		312
Net loss		(5,822,218)		(3,565,205)
Undeclared, imputed and/or paid dividends on preferred stock		759,222		764,718
Net loss applicable to common shareholders	$	(6,581,440)	$	(4,329,923)
Basic and diluted net loss per common share	$	(0.11)	$	(0.11)
Shares used in computing basic and diluted net loss per common share		58,735,519		38,212,119

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

F-4

Protein Polymer Technologies, Inc.

Statements of Stockholders’ Equity

For the years ended December 31, 2005 and 2004

	Common stock			Preferred Stock
	Shares	Amount		Shares	Amount
Balance at December 31, 2003	36,830,857	$	368,319	86,095	$	8,064,917
Conversion of Series G preferred stock into common stock	530,000		5,300	(2,650)		(265,000)
Conversion of Series I preferred stock into common stock	90,909		909	(500)		(50,000)
Exercise of Series G warrants at $.25 per share	2,075,312		20,753	–		–
Financing related fees	–		–	–		–
Warrants issued in connection with notes payable	–		–	–		–
Imputed dividend associated with repricing and issuance of warrants	–		–	–		–
Issuance of common stock under stock purchase plan	20,545		207	–		–
Exercise of common stock options	103,500		1,035	–		–
Net loss	–		–	–		–
Balance at December 31, 2004	39,651,123	$	396,523	82,945	$	7,749,917
Conversion of Series G preferred stock into common stock	80,000		800	(400)		(40,000)
Conversion of Series I preferred stock into common stock	2,999,998		30,000	(16,500)		(1,650,000)
Exercise of Series G warrants at $.33 per share	855,303		8,553	–		–
Issuance of common stock and warrants in private placement, net of issuance costs	23,556,224		235,562	–		–
Discount on notes payable and warrants issued	–		–	–		–
Imputed dividend associated with repricing and issuance of warrants	–		–	–		–
Issuance of warrants and options in exchange for services	–		–	–		–
Issuance of common stock under stock purchase plan	14,742		147	–		–
Exercise of common stock options	154,018		1,540	–		–
Net loss	–		–	–		–
Balance at December 31, 2005	67,311,408	$	673,125	66,045	$	6,059,917

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

F-5

Protein Polymer Technologies, Inc.

Statements of Stockholders’ Equity

For the years ended December 31, 2005 and 2004

	Additional		Accumulated		Total Stockholders’
	paid-in capital		deficit		equity (deficit)
Balance at December 31, 2003	$	41,587,518	$	(48,684,377)	$	1,336,377
Conversion of Series G preferred stock into common stock		259,700		–		–
Conversion of Series I preferred stock into common stock		49,091		–		–
Exercise of Series G warrants at $.25 per share		770,653		–		791,406
Financing related fees		(50,000)		–		(50,000)
Warrants issued in connection with notes payable		132,499		–		132,499
Imputed dividend associated with repricing and issuance of warrants		487,079		(487,079)		–
Issuance of common stock under stock purchase plan		7,606		–		7,813
Exercise of common stock options		33,960		–		34,995
Net loss		–		(3,565,205)		(3,565,205)
Balance at December 31, 2004	$	43,278,106	$	(52,736,661)	$	(1,312,115)
Conversion of Series G preferred stock into common stock		39,200		–		–
Conversion of Series I preferred stock into common stock		1,620,000		–		–
Exercise of Series G warrants at $.33 per share		273,697		–		282,250
Issuance of common stock and warrants in private placement, net of issuance costs		7,027,180		–		7,262,742
Discount on notes payable and warrants issued		39,335				39,335
Imputed dividend associated with repricing and issuance of warrants		481,582		(481,582)		–
Issuance of warrants and options in exchange for services		1,271,277		–		1,271,277
Issuance of common stock under stock purchase plan		4,980		–		5,127
Exercise of common stock options		86,643		–		88,183
Net loss		–		(5,822,218)		(5,822,218)
Balance at December 31, 2005	$	54,122,000	$	(59,040,461)	$	1,814,581

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

F-6

Protein Polymer Technologies, Inc.

Statements of Cash Flows

	Years ended December 31,
		2005		2004
Operating activities
Net loss	$	(5,822,218)	$	(3,565,205)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		48,733		31,350
Stock options issued for services		25,982		–
Warrants issued for services		1,245,295		–
Amortization of discounts on notes payable		56,493		115,342
Changes in operating assets and liabilities:
Prepaid expenses		(19,670)		13,029
Rent receivable		50,000		87,499
Contracts receivable		(113,792)		184,527
Accounts payable		102,456		146,698
Deposits payable		(33,000)		33,000
Accrued expenses		33,084		39,301
Deferred revenue		(102,784)		102,784
Deferred rent		8,820		(24,111)
Net cash used for operating activities		(4,520,601)		(2,835,786)
Investing activities:
Purchase of equipment and improvements		(256,931)		(1,518)
Cash paid for license agreement		(384,505)		–
Issuance of notes receivable		(242,884)		–
Net cash used for investing activities		(884,320)		(1,518)
Financing activities:
Net proceeds from exercise of options and warrants and sale of common stock		6,424,447		784,212
Net proceeds from issuance of debt - related party		260,000		1,050,000
Payments on notes payable - related party		(150,000)		–
Net cash provided by financing activities		6,534,447		1,834,212
Net increase (decrease) in cash and cash equivalents		1,129,526		(1,003,092)
Cash and cash equivalents at beginning of the period		82,222		1,085,314
Cash and cash equivalents at end of the period	$	1,211,748	$	82,222
Supplemental disclosures of cash flow information
Interest paid	$	65,819	$	3,661
Non cash investing and financing activity
Imputed dividends on warrant repricing	$	481,582	$	487,079
Conversion of Series G preferred stock to common stock	$	40,000	$	265,000
Conversion of Series I preferred stock to common stock	$	1,650,000	$	50,000
Conversion of notes payable and accrued interest to common stock and warrants	$	1,213,885		–
Warrants issued for financing fees	$	608,371		–
Assumption of liabilities and indemnification in connection with purchase of license agreement	$	721,930		–

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

F-7

Protein Polymer Technologies, Inc.

Notes to Financial Statements

1. Organization and Significant Accounting Policies

Organization and business activities

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

Basis of Presentation

Prior to the fourth quarter of 2005, the Company’s financial statements had been prepared and presented as those of a development stage enterprise. Cumulative disclosures required for development stage enterprises that were included in the previously filed December 31, 2004 financial statements have been omitted in the comparative financial statements included herein.

Going Concern and Liquidity

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the year ended December 31, 2005 the Company incurred a net loss of $5,822,000 and through December 31, 2005 has accumulated losses aggregating $59,040,000. As of December 31, 2005, the Company had cash and cash equivalents of $1,212,000, which in combination with anticipated additional contract and license payments, will be sufficient to meet its anticipated capital requirements only through the end of March 2006.

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. The Company is currently negotiating the terms of a $1 million bridge loan, although there is no assurance that this loan will be consummated in the time frame needed for continuing operations. If the Company is successful in obtaining the loan, we believe the existing cash in combination with the proceeds of the loan will be sufficient to meet the Company’s anticipated capital requirements through the end of May 2006. Further, the Company is currently in discussions with several potential financing sources and collaborative partners and funding in the form of equity investments, debt instruments, license fees, milestone payments or research and development payments could be generated. There can be no assurance that any of these fundings will be consummated in the time frames needed for continuing operations or on terms favorable to the Company. If adequate funds in the future are not available, the Company will be required to significantly curtail its operating plans and may have to sell or license out significant portions of the Company’s technology or potential products, and possibly cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Cash and cash equivalents

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

Equipment and Leasehold Improvements

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

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of

F-8

Protein Polymer Technologies, Inc.

Notes to Financial Statements

1. Organization and Significant Accounting Policies (continued)

the asset, a loss is recognized for the difference. Fair value is determined based on market quotes, if available, or is based on valuation techniques.

Revenue and Expense Recognition

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

Accounting for Stock-Based Compensation

SFAS No. 123, “Accounting for Stock-Based Compensation”, encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value (See SFAS 123R below under Recently Issued Accounting Pronouncements). The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Company’s stock option awards been determined based upon the fair value at the grant date for awards from 2001 through 2005 and recognized on a straight-line basis over the related vesting period, in accordance with the provisions of SFAS No. 123, the Company’s net loss and loss per share for 2005 and 2004 would have been increased to the proforma amounts indicated on the following page:

	2005		2004
Net loss as applicable to common shareholders	$	(6,581,440)	$	(4,329,923)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(805,098)		(1,961,688)
Pro forma net loss	$	(7,386,538)	$	(6,291,611)
Earnings per share:
Basic – as reported		$ (0.11)		$ (0.11)
Basic – pro forma		$ (0.13)		$ (0.16)

The fair value was estimated using the following weighted-average assumptions: a risk free interest rate of 4.47% for 2005 and 3.50% for 2004; a volatility factor of the expected market price of the Company’s common stock of 125% for 2005 and 128% for 2004, expected option lives of 10 years for 2005 and 10 years for 2004, 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 that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The pro forma effect on net loss for 2005 and 2004 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.

F-9

Protein Polymer Technologies, Inc.

Notes to Financial Statements

1. Organization and Significant Accounting Policies (continued)

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

Net loss per common share

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

The net loss per common share for the years ended December 31, 2005 and 2004 is based on the weighted average number of shares of common stock outstanding during the periods. Potentially dilutive securities include options, warrants and convertible preferred stock; however, such securities have not been included in the calculation of the net loss per common share as their effect is antidilutive. Since this is the case, there is no difference between the basic and dilutive net loss per common share for any of the periods presented and none of the prior periods were required to be restated. For purposes of this calculation, net loss in 2005 and 2004 has been adjusted for imputed, accumulated and/or paid dividends on the preferred stock.

Use of estimates

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

Income Taxes

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

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

Reclassification

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

Recentlyissued accounting pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which replaces APB Opinion No. 120, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for accounting and reporting a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new

F-10

Protein Polymer Technologies, Inc.

Notes to Financial Statements

1. Organization and Significant Accounting Policies (continued)

accounting principle must be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of the change, the new principle must be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 does not change the transition provisions of any existing pronouncements. The Company has evaluated the impact of SFAS No. 154 and does not expect the adoption of this statement to have a significant impact on its statement of income or financial condition. The Company will apply SFAS No. 154 in future periods, when applicable.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFAS No. 123 “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective for fiscal years beginning after June 15, 2005. The Company plans to adopt SFAS No. 123(R) on January 1, 2006. The Company is evaluating the impact of SFAS No. 123(R).

If the fair value method had been adopted, net loss for 2005 and 2004 would have been increased by $805,000 and $1,962,000, respectively, more than reported and loss per share would have increased approximately $0.02 and $0.05 in 2005 and 2004, respectively.

2. Equipment and Leasehold Improvements

	December 31,
	2005		2004
Laboratory equipment	$	1,375,000	$	1,184,000
Office equipment		218,000		200,000
Leasehold improvements		329,000		306,000
		1,922,000		1,690,000
Less accumulated depreciation and amortization		(1,629,000)		(1,605,000)
	$	293,000	$	85,000

Depreciation expense was $49,000 and $31,000 for the years ended December 2005 and 2004, respectively.

3. Rent Receivable

The Company subleases 6,183 square feet of its office and research facilities under a month to month arrangement for $13,000 per month plus utilities. From December 2002 until July 2004, the sublessee was unable to make monthly rental payments due to a lack of funding. In August 2004 the sublessee resumed making rental payments and as of September 2004 an additional $5000 per month is being paid as credit against previous rental obligations. Obligations under the sublease are secured by certain listed property and equipment of the sublessee. At December 31, 2005 and 2004 the current portion of rent receivable was $88,000 and $60,000 respectively and the long term portion was $26,000 and $105,000, net of reserve of $128,000 and $100,000, respectively.

4. Technology License Agreement

On December 19, 2005, the Company entered into a License Agreement with Surgica Corporation (“Surgica”), a medical device company that develops, manufactures and markets embolization products. Embolization is a minimally invasive procedure, generally performed by interventional radiologists, used to treat uterine fibroids, liver cancer and neurovascular malformations. Pursuant to the License Agreement, the Company acquired exclusive marketing and distribution rights to Surgica’s three embolization products, one issued patent, and technical and market know-how. Concurrent with the signing of the License Agreement, the Company closed a previously entered into Asset Purchase Option Agreement (“Option Agreement”) and entered into a Supply and Services Agreement (“Supply Agreement”) with Surgica (See Note 13).

F-11

Protein Polymer Technologies, Inc.

Notes to Financial Statements

4. Technology License Agreement (continued)

The Company capitalized a total of $1,106,000 in connection with this agreement based on cash consideration paid in the amount of $385,000, the assumption of certain liabilities of Surgica totaling $521,000 and indemnification of contingent liabilities up to a maximum of $200,000. Under the terms of the License Agreement, the agreement will continue, unless terminated earlier in accordance with its terms, for twenty (20) years.

Furthermore, the agreement provides that the License Agreement shall automatically terminate and be effectively assigned to the Company if the Company exercises its option to purchase the assets of the Licensor under the Option Agreement, and that in the event the Company does not exercise this option, the parties shall negotiate in good faith for the reconveyance of the license to the Licensor. The total capitalized amount is being amortized on a straight line basis over the initial twenty (20) year term of the License Agreement, with amortization commencing on January 1, 2006.

In addition to the cash payments and assumption of certain liabilities, the License Agreement provides for Surgica to receive a royalty of twenty-five percent (25%) of net profits, if any, on revenues generated by the sale by the Company of surgical products.

Subject to periodic review by the Company of the License Agreement fair value, the Company expects to record the following amortization expense over the next five years, and over the remainder of the agreement term:

Fiscal Year Ended	Amortization Total
12/31/06	$	55,321
12/31/07		55,321
12/31/08		55,321
12/31/09		55,321
12/31/10		55,321
Thereafter		829,830
Total	$	1,106,435

5. Notes Receivable

In connection with the Surgica agreements, the Company advanced Surgica a total of $238,000 for on-going operations in return for Promissory Notes. The Promissory Notes are due and payable on January 5, 2008. Interest on the unpaid balance of the Promissory Notes accrues at the rate of 6.00% per annum, payable annually on the 5th day of January, from the date of issuance through the date that the principal of the Promissory Note is paid in full. As of December 31, 2005, accrued interest receivable pursuant to the Promissory Notes was $5,000.

6. Contracts Receivable

Under an existing Supply and Services agreement with Spine Wave Corporation, the Company provides various research and development services for Spine Wave including the production of product used in Spine Wave’s clinical trials. These services are billed upon the completion of various agreed upon work products. On December 31, 2005, the Company had an outstanding Spine Wave invoice in the amount of $114,000. This invoice was paid in January 2006.

F-12

Protein Polymer Technologies, Inc.

Notes to Financial Statements

7. Accrued Expenses

Accrued expenses consist of the following:

	December 31,
	2005		2004
Payroll and employee benefits	$	146,000	$	125,000
Accounting and professional fees		–		31,000
Accrued interest		–		35,000
Property tax		31,000		8,000
Indemnification contract		200,000		–
Other		4,000		3,000
	$	381,000	$	202,000

8. Notes Payable

On December 19, 2005, in connection with the Surgica License Agreement, the Company assumed several notes payable agreements. The notes bear interest at rates ranging from 6% to 10%, and mature at various dates through January 2009. As of December 31, 2005 the current and long term note balances were $196,000 and $324,000, respectively. Future maturities on the assumed notes are as follows:

	Year Ending December 31,	Notes Payable Maturities
	2006	$	196,000
	2007		123,000
	2008		100,000
	2009		100,000
Total maturities		$	519,000

9. Notes Payable, Related Party

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

On August 2, 2004, the Company issued a note with detachable warrants payable to one of its current shareholders in exchange for $250,000 in cash. The note became due on March 31, 2005 with accrued interest at a rate of 10% per annum. The detachable warrants were for the purchase of 100,000 shares of the Company’s common stock at $0.37 per share. The warrants have a term of three years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $23,995, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount was amortized to interest during 2004 based on the original term of the debt. The fair value of the warrants was determined using the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 133% volatility, 1.98% average risk-free interest rate, a three-year life and an underlying common stock value of $0.35 per share. This note and accumulated interest was converted into common stock and warrants in the equity transaction completed on April 1, 2005.

F-13

Protein Polymer Technologies, Inc.

Notes to Financial Statements

9. Notes Payable, Related Party (continued)

On August 19, 2004, the Company issued a note with detachable warrants payable to one of its current shareholders in exchange for $250,000 in cash. The note became due on March 31, 2005 with accrued interest at a rate of 10% per annum. The detachable warrants were for the purchase of 100,000 shares of the Company’s common stock at $0.45 per share. The warrants have a term of three years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $34,000, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount was amortized to interest during 2004 based on the original term of the debt. The fair value of the warrants was determined using the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 140% volatility, 1.98% average risk-free interest rate, a three-year life and an underlying common stock value of $0.52 per share. This note and accumulated interest was converted into common stock and warrants in the equity transaction completed on April 1, 2005.

On September 9, 2004, the Company issued a note with detachable warrants payable to one of its current shareholders in exchange for $250,000 in cash. The note became due on March 31, 2005 with accrued interest at a rate of 10% per annum. The detachable warrants were for the purchase of 100,000 shares of the Company’s common stock at $0.45 per share. The warrants have a term of three years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $40,000, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount was amortized to interest expense during 2004 based on the original term of the debt. The fair value of the warrants was determined using the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 141% volatility, 1.98% average risk-free interest rate, a three-year life and an underlying common stock value of $0.67 per share. This note and accumulated interest was converted into common stock and warrants in the equity transaction completed on April 1, 2005.

On December 22, 2004, the Company issued a note with detachable warrants payable to one of its current shareholders in exchange for $150,000 in cash. The note became due on March 22, 2005 with accrued interest at a rate of 10% per annum. The detachable warrants were for the purchase of 60,000 shares of the Company’s common stock at $0.50 per share. The warrants have a term of three years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $19,000, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount was amortized to interest expense over the term of the debt. The fair value of the warrants was determined using the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 127% volatility, 1.98% average risk-free interest rate, a three-year life and an underlying common stock value of $0.50 per share. For the quarter ended March 31,2005, debt discount of $17,000 was amortized to interest expense. This note and accumulated interest was converted into common stock and warrants in the equity transaction completed on April 1, 2005.

On January 4, 2005, the Company issued a note with detachable warrants payable to one of its current shareholders in exchange for $100,000 in cash. The note plus accrued interest at a rate of 10% per annum were originally due on April 4, 2005. The detachable warrants were for the purchase of 40,000 shares of the Company’s common stock at $0.62 per share. The warrants have a term of three years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $16,000, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount is being amortized to interest expense over the term of the debt. The fair value of the warrants was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 128% volatility, 2.37% average risk-free interest rate, a three-year life and an underlying common stock value of $0.62 per share. For the quarter ended March 31, 2005, debt discount of $16,000 was amortized to interest expense. This note and accumulated interest was converted into common stock and warrants in the equity transaction completed on April 1, 2005.

On February 28, 2005, the Company issued a note with detachable warrants payable to one of its current shareholders in exchange for $160,000 in cash. The note plus accrued interest at a rate of 10% per annum were originally due on April 4, 2005. The detachable warrants were for the purchase of 64,000 shares of the Company’s common stock at $0.60 per share. The warrants have a term of three years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $24,000, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount is being amortized to interest expense over the term of the debt. The fair value of the warrants was based on the Black-Scholes model.

F-14

Protein Polymer Technologies, Inc.

Notes to Financial Statements

9. Notes Payable, Related Party (continued)

The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 124% volatility, 2.58% average risk-free interest rate, a three-year life and an underlying common stock value of $0.60 per share. For the quarter ended March 31, 2005, debt discount of $24,000 was amortized to interest expense. This note and accumulated interest was converted into common stock and warrants in the equity transaction completed on April 1, 2005.

10. Deferred Revenue

Under an existing Supply and Services agreement with Spine Wave Corporation, the Company provides various research and development services for Spine Wave including the production of product used in Spine Wave’s clinical trials. The agreement provides for certain services to be billed and paid in advance to defray certain operating expenses incurred as the work takes place. The payments received in advance of the completion of the work are booked as Deferred Revenue. On December 31, 2004, the Company had deferred revenue from Spine Wave in the amount of $103,000. The services were completed in January and February 2005 and the deferred revenue was credited to contract income.

11. Stockholders’ Equity

Convertible Preferred Stock

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

Each share of Series I Stock received two common stock warrants. One warrant was exercisable at any time for approximately 27 shares of common stock at an exercise price of $0.88 per share, and expired 18 months after the close of the offering; the other warrant was exercisable at any time for approximately 18 shares of common stock at an exercise price of $1.65 per share, and expires 48 months after the close of the offering. In connection with the issuance of the Series I Stock, additional warrants to purchase 819,543 shares of common stock at an exercise price of $0.65 per share, expired 18 monthsafter the close of the offering were issued, as well as warrants to purchase 204,998 shares of common stock at an exercise price of $0.58 per share, warrants to purchase 27,340 shares of common stock at an exercise price of $0.68 per share, warrants to purchase 30,748 shares of common stock at an exercise price of $0.92 per share and warrants to purchase 20,500 shares of common stock at an exercise price of $1.73 per share, each expiring 5 years after the close of the offering. At December 31, 2005, there was 14,000 shares of Series I Stock outstanding.

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

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

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

Each share of Series H Stock also received two common stock warrants. One warrant was exercisable at any time for 15 shares of common stock at an exercise price of $1.50 per share, and expired approximately 12 months after the close of

F-15

Protein Polymer Technologies, Inc.

Notes to Financial Statements

11. Stockholders’ Equity (continued)

the offering; the other warrant was exercisable at any time for 10 shares of common stock at an exercise price of $2.00 per share, and expired approximately 24 months after the close of the offering. At December 31, 2005, there was 12,182 shares of Series H Stock outstanding.

On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series G Convertible Preferred Stock (“Series G Stock”) from several institutional and accredited individual investors. On September 15, 1999, the Company received an additional $325,000 for 3,250 shares of Series G Stock, for a total of $2,100,000. Each share of Series G Stock was priced at $100 per share. Each share can be converted at any time by the holder into common stock at a price of $0.50 per share, subject to certain antidilution adjustments. Each share of Series G Stock also receives a common stock warrant, exercisable for 12 months, that allows the holder to acquire 200 shares of PPTI common stock at a price of $0.50 per share. At December 31, 2005, there was 12,100 shares of Series G Stock outstanding.

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

Each share of Series D and F Stock earns a cumulative dividend at the annual rate of $10 per share, payable if and when declared by the Company’s Board of Directors, in the form of cash, common stock or any combination thereof. As of December 31, 2005, the accumulated dividends were approximately $2,354,000. The Series D and F Stock are convertible into common stock after two years from the date of issuance at the holder’s option. The conversion price at the time of conversion is the lesser of $3.75 or the market price. The Series D and F Stock are redeemable at the Company’s option after four years from the date of issuance. Automatic conversion of all of the Series D and F Stock will occur if: (a) the Company completes a public offering of common stock at a price of $2.50 or higher; or (b) the holders of a majority thereof elect to convert. The Company has the option to demand conversion of the Series D and F Stock if the average market price of its common stock equals or exceeds $5.00 per share over a period of twenty business days. The Series D and F Stock have a liquidation preference of $100 per share plus accumulated dividends. At December 31, 2005, there was 1,344 and 26,420 shares of Series D and Series F Stock outstanding, respectively.

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

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

On or about April 15, 2005, the Company, in a final closing pursuant to the Securities Purchase Agreement, sold an aggregate of 10,827,955 shares to additional investors for an aggregate purchase price of $3,573,000. As part of the transaction, the Company also issued to the investors warrants that entitle the holders to purchase an aggregate of 5,413,976 shares of Common Stock at an exercise price of $0.50 per share.

For the entire private placement offering, including the Initial Closing on April 1, 2005 and the Subsequent Closing, the Company issued a total of 23,556,224 shares of common stock at price of $0.33 per share, for aggregate total proceeds of $7,774,000 (including approximately $1,200,000 of converted short-term promissory bridge notes previously issued by the Company to certain of the Initial Investors), together with warrants for the purchase of an aggregate of approximately 11,778,108 shares of common stock at an exercise price of $0.50 per share.

The Company incurred aggregate selling fees of approximately $1,109,000, of which $509,000 was paid in cash and $608,000 was paid by issuing warrants to purchase 751,088 shares of the Company’s Common Stock at an exercise price of $0.55 per share exercisable at any time and expiring approximately 5 years from the date of issuance. The fair value of the warrants was estimated by management using the Black-Scholes option-pricing model.

F-16

Protein Polymer Technologies, Inc.

Notes to Financial Statements

11. Stockholders’ Equity (continued)

On April 22, 2005 the Company agreed to issue a warrant to purchase an aggregate of 2,000,000 shares of the Company’s common stock to William N. Plamondon, III, a director of the Company who earlier in the month was appointed to serve as the Company’s Chief Executive Officer. The warrant was immediately exercisable at an exercise price of $0.67 per share (closing market price of date of grant), and expires three years from the date of grant. In connection with the issuance of the

warrant, the Company recorded a non-cash expense of $1,245,000 during the quarter ended June 30, 2005 based on a Black-Scholes model valuation, and a corresponding increase to additional paid in capital.

Exercise and Exchange of Warrants

In January 2005, certain holders of warrants issued in conjunction with the sale of Series G convertible preferred stock exercised their warrants to purchase common stock. These warrants were due to expire on January 31, 2005. The exercise prices of such warrants was $0.55 per share. As an incentive to exercise the warrant early the Company offered to reduce the exercise price of the warrants to $0.33 per share and offered each holder the issuance of a new warrant, for a similar number of shares, at an exercise price of $0.50 per share. As a result, the Company raised $282,000. The newly issued warrants were to expire on the last day of January 2006. Prior to the expiration date, the Board of Directors extended the expiration date to January 31, 2007. In connection with the repricing in January 2005, and issuance of additional warrants to the investors, the Company recorded an imputed dividend in the amount of $482,000 to reflect the additional benefit created for these investors.

In October 2004, certain holders of warrants issued in conjunction with sale of Series I Convertible Preferred Stock of the Company exercised their warrants to purchase common stock. Certain of such warrants were due to expire at the end of September 2004, but the Company extended the exercise period of such warrants until the end of October 2004. The exercise prices of such warrants were between $0.58 and $1.73 per share. As an incentive to exercise the warrants early, the Company reduced the exercise price to $0.50 per share for all of such warrants to the extent such warrants were exercised on or before October 29, 2004. As a result, the Company raised $545,000. In connection with the repricing of warrants to the investors, the Company recorded an imputed dividend in the amount of $183,000 to reflect the additional benefit created for these investors.

In March 2004, certain holders of warrants exercised their warrants to purchase common stock. These warrants were due to expire at the end of March 2004. The exercise prices of such warrants were $0.40 and $0.55 per share. As an incentive to exercise the warrants early the Company offered to reduce the exercise price of the warrants to $0.25 per share and offered each holder the issuance of a new warrant, for a similar number of shares, at an exercise price of $0.55 per share. As a result, the Company raised $246,000. The newly issued warrants were to expire on the last day of January 2005. Prior to the expiration date, the Board of Directors extended the expiration date to January 31, 2007. In connection with the repricing of warrants and the issuance of new warrants to the investors, the Company recorded an imputed dividend in the amount of $304,000 to reflect the additional benefit created for these investors.

Employee Stock Purchase Plan

In September 1996 the Company established the Protein Polymer Technologies, Inc., Employee Stock Purchase Plan (“Plan”). The Plan commenced January 2, 1997, and allows for offering periods of up to two years with quarterly purchase dates occurring the last business day of each quarter. The purchase price per share is generally calculated at 85% of the lower of the fair market value on an eligible employee’s entry date or the quarterly purchase date. The maximum number of shares available for issuance under the Plan is 500,000; an eligible employee may purchase up to 5,000 shares per quarter. The Plan Administrator consists of a committee of at least two non-employee directors of the Company who are members of the Compensation Committee. The Company’s Board of Directors may modify the Plan at any time. During 2005, a total of 14,742 shares were purchased under the Plan at prices ranging from $0.20 to $0.55. The value of shares issued under the Plan as calculated in accordance with Statement 123 is not significant and is not included in the following pro forma information.

F-17

Protein Polymer Technologies, Inc.

Notes to Financial Statements

11. Stockholders’ Equity (continued)

Stock Options

In June 1996, the Company adopted the 1996 Non-Employee Directors Stock Option Plan (“1996 Plan”), which provides for the granting of nonqualified options to purchase up to 250,000 shares of common stock to directors of the Company. In April 2003, the 1996 Plan was amended to increase the number of options available for grant to 1,750,000, and the annual award to each Director to 80,000. Such grants of options to purchase 80,000 shares of common stock are awarded automatically on the first business day of June during each calendar year to every Participating Director then in office, subject to certain adjustments. No Participating Director is eligible to receive more than one grant per year. The purchase price of each option is set at the fair market value of the common stock on the date of grant. Each option has a duration of ten years, and is exercisable six months after the grant date. The Company’s Compensation Committee administers the 1996 Plan. At December 31, 2005, 1,529,950 options to purchase common stock have been granted under the 1996 Plan with 1,529,950 options exercisable.

In April 2002, the Company adopted the 2002 Stock Option Plan, which provides for the issuance of incentive and non-statutory stock options for the purchase of up to 1,500,000 shares of common stock to its key employees and certain other individuals. In April 2003, the plan was amended to increase the number of options available for grant to 9,000,000. The options will expire ten years from their respective dates of grant. Options become exercisable ratably over periods of up to three years from the dates of grant. The purchase price of each option approximated the fair market value of the common stock on the date of grant. At December 31, 2005, 7,813,082 options to purchase common stock had been granted under the 2002 Plan with 6,097,116 options exercisable.

The Company adopted the 1992 Stock Option Plan, which provides for the issuance of incentive and non-statutory stock options for the purchase of up to 1,500,000 shares of common stock to its key employees and certain other individuals. The 1992 Stock Option Plan expired as of December 31, 2002. The options granted will expire ten years from their respective dates of grant. Options become exercisable ratably over periods of up to five years from the dates of grant. The purchase price of each option approximated the fair market value of the common stock on the date of grant. At December 31, 2005, 1,314,000 options to purchase common stock had been granted under the 1992 Plan with 1,160,000 with options exercisable.

The Company adopted the 1989 Stock Option Plan, which provided for the issuance of incentive and non-statutory stock options for the purchase of up to 500,000 shares of common stock to key employees and certain other individuals. The 1989 Stock Option Plan expired as of March 17, 1999. The options granted will expire ten years from their respective dates of grant. Options granted in the plan became exercisable ratably over periods of up to five years from the date of grant. At December 31, 2005, 302,500 options to purchase common stock have been granted under the 1989 Plan with 302,500 options exercisable.

Since inception, the Company has granted non-qualified options outside the option plans to employees, directors and consultants. At December 31, 2005, 1,684,050 options to purchase common stock have been granted with 1,239,606 options exercisable.

F-18

Protein Polymer Technologies, Inc.

Notes to Financial Statements

11. Stockholders’ Equity (continued)

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

	Years ended December 31
	2005			2004
	Options	Weighted Average Exercise Price		Options	Weighted Average Exercise Price
Outstanding – beginning of year	11,888,500	$	0.72	9,592,000	$	0.76
Granted	1,003,600	$	0.58	2,400,000	$	0.57
Exercised	(154,018)	$	0.57	(103,500)	$	0.34
Forfeited/Expired	(100,000)		–	–		–
Outstanding - end of year	12,638,082	$	0.72	11,888,500	$	0.72
Exercisable - end of year	10,393,422	$	0.74	7,148,527	$	0.76

The exercise prices for options outstanding as of December 31, 2005 range from $0.22 to $3.75. The weighted average remaining contractual life of these options is approximately 7.93 years.

Warrants Activity for the Period and Summary of Outstanding Warrants

During the years ended December 31, 2005, and December 31, 2004, the board of directors approved the issuance of warrants to purchase an aggregate of 15,582,499 and 1,405,000 shares respectively, of the Company’s common stock. Such warrants are exercisable at prices ranging from $0.37 to $0.67 per share and expire at various times through April 2009.

During the years ended December 31, 2005, and December 31, 2004, certain warrant holders exercised warrants to purchase 905,000 and 3,510,313 shares, respectively, of the Company’s common stock for an aggregate of $282,000 and $791,000, respectively.

A summary of warrant activity for 2005 and 2004 is as follows:

	Number of Warrants Outstanding and Exercisable		Weighted- Average Exercise Price
Outstanding, December 31, 2003	5,172,669	$		0.76
Granted	1,405,000			0.51
Exercised	(3,510,313)			0.64
Expired	(986,361)			0.72
Outstanding, December 31, 2004	2,080,995			0.78
Granted	15,582,499			0.52
Exercised	(905,000)			0.33
Expired	(80,000)			0.33
Outstanding, December 31, 2005	16,678,494			0.56

At December 31, 2005, the weighted-average remaining contractual life of the warrants was approximately 37 months.12.

F-19

Protein Polymer Technologies, Inc.

Notes to Financial Statements

12. Stockholder Protection Agreement

In 1997, the Company’s Board of Directors adopted a Stockholder Protection Agreement (“Rights Plan”) that distributes Rights to stockholders of record as of September 10, 1997. The Rights Plan contains provisions to protect stockholders in the event of an unsolicited attempt to acquire the Company. The Rights trade together with the common stock, and generally become exercisable ten business days after a person or group acquires or announces the intention to acquire 15% or more of the Company’s outstanding shares of common stock, with certain permitted exceptions. The Rights then generally allow the holder to acquire additional shares of the Company’s capital stock at a discounted price. The issuance of the Rights is not a taxable event, does not affect the Company’s reported earnings per share, and does not change the manner in which the Company’s common stock is traded.

13. Commitments

Lease Agreement

The Company leases its office and research facilities totaling 27,000 square feet under an operating lease, which expires in May 2008. The facilities lease is subject to an annual escalation based upon the Consumer Price Index in 2004 and an adjustment of one hundred two percent (102%) of the previous year’s rent annually from 2005 through 2008. The lease provides for deferred rent payments; however, for financial purposes rent expense is recorded on a straight-line basis over the term of the lease. Accordingly, deferred rent in the accompanying balance sheet represents the difference between rent expense accrued and amounts paid under the lease agreement.

Annual future minimum operating lease payments are as follows:

	Year Ending December 31,	Operating Leases
	2006	$	666,000
	2007		680,000
	2008		228,000
Total minimum operating lease payments		$	1,574,000

Rent expense, net of rental income, was approximately $536,000, $567,000 for the years ended December 31, 2005 and 2004, respectively. Rental income was approximately $157,000 and $66,000 for the years ended December 31, 2005 and 2004, respectively.

Indemnification Against Claims related to License Agreement

In connection with the Technology License Agreement (See Note 4), the Company agreed to indemnify Surgica for up to $200,000 in connection with claims by the Sapphire Group LLC for fees owed pursuant to an Engagement Letter entered into between Surgica and the Sapphire Group LLC, as a result of agreements entered into between Surgica and the Company. A former Director of the Company is a principal of the Sapphire Group.

Asset Purchase Option Agreement

On December 19, 2005 the Company closed an Asset Purchase Option Agreement (“Option Agreement”), that had been entered into with Surgica on November 23, 2005. Under the terms of the Option Agreement, the Company has the right to acquire substantially all of the assets of Surgica for 2,000,000 shares of the Company’s common stock, and additional shares of the Company’s stock (“ Earn-out Shares”), based on the future sales performance of Surgica’s products during the first quarter of 2007. The number of Earn-out Shares, if any, will be determined in part on the price per share of the Company’s common stock based on the 90 day prior average price as of April 1, 2007. The Option Agreement is exercisable, at our sole discretion, for a term of up to two (2) years. The Option Agreement Closing is subject to a number of conditions, including approval of the Option Agreement by a majority of the holders Surgica’s common stock and preferred stock voting as a single class, with the preferred voting on an “as converted” basis.

F-20

Protein Polymer Technologies, Inc.

Notes to Financial Statements

13. Commitments (continued)

Supply and Services Agreement

On December 19, 2005 the Company entered into a Supply and Services Agreement (“Supply Agreement”) with Surgica. Under the terms of the Supply Agreement, Surgica is obligated to provide product development and manufacturing services to the Company, and the Company is obligated to fund monthly operating costs of Surgica up to amounts specified in Supply Agreement, purchase product for sale and for clinical use at prices specified in the Supply Agreement. Pursuant to the terms of the Supply Agreement, the Company is obligated to fund annual operating costs of Surgica of up to approximately $800,000 during 2006. Thereafter, the Company’s obligation to fund Surgica’s operating costs is subject to a future determination to be made based on mutually agreed upon operating budgets.

Letter of Intent – Thuris Corporation

In November 2005, the Company entered into a non-binding letter of intent to acquire Thuris Corporation (“Thuris”), a privately held biopharmaceutical company focused on medical device solutions to aid in drug development and diagnosis of Central Nervous System disorders. Under the terms of the letter of intent, the Company would acquire 100% of the outstanding stock of Thuris in exchange for a number of shares of the Company’s common stock or common stock equivalents, equal to between 30% and 50% of the Company’s outstanding stock, calculated on a fully diluted basis.

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

In connection with the license agreement, the Company entered into a separate supply and services agreement to provide Spine Wave with a variety of research and development services, and to supply materials to Spine Wave for pre-clinical and clinical testing. Spine Wave, in return, agreed to reimburse the Company for both our direct costs and the associated overhead costs for the services provided.

In March 2002, the Company executed additional agreements with Spine Wave, Inc. that expanded its contractual research and development relationship, and that offered the Company additional equity incentives in the form of Spine Wave common stock and warrants. Under the amended supply and services agreement, the Company, on behalf of Spine Wave, is proceeding with pre-clinical safety and performance studies of a product for spinal disc repair to support Spine Wave’s filing of an investigational device exemption with the FDA to obtain approval to initiate human clinical testing. During the subsequent period leading to regulatory marketing approval, the Company’s contractual responsibilities include the supply of product to be used in clinical testing and preparation for commercial manufacturing operations. Research and development services performed for Spine Wave are reimbursed including both direct costs and associated overhead costs. Spine Wave is responsible for clinical testing, regulatory approvals, and commercialization. For the year ended December 31, 2005 and for the period of project inception to date the Company received $611,000 and $5,525,000, respectively, in contract revenue from Spine Wave which represents the reimbursement of direct costs plus overhead costs allocated to the research and development resources used in performing the collaborative activities.

F-21

Protein Polymer Technologies, Inc.

Notes to Financial Statements

14. Collaborative Development and License Agreements

Additional equity incentives offered in conjunction with the expanded supply and services agreement of March 17, 2002 consist of a four year warrant (the expiration date was recently extended to April 21, 2006, and upon meeting certain conditions, would be extended to September 21, 2006) to purchase 1,000,000 shares of Spine Wave common stock at an exercise price of $0.50 per share, and 400,000 shares of common stock valued at $0.05 per share subject to repurchase at cost until each of three performance goals is achieved. The performance goals consist of: (i) completion of certain studies for filing an investigational device exemption application (100,000 shares); (ii) completion of additional studies for filing of the investigational device exemption and provision of inventory for the pilot clinical study (150,000 shares); and (iii) completion of certain manufacturing arrangements, and production of certain quantities of product (150,000 shares). Spine Wave’s repurchase option expired on December 31, 2005.

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

Femcare, Ltd. In January 2000, The Company entered into an agreement with Femcare, Ltd. (“Femcare”), for the commercialization in Europe and Australia of the Company’s product for treatment of stress urinary incontinence. Under the terms of the license agreement, Femcare paid a $1 million non-refundable license fee in exchange for the patented technology and a three year commitment from the Company to provide support to Femcare in its efforts to clinically test the products in Great Britain and to achieve European regulatory approval. The Company did not incur any research and development costs associated with its support. As a result of the arrangement, the Company recognized approximately $333,000 in deferred license fee revenue for years ended December 31, 2000, 2001 and 2002. Subsequently, Femcare notified the Company that it was closing its urology business and ceasing all product development efforts pertaining to the licensed technology, and in July 2005, both parties mutually agreed to terminate the license agreement and discharged each other from any claims, obligations, liabilities, or other causes of action.

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

In return for the licensed rights, Genencor paid the Company an up-front license fee of $750,000, and will pay royalties on the sale of any products commercialized by Genencor under the agreement. The licensed technology was transferred to Genencor upon execution of the license agreement without any further product development obligation on our part. Future royalties on the net sales of products incorporating the technology under license and developed by Genencor will be calculated based on a royalty rate to be determined at a later date. In addition, the Company is entitled to receive up to $5 million in milestone payments associated with Genencor’s achievement of various industrial product development milestones incorporating the licensed technology. In December 2002 the Company received a license milestone payment of $250,000 from Genencor for Genencor’s initiation of a product development project based on technology licensed from the Company.

15. Income Taxes

At December 31, 2005, the Company had net operating loss carryforwards of approximately $45,034,000 for federal income tax purposes, which may be applied against future income, if any, and will begin expiring in 2006 unless previously utilized. In addition, the Company had California net operating loss carryforwards of approximately $16,915,000, which will begin expiring in 2006. The difference between the tax loss carryforwards for federal and California purposes is attributable to the capitalization of research and development expenses for California tax purposes, certain 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 $1,891,000 and $1,039,000, respectively, which will begin expiring in 2009 unless previously utilized. The Company also has California Manufacturers’ Investment Credit carryforward of approximately $62,000.

F-22

Protein Polymer Technologies, Inc.

Notes to Financial Statements

15. Income Taxes (continued)

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

Significant components of the Company’s deferred tax assets as of December 31, 2005 are shown below. A valuation allowance of $20,326,000 has been recognized to offset the deferred tax assets as realization of such assets is uncertain.

	2005		2004
Deferred tax assets:
Net operating loss carryforwards	$	16,807,000	$	16,077,000
Federal & state tax credits		2,992,000		2,715,000
Other, net		527,000		142,000
Total deferred tax assets		20,326,000		18,934,000
Valuation allowance for deferred tax assets		(20,326,000)		(18,934,000)
Net deferred tax assets	$	–	$	–

During the year ended December 31, 2005, the valuation allowance increased by approximately $1,392,000.

16. Employee Benefits Plan

On January 1, 1993, the Company established a 401(k) Savings Plan for substantially all employees who meet certain service and age requirements. Participants may elect to defer up to 20% of their compensation per year, subject to legislated annual limits. Each year the Company may provide a discretionary matching contribution. As of December 31, 2005, the Company had not made a contribution to the 401(k) Savings Plan.

F-23

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

None.

Item 8A. Controls And Procedures

Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer (the principal executive officer) and Director of Finance, Controller (the principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Director of Finance, Controller have concluded that such disclosure controls and procedures were effective in alerting them in a timely manner to material information relating to the Company required to be included in its periodic reports filed with the Securities and Exchange Commission.

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934 that occurred during our last fiscal year that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Item 8B. Other Information

None.

PART II

Items 9, 10, 11, 12 and 14 are incorporated by reference from the Company’s definitive Proxy Statement to be filed by the Company with the Commission no later than April 30, 2006.

Item 3. Exhibits

The following documents are included or incorporated by reference:

Exhibit Number	Description
3.1 (3)	Certificate of Incorporation of the Company.
3.1.1 (3)	Certificate of Designation of Series X Senior Participating Preferred Stock.
3.1.2 (9)	Certificate of Designation of Series E Convertible Preferred Stock.
3.1.3 (9)	Certificate of Designation of Series F Convertible Preferred Stock.
3.1.4 (10)	Certificate of Designation of Series G Convertible Preferred Stock.
3.1.5 (15)	Certificate of Designation of Series H Convertible Preferred Stock.
3.1.6 (18)	Certificate of Designation of Series I Convertible Preferred Stock.
3.2 (9)	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.

25

10.2 (2)	1992 Stock Option Plan of the Company, together with forms of Incentive Stock Option Agreement and Nonstatutory Option Agreement.
10.3 (1)	Form of Employee’s Proprietary Information and Inventions Agreement.
10.4 (1)	Form of Consulting Agreement.
10.5 (1)	Form of Indemnification Agreement.
10.6 (2)	License Agreement, dated as of April 15, 1992, between the Board of Trustees of the Leland Stanford Junior University and the Company.
10.7 (3)	Securities Purchase Agreement related to the sale of the Company’s Series D Preferred Stock.
10.8 (4)	1996 Non-Employee Directors’ Stock Option Plan.
10.9 (5)	Stockholder Protection Agreement, dated August 22, 1997, between the Company and Continental Stock Transfer & Trust Company as rights agent.
10.10 (6)	Employee Stock Purchase Plan, together with Form of Stock Purchase Agreement.
10.11 (7)	Lease, with rider and exhibits, dated April 13, 1998, between the Company and Sycamore/San Diego Investors.
10.12 (8)	First Amendment to Stockholder Protection Agreement dated April 24, 1998, between the Company and Continental Stock Transfer & Trust Company as rights agent.
10.13 (9)	Letter of Agreement dated April 13, 1998 between the Company and Johnson & Johnson Development Corporation for the exchange of up to 27,317 shares of Series D Preferred Stock for a like number of shares of Series F Preferred Stock.
10.14 (10)	Securities Purchase Agreement related to the sale of the Company’s Series G Convertible Preferred Stock.
10.15 (10)	Second Amendment to Stockholder Protection Agreement, dated July 26, 1999 between the Company and Continental Stock Transfer and Trust Company as rights agent.
10.16 (11)**	License and Development Agreement dated as of January 26, 2000 between the Company and Prospectivepiercing Limited, to be known as Femcare Urology Limited.
10.17 (11)**	Supply Agreement dated as of January 26, 2000 between the Company and Femcare Urology Limited.
10.18 (11)**	Escrow Agreement dated as of January 26, 2000 between the Company and Femcare Urology Limited.
10.19 (11)	License Agreement dated as of February 18, 2000 between the Company and Sanyo Chemical Industries, Ltd.
10.20 (12)**	License Agreement dated December 21, 2000 between the Company and Genencor International, Inc.
10.21 (12)	Form of Warrant to Purchase Common Stock issued in connection with License Agreement between the Company and Genencor International, Inc.
10.22 (13)	Securities Purchase Agreement related to the sale of the Company’s Series H Preferred Stock.
10.23 (15)**	Founder Stock Purchase Agreement dated April 12, 2001 between the Company and Spine Wave,

26

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

27

10.42 **	Supply and Services Agreement, dated as of December 19, 2005, between the Company and Surgica Corporation.
10.43 **	Voting Agreement, dated as of November 23, 2005, between the Company and Louis R. Matson.
14.1 (23)	Code of Conduct.
23.1	Consent of Peterson & Co., LLP, Independent Registered Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a 14(a)/15d 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Director of Finance (Principal Financial Officer) pursuant to Securities Exchange Act Rules 13a 14(a)/15d 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Director of Finance (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

28

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

29

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

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

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

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

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

30

SIGNATURES

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

PROTEIN POLYMER TECHNOLOGIES, INC.

March 31, 2006	By:	/S/ WILLIAM N. PLAMONDON, III
		William N. Plamondon, III
		Chief Executive Officer

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

Signature	Capacity	Date
/S/ WILLIAM N. PLAMONDON, III William N. Plamondon, III	Chief Executive Officer (Principal Executive Officer)	March 31, 2006
/S/ JANIS Y. NEVES Janis Y. Neves	Director of Finance, Controller, and Secretary (Principal Financial Officer)	March 31, 2006
/S/ J. THOMAS PARMETER J. Thomas Parmeter, Ph.D.	Chairman of the Board	March 31, 2006
/S/ DONALD S. KAPLAN Donald S. Kaplan, Ph.D.	Director	March 31, 2006
/S/ KERRY L. KUHN Kerry L. Kuhn, M.D.	Director	March 31, 2006
/S/ STEVEN M. LAMON Steven M. Lamon	Director	March 31, 2006
/S/ JAMES B. MCCARTHY James B. McCarthy	Director	March 31, 2006
/S/ STEVE PELTZMAN Steve Peltzman	Director	March 31, 2006

31

EXHIBIT INDEX

10.40** Asset Purchase Option Agreement, dated as of November 23, 2005, by and between the Company and Surgica Corporation.

10.42** License Agreement, dated as of December 19, 2005, between the Company and Surgica Corporation.

10.43** Supply and Services Agreement, dated as of December 19, 2005, between the Company and Surgica Corporation.

10.44 Voting Agreement, dated as of November 23, 2005, between the Company and Louis R. Matson.

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

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

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

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

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

EX-10

                                                                   Exhibit 10.40



================================================================================






                         ASSET PURCHASE OPTION AGREEMENT



                                 BY AND BETWEEN



                       PROTEIN POLYMER TECHNOLOGIES, INC.



                                       and



                               SURGICA CORPORATION





                                November 23, 2005



================================================================================





                                                                  EXECUTION COPY

                         ASSET PURCHASE OPTION AGREEMENT

         THIS ASSET PURCHASE  OPTION  AGREEMENT  (this  "Agreement") is made and
entered  into as of  November  23, 2005 by and between  Surgica  Corporation,  a
Delaware corporation (the "Company") and Protein Polymer  Technologies,  Inc., a
Delaware  corporation (the  "Optionee").  Unless otherwise  defined herein,  all
capitalized  terms used  herein  shall  have the  respective  meanings  ascribed
thereto in the Purchase Agreement (defined below).

                                 R E C I T A L S

         WHEREAS,  the  Company  and the  Optionee  propose  to enter  into that
certain  License  Agreement  and that  certain  Supply and  Services  Agreement,
attached  hereto as Exhibit A and  Exhibit B,  respectively  (collectively,  the
"License Agreement"),  pursuant to which the Company,  among other things, would
license to Optionee certain  intellectual  property (including patent and patent
applications), as well as marketing and distribution rights;

         WHEREAS,  in order to induce the  Optionee  to enter  into the  License
Agreement  and to advance funds to the Company,  pursuant to this  Agreement and
subject to the terms herein,  the Optionee shall have the right to purchase from
the  Company  substantially  all of the assets of the  Company  now  existing or
hereafter  acquired  through  the date of the  exercise  of the Option  (defined
below) (the  "Assets") for the purchase  price  described in Section 1.4 of this
Agreement.

         NOW,  THEREFORE,  in consideration of the premises and mutual covenants
and agreements  herein set forth and for other good and valuable  consideration,
the receipt and adequacy of which are hereby  acknowledged,  each of the parties
hereto (individually,  a "Party",  collectively,  the "Parties") hereby agree as
follows:

                                    ARTICLE I

                               OPTION TO PURCHASE

         Section 1.1.  Option to Purchase Assets.
         ---------------------------------------

         Subject to the  satisfaction  or waiver of the  conditions set forth in
Article V hereof,  the Company  hereby grants to Optionee the option to purchase
substantially  all of the Assets  (the  "Option")  during the Option  Period (as
defined in Section 1.2 of this Agreement),  as the same may be extended pursuant
to the terms  hereof,  or such later date as the Parties  shall  mutually  agree
upon.  The date on which the Option  becomes  effective is referred to herein as
the "Option Effective Date."


                                       -1-




         Section 1.2.  The Option Period.
         -------------------------------

         The "Option  Period" shall commence on the date hereof and extend until
One (1) year from the Effective  Date,  provided that,  upon written notice from
Optionee to the Company not more than 60 days and not less than 30 days prior to
such  date,  the  Option  Period  may be  extended  until Two (2) years from the
Effective Date, in the sole and absolute discretion of Optionee.

         Section 1.3.  Exercise of Option.
         --------------------------------

         (a) During the Option  Period,  Optionee  may  exercise the Option only
upon written  notice (the "Option  Notice") to the Company,  in accordance  with
Section 7.7 herein.

         (b) Within 10 days after the Optionee  delivers the Option Notice,  the
Optionee,  Optionee's wholly-owned subsidiary and the Company, must enter into a
definitive asset purchase agreement in substantially the form attached hereto as
Exhibit C (the "Purchase Agreement").

         Section 1.4.  Option Payment.
         ----------------------------

         The  consideration  which  shall be paid by Optionee to the Company for
the  Assets  shall be equal to that set  forth in  Section  2.6 of the  Purchase
Agreement.

         Section 1.5.  Option Closing.
         ----------------------------

         The Option shall become effective (the "Option  Closing") on the Option
Effective Date, which shall be one Business Day after  satisfaction or waiver of
all the  conditions  set forth in Article V hereof,  but in no event  later than
December  17,  2005.  At the Option  Closing,  the parties  shall enter into the
License  Agreement  and Supply and  Services  Agreement  and shall  execute  and
deliver such other instruments and documents contemplated by Article V hereof.

                                   ARTICLE II

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company  represents  and  warrants to the  Optionee for its benefit
that the statements  contained in this Article II are true and correct,  subject
to such  exceptions as are  specifically  disclosed in writing in the Disclosure
Schedule provided by the Company to the Optionee (the "Disclosure Schedule").

         Section 2.1.  Organization, Qualification and Corporate Power.
         -------------------------------------------------------------

         The Company is a corporation  duly organized,  validly  existing and in
corporate good standing under the laws of the State of Delaware.  The Company is
duly  qualified to conduct  business and is in corporate good standing under the



                                       -2-




laws of each jurisdiction in which the nature of its businesses or the ownership
or leasing of its  properties  requires  such  qualification,  except  where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect on the  Company.  The Company has the  corporate  power and  authority to
carry on the businesses in which it is engaged and to own and use the properties
owned  and used by it.  The  Company  has  furnished  or made  available  to the
Optionee  true and  complete  copies of its  Certificate  of  Incorporation  and
Bylaws,  each as amended  and/or  restated  and as in effect on the date  hereof
(hereinafter  the "Charter" and "Bylaws,"  respectively).  The Company is not in
default under or in violation of any provision of its Charter or Bylaws, each as
amended to date.

         Section 2.2.  Representations and Warranties in Purchase Agreement.
         ------------------------------------------------------------------

         The representations  and warranties  regarding the Company set forth in
Article  III of the  Purchase  Agreement  are  true and  correct  as of the date
hereof.

         Section 2.3.  Authorization of Transaction.
         ------------------------------------------

         Subject to the  Requisite  Stockholder  Approval (as defined  below) of
this Agreement, the Company has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations  hereunder.  The execution
and delivery of this Agreement and,  subject to the adoption of this  Agreement,
the proper notice or waiver thereof to the Company's  preferred  stockholders as
provided  in the  Charter  and Bylaws of the  Company  and the  approval  of the
transaction by a majority of the votes represented by the outstanding  shares of
stock entitled to vote on this  Agreement,  which is a majority of the Company's
common stock and preferred  stock voting as a single  class,  with the preferred
voting on an "as converted" basis,  voting in accordance with the corporate laws
of the  State of  Delaware  and the  Charter  and  Bylaws  of the  Company  (the
"Requisite  Stockholder  Approval"),  the  performance  by the  Company  of this
Agreement and the consummation by the Company of the  transactions  contemplated
hereby have been duly and validly  authorized by all necessary  corporate action
on the part of the Company.  This  Agreement has been duly and validly  executed
and delivered by the Company and, assuming the due authorization,  execution and
delivery by the  Optionee,  constitutes  a valid and binding  obligation  of the
Company, enforceable against the Company in accordance with its terms, except as
enforcement  may be limited by bankruptcy,  insolvency,  fraudulent  conveyance,
reorganization,  moratorium and other similar laws affecting the  enforcement of
creditors'  rights  generally,  and except that the  availability  of  equitable
remedies,  including specific  performance,  is subject to the discretion of the
court before which any proceeding therefor may be brought.

         Section 2.4.  Noncontravention.
         ------------------------------

         Subject  to  receipt  of the  Requisite  Stockholder  Approval  and the
consent  of  AngioDynamics,  Inc.,  substantially  in the  form as set  forth on
Exhibit  D,  attached  hereto,  except as set forth on  Schedule  2.4,  attached
hereto, neither the execution and delivery of this Agreement by the Company, nor
the consummation by the Company of the transactions  contemplated  hereby, will:
(a)  conflict  with or violate  any  provision  of the  Charter or Bylaws of the
Company;  (b) require on the part of the Company any filing with, or any permit,
authorization, consent or approval of, any Governmental Body; (c) conflict with,



                                       -3-




result in a breach of,  constitute  (with or without due notice or lapse of time
or both) a default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify or cancel, or require any notice, consent
or waiver under, any contract, lease, sublease, license, sublicense,  franchise,
permit,  indenture,  agreement  or mortgage for borrowed  money,  instrument  of
indebtedness,  Lien or other  arrangement  to which the Company is a party or by
which the Company is bound or to which any of its Assets is subject;  (d) result
in the imposition of any Lien upon any Assets of the Company; or (e) violate any
order, writ, injunction,  decree,  statute, rule or regulation applicable to the
Company, any of its properties or Assets.

         Section 2.5.  Subsidiaries.
         --------------------------

         The Company  does not have any direct or indirect  subsidiaries  or any
other  equity  interest  in any  other  firm,  corporation,  partnership,  joint
venture, association or other business organization.

         Section 2.6.  Absence of Certain Changes.
         ----------------------------------------

         Since June 30,  2005,  the Company has  conducted  its  business in the
Ordinary  Course of Business  and there has not  occurred  any change,  event or
condition  (whether or not covered by insurance)  that has resulted in, or might
reasonably be expected to result in any material  adverse  change in the Assets,
business, financial condition or results of operations of the Company.

         Section 2.7.  Powers of Attorney.
         --------------------------------

         There are no outstanding  powers of attorney  executed on behalf of the
Company.

         Section 2.8.  Fees.
         ------------------

         Except as  disclosed  in Schedule  2.8, the Company has no liability or
obligation  to pay any fees or  commissions  to any broker,  investment  banking
firm,  finder or agent with  respect to the  transactions  contemplated  by this
Agreement.

         Section 2.9.  Books and Records.
         -------------------------------

         The minute books and other similar  records of the Company contain true
and  complete  records of all  material  actions  taken at any  meetings  of the
stockholders of the Company,  Board of Directors or any committee thereof and of
all written consents executed in lieu of the holding of any such meeting.

         Section 2.10.  Company Action.
         -----------------------------

         The Board of  Directors  of the  Company,  at a meeting duly called and
held,  has by the  unanimous  vote of all  directors  (i)  determined  that  the
transaction contemplated herein is fair and in the best interests of the Company
and its  stockholders,  (ii)  adopted  this  Agreement  in  accordance  with the
provisions of the corporate  laws of the State of Delaware,  and (iii)  directed
that this  Agreement be submitted to the  stockholders  of the Company for their



                                       -4-




adoption and approval and  resolved to recommend  that the  stockholders  of the
Company vote in favor of the adoption of this Agreement.

         Section 2.11.  Disclosure.
         -------------------------

         No  representation  or  warranty  by  the  Company  contained  in  this
Agreement,  and no statement  contained in the Disclosure  Schedule or any other
document,  certificate or other instrument delivered to or to be delivered by or
on behalf  of the  Company  pursuant  to this  Agreement,  contains  any  untrue
statement of a material fact or omits to state any material fact  necessary,  in
light  of the  circumstances  under  which  it was  made,  in  order to make the
statements herein not misleading.

                                   ARTICLE III

                 REPRESENTATIONS AND WARRANTIES OF THE OPTIONEE

                The Optionee represents and warrants to the Company as follows:

         Section 3.1.  Organization.
         --------------------------

         The Optionee is a corporation  duly organized,  validly existing and in
good  standing  under the laws of the state of  Delaware.  The  Optionee is duly
qualified to conduct  business and is in corporate  good standing under the laws
of each  jurisdiction  in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification,  except where the failure
to be so qualified or in good standing would not have a Material  Adverse Effect
on it.

         Section 3.2.  Authorization of Transaction.
         ------------------------------------------

         The Optionee has all corporate requisite power and authority to execute
and  deliver  this  Agreement  and to  perform  its  obligations  hereunder  and
thereunder.  The execution and delivery of this Agreement and the performance of
this Agreement and the consummation of the transactions  contemplated hereby and
thereby by the Optionee  have been duly and validly  authorized by all necessary
corporate  action on the part of the Optionee.  This Agreement has been duly and
validly   executed  and  delivered  by  the  Optionee  and,   assuming  the  due
authorization,  execution  and delivery by the Company,  constitutes a valid and
binding  obligation of the Optionee,  enforceable  against it in accordance with
its terms,  except as enforcement  may be limited by  bankruptcy,  insolvency or
other similar laws affecting the enforcement of creditors' rights generally, and
except  that  the  availability  of  equitable   remedies,   including  specific
performance,  is  subject  to the  discretion  of the  court  before  which  any
proceeding therefor may be brought.

         Section 3.3.  Noncontravention.
         ------------------------------

         Neither  the  execution  and  delivery  of  this  Agreement,   nor  the
consummation by the Optionee of the transactions  contemplated  hereby, will (a)
conflict or violate any provision of the Certificate of  Incorporation or Bylaws



                                       -5-




of the Optionee,  (b) conflict with,  result in breach of,  constitute  (with or
without  due  notice  or lapse of time or both) a default  under,  result in the
acceleration of, create in any party any right to accelerate,  terminate, modify
or cancel, or require any notice, consent or waiver under, any contract,  lease,
sublease,  license,  sublicense,  franchise,  permit,  indenture,  agreement  or
mortgage for borrowed money,  instrument of indebtedness,  security  interest or
other  arrangement  to which the Optionee is a party or by which either is bound
or to which any of their  assets are  subject,  or (c) violate any order,  writ,
injunction,  decree,  statute,  rule or regulation applicable to the Optionee or
any of its properties or assets.

         Section 3.4.  Company Action.
         ----------------------------

         The Board of  Directors of the  Optionee,  at a meeting duly called and
held, have (i) determined that the transaction  contemplated  herein is fair and
in the best  interests of the Optionee  and each of its  stockholders,  and (ii)
adopted this Agreement in accordance with the provisions of the Delaware General
Corporation Law.

         Section 3.5.  Brokers' Fees.
         ---------------------------

         The  Optionee  has no  liability  or  obligation  to pay  any  fees  or
commissions  to any  broker,  finder or agent with  respect to the  transactions
contemplated by this Agreement.

         Section 3.6.  Financial Reports and SEC Documents.
         -------------------------------------------------

         The  Optionee's  Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004,  as amended by Form 10-KSB/A  filed on May 18, 2005,  and all
other reports, definitive proxy statements or information statements filed or to
be filed by it subsequent to December 31, 2004 under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act in the form filed or to be filed  (collectively,  "SEC
Documents")  with the SEC, as of the date filed or to be filed,  (A) complied or
will comply in all material respects as to form with the applicable requirements
under the Exchange Act and (B) as of the time filed, or to be filed, did not and
will not  contain  any untrue  statement  of a material  fact or omit to state a
material fact required to be stated  therein or necessary to make the statements
therein,  in the light of the  circumstances  under  which they were  made,  not
misleading;  and each of the balance  sheets  contained  in or  incorporated  by
reference into any such SEC Document  (including the related notes and schedules
thereto)  fairly  presents,  or will fairly present,  the financial  position of
Optionee  and  its  subsidiaries,  if  any,  as of its  date,  and  each  of the
statements  of income  and  changes  in  shareholders'  equity and cash flows or
equivalent  statements  in such SEC Documents  (including  any related notes and
schedules  thereto)  fairly  presents,  or will fairly  present,  the results of
operations,  changes in  shareholders'  equity and changes in cash flows, as the
case may be, of Optionee and its subsidiaries,  if any, for the periods to which
they relate,  in each case in  accordance  with U.S. GAAP  consistently  applied
during  the  periods  involved,  except  in each  case as may be noted  therein,
subject to the absence of footnotes and to normal  year-end  adjustments  in the
case of unaudited statements.


                                       -6-




                                   ARTICLE IV

                    COVENANTS BY THE OPTIONEE AND THE COMPANY

                The Optionee and the Company covenant as follows:

         Section 4.1.  Satisfaction of Conditions.
         ----------------------------------------

         Each of the Parties shall use its  commercially  reasonable  efforts to
take all actions and to do all things necessary,  proper or advisable to satisfy
the conditions set forth in Article V of this Agreement.

         Section 4.2.  Notices and Consents.
         ----------------------------------

         Each of the  Optionee  and the  Company  shall use  their  commercially
reasonable  efforts  to  obtain,  at its  expense,  all such  waivers,  permits,
consents,  approvals or other authorizations from third parties and Governmental
Bodies,  and to effect all such  registrations,  filings and notices  with or to
third parties and Governmental  Bodies, as may be required by or with respect to
the Optionee or the Company,  respectively,  in connection with the transactions
contemplated by this Agreement.

         Section 4.3.  Operation of Business.
         -----------------------------------

         Except as contemplated  by this  Agreement,  during the period from the
date of this  Agreement  up until the Closing  Date (as defined in the  Purchase
Agreement),  the Company shall conduct its operations in the Ordinary  Course of
Business and in compliance with all applicable laws and regulations  and, to the
extent consistent  therewith,  use all reasonable efforts to preserve intact its
current  business  organization,  keep  its  physical  Assets  in  good  working
condition, keep available the services of its current officers and employees and
preserve its relationships with customers,  suppliers and others having business
dealings with it to the end that its goodwill and ongoing  business shall not be
impaired  in any  material  respect.  Without  limiting  the  generality  of the
foregoing, prior to the Closing Date, the Company shall not, without the written
consent of the Optionee:

         (a) issue,  sell,  deliver or agree or commit to issue, sell or deliver
(whether  through the  issuance or granting of options,  warrants,  commitments,
subscriptions,  rights to purchase or otherwise) or authorize the issuance, sale
or  delivery  of, or redeem or  repurchase,  any stock of any class or any other
securities or any rights, warrants or options to acquire any such stock or other
securities  (except  pursuant  to the  conversion  or  exercise  of  convertible
securities, options or warrants outstanding on the date hereof), or amend any of
the terms of any such convertible securities, options or warrants;

         (b) split,  combine or  reclassify  any  shares of its  capital  stock;
declare,  set aside or pay any  dividend,  special  bonus or other  distribution
(whether in cash,  stock or property or any  combination  thereof) in respect of
its capital stock;


                                       -7-




         (c)  create,  incur  or  assume  any  debt  not  currently  outstanding
(including obligations in respect of capital leases); assume, guarantee, endorse
or otherwise  become liable or responsible  (whether  directly,  contingently or
otherwise) for the obligations of any other person or entity; or make any loans,
advances or capital  contributions to, or investments in, or increase the amount
of any existing loan to any other person or entity;

         (d) enter into, adopt or amend any Plans or any employment or severance
agreement or  arrangement or increase in any manner the  compensation  or fringe
benefits  of, or modify the  employment  terms of, its  directors,  officers  or
employees,  generally  or  individually,  or pay any benefit not required by the
terms in effect on the date hereof of any existing Plan;

         (e)  acquire,  sell,  transfer,  lease,  sublease,   license,  abandon,
encumber,  transfer or  otherwise  dispose of any  properties  or assets,  real,
personal  or mixed  (including  leasehold  interests  and  intangible  property)
related to the Operations, except in the Ordinary Course of Business

         (f) amend and/or restate its Charter or Bylaws;

         (g) change in any material respect its accounting  methods,  principles
or practices,  or make any change in depreciation  or  amortization  policies or
lives adopted by it except insofar as may be required by a generally  applicable
change in GAAP or as required by Optionee;

         (h)  discharge or satisfy any Lien or pay any  obligation  or liability
other than in the Ordinary Course of Business;

         (i) settle,  compromise,  materially modify or amend, waive, terminate,
cancel, release or assign any rights or Claims concerning, affecting or relating
to any Contract relating to the Operations (including,  without limitation,  any
Assigned Agreement), or otherwise relating to the Operations;

         (j)  mortgage  or pledge any of its  property  or Assets or subject any
such Assets to any Lien;

         (k) sell, assign, license, grant or transfer any rights under, or enter
into any settlement  regarding the breach or infringement  of, any  Intellectual
Property, or modify any existing rights with respect thereto;

         (l) enter into, amend, terminate,  take or omit to take any action that
would  constitute a violation of or default under,  or waive,  release or assign
any rights under, any contract or agreement;

         (m) enter  into,  amend,  modify or consent to the  termination  of any
Assigned Agreement;


                                       -8-




         (n) make or commit to make any  capital  expenditure  in excess of Five
Thousand Dollars ($5,000) per item;

         (o)  take  any  action  or fail to take any  action  permitted  by this
Agreement  with the  knowledge  that such action or failure to take action would
result in (i) any of the representations and warranties of the Company set forth
in this Agreement or the Purchase  Agreement  becoming untrue or (ii) any of the
conditions to the transaction set forth in Article V, not being satisfied;

         (p) make any material charitable contribution;

         (q) engage or terminate any consultant;

         (r) enter into,  materially  amend or (except in  conjunction  with the
completion of the term thereof)  terminate any Contract or transaction  with any
director or officer,  stockholder  or Affiliate of Seller (or with any relative,
beneficiary, spouse or Affiliate of such Person) relating to the Operations;

         (s) terminate,  discontinue,  close or dispose of any facility or other
business operation,  or lay off any employees or implement any early retirement,
separation or program  providing early retirement window benefits or announce or
plan any such action or program for the future;

         (t) allow any Permit  that was issued or relates to the  Operations  to
lapse or  terminate  or fail to renew any  insurance  policy  or Permit  that is
scheduled  to terminate or expire  within forty five (45)  calendar  days of the
Effective  Date,  except to the extent that such failure would not be reasonably
expected to cause a Material Adverse Effect on the ability of the Company to own
and operate the Operations as now conducted;

         (u) enter  into any  contract,  other  than in the  Ordinary  Course of
Business and as provided to the Optionee, or any amendment or termination of, or
default  under,  any  contract  that is or was  material  to the  Operations  or
Seller's rights thereunder;

         (v) commence any litigation  other than (i) for the routine  collection
of bills or (ii) in such cases where the Company in good faith  determines  that
failure to commence  suit would result in the material  impairment of a valuable
aspect of the  Company's  business,  provided  that  Company  consults  with the
Optionee prior to the filing of such a suit;

         (w) make or change any material election in respect of Taxes,  adopt or
change any accounting  method in respect of Taxes,  file any material  return or
any amendment to a material return, enter into any closing agreement, settle any
claim or  assessment  in respect of Taxes (except  settlements  effected  solely
through  payment of  immaterial  sums of money),  or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in respect
of Taxes;


                                       -9-




         (x)  write  down or  write  up (or  fail to  write  down or write up in
accordance  with  U.S.  GAAP  consistent  with past  practice)  the value of any
receivables  or revalue any of the  Company's  assets other than in the Ordinary
Course of Business and in accordance with U.S. GAAP;

         (y) issue any purchase orders or otherwise agreed to make any purchases
involving  exchanges in value in excess of Two Thousand Five Hundred Dollars and
Zero Cents  ($2,500.00)  individually  or Five  Thousand  Dollars and Zero Cents
($5,000.00) in the aggregate, except in the Ordinary Course of Business;

         (z) merge with, enter into a consolidation  with or acquire an interest
of 5% or more in any  Person or acquire a  substantial  portion of the assets or
business of any Person or any division or line of business  thereof engaged in a
business  relating to the Operations,  or otherwise  acquire any material assets
relating to the Operations except in the Ordinary Course of Business;

         (aa)  (i)  grant,   announce,  or  make  any  change  in  the  rate  of
compensation,  wages, salaries,  commission,  bonuses,  incentives,  pensions or
other direct or indirect  remuneration or benefits  payable,  or pay or agree or
orally  promised  to pay,  conditionally  or  otherwise,  any bonus,  incentive,
retention  or other  compensation,  retirement,  welfare,  fringe  or  severance
benefit or vacation  pay, to or in respect of any director,  officer,  employee,
distributor,  contractor, or agent of the Company relating to or involved in the
Operations,  including any increase or change pursuant to any Plan or (ii) enter
into,  establish,  increase  or  promise to  increase,  amend or  terminate  any
benefits under any Plan or any  employment or severance  agreement or commitment
or  collective  bargaining  agreement  with any  employee or  contractor  of the
Company  relating  to or involved  in the  Operations,  in either case except as
required by Law or any collective  bargaining  agreement,  such exceptions being
disclosed in the Disclosure Schedules;

         (bb) fail to pay any creditor any material amount owed to such creditor
when due;

         (cc) change in any manner the character or scope of the Operations;

         or

         (dd)  agree,  whether  in  writing  or  otherwise,  to take any  action
described in this Section 4.3 or grant any options to purchase,  rights of first
refusal,  rights of first offer or any other similar rights or commitments  with
respect to any of the actions specified in this Section 4.3, except as expressly
contemplated by this Agreement.

         Section 4.4.  Full Access.
         -------------------------

         The Company shall permit  representatives  of the Optionee to have full
access (upon reasonable  notice and at all reasonable  times, and in a manner so
as not to interfere with the normal  business  operations of the Company) to all



                                       -10-




premises, properties, financial and accounting records, contracts, other records
and  documents,  and  personnel,  of or  pertaining  to the Company,  subject to
compliance with applicable confidentiality obligations of the Company.

         Section 4.5.  Notice of Breaches.
         --------------------------------

         The Company shall  promptly  deliver to the Optionee  written notice of
any event or development of which the Company is aware and that would (a) render
any  statement,  representation  or warranty  of the  Company in this  Agreement
(including  the  Disclosure  Schedule)  inaccurate or incomplete in any material
respect, or (b) constitute or result in a breach by the Company of, or a failure
by the Company to comply  with,  any  agreement  or  covenant in this  Agreement
applicable to such Party.  The Optionee  shall  promptly  deliver to the Company
written  notice of any event or  development of which the Optionee is aware that
would (i) render any  statement,  representation  or warranty of the Optionee in
this  Agreement  inaccurate  or  incomplete  in any  material  respect,  or (ii)
constitute  or  result  in a breach by the  Optionee  of,  or a  failure  by the
Optionee to comply with, any agreement or covenant in this Agreement  applicable
to such  Party.  No such  disclosure  shall be  deemed to avoid or cure any such
misrepresentation or breach.

         Section 4.6.  Exclusivity.
         -------------------------

         The Company  agrees that from the date of execution  of this  Agreement
until the earlier of (a) the Closing Date or (b)  termination  of this Agreement
in  accordance  with Article VI hereof,  the Company  shall not, and the Company
shall use its best efforts to cause each of its officers, directors,  employees,
representatives  and  agents  not  to,  directly  or  indirectly,  (a)  solicit,
initiate,  engage  or  participate  in or  knowingly  encourage  discussions  or
negotiations with any person or entity (other than the Optionee)  concerning any
merger,   consolidation,   sale  of  assets,  tender  offer,   recapitalization,
accumulation  of  stock,  proxy  solicitation  or  other  business   combination
involving  the Company or any  division of the Company,  (b) solicit,  initiate,
entertain or encourage any proposal or offer related to such an acquisition, (c)
provide any non-public information concerning the business, properties or Assets
of the Company to any person or entity  (other than the  Optionee)  or (d) enter
into any  understanding,  letter of  intent or  agreement,  whether  binding  or
non-binding,  in connection  with the foregoing.  The Company shall  immediately
notify the Optionee  of, and shall  disclose to the Optionee all details of, any
inquiries,  discussions  or  negotiations  of the nature  described in the first
sentence of this Section 4.6. The term  "indirectly"  shall include,  but not be
limited to, through Company representatives.

         Section 4.7.  Reasonable Commercial Efforts and Further Assurances.
         ------------------------------------------------------------------

         Each  of  the  Parties  shall  use  reasonable  commercial  efforts  to
effectuate  the  transactions  contemplated  hereby  and to fill and cause to be
fulfilled the  conditions to closing under this  Agreement.  Each Party,  at the
reasonable  request of another  Party,  shall  execute  and  deliver  such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting  completely the  consummation  of this Agreement and the
transactions contemplated hereby.


                                       -11-




         Section 4.8.  Funding of Business Plan.
         --------------------------------------

         If the Closing occurs prior to June 30, 2007, absent a Material Adverse
Effect, as determined by and in the sole discretion of Optionee,  Optionee shall
provide  support,  as more fully described in Schedule 4.8, to the Operations to
be  transferred  from Seller to Optionee as provided  herein in order to, in the
reasonable  judgment of Optionee,  enable the Minimum Revenue Trigger to be met.
It is currently  anticipated that such support, if any, will be reflected in the
approval budgets for the Operations to be transferred from Seller to Optionee as
further described in the Supply and Services Agreement.

                                    ARTICLE V

                    CONDITIONS TO CONSUMMATION OF TRANSACTION

         Section 5.1.  Conditions to Each Party's Obligations.
         ----------------------------------------------------

         The  respective  obligations  of  each  Party  to  the  Option  Closing
hereunder are subject to the following conditions:

         (a) The Company shall have received the Requisite  Stockholder Approval
from the stockholders of the Company.

         (b) Any required notice to the Company's  preferred  stockholders shall
have been given or waived; and

         (c)  Subject to the  Requisite  Stockholder  Approval,  Company and the
Optionee shall have entered into the License Agreement.

         Section 5.2.  Conditions to Obligations of the Optionee.
         -------------------------------------------------------

         The  obligation  of the  Optionee to the Option  Closing  hereunder  is
subject to the satisfaction of the following additional conditions:

         (a) the Company  shall have  performed or complied with in all material
respects its agreements and covenants  required to be performed or complied with
under this Agreement as of or prior to the Option Closing;

         (b) the  representations  and  warranties  of the  Company set forth in
Article II shall be true and  correct as of the date  hereof,  and shall be true
and correct as of the Option Closing,  except for representations and warranties
made as of a specific date, which shall be true and correct as of such date;

         (c) the Company  shall have  delivered  to the  Optionee a  certificate
(without  qualification  as to knowledge or  materiality  or  otherwise)  to the
effect  that each of the  conditions  specified  in clauses  (a) and (b) of this
Section 5.2 is satisfied in all respects;


                                       -12-




         (d) The Company shall have received the consent of AngioDynamics, Inc.,
substantially in the form of Exhibit D, attached hereto, to assign the Company's
rights and obligations  under that certain  Distributor  Agreement,  dated as of
June 28, 2002, between the Company and AngioDynamics, Inc.

         (e)  Louis R.  Matson  shall  have  entered  into a  Voting  Agreement,
substantially in the form attached hereto as Exhibit E; and

         (f)  Louis  R.  Matson  and the  Company  shall  have  entered  into an
Employment  Agreement  substantially  in the form set forth on Exhibit F hereto;
and

         (g) Louis R. Matson and the  Optionee  shall have  entered  into a Side
Letter Agreement substantially in the form set forth on Exhibit G hereto.

         Section 5.3.  Conditions to Obligations of the Company.
         ------------------------------------------------------

         The  obligation  of  the  Company  to  consummate  the  Option  Closing
hereunder is subject to the satisfaction of the following additional conditions:

         (a) The Optionee  shall have performed or complied with in all material
respects its agreements and covenants  required to be performed or complied with
under this Agreement as of or prior to the Option Closing;

         (b) the  representations  and  warranties  of the Optionee set forth in
Article III shall be true and correct as of the date  hereof,  and shall be true
and correct as of the Option Closing,  except for representations and warranties
made as of a specific date, which shall be true and correct as of such date; and

         (c) the  Optionee  shall have  delivered  to the Company a  certificate
(without  qualification  as to knowledge or  materiality  or  otherwise)  to the
effect  that each of the  conditions  specified  in  clause  (a) and (b) of this
Section 5.3 is satisfied in all respects.

                                   ARTICLE VI

                                   TERMINATION

         Section 6.1.  Termination of Agreement.
         --------------------------------------

         The Parties may terminate this  Agreement  prior to the Closing Date as
provided below:

         (a) the Parties may terminate this Agreement by mutual written consent;

         (b) any Party may terminate  this Agreement by giving written notice to
the other Parties upon the entry of any permanent injunction or other order of a
court  or  other  competent   authority   preventing  the  consummation  of  the
transaction that has become final and nonappealable;


                                       -13-




         (c) The Optionee may terminate  this Agreement if any of the conditions
set forth in Section 5.1 or 5.2 is not  satisfied  on or prior to  December  17,
2005 and the Optionee is not then in breach of this Agreement;

         (d) the Company may terminate  this  Agreement if any of the conditions
set forth in Section 5.1 or 5.3 are not  satisfied  on or prior to December  17,
2005 and the Company is not then in breach of this Agreement; and

         (e) the Optionee may terminate  this  Agreement for any reason prior to
the Closing Date.

         Section 6.2.  Effect of Termination.
         -----------------------------------

         If any Party  terminates  this  Agreement  pursuant to Section 6.1, all
obligations of the Parties shall terminate without any liability of any Party to
any other Party.  Notwithstanding the foregoing, the following obligations shall
survive  termination of this Agreement:  (i) liability of any Party for breaches
of this Agreement;  (ii) confidentiality,  as provided in Section 7.1; and (iii)
each Party's obligation to bear its own fees and expenses incurred in connection
with the  preparation  and  negotiation of this  Agreement and the  transactions
contemplated herein as provided in Section 7.11.

         Section 6.3.  Amendment.
         -----------------------

         The  Parties  may cause  this  Agreement  to be  amended at any time by
execution of an instrument in writing signed on behalf of each of the Parties.

         Section 6.4.  Extension; Waiver.
         -------------------------------

         At any time prior to the  Closing  Date,  any Party may,  to the extent
legally  allowed  (i)  extend  the  time  for  the  performance  of  any  of the
obligations or other acts of the other Parties;  (ii) waive any  inaccuracies in
the representations and warranties made to such Party contained herein or in any
document  delivered  pursuant hereto and (iii) waive  compliance with any of the
agreements or conditions  for the benefit of such Party  contained  herein.  Any
agreement on the part of a Party to any such  extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such Party.

                                   ARTICLE VII

                                  MISCELLANEOUS

         Section 7.1.  Press Releases and Announcements.
         ----------------------------------------------

         No Party  shall issue any press  release or make any public  disclosure
relating to the subject matter of this  Agreement  without the prior approval of
the  other  Parties;  provided,  however,  that any  Party  may make any  public
disclosure it believes in good faith is required by law or regulation  (in which
case the disclosing Party  shall advise the other Parties and provide them  with


                                       -14-




a  copy  of  the   proposed   disclosure   prior  to  making  the   disclosure).
Notwithstanding  the  foregoing,  the  Parties  acknowledge  that  Optionee is a
reporting  company under the  Securities  Exchange Act of 1934, as amended,  and
will be  required to  publicly  disclose  this  Agreement  and the  transactions
contemplated  hereby in the form of press releases,  Current Reports on Form 8-K
and such other means as Optionee determines.

         Section 7.2.  No Third Party Beneficiaries.
         ------------------------------------------

         This Agreement  shall not confer any rights or remedies upon any person
other than the Parties and their respective successors and permitted assigns.

         Section 7.3.  Entire Agreement.
         ------------------------------

         This Agreement,  the Disclosure Schedule, the Schedules,  the documents
and  instruments  and other  agreements  among the  Parties  referred  to herein
constitute  the entire  agreement  among the  Parties and  supersedes  any prior
understandings,  agreements or representations by or among the Parties,  written
or oral, with respect to the subject matter hereof.

         Section 7.4.  Succession and Assignment.
         ---------------------------------------

         This  Agreement  shall be binding  upon and inure to the benefit of the
Parties and their  respective  successors  and permitted  assigns.  No Party may
assign either this  Agreement or any of its rights,  interests,  or  obligations
hereunder  without the prior  written  approval of the other  Parties,  provided
however,  that  Optionee  may assign  some or all of its rights  hereunder  to a
wholly owned subsidiary.

         Section 7.5.  Counterparts.
         --------------------------

         This  Agreement  may be executed in two or more  counterparts,  each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.

         Section 7.6.  Headings.
         ----------------------

         The section  headings  contained  in this  Agreement  are  inserted for
convenience  only and shall not affect in any way the meaning or  interpretation
of this Agreement.

         Section 7.7.  Notices.
         ---------------------

         All  notices,  requests,  demands,  claims,  and  other  communications
hereunder  shall be in writing.  Any notice,  request,  demand,  claim, or other
communication  hereunder  shall be deemed duly delivered two business days after
it is sent by registered or certified mail,  return receipt  requested,  postage
prepaid,  or one  business  day  after  it is sent  via a  reputable  nationwide
overnight courier service or sent via facsimile (with acknowledgment of complete
transmission)  with a confirmation copy by registered or certified mail, in each
case to the intended recipient as set forth in the Purchase Agreement.


                                       -15-




         Any  Party  may give  any  notice,  request,  demand,  claim,  or other
communication  hereunder  using any other means  (including  personal  delivery,
expedited  courier,  messenger  service,  telecopy,  telex,  ordinary  mail,  or
electronic  mail),  but  no  such  notice,  request,  demand,  claim,  or  other
communication  shall be  deemed  to have been  duly  given  unless  and until it
actually is received by the Party for whom it is intended.  Any Party may change
the  address  to  which   notices,   requests,   demands,   claims,   and  other
communications  hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.

         Section 7.8.  Governing Law.
         ---------------------------

         This  Agreement  shall be governed by and construed in accordance  with
the internal laws (and not the law of conflicts) of the State of California.

         Section 7.9.  Amendments and Waivers.
         ------------------------------------

         The Parties may mutually  amend any provision of this  Agreement at any
time prior to Closing  Date.  No  amendment of any  provision of this  Agreement
shall be valid  unless  the same  shall be in  writing  and signed by all of the
Parties. No waiver by any Party of any default,  misrepresentation  or breach of
warranty or covenant  hereunder,  whether intentional or not, shall be deemed to
extend  to any  prior or  subsequent  default,  misrepresentation  or  breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent default,  misrepresentation,  breach of such warranty
or covenant.

         Section 7.10.  Severability.
         ---------------------------

         Any  term  or   provision  of  this   Agreement   that  is  invalid  or
unenforceable in any situation in any jurisdiction shall not affect the validity
or  enforceability  of the remaining terms and provisions hereof or the validity
or  enforceability  of the offending term or provision in any other situation or
in any  other  jurisdiction.  If the  final  judgment  of a court  of  competent
jurisdiction   declares  that  any  term  or  provision  hereof  is  invalid  or
unenforceable,  the Parties  agree that the court  making the  determination  of
invalidity  or  unenforceability  shall  have the  power to  reduce  the  scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace  any invalid or  unenforceable  term or  provision  with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision,  and this Agreement
shall be  enforceable  as so modified  after the  expiration  of the time within
which the judgment may be appealed,  provided that this Agreement shall not then
substantially deprive either Party of the bargained-for performance of the other
Party.

         Section 7.11.  Expenses.
         -----------------------

         All fees and  expenses  (including  all legal and  accounting  fees and
expenses and all other  expenses)  incurred by Optionee in connection  with this
Agreement  and the  transactions  contemplated  hereby shall be paid by Optionee
whether or not the transaction is consummated. All transaction costs incurred by
the Company in connection with this Agreement and the transactions  contemplated
hereby  shall  be  paid  by the  Company  whether  or  not  the  transaction  is
consummated.


                                       -16-




         Section 7.12.  Other Remedies.
         -----------------------------

         Except  as  otherwise  provided  herein,  any and all  remedies  herein
expressly  conferred  upon a  Party  will be  deemed  cumulative  with,  and not
exclusive  of, any other remedy  conferred  hereby or by law or equity upon such
Party,  and the  exercise  by a Party of any one remedy  will not  preclude  the
exercise of any other remedy.

         Section 7.13.  Construction.
         ---------------------------

         The Parties agree that they have been represented by counsel during the
negotiation,  preparation and execution of this Agreement and, therefore,  waive
the  application  of any  law,  regulation,  holding  or  rule  of  construction
providing  that  ambiguities in an agreement or other document will be construed
against the Party  drafting  such  agreement or document.  Any  reference to any
federal,  state,  local, or foreign statute or law shall be deemed also to refer
to all rules and regulations promulgated thereunder, unless the context requires
otherwise.

         Section 7.14.  Incorporation of Schedules and Disclosure Schedule.
         -----------------------------------------------------------------

         The Exhibits,  Schedules  and  Disclosure  Schedule  identified in this
Agreement are incorporated herein by reference and made a part hereof.



                           [Signature page to follow]


                                       -17-



                                                                  EXECUTION COPY


         IN WITNESS WHEREOF,  the parties hereto have executed this Agreement as
of the date first above written.

                                         SURGICA CORPORATION

                                         By:    /s/ Louis R. Matson
                                            ---------------------------------
                                         Name:  Louis R. Matson
                                         Title: President and Chief Executive
                                                 Officer


                                         PROTEIN POLYMER TECHNOLOGIES, INC.

                                         By:    /s/ William N. Plamondon, III
                                            ---------------------------------
                                         Name:  William N. Plamondon, III
                                         Title: Chief Executive Officer


             [Signature Page to the Asset Purchase Option Agreement]

Exhibit A

FORM OF LICENSE AGREEMENT

Exhibit B

FORM OF SUPPLY AND SERVICES AGREEMENT

Exhibit C

FORM OF ASSET PURCHASE AGREEMENT

- --------------------------------------------------------------------------------





                            ASSET PURCHASE AGREEMENT

                                 by and between

                        [_____________ ACQUISITION, LLC],



                       PROTEIN POLYMER TECHNOLOGIES, INC.,


                                       and


                              SURGICA CORPORATION,





                          Dated as of [______], 200[_]





- --------------------------------------------------------------------------------










                                TABLE OF CONTENTS

                                                                                                             Page

Article I         DEFINITIONS....................................................................................1

         Section 1.1           Definitions.......................................................................1

Article II        TRANSFER OF ASSETS AND LIABILITIES............................................................10

         Section 2.1           Acquired Assets..................................................................10
         Section 2.2           Excluded Assets..................................................................12
         Section 2.3           Assumed Liabilities..............................................................12
         Section 2.4           Excluded Liabilities.............................................................13
         Section 2.5           Transfer of Acquired Assets and Assumed Liabilities..............................13
         Section 2.6           Consideration....................................................................14
         Section 2.7           Earnout..........................................................................15
         Section 2.8           Closing..........................................................................16
         Section 2.9           Deliveries by Seller.............................................................16
         Section 2.10          Deliveries by Purchaser..........................................................17
         Section 2.11          Non-Assignable Acquired Assets...................................................17

Article III       REPRESENTATIONS AND WARRANTIES OF SELLER......................................................18

         Section 3.1           Organization and Qualification of Seller.........................................18
         Section 3.2           Authority of Seller to Execute and Perform Agreement.............................19
         Section 3.3           Subsidiaries.....................................................................19
         Section 3.4           Financial Statements.............................................................19
         Section 3.5           Absence of Certain Changes or Events.............................................20
         Section 3.6           Litigation and Liabilities.......................................................23
         Section 3.7           Title and Condition to Properties; Absence of Liens; etc.........................23
         Section 3.8           Licenses and Registrations; Compliance with Laws; etc............................24
         Section 3.9           Intellectual Property............................................................24
         Section 3.10          Non-Contravention................................................................27
         Section 3.11          Consents and Approvals...........................................................27
         Section 3.12          Acquired Assets..................................................................27
         Section 3.13          Employee Benefit Plans; ERISA....................................................27
         Section 3.14          Insurance Policies...............................................................28
         Section 3.15          Contracts........................................................................28
         Section 3.16          Environmental Matters............................................................29
         Section 3.17          Taxes............................................................................30
         Section 3.18          Liabilities......................................................................30
         Section 3.19          Real Estate......................................................................31
         Section 3.20          Tangible Personal Property.......................................................31
         Section 3.21          Labor Matters....................................................................32
         Section 3.22          Certain Interests................................................................33
         Section 3.23          Brokers..........................................................................33
         Section 3.24          Sufficiency of Assets............................................................33
         Section 3.25          No Untrue Statements.............................................................33


                                       -i-



                                TABLE OF CONTENTS
                                   (continued)
                                                                                                             Page


Article IV        REPRESENTATIONS AND WARRANTIES OF PURCHASER...................................................33

         Section 4.1           Organization.....................................................................33
         Section 4.2           Authority to Execute and Perform Agreement; Ability to Perform...................34
         Section 4.3           Consents and Approvals...........................................................34
         Section 4.4           Non-Contravention................................................................34
         Section 4.5           Financial Reports and SEC Documents..............................................34
         Section 4.6           Purchaser Litigation.............................................................35
         Section 4.7           Brokers..........................................................................35
         Section 4.8           Validity of Shares...............................................................35

Article V         ADDITIONAL AGREEMENTS OF THE PARTIES..........................................................35

         Section 5.1           Conduct of Operations............................................................35
         Section 5.2           Further Assurances...............................................................36
         Section 5.3           Certain Notifications............................................................36
         Section 5.4           Access to Records and Facilities; Confidentiality................................36
         Section 5.5           Preservation of Records..........................................................36
         Section 5.6           Non-Competition and Non-Solicitation Covenant of Seller..........................37
         Section 5.7           Employees........................................................................38
         Section 5.8           Satisfaction of Conditions Precedent.............................................38
         Section 5.9           Expenses and Apportioned Obligations.............................................38
         Section 5.10          Bulk Sales Compliance............................................................38
         Section 5.11          Public Announcements.............................................................38
         Section 5.12          Use of Name and Logo.............................................................39
         Section 5.13          Excluded Liabilities.............................................................39
         Section 5.14          Competing Offers; Merger or Liquidation..........................................39
         Section 5.15          Exemption from Registration or Securities Act Registration; Preparation
                               of Notice of Meeting and Proxy Statement or Information Statement................39
         Section 5.16          Support of Operations............................................................41

Article VI        CONDITIONS TO CLOSING.........................................................................42

         Section 6.1           Conditions to Obligations of Seller..............................................42
         Section 6.2           Conditions to Obligations of Purchaser...........................................42

Article VII       TERMINATION...................................................................................44

         Section 7.1           Termination......................................................................44
         Section 7.2           Effect of Termination............................................................45

Article VIII      INDEMNIFICATION...............................................................................45

         Section 8.1           Indemnification by Seller........................................................45
         Section 8.2           Indemnification by Purchaser.....................................................46
         Section 8.3           Defense of Claims................................................................46


                                      -ii-



                                TABLE OF CONTENTS
                                   (continued)
                                                                                                             Page

         Section 8.4           Survival of Representations and Warranties.......................................48
         Section 8.5           Offset...........................................................................48

Article IX        MISCELLANEOUS.................................................................................49

         Section 9.1           Amendments; Non-Contractual Remedies; Preservation of Remedies...................49
         Section 9.2           Waiver...........................................................................49
         Section 9.3           Governing Law....................................................................49
         Section 9.4           Submission of Jurisdiction; Waiver of Jury Trial.................................49
         Section 9.5           Specific Performance.............................................................50
         Section 9.6           Notices..........................................................................50
         Section 9.7           Section Headings.................................................................51
         Section 9.8           Construction.....................................................................51
         Section 9.9           Counterparts.....................................................................51
         Section 9.10          Assignments......................................................................52
         Section 9.11          Entire Agreement, Enforceability and Miscellaneous...............................52
         Section 9.12          Interpretation...................................................................52


                                      -iii-



                                TABLE OF CONTENTS
                                   (continued)
                                                                                                             Page

EXHIBITS

Exhibit A                  Bill of Sale and Assignment
Exhibit B                  Patent Assignment
Exhibit C                  Copyright Assignment
Exhibit D                  Trademark Assignment
Exhibit E                  Lease Assignment
Exhibit F                  Allocation Method
Exhibit G                  Certificate of Secretary of Seller
Exhibit H                  Employment Agreement
Exhibit I                  Non-Competition Agreement
Exhibit J                  Side Letter Agreement

SCHEDULES

Schedule 1.1               Persons with Knowledge
Schedule 2.1(b)            Equipment
Schedule 2.1(c)            Inventory
Schedule 2.1(d)            Assigned IP Assets
Schedule 2.1(f)            Assigned Agreements
Schedule 2.1(g)(i)         Material Permits
Schedule 2.1(g)(ii)        Other Permits
Schedule 2.1(h)            Insurance Policies
Schedule 2.1(o)            Transferred Bank Accounts
Schedule 2.2(f)            Excluded Assets
Schedule 3.1               Organization and Qualification of Seller
Schedule 3.3               Subsidiaries
Schedule 3.4               Reference Statement
Schedule 3.4(c)            Accounts Receivable
Schedule 3.5               Absence of Certain Changes or Events
Schedule 3.6               Litigation and Liabilities
Schedule 3.7               Liens
Schedule 3.8               Licenses and Registrations; Compliance with Laws
Schedule 3.9(a)(i)         Owned Intellectual Property
Schedule 3.9(a)(ii)        IP Licenses and Licensed IP
Schedule 3.9(b)            Exceptions to Title to Intellectual Property
Schedule 3.9(e)(i)         Intellectual Property Claims
Schedule 3.9(e)(ii)        Third Party Indemnification Obligations
Schedule 3.9(f)            Persons Waiving Rights to Intellectual Property
Schedule 3.10              Non-Contravention
Schedule 3.11              Consents and Approvals
Schedule 3.13              Employee Benefits; ERISA
Schedule 3.14              Insurance
Schedule 3.15(a)           Contracts


                                      -iv-



                                TABLE OF CONTENTS
                                   (continued)
                                                                                                             Page


Schedule 3.15(c)           Defaults Under Contracts
Schedule 3.15(d)           Open Bids
Schedule 3.16              Environmental Contracts
Schedule 3.17              Taxes
Schedule 3.18              Liabilities
Schedule 3.19(a)           Leased Real Property and Ancillary Leased Real Property Documents
Schedule 3.20(a)           Tangible Personal Property
Schedule 3.20(b)           Tangible Personal Property Leases
Schedule 3.22              Certain Interests
Schedule 3.23              Brokers
Schedule 4.2               Authorizations and Consents
Schedule 4.6               Brokers
Schedule 5.1               Conduct of Operations
Schedule 6.2(a)            Consents





                                       -v-



                            ASSET PURCHASE AGREEMENT
                            ------------------------

         ASSET PURCHASE AGREEMENT, dated as of [__________], 200[_] (the
"Agreement"), by and between SURGICA CORPORATION, a Delaware corporation
("Seller"), PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation ("PPT")
and [_____________ ACQUISITION, LLC], a [________] limited liability company
("Acquisition Co.") and wholly-owned subsidiary of PPT (collectively, PPT and
Acquisition Co. are referred to herein as "Purchaser").

                                 R E C I T A L S
                                 - - - - - - - -

         WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to
purchase from Seller, substantially all of the property, assets and rights owned
or leased by Seller relating to the Operations (as defined herein), and in
connection therewith Purchaser is willing to assume certain obligations and
liabilities of the Seller relating thereto, all upon the terms and subject to
the conditions set forth herein.

         NOW, THEREFORE, in consideration of the foregoing and of the premises,
representations, mutual agreements, covenants and conditions hereinafter set
forth, and intending to be legally bound hereby, the parties hereto hereby agree
as follows:

                                    Article I

                                   DEFINITIONS

                  Section  1.1  Definitions.  As  used in  this  Agreement,  the
following terms have the meanings indicated:

                  "Accountant" shall mean [________]

                  "Acquired Assets" shall have the meaning set forth in Section
2.1.

                  "Affiliate" shall have the meaning set forth in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.

                  "Agreement" shall have the meaning set forth in the preamble
to this Agreement.

                  "Allocation Method" shall have the meaning set forth in
Section 2.6(c).

                  "Ancillary Leased Real Property Documents" shall have the
meaning set forth in Section 3.19(a).

                  "Annualized First Quarter Revenue" shall mean the product of
(i) four (4) multiplied by (ii) the revenue for the first (1st) quarter of 2007
derived from the Operations to be transferred from Seller to Purchaser as
provided herein and as evidenced in regularly prepared financial statements in a
manner consistent with those historically provided by Seller.

                  "Assigned Agreements" shall have the meaning set forth in
Section 2.1(f).





                  "Assigned IP Assets" shall have the meaning set forth in
Section 2.1(d).

                  "Assumed Liabilities" shall have the meaning set forth in
Section 2.3.

                  "Balance Sheet" shall have the meaning set forth in Section
3.4(a).

                  "Balance Sheet Date" shall have the meaning set forth in
Section 3.4(a).

                  "Bill of Sale and Assignment" shall have the meaning set forth
in Section 2.5(a)(i).

                  "Books and Records" shall have the meaning set forth in
Section 2.1(i).

                  "Business Day" shall mean any day that is not a Saturday, a
Sunday or other day on which banks are required or authorized by Law to be
closed in the State of California.

                  "Claim" shall have the meaning set forth in Section 8.3.

                  "Closing" shall have the meaning set forth in Section 2.8.

                  "Closing Date" shall have the meaning set forth in Section
2.8.

                  "Code" shall mean the Internal Revenue Code of 1986, as
amended.

                  "Common  Stock" shall mean the common stock,  $0.01 par value,
of PPT.

                  "Common Stock Equivalent A" shall mean the number of shares of
Common Stock equal to the quotient of (i) Fifty Cents ($0.50) divided by (ii)
the price per share of Common Stock based on the ninety- (90) day prior average
price of the Common Stock as of April 1, 2007.

                  "Common Stock Equivalent B" shall mean the number of shares of
Common Stock equal to the quotient of (i) One Dollar and Zero Cents ($1.00)
divided by (ii) the price per share of Common Stock based on the ninety- (90)
day prior average price of the Common Stock as of April 1, 2007.

                  "Consent" shall have the meaning set forth in Section 3.11.

                  "Contracts" shall have the meaning set forth in Section
2.1(f).

                  "Copyright Assignment" shall have the meaning set forth in
Section 2.5(a)(iii).

                  "Copyrights" shall have the meaning set forth in the
definition of Intellectual Property in this Section 1.1.

                  "Debt" shall mean, with respect to any Person, (a) all
indebtedness of such Person, whether or not contingent, for borrowed money, (b)
all obligations of such Person for the deferred purchase price of property or
services, (c) all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such


                                      -2-



Person (even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (d) all obligations of such Person as lessee under leases that have
been or should be, in accordance with U.S. GAAP, recorded as capital leases, (e)
all obligations, contingent or otherwise, of such Person under acceptance,
letter of credit or similar facilities, (f) all obligations of such Person to
purchase, redeem, retire, defease or otherwise acquire for value any capital
stock of such Person or any warrants, rights or options to acquire such capital
stock, valued, in the case of redeemable preferred stock, at the greater of its
voluntary or involuntary liquidation preference plus accrued and unpaid
dividends, (g) all indebtedness of others referred to in clauses (a) through (f)
above guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement (i)
to pay or purchase such indebtedness or to advance or supply funds for the
payment or purchase of such indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such indebtedness or to assure
the holder of such indebtedness against loss, (iii) to supply funds to or in any
other manner invest in the debtor (including any agreement to pay for property
or services irrespective of whether such property is received or such services
are rendered) or (iv) otherwise to assure a creditor against loss, and (h) all
indebtedness referred to in clauses (a) through (f) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such indebtedness.

                  "Disclosure Schedule" shall have the meaning specified in the
preamble to Article III.

                  "Earnout Amount" shall mean the aggregate amount of (i) the
Common Stock Equivalent A for every One Dollar and Zero Cents ($1.00) in
Annualized First Quarter Revenue up to, and including, Two Million Dollars and
Zero Cents ($2,000,000.00) plus (ii) the Common Stock Equivalent B for every One
Dollar and Zero Cents ($1.00) in Annualized First Quarter Revenue in excess of
Two Million Dollars and Zero Cents ($2,000,000.00).

                  "Earnout Payment Date" shall mean shall have the meaning set
forth in Section 2.7(a).

                  "Environment" shall mean surface waters, groundwaters,
sediment, soil, subsurface strata and outdoor or indoor ambient air.

                  "Environmental Action" shall mean any investigation,
monitoring, notification, clean-up, containment, response, removal, remedial
compliance or other action relating to any Environmental Laws for which Seller
is, or as a result of Seller's being, obligated to defend, indemnify and hold
Purchaser harmless pursuant to Section 8.1.

                  "Environmental Laws" shall mean all applicable Laws, now or
hereafter in effect and as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative order, consent
decree or judgment, or other agency requirement having the force and effect of
law and relating to the Environment, pollution, Hazardous Substances, protection
of the environment, protection of natural resources, or health and safety,
including the


                                      -3-



Comprehensive Environmental Response, Compensation and Liability Act; the
Resource Conservation and Recovery Act; the Hazardous Materials Transportation
Act; the Clean Water Act, the Toxic Substances Control Act; the Clean Air Act;
the Safe Drinking Water Act; the Atomic Energy Act; the Federal Insecticide,
Fungicide and Rodenticide Act; the Occupational Safety and Health Act; and the
Federal Food, Drug and Cosmetic Act.

                  "Equipment" shall have the meaning set forth in Section
2.1(b).

                  "ERISA" shall have the meaning set forth in Section 3.13(a).

                  "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.

                  "Excluded Assets" shall have the meaning set forth in Section
2.2.

                  "Excluded Liabilities" shall have the meaning set forth in
Section 2.4.

                  "Financial Statements" shall have the meaning set forth in
Section 3.4(a).

                  "U.S. GAAP" shall mean United States generally accepted
accounting principles consistently applied.

                  "Governmental Bodies" shall have the meaning set forth in
Section 3.8.

                  "Governmental Body" shall have the meaning set forth in
Section 3.8.

                  "Hazardous Substance" shall mean any toxic, hazardous,
chemical, material, explosive, dangerous, flammable or radioactive substance
that is regulated by or under authority of any Environmental Laws, including,
without limitation, (i) petroleum and petroleum products and compounds
containing them, including gasoline, diesel fuel and oil; urea formaldehyde foam
insulation; polychlorinated biphenyls and transformers, other equipment, or
compounds containing them; lead and lead-based paint; asbestos or
asbestos-containing materials in any form that is or could become friable; radon
gas; underground or above-ground storage tanks, whether empty or containing any
substance; any substance the presence of which is prohibited or regulated by any
federal, state or local authority; any substance that requires special handling;
(ii) in the United States, all substances defined as Hazardous Substances, Oils,
Pollutants or Contaminants in the Natural Oil and Hazardous Substances Pollution
Contingency Plan; and (iii) any other material or substance now or in the future
defined as a "hazardous substance", "hazardous material", "hazardous waste",
"extremely hazardous waste", "restricted hazardous wastes", "toxic substance",
"toxic pollutant", "contaminant", or pollutant", or words of similar import,
under any applicable Environmental Law.

                  "Indemnified Party" shall mean a Purchaser Indemnified Party
pursuant to Section 8.1 or a Seller Indemnified Party pursuant to Section 8.2,
as the case may be.

                  "Indemnifying Party" shall mean Seller pursuant to Section 8.1
or Purchaser pursuant to Section 8.2, as the case may be.


                                      -4-



                  "Instruments of Assignment" shall have the meaning set forth
in Section 2.5(a)(vi).

                  "Intellectual Property" shall mean all of the following as
they exist in any jurisdictions throughout the world, in each case, to the
extent owned by or licensed to Seller:

                  (i) patents, patent applications, industrial rights and the
inventions, designs and improvements described and claimed therein, patentable
inventions, and other patent rights (including any divisionals, continuations,
continuations-in-part, renewals, substitutions, reexaminations or reissues
thereof, whether or not patents are issued on any such applications and whether
or not any such applications are amended modified, withdrawn or refiled)
(collectively, "Patents");

                  (ii) trademarks, service marks, trade dress, trade names,
brand names, designs, logos, slogans, corporate names and other identifiers of
source or goodwill (including, in each case, the goodwill associated therewith),
whether registered or unregistered, and all registrations and applications for
registration thereof, including, without limitation, the name "Surgica
Corporation" and all variants of Surgica Corporation the registrations of which
are owned by Seller (collectively, "Trademarks");

                  (iii) copyrights, including any renewals and extensions
thereof, copyright registrations and applications for registration thereof, and
non-registered copyrights (collectively, "Copyrights");

                  (iv) trade secrets, confidential business information and
other proprietary information including, without limitation, designs, research
and development information, technical information, specifications, operating
and maintenance manuals, methods, engineering drawings, know-how, data, data
rights, mask works, discoveries, inventions, industrial designs and other
proprietary rights (whether or not patentable or subject to copyright, mask work
or trade secret protection)

                  (v) advertising and promotional rights and rights to privacy
and publicity;

                  (vi) all domain names, web sites and web pages and related
rights and items;

                  (vii) computer software programs and software systems,
including, without limitation, all databases, compilations, tool sets,
compilers, higher level or "proprietary" languages, and all related material
documentation and information, whether in source code, object code or human
readable form, other than software used by Seller that is commercially available
pursuant to "shrink-wrap," "click-through" or other standard form license
agreements and software that is embedded as part of commercially available
products or services (collectively, "Software"); and

                  (viii) all common rights thereto.

                  "intellectual property", if used in lower case, shall mean all
of the foregoing, without restriction as to identity of ownership, licensor or
licensee.


                                      -5-



                  "Inventory" shall have the meaning set forth in Section
2.1(c).

                  "IP Licenses" shall mean all permits, licenses, sublicenses
and other agreements or permissions including, without limitation, agreements
between Seller and third parties relating to the development or use of
Intellectual Property, the development or transmission of data, or the use,
modification, framing, linking advertisement, or other practices with respect to
Internet web sites under which Seller is a licensee or otherwise authorized to
use or practice, or under which Seller is a licensor of any Intellectual
Property.

                  "Knowledge" shall mean the actual knowledge of the Persons
listed on Schedule 1.1, after reasonable investigation sufficient to express an
informed view and such knowledge that would be imputed to such Persons in the
normal exercise of their duties.

                  "Laws" shall have the meaning set forth in Section 2.11(a).

                  "Lease Assignment" shall have the meaning set forth in Section
2.5(a)(v).

                  "Leased Real Property" shall have the meaning set forth in
Section 3.19(a).

                  "Liabilities" shall have the meaning set forth in Section
3.18.

                  "Liens" shall mean any pledges, liens (including environmental
and Tax liens), charges, encumbrances, transfer restrictions, options, rights of
first refusal, mortgages, deeds of trust, easements, leases, servitudes,
security interests, hypothecations, violations, licenses, reversions, reverters,
preferential arrangements, restrictive covenants, conditions or restrictions and
Claims of any kind or other encumbrances of any nature whatsoever, including any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership.

                  "Losses" shall have the meaning set forth in Section 8.1.

                  "Material Adverse Effect" shall mean any circumstance, change
in or effect on the Operations or Seller that, individually or in the aggregate
with all other circumstances, changes in or effects on the Operations or Seller:
(a) is or is reasonably likely to be materially adverse to the business,
operations, assets or liabilities (including contingent liabilities), employee
relationships, customer or supplier relationships, results of operations, the
condition (financial or otherwise) or prospects of the Operations, in each case
taken as a whole (other than changes, effects or circumstances that are the
result of economic factors affecting the economy as a whole or that are the
result of factors generally affecting the industry or specific markets in which
the Operations operate), or (b) is reasonably likely to materially adversely
affect the ability of the Purchaser to operate or conduct the Operations in the
manner in which it is currently or currently contemplated to be operated or
conducted by Seller, or (c) could prevent, or materially impair or materially
delay, Purchaser from consummating the transactions contemplated by the
Transaction Documents; provided, that a "Material Adverse Effect" shall not
include any adverse change, effect or event (a) arising out of or resulting
primarily from actions contemplated by the parties hereto in connection with
this Agreement or the other Transaction Documents or (b) that is attributable to
the announcement or performance of this


                                      -6-



Agreement or the other Transaction Documents or the transactions contemplated by
this Agreement or the other Transaction Documents.

                  "Material Permits" shall have the meaning set forth in Section
2.1(g).

                  "Minimum Revenue Trigger" shall mean average sales per quarter
from the Operations to be transferred from Seller to Purchaser as provided
herein for the first (1st) quarter of 2007 and second (2nd) quarter of 2007
which are equal to or greater than Four Hundred Fifty Thousand Dollars and Zero
Cents ($450,000.00).

                  "Operations" shall mean all business and operations of Seller
as currently conducted, and as conducted on the Closing Date, including, without
limitation, all research, development, manufacturing, marketing, sales, service
and other activities of Seller (including its predecessors, if any) relating
thereto or in connection therewith.

                  "Options" shall have the meaning set forth in Section 3.19(a).

                  "Order" shall have the meaning set forth in Section 6.1(a).

                  "Ordinary Course of Business" shall have the meaning set forth
in Section 3.5.

                  "Other Instruments" shall have the meaning set forth in
Section 2.5(a)(vi).

                  "Patent Assignment" shall have the meaning set forth in
Section 2.5(a)(ii).

                  "Patents" shall have the meaning set forth in the definition
of Intellectual Property in this Section 1.1.

                  "Permits" shall have the meaning set forth in Section 3.8.

                  "Permitted Liens" shall have the meaning set forth in Section
3.7.

                  "Person" shall mean and include an individual, a partnership,
a joint venture, a limited liability company, a corporation, a trust, a firm, an
association, an unincorporated organization and a government or any department
or agency thereof or any other entity, as well as any syndicate or group that
would be deemed to be a person under Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended.

                  "Plans" shall have the meaning set forth in Section 3.13.

                  "Pre-Closing Tax Period" shall mean (i) any Tax period ending
on or before the Closing Date and (ii) with respect to a Tax period that
commences before but ends after the Closing Date, the portion of such period up
to and including the Closing Date.

                  "Private Placement Alternative" shall have the meaning set
forth in Section 5.15(a).

                  "Private Placement Documents" shall have the meaning set forth
in Section 5.15(a).


                                      -7-



                  "Proceedings" shall have the meaning set forth in Section 3.6.

                  "Purchase Price" shall have the meaning set forth in Section
2.6(a).

                  "Purchaser" shall have the meaning set forth in the preamble
to this Agreement.

                  "Purchaser Indemnified Party" shall have the meaning set forth
in Section 8.1.

                  "Remedial Action" shall mean all action to (a) clean up,
remove, treat or handle in any other way Hazardous Substances in the
Environment; (b) prevent the Release of Hazardous Substances so that they do not
migrate, endanger or threaten to endanger public health or the Environment; or
(c) perform remedial investigations, feasibility studies, corrective actions,
closures and post-remedial or post-closure studies, investigations, operations,
maintenance and monitoring.

                  "Release" shall mean disposing, discharging, injecting,
spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping,
placing and the like into or upon any land or water or air or otherwise entering
into the Environment.

                  "Restricted Period" shall have the meaning set forth in
Section 5.6(a).

                  "Revenue Trigger Report" shall have the meaning set forth in
Section 2.7(b).

                  "S-4 Alternative" shall have the meaning set forth in Section
5.15(b).

                  "SEC" shall mean the Securities and Exchange Commission.

                  "SEC Documents" shall have the meaning set forth in Section
4.5.

                  "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.

                  "Seller" shall have the meaning set forth in the preamble to
this Agreement.

                  "Seller Indemnified Party" shall have the meaning set forth in
Section 8.2.

                  "Seller Special Meeting" shall have the meaning set forth in
Section 5.15(d).

                  "Shares" shall have the meaning set forth in Section 2.6(a).

                  "Software" shall have the meaning set forth in the definition
of Intellectual Property in this Section 1.1.

                  "Statement" shall have the meaning set forth in Section
5.15(c).

                  "Tangible Personal Property" shall have the meaning set forth
in Section 3.20(a).

                  "Tax" shall mean all taxes (whether federal, state, local or
foreign) based upon or measured by income and any other tax whatsoever,
including but not limited to any income,


                                      -8-



alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, value added, transfer, franchise, profits, license, registration,
recording, documentary, conveyance, gains, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental or
windfall profit tax, custom duty or other tax, governmental fee or other like
assessment or charge of any kind whatsoever, whether or not measured in whole or
in part by net income, together with any interest, deficiency penalty, addition
to tax or additional amount imposed by any Governmental Body responsible for the
imposition of any such tax (domestic or foreign) and obligations under any tax
sharing, tax allocation or similar agreement to which Seller is a party.

                  "Tax Returns" shall mean all returns, declarations, reports,
estimates, information returns and statements required to be filed in respect to
any Taxes.

                  "Third Party Claims" shall have the meaning set forth in
Section 8.3.

                  "Trademark Assignment" shall have the meaning set forth in
Section 2.5(a)(iv).

                  "Trademarks" shall have the meaning set forth in the
definition of Intellectual Property in this Section 1.1.

                  "Transaction Documents" shall mean this Agreement and the
Instruments of Assignment all Schedules and Exhibits hereto and thereto,
together with any other agreements, instruments, certificates and documents
executed by the parties hereto in connection herewith or therewith.

                  "Transfer Taxes" shall have the meaning set forth in Section
5.9.

                  "Transferred Bank Accounts" shall have the meaning set forth
in Section 2.1(o).

                  "Treasury Regulations" shall mean the Treasury Regulations
(including Temporary Treasury Regulations) promulgated by the United States
Department of Treasury with respect to the Code or other federal tax statutes.

                  "WARN Act" means the Worker Adjustment and Retraining
Notification Act (Pub. L. 100-379, 102 Stat. 890 (1988)), as amended.

                                   Article II

                       TRANSFER OF ASSETS AND LIABILITIES

                  Section 2.1 Acquired Assets. Upon the terms and subject to the
conditions  of this  Agreement,  at the Closing  provided for in Section 2.8, in
each case subject to Section 2.11, Seller, shall sell, convey, assign,  transfer
and deliver to Purchaser,  and Purchaser shall purchase and acquire from Seller,
free and clear of all Liens, all of Seller's right, title and interest in and to
all of the  property,  assets and rights  owned,  goodwill and business of every
kind,  character  and  description,   leased  or  licensed,   whether  tangible,
intangible,  real, personal or mixed and wheresoever located, whether carried on
the books of Seller or not carried on the books of Seller due to  expense,  full
depreciation or otherwise, relating to or used in the Operations (other than


                                      -9-



the Excluded  Assets) as the same may exist on the Closing  Date  (collectively,
the  "Acquired  Assets"),  expressly  subject  to the  Assumed  Liabilities  and
Permitted Liens.  Such Acquired Assets shall include,  without  limitation,  the
following (except to the extent that they are Excluded Assets):

         (a) the Operations as a going concern;

         (b) All of Seller's  right,  title and  interest in and to all tangible
personal  property  owned  or  leased  by  Seller  relating  to or  used  in the
Operations,  including,  without limitation, all furniture,  fixtures,  computer
equipment, furnishings, tools, machinery, spare parts, motor vehicles, leasehold
improvements  and  equipment,  and any  prepaid  deposits  for  any of the  same
(collectively,  the "Equipment"),  and all manufacturers'  warranties associated
with such items, including,  without limitation, the list of Equipment set forth
on Schedule 2.1(b).

         (c) All of Seller's right,  title and interest in and to all inventory,
work-in-process,  components, finished goods, parts, supplies, raw materials and
other items owned or leased by Seller  relating to or used in the Operations and
any prepaid deposits for any of the same  (collectively,  the  "Inventory"),  as
well as all  manufacturers'  warranties  associated with such items,  including,
without limitation, the list of Inventory set forth on Schedule 2.1(c);

         (d)  All  of  Seller's  right,   title  and  interest  in  and  to  all
Intellectual  Property and all IP Licenses, in both cases relating to or used in
the  Operations  (collectively,  the "Assigned IP Assets"),  including,  without
limitation, the list of Assigned IP Assets set forth on Schedule 2.1(d);

         (e) All of  Seller's  right,  title and  interest in and to all claims,
deposits,  prepayments,  warranty and guarantee rights,  refunds and rebates and
similar items relating to the Operations;

         (f) All of Seller's  rights  under,  and interest  in, all  agreements,
arrangements,   contracts  (including  contracts  governing  relationships  with
exhibitors),  notes, bonds, loans, instruments,  mortgages,  indentures,  leases
(including any and all leases, subleases,  sale/leaseback agreements,  operating
leases  or  similar   arrangements),   conditional  sales  contracts,   licenses
(including,  without limitation, all IP Licenses),  franchises,  understandings,
commitments, sales and purchase orders, and under all bids, offers and contracts
under  negotiation  as of the  Closing  Date  (to the  extent  such  offers  are
transferable)  and  other  binding  arrangements   (collectively,   "Contracts")
relating  to the  Operations  to which  Seller  is a party or by or to which the
Acquired Assets are bound or subject (collectively,  the "Assigned Agreements"),
including,  without  limitation,  the list of Assigned  Agreements  set forth on
Schedule 2.1(f);

         (g) To the extent  transferable  under  applicable Law, all of Seller's
right,  title and interest in and to all Permits,  municipal,  state and federal
franchises, licenses, agreements, waivers and authorizations relating to or used
in the  Operations,  including,  without  limitation,  (i) the list of  Material
Permits set forth on Schedule  2.1(g)(i) (the  "Material  Permits") and (ii) any
other Permits set forth on Schedule 2.1(g)(ii);

         (h) All of Seller's  right,  title and interest in and to all insurance
policies  for the  benefit of Seller in respect of the  Operations  or  Acquired
Assets and all rights of every nature


                                      -10-



and  description  under or  arising  out of such  policies,  including,  without
limitation, the list of such policies set forth on Schedule 2.1(h);

         (i) All of Seller's right, title and interest in and to all original or
copies (in  accordance  with Section  2.2(a)) of all books,  records,  and other
documents  (whether on paper,  computer  diskette,  tape or other storage media)
used in the Operations (collectively,  the "Books and Records"),  including, but
not limited to, tax  records,  property  records,  purchase  and sales  records,
credit data, marketing,  advertising and promotional materials,  personnel files
and payroll records,  accounting records,  financial reports, fixed asset lists,
customer lists,  customer records and information,  supplier lists, parts lists,
manuals,  technical  and repair data,  invoices,  correspondence,  files and any
similar items;

         (j) All of  Seller's  right,  title and  interest in and to all rights,
Claims,  causes of action,  choses in action,  rights of recovery  and rights of
setoff of any kind against third parties relating to the Operations,  including,
but not  limited  to,  all rights to  insurance  proceeds  and rights  under and
pursuant to all warranties,  representations and guarantees made by suppliers of
products,  materials,  or equipment,  or components  thereof covering any of the
Acquired Assets;

         (k) All of Seller's right, title and interest in and to all stationery,
forms, labels, shipping materials, brochures, art work, photographs, advertising
materials and any similar items relating to or used in the Operations

         (l) All of Seller's right, title and interest in and to all Leased Real
Property,  including,  without  limitation,  such real  properties  set forth in
Schedule  3.20(a),  together  with any and all rights to easements  for ingress,
egress  and  utilities  which  are  attendant  to such  property  and all  other
appurtenances thereto;

         (m) All of Seller's  right,  title and  interest in and to all accounts
receivable,  notes and other amounts  receivable from third parties,  including,
without limitation,  customers and employees,  and any amounts designated on the
Balance Sheet as  prepayments,  advances and deposits of Seller  relating to the
Operations as of the Closing Date (including rights to payment for services that
have been performed but have not been billed prior to the Closing Date), whether
or not in the ordinary  course of business,  together with any unpaid  financing
charges accrued thereon;

         (n) All of Seller's  right,  title and  interest in and to all goodwill
associated with the Operations;

         (o) All of Seller's right,  title and interest in the bank accounts set
forth on Schedule 2.1(o) (the "Transferred Bank Accounts");

         (p) All of Seller's right, title and interest in all cash on hand, cash
equivalents, bank accounts and short-term instruments (including restricted cash
in respect of the items set forth in Section  2.1(e)) and all  similar  types of
investments,   such  as  certificates  of  deposit,  treasury  bills  and  other
marketable  securities,  relating  to  the  Operations  as of the  Closing  Date
(whether or not such cash is held in a Transferred Bank Account); and


                                      -11-



         (q) All of Seller's and its  Affiliates'  right,  title and interest to
and under all other assets,  rights and claims of every kind and nature relating
to the Operations as of the Closing Date.

                  Section  2.2  Excluded  Assets.   Notwithstanding   any  other
provision of this  Agreement,  the Acquired  Assets shall not include any of the
following assets and properties of Seller (collectively, the "Excluded Assets"),
which assets shall not be transferred, conveyed, set over, delivered or assigned
to Purchaser:

         (a) All original Books and Records (i) that would otherwise  constitute
Acquired Assets but for the fact that Seller is required to retain such original
Books and  Records  pursuant  to  applicable  Laws (in which case copies of such
Books and  Records  shall be  included  in the  Acquired  Assets  to the  extent
permitted by applicable Laws) or (ii) that constitute  documents relating to the
corporate  organization,  qualification to do business or corporate existence of
Seller;

         (b) All claims, rights,  interests and proceeds with respect to any Tax
refunds  and other  refunds of charges or  assessments  by a  Governmental  Body
arising from or pertaining to the conduct of the Operations for any  Pre-Closing
Tax Period;

         (c) All rights,  Claims,  causes of action and documents relating to an
Excluded Asset or an Excluded Liability;

         (d) All of Seller's rights, title and interest under this Agreement and
the Transaction Documents to which Seller is a party; and

         (e) All of Seller's  right,  title and interest in and to all Contracts
to which Seller is a party exclusively relating to Seller's internal governance,
including,  without  limitation,  the  Seller's  Certificate  of  Incorporation,
Bylaws,  in each case as amended  and/or  restated,  or any other Contract among
Seller and its stockholders relating to Seller's internal governance.

                  Section 2.3 Assumed Liabilities. Upon the terms and subject to
the conditions of this  Agreement,  at the Closing,  Purchaser  shall assume and
thereafter pay,  perform and discharge only the following  Liabilities of Seller
relating to the Operations (collectively, the "Assumed Liabilities"):

         (a) All  liabilities or  obligations  arising out of or relating to the
Operations  and  Acquired  Assets for all  periods  commencing  on and after the
Closing Date; and

         (b) All  liabilities or  obligations  of Seller  relating to or arising
under  the  Assigned  Agreements  set  forth  in  Schedule  2.1(f)  (other  than
liabilities or obligations  attributable to any failure by Seller to comply with
the terms thereof).

                  Section 2.4 Excluded Liabilities.  Notwithstanding Section 2.3
above, Seller shall retain, and shall be responsible for paying,  performing and
discharging when due, and Purchaser shall not assume or have any  responsibility
for, any Liabilities of Seller  whatsoever,  whether Known or unknown,  fixed or
contingent,  obsolete  or  otherwise,  other than the Assumed  Liabilities  (the
"Excluded Liabilities"), including without limitation, those set forth below:


                                      -12-



         (a) Debt;

         (b) All  obligations  or  Liabilities  arising  from or relating to any
Excluded Asset;

         (c) All obligations or Liabilities of Seller pursuant to  Environmental
Laws arising from or relating to any action,  event,  circumstance  or condition
related to the Operations or the Leased Real Property;

         (d) Except with respect to the Assigned Agreements described in Section
2.3(b), all obligations or liabilities  arising from or relating to the Seller's
officers, directors, employees, independent contractors and consultants, and the
Plans; and

         (e) Any liability or obligation for Taxes of Seller or  attributable to
the Acquired Assets or the Operations for any Pre-Closing Tax Period  (including
all liabilities of Seller for Taxes related to the transactions  contemplated by
this Agreement).

                  Section  2.5   Transfer   of   Acquired   Assets  and  Assumed
Liabilities.

         (a) At the  Closing,  Seller  shall  effectuate  the sale,  conveyance,
assignment,  transfer  and  delivery  of the  Acquired  Assets to  Purchaser  by
delivering  to  Purchaser  (or its  designees  with  respect  to any or all such
assets) each of the following:

                  (i) A duly  executed bill of sale and  assignment  relating to
the  Assigned  Agreements,  Permits and other  Acquired  Assets,  in the form of
Exhibit A hereto (the "Bill of Sale and Assignment");

                  (ii) A duly  executed  assignment  of Patents,  in the form of
Exhibit B hereto (the "Patent Assignment");

                  (iii) A duly executed assignment of Copyrights, in the form of
Exhibit C hereto (the "Copyright Assignment");

                  (iv) A duly executed assignment of Trademarks,  in the form of
Exhibit D hereto (the "Trademark Assignment");

                  (v) A duly executed  assignment  and estoppel of real property
leases, in the form of Exhibit E hereto (the "Lease Assignment"); and

                  (vi) Such  other  documents  of title and good and  sufficient
instruments of conveyance and transfer  (collectively,  the "Other  Instruments"
and, together with the Bill of Sale and Assignment,  the Patent Assignment,  the
Copyright Assignment,  the Trademark Assignment,  and the Lease Assignment,  the
"Instruments  of  Assignment")  as  are  reasonably  necessary  to  transfer  to
Purchaser (or its  designees)  Seller's  right and title to and interests in the
Acquired Assets free and clear of all Liens, other than the Assumed  Liabilities
and Permitted Liens.

                  Section 2.6 Consideration.


                                      -13-



         (a) Upon the terms and subject to the conditions of this Agreement, the
aggregate  purchase price (the "Purchase  Price") payable by Purchaser to Seller
in full and complete payment for the sale, conveyance,  assignment, transfer and
delivery of the Acquired Assets by Seller shall consist of (i) the assumption of
the  Assumed  Liabilities  by  Purchaser  at  the  Closing;   (ii)  Two  Million
(2,000,000) shares of Common Stock (the "Shares"); and (iii) the Earnout Amount,
if any. The Shares,  and the shares comprising the Earnout Amount, if any, shall
constitute "restricted  securities" as that term is defined in Section 144(a)(3)
of the Securities Act and shall be restricted as to their resale,  as more fully
described below.

         (b) Seller hereby  agrees that it shall not,  without the prior written
consent of  Purchaser,  sell,  contract to sell,  sell any option or contract to
purchase,  purchase any option or contract to sell,  grant any option,  right or
warrant to  purchase,  pledge,  lend or  otherwise  transfer  or dispose of, any
Shares, shares comprising the Earnout Amount or any securities  convertible into
or exercisable or exchangeable  for the Shares or shares  comprising the Earnout
Amount  held by  Seller,  or  enter  into any  swap or  other  arrangement  that
transfers to another,  in whole or in part, any of the economic  consequences of
ownership of such securities, for a period of one hundred eighty (180) days from
the Closing  Date with  respect to the Shares and one hundred  eighty (180) days
from the Earnout Payment Date with respect to the shares  comprising the Earnout
Amount; provided,  however, that if Purchaser exercises the option granted to it
by Seller pursuant to that certain Asset Purchase Option Agreement,  dated as of
November [_], 2005 by and between PPT and Seller (the "Option Agreement"),  more
than one hundred  eighty (180) days prior to July 30, 2007,  the  aforementioned
restrictions  shall  apply  for a period of  thirty  (30) days from the  Earnout
Payment Date with respect to the shares  comprising the Earnout Amount. In order
to  enforce  the  foregoing   covenant,   Purchaser  may  impose  stop  transfer
instructions with respect to the Shares and shares comprising the Earnout Amount
held by Seller until the end of such period(s).

         (c) The Purchase Price shall be allocated among the Acquired Assets and
the covenants  contained in Section 5.6 of this Agreement as of the Closing Date
in  accordance  with  Exhibit  F  (the  "Allocation  Method").   Any  subsequent
adjustments  to the sum of the  Purchase  Price shall be  allocated  in a manner
consistent  with the  Allocation  Method  and  Section  1060 of the Code and the
Treasury  Regulation  issued  thereunder.  For all Tax  purposes,  Purchaser and
Seller  agree that the  transactions  contemplated  in this  Agreement  shall be
reported  in a manner  consistent  with the  terms  of this  Agreement  and that
neither  Seller nor Purchaser will take any position  inconsistent  therewith in
any Tax Return, in any refund claim, in any litigation or otherwise.  Seller and
Purchaser  agree to  cooperate  in good faith with each other in filing IRS Form
8594 in the form prepared by Purchaser.

                  Section  2.7  Earnout.  As  additional  consideration  for the
transactions set forth herein:

         (a) If,  on the  later of (i)  July 30,  2007 or (ii) the date on which
Purchaser  exercises the option  granted to it by Seller  pursuant to the Option
Agreement, the Minimum Revenue Trigger has been achieved,  Purchaser shall issue
shares of Common  Stock to Seller no later  than ten (10)  Business  Days  after
Purchaser's  receipt of  confirmation  that Seller  accepts the Revenue  Trigger
Report, subject to the resolution of any dispute pursuant to Section 2.7(c) (the
"Earnout Payment Date"), the Earnout Amount.  Notwithstanding the foregoing,  no
fractional  shares of


                                      -14-



Common  Stock shall be issued in  conjunction  with any payment by  Purchaser to
Seller of the Earnout  Amount.  In lieu of any fractional  share to which Seller
would  otherwise be entitled,  Purchaser  shall pay cash equal to the product of
such  fraction  multiplied  by the price per share of Common  Stock based on the
ninety- (90) day prior average price of the Common Stock as of April 1, 2007.

         (b) Whether  the Minimum  Revenue  Trigger has been  achieved,  and the
Annualized  First Quarter  Revenue,  shall be determined by Purchaser within (i)
thirty (30) days after the close of the second  quarter of 2007 or (ii) the date
on which Purchaser  exercises the option granted to it by Seller pursuant to the
Option Agreement, whichever is later. Copies of Purchaser's report (the "Revenue
Trigger Report") setting forth Purchaser's  determination of whether the Minimum
Revenue  Trigger has been achieved,  and the Annualized  First Quarter  Revenue,
shall be submitted by Purchaser in writing to Seller and, unless Seller notifies
Purchaser within thirty (30) Business Days after receipt of such Revenue Trigger
Report  that it objects to the  computations  set forth  therein,  such  Revenue
Trigger  Report  shall  be  binding  and  conclusive  for the  purposes  of this
Agreement. Following delivery to Seller of the Revenue Trigger Report, Purchaser
shall give Seller and its accountants reasonable access to Purchaser's personnel
as well as any books, records,  work-papers,  documents,  and reports created or
prepared  by  Purchaser  in  connection  with the  determination  of the Minimum
Revenue Trigger and the Annualized  First Quarter Revenue and the preparation of
the  corresponding  Revenue  Trigger  Report on  reasonable  prior notice during
regular business hours in order to verify the computations set forth therein.

         (c) If Seller  disagrees with the computations set forth in the Revenue
Trigger  Report,  Seller  may,  within  thirty  (30) days after  delivery of the
Revenue  Trigger  Report,  deliver a notice to Purchaser  disagreeing  with such
computation and the basis for its disagreement, and thereafter the parties shall
in good faith attempt to resolve any dispute, in which event the Revenue Trigger
Report  and the  computations  set  forth  therein,  as  amended  to the  extent
necessary to reflect the  resolution  of the dispute,  shall be  conclusive  and
binding on the  parties.  If the parties do not reach  agreement  resolving  the
dispute within ten (10) days after notice is given by Seller,  the parties shall
submit the dispute to the  Accountant to review this  Agreement and the disputed
items or amounts  for the  purpose of making the  appropriate  calculations  (it
being  understood that the Accountant  shall be functioning as an expert and not
as an arbitrator).  Promptly, but no later than thirty (30) days, the Accountant
shall  determine,  based solely on written  submissions by Purchaser and Seller,
and not by independent  review,  only those issues in dispute and shall render a
written   report  as  to  the  resolution  of  the  dispute  and  the  resulting
computations  which  shall  be  conclusive  and  binding  on  the  parties.  The
Accountant shall have access to such books,  records,  work-papers and personnel
as it shall request.  In resolving any disputed  item,  the Accountant  shall be
bound by the provisions of this Section 2.7(c).  The fees, costs and expenses of
the Accountant (i) shall be borne by Purchaser if the Accountant determines that
the Revenue  Trigger has been  understated by ten percent (10%) percent or more,
but only if the Minimum  Revenue Trigger has been met or exceeded and (ii) shall
be borne by Seller if the Accountant determines that the Revenue Trigger has not
been  understated  or has  been  understated  by less  than ten  percent  (10 %)
percent,  regardless of whether or not the Minimum  Revenue Trigger has been met
or exceeded.


                                      -15-



         (d) Any  issuance  pursuant to Section  2.7(c) shall be made within ten
(10) Business Days after the determination thereof to the applicable party.

                  Section 2.8 Closing.  Subject to the terms and  conditions  of
this Agreement,  the closing of the transactions  contemplated by this Agreement
(the "Closing")  shall take place at the offices of Paul,  Hastings,  Janofsky &
Walker LLP, 515 South Flower Street, Los Angeles, California 90071 at 10:00 a.m.
California  time, on the date that is no later than the third (3rd) Business Day
following  satisfaction  or waiver of all of the conditions to Closing set forth
in Article VI hereof,  or at such other  time,  place or date as  Purchaser  and
Seller mutually agree upon in writing.  The date upon which the Closing actually
occurs is referred to herein as the "Closing Date".

                  Section 2.9 Deliveries by Seller. At the Closing, Seller shall
deliver,  or cause to be delivered,  to Purchaser  each of the  following,  duly
executed,  to the extent  execution by Seller is  necessary,  by or on behalf of
Seller:

         (a) the Bill of Sale and Assignment;

         (b) the Patent Assignment;

         (c) the Copyright Assignment;

         (d) the Trademark Assignment;

         (e) the Lease Assignment;

         (f) a receipt for the Purchase Price;

         (g) the officer's certificate of Seller dated the Closing Date referred
to in Section 6.2(d);

         (h) a certificate  of the Secretary of Seller dated the Closing Date in
substantially the form attached as Exhibit G hereto;

         (i) duly  executed  releases  of all Liens in respect  of the  Acquired
Assets (other than Permitted Liens);

         (j) the  Other  Instruments,  in form  and  substance  satisfactory  to
Purchaser, as may be requested by Purchaser, if any;

         (k) copies of all Consents of  Governmental  Bodies (if  applicable) to
the transfer or assignment of the Material Permits;

         (l)  copies  of all  Consents  from  third  parties  necessary  for the
transfer or assignment of any Acquired Asset; and


                                      -16-



         (m) a  recent  certificate  of  good  standing  for  Seller  (or  other
equivalent  certificate)  from the appropriate  Governmental Body dated within a
reasonable time period before the Closing.

                  Section  2.10   Deliveries  by  Purchaser.   At  the  Closing,
Purchaser  shall  deliver  or  cause  to be  delivered  to  Seller,  each of the
following,  duly executed, to the extent execution by Purchaser is necessary, by
or on behalf of Purchaser:

         (a) the Purchase Price;

         (b) counterparts of the Instruments of Assignment;

         (c) the  officer's  certificate  of  Purchaser  referred  to in Section
6.1(c);

         (d) a certificate  of good standing (or other  equivalent  certificate)
for Purchaser  from the  appropriate  Government  Body dated within a reasonable
time before the Closing; and

         (e) copies of all Consents of  Governmental  Bodies (if  applicable) to
the transfer or assignment of the Material Permits.

                  Section 2.11 Non-Assignable Acquired Assets.

         (a) To the extent that any of the Acquired Assets  (including,  without
limitation,  any  Assigned  Agreements  or  Permits)  are not  capable  of being
assigned to Purchaser (or its  designees) at the Closing  without the Consent of
the issuer  thereof or any other party thereto or any other  Person,  or if such
assignment  or attempted  assignment  would  constitute a breach  thereof,  or a
violation  of  any  applicable  United  States  or  non-United  States  federal,
national,  supranational,  state,  provincial,  local or similar  statute,  law,
ordinance, regulation, rule, code, order, judgment or decree, injunction, award,
administrative  order or decree,  administrative or judicial  decision,  and any
other  executive  or  legislative  proclamation,  requirement  or  rule  of  law
(including  common  law)  (collectively,   "Laws"),  this  Agreement  shall  not
constitute  an  assignment  thereof,  or an  attempted  assignment,  unless such
Consent has been obtained.

         (b) In the event that any Consent  referred  to in Section  2.11(a) has
not been obtained prior to the Closing,  Seller and Purchaser shall cooperate to
obtain  each and every such  Consent  and to  resolve  the  impracticalities  of
assignment referred to in Section 2.11(a) after the Closing.

         (c) To the extent any Consents  referred to in Section 2.11(a) have not
been  obtained by Seller prior to the  Closing,  until the  impracticalities  of
assignment  referred to in this Section 2.11 are resolved,  Seller shall use its
reasonable  efforts  to (i)  provide  Purchaser,  to  the  extent  permitted  by
applicable  Law,  the  benefits of any  Acquired  Assets  referred to in Section
2.11(a),  (ii)  cooperate in any reasonable  and lawful  arrangement  (including
subleasing or subcontracting, or performance thereunder by Seller as Purchaser's
agent) designed to provide such benefits to Purchaser, and (iii) enforce for the
account and benefit of Purchaser  any and all rights of Seller  arising from the
Acquired  Assets  referred to in Section 2.11(a) against such issuer thereof and
all  other  parties  thereto  and/or  any  other  Person   (including,   without
limitation, the right to elect to terminate in accordance with the terms thereof
upon the sole determination of Purchaser).


                                      -17-



         (d) At such time and on each  occasion  after the  Closing  Date as all
Consents referred to in this Section 2.11 with respect to an Acquired Asset have
been  obtained,  such Acquired  Asset shall  automatically  be  transferred  and
assigned by Seller to Purchaser for no additional consideration.

                                  Article III

                    REPRESENTATIONS AND WARRANTIES OF SELLER

         As an  inducement  to  Purchaser to enter into this  Agreement,  Seller
represents  and  warrants  to  Purchaser  for its  benefit  that the  statements
contained in this Article III are true and correct as of the date hereof and the
Closing  Date (or in the case of  representations  and  warranties  made as of a
specific date, as of such date),  subject to such exceptions as are specifically
disclosed in writing in the Disclosure  Schedule provided by Seller to Purchaser
(the "Disclosure Schedule").

                  Section 3.1 Organization and  Qualification of Seller.  Seller
is a corporation duly organized, validly existing and in corporate good standing
under the laws of the State of Delaware and has all  requisite  corporate  power
and authority to own,  lease and operate the Acquired  Assets and to conduct the
Operations.  Except as set forth on  Schedule  3.1,  Seller is duly  licensed or
qualified to do business and is in good standing in each  jurisdiction  in which
the properties  owned or leased by it or the conduct of the Operations  requires
such  qualification,  except to the extent that the failure to be so licensed or
qualified  and in good standing  would not (a)  adversely  affect the ability of
Seller to carry out its obligations  under,  and to consummate the  transactions
contemplated by, this Agreement and the Transaction Documents to which Seller is
a party or (b)  otherwise  have a  Material  Adverse  Effect.  The copies of the
Certificate of Incorporation and Bylaws previously delivered to Purchaser or its
counsel,  in each  case as  amended  and/or  restated,  are true,  complete  and
correct.

                  Section  3.2  Authority  of  Seller  to  Execute  and  Perform
Agreement. Seller has full right and all necessary corporate power and authority
required  to enter  into,  execute  and  deliver  this  Agreement  and the other
Transaction Documents to which it is or will be a party and to perform fully its
obligations   hereunder  and  thereunder  and  to  consummate  the  transactions
contemplated  hereby and thereby.  The  execution and delivery by Seller of this
Agreement  and the  Transaction  Documents  to  which  Seller  is a  party,  the
performance  by Seller  of its  obligations  hereunder  and  thereunder  and the
consummation by Seller of the transactions  contemplated hereby and thereby have
been duly authorized by all requisite corporate action on the part of Seller and
its stockholders.  This Agreement has been duly executed and delivered by Seller
and, on the Closing Date, the other  Transaction  Documents to which Seller is a
party will be duly executed and delivered by Seller. Assuming due authorization,
execution and delivery  hereof and thereof by Purchaser,  this Agreement is, and
upon their execution the other Transaction  Documents will be, legal,  valid and
binding  obligations of Seller,  enforceable  against Seller in accordance  with
their respective terms,  except that such  enforceability  may be subject to (i)
bankruptcy,  insolvency,  reorganization  or other  similar  laws  affecting  or
relating  to  enforcement  of  creditors'  rights  generally,  and (ii)  general
equitable principles.


                                      -18-



                  Section 3.3 Subsidiaries. Except as set forth on Schedule 3.3,
There are no corporations,  partnerships,  joint ventures, associations or other
entities that own, hold, or lease any of the Acquired  Assets or that are in any
respect  involved in the  Operations in which Seller or its  Affiliates  own, of
record or beneficially, any direct or indirect equity, debt or other interest or
any right (contingent or otherwise) to acquire the same.

                  Section 3.4  Financial  Statements.  [TO BE UPDATED BASED UPON
DATE OF OPTION EXERCISE]

         (a) Seller has delivered to Purchaser  (i) the financial  statements of
Seller (balance sheet and statements of operations and cash flow,  together with
the notes  thereto) for the fiscal years ended  December 31, 2002,  December 31,
2003 and December 31, 2004 and (ii) the  unaudited  balance sheet of Seller (the
"Balance  Sheet") as of [June 30,  2005] (the  "Balance  Sheet  Date"),  and the
related consolidated  statements of operations and cash flows for the [six- (6)]
month period  ended [June 30,  2005]  (together  with the  financial  statements
referred to in clause (i) above,  the "Financial  Statements"),  copies of which
are set forth in  Schedule  3.4.  The  Financial  Statements  were  prepared  in
accordance with the books of account and other  financial  records of the Seller
and are complete and correct in all material  respects and have been prepared in
accordance with U.S. GAAP applied  consistent with past practice.  The Financial
Statements are true and correct, include all adjustments that are necessary, and
fairly  present in all material  respects  the  financial  condition,  operating
results  and cash flows of Seller as of the dates  thereof  and for the  periods
indicated in accordance  with U.S.  GAAP,  except that the Financial  Statements
referred to in clause (ii) above do not contain the  information and disclosures
to be found in notes to financial  statements  prepared in accordance  with U.S.
GAAP and are subject to normal year-end adjustments, which will not be material.

         (b) The books of account and other financial records of the Seller: (i)
reflect all items of income and expense and all assets and Liabilities  required
to be reflected  therein in  accordance  with past  practice  and, to the extent
applicable,  on an income Tax basis,  (ii) are in all material respects complete
and  correct,  and do not  contain  or  reflect  any  material  inaccuracies  or
discrepancies  and (iii) have been  maintained in accordance  with good business
and accounting practices.

         (c) All  accounts  receivable  of the Seller  reflected  in the Balance
Sheet and all accounts  receivable  of Seller that have arisen since the Balance
Sheet Date (except such accounts  receivable as have been  collected  since such
dates) are valid and  enforceable  claims against the account  debtors,  and the
goods and services sold and delivered  that gave rise to such accounts were sold
and delivered in conformity with all applicable express and implied  warranties,
purchase  orders,  agreements and  specifications.  Such accounts  receivable of
Seller  are  subject to no valid  defense,  offset or  counterclaim,  other than
normal cash discounts accrued in the Ordinary Course of Business,  and are fully
collectible,  without resort to litigation or extraordinary collection activity,
within  ninety  (90) days after the  Closing  Date,  except to the extent of the
allowance for doubtful  accounts  reflected on the Balance Sheet.  Except as set
forth in Schedule  3.4(c),  as of the  Closing  Date,  all of Seller's  accounts
receivable  and payable  will have arisen from the sale or purchase of inventory
or services to Persons not affiliated  with Seller and in the Ordinary Course of
Business.


                                      -19-



         (d) All  inventories  of raw  materials,  work-in-process  and finished
goods set forth or reflected in the Balance  Sheet,  or acquired by Seller since
the Balance Sheet Date,  consists of a quality and quantity  usable and saleable
by Seller in the Ordinary Course of Business. The value at which inventories are
carried on the Balance Sheet reflects the normal  inventory  valuation policy of
Seller,  on a basis  consistent  with that of the preceding  period,  of stating
inventory at its lower of cost or market value, and, consistent  therewith,  all
non-current  or obsolete  inventory held by Seller on the Balance Sheet Date has
been valued at its current market value on the Balance Sheet. There is no reason
to believe that Seller will experience in the foreseeable  future any difficulty
in obtaining,  in the desired quantity and quality, the raw materials,  supplies
or component products required for the manufacture, assembly, production or sale
of its products including, without limitation,  inventory which historically has
been imported.

                  Section  3.5 Absence of Certain  Changes or Events.  Except as
set forth on Schedule  3.5,  since [June 30,  2005],  Seller has  conducted  the
Operations only in the ordinary course of business consistent with past practice
(the "Ordinary Course of Business").  As amplification and not limitation of the
foregoing, since such date, Seller has not:

         (a)  suffered  a  Material  Adverse  Effect  or  an  event  that  could
reasonably be expected to cause a Material Adverse Effect;

         (b)  made any  capital  expenditures  or  similar  commitments  for any
capital expenditures.

         (c)  issued  any  purchase  orders  or  otherwise  agreed  to make  any
purchases  involving  exchanges in value in excess of Two Thousand  Five Hundred
Dollars and Zero Cents  ($2,500.00)  individually  or Five Thousand  Dollars and
Zero  Cents  ($5,000.00)  in the  aggregate,  except in the  Ordinary  Course of
Business;

         (d)  incurred,  assumed,  guaranteed,  paid or  discharged  any Lien or
Liability related to the Operations, absolute, accrued, contingent or otherwise,
whether due or to become due,  including without limitation any Debt, other than
current liabilities incurred in the Ordinary Course of Business;

         (e) incurred any Debt in excess of Two  Thousand  Five Hundred  Dollars
and Zero Cents ($2,500.00)  individually or Five Thousand Dollars and Zero Cents
($5,000.00) in the aggregate, except in the Ordinary Course of Business;

         (f) made any loan or advance or  increased  the amount of any  existing
loans to any Person or Affiliate of Seller;

         (g)  sold,  transferred,  leased,  subleased,  licensed,  abandoned  or
otherwise  disposed  of any  properties  or  assets,  real,  personal  or  mixed
(including   leasehold  interests  and  intangible   property)  related  to  the
Operations  included in the Acquired  Assets,  except in the Ordinary  Course of
Business;

         (h) issued,  sold,  delivered or agreed or committed to issue,  sell or
deliver  (whether  through  the  issuance  or  granting  of  options,  warrants,
commitments,  subscriptions,  rights to purchase or otherwise) or authorized the
issuance, sale or delivery of, or redeemed or


                                      -20-



repurchased,  any  stock of any  class or any other  securities  or any  rights,
warrants  or  options  to acquire  any such  stock or other  securities  (except
pursuant to the  conversion or exercise of  convertible  securities,  options or
warrants  outstanding  on the date  hereof),  or amended any of the terms of any
such convertible securities, options or warrants;

         (i) split,  combined or  reclassified  any shares of its capital stock;
declared,  set aside or paid any dividend,  special  bonuses other  distribution
(whether in cash,  stock or property or any  combination  thereof) in respect of
its capital stock;

         (j) merged  with,  entered  into a  consolidation  with or  acquired an
interest  of 5% or more in any Person or acquired a  substantial  portion of the
assets or  business of any Person or any  division  or line of business  thereof
engaged in a business  relating to the  Operations,  or  otherwise  acquired any
material  assets  relating to the  Operations  except in the Ordinary  Course of
Business;

         (k) permitted or allowed any of the Acquired  Assets to be subjected to
any Lien other than Permitted  Liens and Liens that will be released at or prior
to the Closing;

         (l)  transferred  or granted  any  rights  under,  or entered  into any
settlement  regarding the breach or infringement of, any  Intellectual  Property
included in the Assigned IP Assets, or modified any existing rights with respect
thereto except for the granting of non-exclusive licenses or rights to customers
for the use of products sold by Seller in the Ordinary Course of Business;

         (m) changed in any manner the character or scope of the Operations;

         (n) written  down or written up (or failed to write down or write up in
accordance  with  U.S.  GAAP  consistent  with past  practice)  the value of any
receivables  or revalued any of the  Acquired  Assets other than in the Ordinary
Course of Business and in accordance with U.S. GAAP;

         (o) made any change in the accounting  methods or practices or made any
change in depreciation  or amortization  policies or lives adopted by it, except
as required by U.S. GAAP;

         (p) made,  changed revoked or otherwise  modified any express or deemed
Tax election or settled or compromised any Tax Liability;

         (q)  settled,  compromised,  materially  modified or  amended,  waived,
terminated,  cancelled,  released or assigned  any rights or Claims  concerning,
affecting or relating to any  Contract  relating to the  Operations  (including,
without  limitation,  any Assigned  Agreements),  or  otherwise  relating to the
Operations or the Acquired Assets;

         (r) suffered or incurred any material  damage,  destruction or casualty
loss  (whether or not covered by  insurance)  affecting  the  Operations  or the
Acquired Assets;

         (s) amended,  modified or consented to the  termination of or failed to
renew,  or received  any  written  notice or threat  (that was not  subsequently
withdrawn)  to terminate or fail to renew,  any Contract that is or was material
to the Operations or Seller's rights thereunder;


                                      -21-



         (t) made any material charitable contribution;

         (u) entered into, materially amended or (except in conjunction with the
completion of the term thereof)  terminated any Contract or transaction with any
director,  officer,  employee,  stockholder  or Affiliate of Seller (or with any
relative,  beneficiary,  spouse or  Affiliate  of such  Person)  relating to the
Operations or the Acquired Assets;

         (v) entered into, amended,  modified or consented to the termination of
any Assigned Agreement;

         (w)  terminated,  discontinued,  closed or disposed of any  facility or
other business  operation,  or laid off any employees or  implemented  any early
retirement,  separation or program providing early retirement window benefits or
announced or planned any such action or program for the future;

         (x) allowed any Permit that was issued or relates to the  Operations to
lapse or  terminate  or failed to renew any  insurance  policy or Permit that is
scheduled  to terminate or expire  within forty five (45)  calendar  days of the
Closing  Date,  except to the extent that such failure  would not be  reasonably
expected to cause a Material  Adverse  Effect on the ability of Purchaser to own
and operate the Acquired Assets and conduct the Operations as now conducted;

         (y) failed to maintain  Seller's plant,  property and equipment in good
repair and operating condition, ordinary wear and tear excepted;

         (z)  (i)  granted,  announced,  or  made  any  change  in the  rate  of
compensation,  wages, salaries,  commission,  bonuses,  incentives,  pensions or
other direct or indirect  remuneration or benefits payable, or paid or agreed or
orally  promised  to pay,  conditionally  or  otherwise,  any bonus,  incentive,
retention  or other  compensation,  retirement,  welfare,  fringe  or  severance
benefit or vacation  pay, to or in respect of any director,  officer,  employee,
distributor,  contractor,  or agent of Seller  relating  to or  involved  in the
Operations,  including  any  increase  or  change  pursuant  to any Plan or (ii)
entered  into,  established,  increased  or  promised  to  increase,  amended or
terminated any benefits under any Plan or any employment or severance  agreement
or commitment or collective bargaining agreement with any employee or contractor
of Seller  relating to or involved in the  Operations,  in either case except as
required by Law or any collective  bargaining  agreement,  such exceptions being
disclosed on Schedule 3.5;

         (aa) (i) established, entered into, or adopted any Plan, (ii) caused or
permitted  any Plan to be materially  amended  (other than as required to comply
with  applicable  Law), or (iii) waived any of its rights under, or permitted or
provided for the  acceleration of vesting or payment under, any provision of any
Plan;

         (bb)  failed  to pay any  creditor  any  material  amount  owed to such
creditor when due; or

         (cc)  agreed,  whether  in  writing  or  otherwise,  to take any action
described  in this  Section 3.5 or granted any  options to  purchase,  rights of
first refusal,  rights of first offer or any other similar rights or commitments
with respect to any of the actions specified in this


                                      -22-



Section  3.5,  except  as  expressly  contemplated  by  this  Agreement  and the
Transaction Documents to which Seller is a party.

                  Section 3.6  Litigation and  Liabilities.  Except as listed on
Schedule  3.6,  there  are  no  Claims  or  legal,  administrative  or  arbitral
proceedings, hearings, inquiries or investigations by or before any Governmental
Body  ("Proceedings")  pending by or against Seller or any Affiliate  thereof or
affecting Seller in connection with or relating to the transactions contemplated
by this Agreement or the  Transaction  Documents or of any action taken or to be
taken  in  connection   therewith  or  the   consummation  of  the  transactions
contemplated  thereby,  or,  to  Seller's  Knowledge,   threatened  against,  or
involving the Operations or the Acquired Assets. Except as set forth on Schedule
3.6, none of Seller, its Affiliates or any of its assets or properties  relating
to the Operations,  including the Acquired Assets, is subject to any Order (nor,
to the Knowledge of Seller,  are there any such Orders  threatened to be imposed
by any Governmental Body) that has or has had a Material Adverse Effect or could
affect  the  legality,   validity  or  enforceability  of  this  Agreement,  any
Transactional  Documents or the  consummation of the  transactions  contemplated
hereby or thereby.

                  Section  3.7 Title and  Condition  to  Properties;  Absence of
Liens;  etc. Seller has good,  valid and marketable title to, or, in the case of
leased or subleased Acquired Assets,  valid and subsisting  leasehold  interests
in, all of its properties  and assets,  real,  personal and fixed,  tangible and
intangible, comprising part of the Acquired Assets, free and clear of any Liens,
except (i) for Liens for Taxes,  assessments and governmental  charges or levies
not yet due and payable,  (ii) Liens for Taxes that are being  contested in good
faith and by  appropriate  proceedings,  provided,  that adequate  reserves with
respect thereto are maintained on Seller's  books,  (iii) pledges or deposits to
secure obligations under workers' compensation laws or similar legislation or to
secure public or statutory  obligations (iv) in the case of leased assets, those
set  forth in the lease  agreements  pertaining  thereto  and  disclosed  in the
Disclosure  Schedules  (v) statutory  Liens imposed by Law, such as  landlords',
carriers',  warehousemen's,  mechanics', suppliers',  materialmen's,  workmen's,
repairmen's  liens or other  similar  Liens  arising in the  Ordinary  Course of
Business with respect to amounts not yet overdue or amounts  being  contested in
good faith by appropriate  proceedings or (vi) Liens that,  individually  and in
the aggregate, do not and could not reasonably be expected to materially detract
from the value of the Acquired  Assets,  or materially  interfere  with the use,
occupancy or operation  thereof as currently  used,  occupied or operated and as
set forth on Schedule 3.7 (such of the foregoing  Liens described in clauses (i)
through (vi), collectively, the "Permitted Liens").

                  Section 3.8 Licenses and Registrations;  Compliance with Laws;
etc.   Except  as  set  forth  on  Schedule   3.8,   Seller  has  all   permits,
authorizations,   identification   numbers,   licenses,   orders,  waivers,  and
registrations,  including,  but not  limited to those  required  under or issued
pursuant to any applicable  Environmental Laws, and shall have the approvals of,
and have made all required  registrations  with, any United States or non-United
States federal, national,  supranational,  state, provincial,  local, or similar
government or political subdivision thereof, or any agency or instrumentality of
any such  government  or  political  subdivision,  governmental,  regulatory  or
administrative  authority,  agency or  commission  or any  court,  tribunal,  or
judicial  or  arbitral  body  (each a  "Governmental  Body,"  and  collectively,
"Governmental  Bodies")  the  absence of which could  reasonably  be expected to
cause a Material  Adverse  Effect on the ability of Purchaser to own and operate
the Acquired  Assets and conduct the Operations as now


                                      -23-



conducted (collectively,  "Permits").  Except as set forth on Schedule 3.8, such
Permits are in effect in accordance  with their terms;  no notices of violations
have been  issued by any  Governmental  Body in  respect of any  Permit;  and no
proceeding  is pending or, to the  Knowledge of Seller,  threatened to revoke or
limit any Permit.  Seller is in compliance with the terms of such Permits in all
respects  material to the  Operations.  Except as set forth on Schedule 3.8, the
Operations have not been conducted and are not being conducted in conflict with,
violation  of or  default  under any Law or Order and  Seller has filed with the
proper  authorities  all material  statements and reports  required by, and have
complied in all material respects with, all Laws and Orders applicable to Seller
or any of its  properties  or assets,  including  the  Acquired  Assets,  or the
Operations,  and Seller is not in violation of any such Law or Order. Seller has
not, in the last three (3) years,  received  any notice of any Claim that Seller
has not complied in any material  respect with any Law or Order.  Seller has not
made any  illegal  payment to  officers  or  employees  of any  governmental  or
regulatory  body, or made any payment to customers for the sharing of fees or to
customers  or  suppliers  for  rebating  of  charges,  or  engaged  in any other
reciprocal  practices,  or made any illegal  payment or given any other  illegal
consideration  to  purchasing  agents or other  representatives  of customers in
respect of the sales made or to be made by Seller.

                  Section 3.9 Intellectual Property.

         (a) Disclosure.

                  (i) Schedule  3.9(a)(i) sets forth a true and complete list of
all issued or applied for Patents  and all issued or applied  for  Copyright  or
Trademark  registrations included in the Assigned IP Assets.  Schedule 3.9(a)(i)
also lists all unregistered  Intellectual  Property (excluding  unregistered and
immaterial copyrightable works) included in the Assigned IP Assets. The Assigned
IP Assets constitutes all intellectual  property used in and/or necessary to the
conduct of the Operations as it is currently conducted.

                  (ii)  Schedule  3.9(a)(ii)  sets  forth  all (A)  material  IP
Licenses   granted  to  third   parties  by  Seller   (excluding   non-material,
non-exclusive  licenses  granted by Seller to customers  for the use of products
sold by Seller in the Ordinary  Course of Business) and (B) material IP Licenses
granted to Seller by third  parties,  in each case,  included in the Assigned IP
Assets. Except as set forth in Schedule 3.9(a)(ii),  no Person other than Seller
has ownership  rights to  improvements  or  modifications  made by Seller in the
Assigned  IP,  including,  without  limitation,  in  Assigned  IP that  has been
licensed to Seller.

         (b) Rights. Except for Intellectual Property licensed to Seller and, in
any case, subject to licenses granted by Seller,  Seller owns, free and clear of
all Liens (other than  Permitted  Liens) and except as set forth in Schedule 3.9
(b), all right, title and interest in all Intellectual  Property included in the
Assigned  IP Assets and is  entitled  to use such  Intellectual  Property  on an
unrestricted basis in the Operations. Except as set forth in Section 3.15(b) and
Section 3.15(c),  all IP Licenses granted by any third party to Seller listed on
Schedule  3.9(a)(ii)  are valid and  enforceable  except as  enforcement  may be
limited by (i) bankruptcy, insolvency, reorganization,  fraudulent conveyance or
transfer,  moratorium or similar laws affecting  creditors' rights generally and
(ii) general principles of equity; provided,  however, that no representation or
warranty  is made here or in  Section  3.15 as to the  ability of any such third
party to grant the license in question. All currently existing Copyright and


                                      -24-



Trademark  registrations and United States Patents listed on Schedule  3.9(a)(i)
are,  with  respect  to issued and  registered  items,  validly-issued,  and all
necessary  registration,  maintenance,  renewal fees,  annuity fees and Taxes in
connection  with such  registrations  have been  timely  paid and all  necessary
documents and  certificates  in  connection  with such  registrations  have been
timely filed with the relevant patent, copyright, trademark or other authorities
in the United  States (or other  applicable  jurisdictions)  for the purposes of
maintaining such registered Intellectual Property.

         (c) The Assigned IP Assets (but in the case of IP  Licenses,  qualified
by the  Knowledge  of  Seller),  are  valid and  enforceable,  and have not been
adjudged invalid or unenforceable in whole or part.

         (d) To the  Knowledge of Seller,  no Person is engaging in any activity
that  infringes  the  Assigned  IP Assets.  Each  Seller IP License is valid and
enforceable, is binding on all parties to such license, and is in full force and
effect, and, to the Knowledge of Seller, no party to any Seller IP License is in
breach thereof or default thereunder.

         (e) Claims; Third Party Obligations.

                  (i) Except as  disclosed in Schedule  3.9(e)(i),  no Claim has
been  served on Seller  and is  currently  pending  or, to  Seller's  Knowledge,
threatened  and  Seller  has no  Knowledge  of any  basis  for  any  Claim  that
challenges  the  validity,  enforceability,  ownership,  or right to use,  sell,
license or sublicense (except for limitations in the IP Licenses included in the
Assigned IP Assets or as otherwise  provided by Laws) any Intellectual  Property
included  in the  Assigned  IP  Assets,  and no  item of  Intellectual  Property
included in the Assigned IP Assets is subject to any outstanding order,  ruling,
decree, stipulation,  charge or agreement restricting in any manner the use, the
licensing,  or  the  sublicensing  thereof  (except  for  limitations  in the IP
Licenses  included in the Assigned IP Assets or as otherwise  provided by Laws).
Except as disclosed in Schedule 3.9(e)(i), to Seller's Knowledge, Seller has not
infringed upon,  misappropriated or otherwise violated the intellectual property
rights of any  third  party and  Seller  has not  received  any  Claim,  charge,
complaint, demand or notice alleging any such infringement,  misappropriation or
violation,  by Seller or by the  Operations as currently  conducted,  and has no
Knowledge of any basis for any such Claim. The Operations as currently conducted
do not (A) infringe or misappropriate  the intellectual  property of any Person,
(B) violate any term or  provision of any  Assigned  Agreement,  (C) violate the
rights  of any  Person  (including  rights  to  privacy  or  publicity),  or (D)
constitute unfair competition or an unfair trade practice under the Laws.

                  (ii) Schedule 3.9(e)(ii) lists all Assigned Agreements between
Seller and any other Person wherein or whereby Seller has agreed to, or assumed,
any obligation or duty to warrant, indemnify, reimburse, hold harmless, guaranty
or otherwise  assume or incur any  obligation or Liability or provide a right of
rescission  with respect to the  infringement or  misappropriation  by Seller or
such other Person of the intellectual property of any Person other than Seller.

         (f)  Employees,  Consultants  and Other  Persons.  Seller has taken all
commercially  reasonable  steps  to  protect  Seller's  rights  in  confidential
information  and trade secrets of Seller


                                      -25-



related to or used in the Operations. Except as disclosed in Schedule 3.9(f), as
of the date hereof, each present or past employee, director, officer, contractor
or  consultant of Seller who  developed  any part of any  Intellectual  Property
(excluding  unregistered  and immaterial  copyrightable  works)  included in the
Assigned IP Assets (except for Intellectual  Property  licensed by a third party
to Seller) either:  (i) is a party to an agreement that, to the extent permitted
by Laws, conveys or obligates such Person to convey to Seller any and all right,
title and  interest  in and to all such  Assigned  IP Assets  developed  by such
Person in connection with such Person's  employment with or engagement on behalf
of  Seller  or a  party  contracting  with  Seller;  (ii) as to  copyrighted  or
copyrightable  material  which are  included in the  Assigned IP Assets and were
created in the course of such Person's  employment  with or engagement on behalf
of Seller is a party to a "work made for hire"  agreement  pursuant to which, to
the extent permitted by Laws,  Seller is deemed to be the original  owner/author
of all proprietary rights in such material;  or (iii) otherwise has by operation
of Law,  to the  extent  permitted  by Law,  vested in Seller any and all right,
title and  interest  in and to all such  Assigned  IP Assets  developed  by such
Person in connection with such Person's employment with, or engagement on behalf
of, Seller.

         (g)  Transfer.  (i)  Except  as set  forth  in  Schedule  3.11 and (ii)
provided  Purchaser  is in  compliance  with all material  requirements  of this
Agreement  and the Laws,  the  execution  and  delivery  by Seller  of,  and the
assignment and transfer of the Assigned IP Assets to Purchaser  contemplated  by
this Agreement, in and of themselves,  will not result in the loss or impairment
of the rights of  Purchaser  to own or use (in the  manner and for the  purposes
used by Seller prior to the Closing Date) any of the Assigned IP Assets.

         (h)  Third  Party  Rights.  Neither  this  Agreement  nor  any  of  the
Transaction  Documents nor any transactions  contemplated hereby or thereby will
result in  Purchaser's  granting  any  rights or  licenses  with  respect to the
intellectual  property  of  Purchaser  to any Person  pursuant  to any  Assigned
Agreement to which Seller is a party or by which any of its Acquired  Assets are
bound.

                  Section  3.10  Non-Contravention.   Except  as  set  forth  on
Schedule  3.10,  the  execution  and  delivery of this  Agreement  and the other
Transaction  Documents by Seller, the consummation by Seller of the transactions
contemplated  hereby and thereby and the performance by Seller of this Agreement
and the other  Transaction  Documents in accordance with their  respective terms
will not (a) violate,  conflict with or result in the breach of any provision of
its  Certificate  of  Incorporation  or Bylaws,  in each case as amended  and/or
restated  (b)  violate,  conflict  with or result in the breach of any  material
provision of, or result in a material  modification of or otherwise  entitle any
party to terminate,  or constitute  (whether after the filing of notice or lapse
of time or both) a default  under,  any Assigned  Agreement to which Seller is a
party or by or to which the Acquired Assets may be bound or subject, (c) violate
or result in the  revocation or  suspension of any Permit,  (d) conflict with or
violate (or cause an event that could have a Material Adverse Effect as a result
of) any Law or Order applicable to, against,  or binding upon Seller or by which
any of  Seller's  securities,  business  or  property  are  bound  or any of the
Acquired  Assets,  or (e) conflict with,  result in any breach of,  constitute a
default  (or event  which that the  giving of notice or lapse of time,  or both,
would become a default) under,  require any consent under, or give to others any
rights  of  termination,  amendment,  acceleration,  suspension,  revocation  or
cancellation of, or result in the creation or imposition of any Lien (other than
Permitted  Liens) on any of the Acquired Assets pursuant to


                                      -26-



any  provision  of  any  Assigned  Agreement,  Lien,  note,  bond,  mortgage  or
indenture,  contract,  agreement, lease, sublease, license, permit, franchise or
other  instrument or  arrangement  to which Seller is a party or by which any of
the Acquired Assets are bound or affected, except, in the case of clause (d) and
this clause (e), to the extent that such conflicts,  breaches, defaults or other
matters  result from facts or  circumstances  relating  solely to Purchaser  and
would  not  (A)  adversely  affect  the  ability  of  Seller  to  carry  out its
obligations  under,  and to consummate the  transactions  contemplated  by, this
Agreement  and the  Transaction  Documents  to  which  Seller  is a party or (B)
otherwise have a Material Adverse Effect.

                  Section 3.11  Consents and  Approvals.  Except as set forth on
Schedule  3.11, the  execution,  delivery and  performance of this Agreement and
each of the other Transaction Documents by Seller, the consummation by Seller of
the transactions  contemplated hereby and thereby, and compliance by Seller with
any of the provisions hereof or thereof shall not require any consent, approval,
order,  authorization  or action of, any filing,  expiration of waiting periods,
registration  or declaration  with, or notice to ("Consent"),  any  Governmental
Body or any other Person.

                  Section 3.12 Acquired Assets. Since the Balance Sheet Date, to
Seller's  Knowledge,   all  of  the  Acquired  Assets  have  been  acquired  for
consideration  not less or greater than the fair market  value of such  Acquired
Assets at the date of such acquisition.

                  Section 3.13 Employee Benefit Plans; ERISA.

         (a)  Schedule  3.13 lists each  material,  written  employment,  bonus,
deferred compensation,  incentive  compensation,  stock purchase,  stock option,
stock   appreciation   right  or   other   stock-based   incentive,   severance,
change-in-control,   or  termination  pay,  hospitalization  or  other  medical,
disability,  life  or  other  insurance,   supplemental  unemployment  benefits,
profit-sharing,  pension, or retirement plan, program, agreement or arrangement,
and each  other  employee  benefit  plan,  program,  agreement  or  arrangement,
sponsored, maintained or contributed to or required to be contributed to for the
employees  of the  Seller by Seller  (the  "Plans").  Each of the Plans has been
operated and administered in all material respects in accordance with applicable
laws,  rules  and  regulations,  including  but  not  limited  to  the  Employee
Retirement  Income  Security Act of 1974, as amended  ("ERISA") and the Code. No
benefit under any Plan is or will be an Assumed Liability.

         (b) Except as set forth on Schedule  3.13,  as of the date hereof,  the
consummation  of the  transactions  contemplated  by this Agreement or any other
Transaction  Documents  will not (i) entitle any  individual  to severance  pay,
unemployment compensation or other benefits or compensation, (ii) accelerate the
time of payment or vesting,  or increase the amount of any compensation  due, or
in respect of, any  individual,  (iii)  result in or satisfy a condition  to the
payment of  compensation  that would,  in  combination  with any other  payment,
result in an  "excess  parachute  payment"  within the  meaning of Code  Section
280G(b)(1),  or (iv) constitute or involve a prohibited  transaction (as defined
in ERISA  Section 406 or Code Section  4975),  constitute or involve a breach of
fiduciary responsibility within the meaning of ERISA Section 502(1) or otherwise
violate any provision of ERISA.


                                      -27-



                  Section 3.14  Insurance  Policies.  Schedule 3.14 sets forth a
list (or a copy) of all insurance policies  maintained by Seller relating to the
Operations or the Acquired Assets, products, employees, and operations of Seller
as of the date  hereof.  All such  policies  contain  such types and amounts and
cover such risks as are  consistent  with  customary  practices and standards of
companies engaged in business and operations  similar to those of Seller, are in
full force and effect,  all premiums due and payable thereon have been paid, and
Seller  has  complied  in all  material  respects  with the  provisions  of such
policies  and have not  received  notice  from any of its  insurance  brokers or
carriers  that such  broker or carrier  will not be willing or able to renew its
existing  coverage.  Seller has delivered or made  available to Purchaser or its
counsel true, complete and correct copies of all such policies together with all
riders and amendments thereto.

                  Section 3.15 Contracts.

         (a) Schedule  3.15(a) hereto lists,  as of the date hereof,  all of the
Assigned  Agreements  to which Seller is a party or by or to which Seller or any
of its assets or properties  are bound or subject.  True and complete  copies of
all of the foregoing Assigned Agreements,  in each case as amended to date, have
been  delivered to, or, to the extent not  requested to be delivered,  have been
made available for inspection by, Purchaser or its counsel.

         (b)  All  Contracts   described  or  listed  in  Schedule  3.15(a)  (i)
constitute the legal, valid and binding obligations of Seller, are in full force
and effect, (ii) are freely and fully assignable to Purchaser without penalty or
other adverse  consequences  and (iii) upon the consummation of the transactions
contemplated by this Agreement and the  Transaction  Documents shall continue in
full force and effect  without  penalty or other  adverse  consequence,  and are
enforceable in accordance with their  respective terms except as enforcement may
be limited by (A) bankruptcy, insolvency, reorganization,  fraudulent conveyance
or transfer,  moratorium or similar laws affecting  creditors'  rights generally
and (B) general principles of equity.

         (c) Except as set forth in Schedule 3.15(c), Seller is not in breach or
default  under any  Assigned  Agreement,  nor, to Seller's  Knowledge,  does any
condition exist that, with notice or lapse of time or both,  would  constitute a
breach or default on the part of Seller  thereunder,  except to the extent  that
such breach,  default or condition  would not be reasonably  expected to cause a
Material  Adverse  Effect on the  ability of  Purchaser  to own and  operate the
Acquired Assets and conduct the Operations as now conducted. Except as set forth
on Schedule 3.15(c),  to the Knowledge of Seller, no other party to any Assigned
Agreement is in breach or default  thereunder,  nor, to the Knowledge of Seller,
does any  condition  exist  that  with  notice  or  lapse of time or both  would
constitute  a breach or  default  on the part of such  other  party  thereunder.
Except as set forth on Schedule 3.15(c), Seller has no Knowledge that any Person
intends to terminate  (whether for cause or convenience) any Assigned  Agreement
before its stated term, if any. Seller has no Knowledge of any Claim, threatened
in writing or pending,  by any Governmental Body or any other Person,  under any
Assigned Agreement.

         (d) Except as set forth in Schedule 3.15(d), to Seller's Knowledge,  no
outstanding bid or proposal was bid at an anticipated  loss at the time such bid
or proposal was prepared and tendered.


                                      -28-



         (e) There is no contract,  agreement or other arrangement  granting any
Person any preferential right to purchase any of the Acquired Assets.

                  Section 3.16 Environmental Matters.

         (a) Except as listed in Schedule 3.16

                  (i)  Seller  and  its   Affiliates   (as  it  relates  to  the
Operations)  are, and for the past five (5) years have been, in compliance  with
all applicable Environmental Laws and all Permits;

                  (ii) there has been no Release of any Hazardous  Substances on
any of the Leased  Real  Property  during the period of  Seller's  or any of its
Affiliates' ownership, lease, use or occupancy thereof, on any property formerly
owned,  leased,  used or occupied by Seller or any of its Affiliates  related to
the Operations;

                  (iii)  there are no Claims  pending  or, to the  Knowledge  of
Seller,  threatened  against  Seller or any of its  Affiliates  (relating to the
Operations),  the Leased Real Property and there are no  circumstances  that can
reasonably be expected to form the basis of any such Claim;

                  (iv)  there  are  no  underground   storage   tanks,   surface
impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Substances
are being or have been  treated,  stored or  disposed  on any of the Leased Real
Property and there is no asbestos or asbestos-containing  material that requires
abatement or encapsulation under any Environmental Law at any of the Leased Real
Property; and

                  (v) neither Seller nor any of its Affiliates has any actual or
alleged Liability relating to the Operations under any Environmental Law.

         (b) Seller has  provided  Purchaser  with  copies of any  environmental
assessment or audit reports or other similar studies or analyses relating to the
Operations and the Leased Real Property.

         (c)  Neither  the  execution  of  this  Agreement  or  the  Transaction
Documents  nor the  consummation  of the  transactions  contemplated  hereby  or
thereby  will  require  any  Remedial  Action  or notice  to or  Consent  of any
Governmental  Body or Person  pursuant to any  applicable  Environmental  Law or
Permit.

                  Section 3.17  Taxes.  Seller has duly and timely filed all Tax
Returns  with  respect to material  Taxes  required to be filed on or before the
Closing  Date.  All such Tax  Returns  are true,  correct  and  complete  in all
material respects.  No adjustment relating to such Tax Returns has been proposed
formally or  informally  by any Tax  authority  and no basis exists for any such
adjustment.  All Taxes  that are shown to be due on such Tax  Returns  have been
duly and timely paid (except for any  extension or for any Taxes which are being
disputed  by Seller in good faith as set forth on  Schedule  3.17  Except as set
forth on Schedule 3.17,  Seller has withheld and paid all Taxes required to have
been  withheld and paid in  connection  with  amounts  owing with respect to the
Operations to any employees, agents, contractors, creditor, stockholder or other
third party and  nonresidents  and, to the extent  required,  has remitted  such
amounts to the proper  agencies.  Seller is not a  "foreign  person"  within the
meaning of Section 1445(b)(2) of the


                                      -29-



Code. Except as set forth on Schedule 3.17, Seller, (a) has not been a member of
an  affiliated  group filing a  consolidated  income Tax Return;  and (b) has no
liability  for the  Taxes  of any  person  under  Treasury  Regulations  Section
1.1502-6(a)  (or any  analogous  or similar  provision  of any  state,  local or
foreign law or  regulation),  as a transferee  or  successor,  by  contract,  or
otherwise.  There are no pending or threatened Proceedings for the assessment or
collection of Taxes against Seller  (insofar as either relates to the activities
or income of Seller or the  Operations or could result in liability of Seller on
the  basis  of joint  and/or  several  liability)  or any  corporation  that was
included in the filing of a Tax Return with Seller on a consolidated or combined
basis.  There are no Tax liens on any properties or assets of Seller,  including
the Acquired Assets and the Operations.

                  Section 3.18 Liabilities. Except as set forth on Schedule 3.18
Seller  has  no  direct  or  indirect  Debt,  liability,  Claim,  loss,  damage,
deficiency  or  obligation  or  responsibility,  fixed  or  unfixed,  choate  or
inchoate, liquidated or unliquidated, secured or unsecured, accrued, asserted or
unasserted,  matured  or  unmatured,   determined  or  determinable,   absolute,
contingent or otherwise,  including  those arising under any Law  (including any
Environmental  Law),  Proceeding  or Order and those arising under any contract,
agreement,  arrangement,  commitment  or  undertaking,  whether or not of a kind
required by U.S.  GAAP to be set forth on a financial  statement or in the notes
thereto  ("Liabilities")  relating to the Operations or Acquired Assets,  except
for: (i) Liabilities that are fully and adequately reflected or reserved against
on the  Financial  Statements  and (ii)  Liabilities  that  have  arisen  in the
Ordinary  Course of  Business  since  the date of the  Balance  Sheet  until the
Closing Date and (iii) Liabilities that, individually,  or in the aggregate, are
not material to the Operations,  as determined by Purchaser,  acting reasonably.
Reserves are reflected on the Reference Balance Sheet against all Liabilities of
Seller in amounts that have been  established  on a basis  consistent  with past
practice and in accordance with U.S. GAAP.

                  Section 3.19 Real Estate.

         (a) Schedule  3.19(a) sets forth a true and complete list of all of the
real property which Seller leases, subleases,  licenses or through any Contract,
has the right or obligation to use or occupy, now or in the future,  relating to
or used in the  Operations and any and all ancillary  documents (the  "Ancillary
Leased Real Property  Documents")  pertaining thereto (including all amendments,
modifications,   supplements,  exhibits,  schedules,  addenda  and  restatements
thereto  and thereof  and all  consents,  including  consents  for  alterations,
assignments and sublets,  documents  recording  variations,  memoranda of lease,
options,  rights of  expansion,  extension,  first  refusal  and first offer and
evidence of commencement  dates and expiration  dates)  (collectively,  together
with all buildings,  structures,  facilities,  plants, improvements currently or
hereafter located thereon, all fixtures, systems, equipment, machinery and items
of personal property of Seller relating to or used in the Operations attached or
appurtenant  thereto,  and all easements,  licenses,  rights of way, privileges,
appurtenances,  strips, gores and other rights pertaining to the foregoing,  the
"Leased Real Property"). Seller holds the leasehold estate under and interest in
each parcel of the Leased Real Property free and clear of all Liens,  other than
Permitted Liens.  With respect to each of such leases and subleases,  Seller has
not  exercised or given any notice of  exercise,  nor has any lessor or landlord
exercised  or received  any notice of  exercise by a lessor or landlord  of, any
option,  right of first offer or right of first  refusal


                                      -30-



contained  in any such lease or  sublease,  including  any such  option or right
pertaining   to  purchase,   expansion,   renewal,   extension   or   relocation
(collectively, "Options").

         (b) The transactions contemplated by this Agreement and the Transaction
Documents  will not require the  issuance of any new or amended  certificate  of
occupancy,  and,  to the  Knowledge  of  Seller,  there are no facts  that would
prevent the Leased Real  Property  from being  occupied by  Purchaser  after the
Closing  in the same  manner  as  occupied  by Seller  immediately  prior to the
Closing.

         (c) The rental set forth in each lease or  sublease  of the Leased Real
Property is the actual rental being paid,  and there are no separate  agreements
or understandings with respect to the same.

         (d) Seller has the full right to exercise any Options  contained in the
leases and  subleases  pertaining  to the Leased Real  Property on the terms and
conditions  contained  therein and upon due exercise  would be entitled to enjoy
the full benefit of such Options with respect thereto.

         (e) All leases  relating to Leased Real Property  constitute the legal,
valid and binding  obligations of Seller,  are in full force and effect and have
not been  modified  or amended  and are  enforceable  in  accordance  with their
respective  terms.  Seller is not in material  default  under any leases of such
Leased Real Property and, to Seller's Knowledge, the landlord of the Leased Real
Property is not in default under its obligations  under the lease of such Leased
Real Property and, to Seller's  Knowledge,  no condition has occurred which with
notice or lapse of time or both would constitute a default thereunder.

                  Section 3.20 Tangible Personal Property.

         (a) Schedule  3.20(a)  lists each item or distinct  group of machinery,
Equipment,   Inventory,  tools,  supplies,  furniture,   fixtures,   personalty,
vehicles,  books,  computer  equipment and other tangible personal property (the
"Tangible Personal Property") used in the Operations.

         (b) Schedule  3.20(b) sets forth a true and complete list of all leases
and subleases for Tangible Personal Property and any and all material  ancillary
documents pertaining thereto (including all amendments, consents and evidence of
commencement dates and expiration dates).

         (c) Seller has the full right to exercise any renewal options contained
in the leases and subleases  pertaining to the Tangible Personal Property on the
terms and conditions  contained  therein and upon due exercise would be entitled
to enjoy the use of each item of leased Tangible  Personal Property for the full
term of such renewal options.

                  Section 3.21 Labor Matters.

         (a) Seller is not a party to any  collective  bargaining  agreement  or
other  labor  union  contract  applicable  to persons  employed  by Seller,  and
currently there are no organizational campaigns, petitions or other unionization
activities seeking recognition of a collective bargaining unit that could affect
Seller.


                                      -31-



         (b) There are no  unfair  labor  practice  complaints  pending  against
Seller before the National Labor Relations Board or any other Governmental Body.

         (c) Seller is currently in compliance with all applicable Laws relating
to the employment of labor, including those related to wages, hours,  collective
bargaining  and the payment and  withholding of taxes and other sums as required
by  the  appropriate  Governmental  Body  and  has  withheld  and  paid  to  the
appropriate  Governmental  Body or is holding  for  payment  not yet due to such
Governmental  Body all amounts  required to be withheld  from  employees  of the
Seller and is not liable for any  arrears of wages,  Taxes,  penalties  or other
sums for failure to comply with any of the foregoing.

         (d)  Seller  has  paid  in  full to all  its  respective  employees  or
adequately  accrued  for in  accordance  with  U.S.  GAAP all  wages,  salaries,
commissions,  bonuses,  benefits and other  compensation  due to or on behalf of
such employees.

         (e) There is no Claim  with  respect  to  payment  of wages,  salary or
overtime pay that has been asserted or is now pending or  threatened  before any
Governmental  Body with respect to any Persons currently or formerly employed by
Seller.

         (f) Seller is not a party to, or otherwise bound by, any consent decree
with, or citation by, any Governmental  Body relating to employees or employment
practices.

         (g) There is no charge or proceeding with respect to a violation of any
occupational  safety or health standard that has been asserted or is now pending
or threatened with respect to Seller.

         (h) There is no charge of  discrimination  in  employment or employment
practices,  for any  reason,  including  age,  gender,  race,  religion or other
legally  protected  category,  which  has been  asserted  or is now  pending  or
threatened before the United States Equal Employment Opportunity Commission,  or
any other  Governmental Body in any jurisdiction in which Seller has employed or
currently employs any Person.

                  Section  3.22  Certain  Interests.   Except  as  disclosed  in
Schedule  3.22,  no  Affiliate of Seller has (a) any interest in any Person that
engages in the same or similar  business as the Operations,  (b) any interest in
any Person  that  purchases  from or sells or  furnishes  to Seller any goods or
services  used in the  Operations,  (c) a beneficial  interest in any  contract,
commitment, agreement or understanding to which Seller is a party or by which it
may be bound or affected  related to the Operations  and/or the Acquired Assets;
or (d) any claim  against any of the  Acquired  Assets.  Except as  disclosed on
Schedule  3.22,  none of the assets of Seller include any  receivables  from any
executive or employee of Seller.

                  Section 3.23 Brokers. Except as disclosed in Schedule 3.23, no
broker,  finder or investment  banker is entitled to any brokerage,  finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement or the  Transaction  Documents based upon  arrangements  made by or on
behalf of Seller.

                  Section  3.24  Sufficiency  of  Assets.  The  Acquired  Assets
constitute all the  properties,  assets and rights used,  held or intended to be
used in, and all such properties, assets


                                      -32-



and rights as are  necessary  to  conduct,  the  Operations.  At all times since
[December 31, 2004],  Seller has caused the Acquired  Assets to be maintained in
accordance with good business practice,  and all the Acquired Assets are in good
operating  condition and repair,  have been  properly  operated,  serviced,  and
maintained,  and are  suitable  for the  purposes  for  which  they are used and
intended, ordinary wear and tear excepted.

                  Section  3.25  No  Untrue  Statements.  No  representation  or
warranty of Seller in this Agreement or Transaction  Documents or at the Closing
contains or will  contain any untrue  statement  of a material  fact or omits or
will omit to state a material  fact  required to make the  statements  herein or
therein  not  misleading.  There is no fact that  Seller  has not  disclosed  to
Purchaser  in writing that has had or,  insofar as Seller can now  foresee,  may
have a Material  Adverse  Effect on the ability of Seller to perform  fully this
Agreement and the Transaction Documents

                                   Article IV

                   REPRESENTATIONS AND WARRANTIES OF PURCHASER

         As an  inducement  to Seller to enter  into this  Agreement,  Purchaser
hereby represents and warrants to Seller as follows:

                  Section 4.1 Organization.  PPT is a Delaware  corporation duly
organized,  validly existing and in good standing under the laws of the State of
Delaware.  Acquisition  Co. is a [limited  liability  company]  duly  organized,
validly existing and in good standing under the laws of the State of [Delaware].
PPT and Acquisition Co. have all requisite power and authority to own, lease and
operate its  properties  and assets and to carry on its business as now being or
heretofore conducted.

                  Section  4.2  Authority  to  Execute  and  Perform  Agreement;
Ability to Perform.  Except for Consents or authorizations set forth on Schedule
4.2, PPT and  Acquisition  Co. have the entity power and  authority  required to
enter  into,  execute  and  deliver  this  Agreement  and the other  Transaction
Documents  to  which  each  is or will be a party  and to  perform  fully  their
obligations hereunder and thereunder. PPT and Acquisition Co. have not taken any
action  that in any  respect  conflicts  with,  constitutes  a default  under or
results in a violation of any  provision of its,  respectively,  Certificate  of
Incorporation  and  Certificate  of  Formation.  The  execution,   delivery  and
performance of this Agreement and the other Transaction  Documents to which each
is a party have been duly authorized by all necessary  corporate  actions.  This
Agreement has been duly executed and delivered by PPT and  Acquisition  Co. and,
on  the  Closing  Date,  the  other  Transaction  Documents  to  which  PPT  and
Acquisition  Co.  are  parties on the  Closing  Date will be duly  executed  and
delivered by PPT and  Acquisition Co. Assuming due execution and delivery hereof
and thereof by Seller,  this Agreement and the other Transaction  Documents will
be valid and binding  obligations  of PPT and  Acquisition  Co.  enforceable  in
accordance with their respective terms,  except that such  enforceability may be
subject to (i)  bankruptcy,  insolvency,  reorganization  or other  similar laws
affecting or relating to enforcement of creditors'  rights  generally,  and (ii)
general equitable principles.


                                      -33-



                  Section 4.3 Consents and Approvals. Other than as set forth in
Schedule  4.2,  the  execution  and  delivery  of this  Agreement  and the other
Transaction Documents to which Purchaser is or will be a party, the consummation
by Purchaser of the transactions  contemplated hereby and thereby and compliance
by Purchaser with any of the provisions  hereof and thereof will not require any
Consent of any Governmental Body or any other Person, except as may be necessary
as a result of any specific facts or circumstance relating solely to Seller

                  Section  4.4   Non-Contravention.   Assuming  the  making  and
obtaining of all Consents referred to in Schedule 4.2, except as may result from
any facts or circumstances relating solely to Seller, the execution, delivery of
this Agreement by Purchaser and the execution of the other Transaction Documents
to which Purchaser is or will be a party,  the  consummation of the transactions
contemplated  hereby  and  thereby  and the  performance  by  Purchaser  of this
Agreement  and  the  other  Transaction   Documents  in  accordance  with  their
respective  terms  will not (a)  violate  any  provision  of the  organizational
documents of Purchaser,  (b) violate any Law or Order applicable to, against, or
binding upon, Purchaser or by which any of Purchaser's  securities,  business or
property are bound or (c) conflict  with or result in the breach of any material
provision of any Contract to which Purchaser may be bound,  constitute a default
(or event that with the giving of notice or lapse of time, or both, would become
a default)  under,  require any Consent  under,  or give to others any rights of
termination, amendment, acceleration, suspension, revocation or cancellation of,
any note, bond, mortgage or indenture,  contract,  agreement,  lease,  sublease,
license, permit, franchise or other instrument or arrangement to which Purchaser
is a party,  which would adversely  affect the ability of Purchaser to carry out
its obligations under, and to consummate the transactions  contemplated by, this
Agreement or the Transaction Documents.

                  Section 4.5 Financial Reports and SEC Documents.  PPT's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2004, as amended by
Form 10-KSB/A  filed on May 18, 2005, and all other  reports,  definitive  proxy
statements or  information  statements  filed or to be filed by it subsequent to
December 31, 2004 under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act in
the form filed or to be filed  (collectively,  PPT's "SEC  Documents")  with the
SEC,  as of the date filed or to be filed,  (A)  complied  or will comply in all
material respects as to form with the applicable requirements under the Exchange
Act and (B) as of the time filed,  or to be filed,  did not and will not contain
any  untrue  statement  of a  material  fact or omit to  state a  material  fact
required to be stated  therein or necessary to make the statements  therein,  in
the light of the circumstances  under which they were made, not misleading;  and
each of the balance sheets  contained in or  incorporated  by reference into any
such SEC Document  (including  the related notes and schedules  thereto)  fairly
presents,  or  will  fairly  present,  the  financial  position  of PPT  and its
subsidiaries as of its date, and each of the statements of income and changes in
shareholders'  equity  and  cash  flows  or  equivalent  statements  in such SEC
Documents  (including any related notes and schedules  thereto) fairly presents,
or will fairly  present,  the results of  operations,  changes in  shareholders'
equity  and  changes  in  cash  flows,  as the  case  may  be,  of PPT  and  its
subsidiaries  for the periods to which they relate,  in each case in  accordance
with U.S. GAAP consistently applied during the periods involved,  except in each
case as may be noted therein,  subject to the absence of footnotes and to normal
year-end adjustments in the case of unaudited statements.


                                      -34-



                  Section  4.6  Purchaser  Litigation.  There  are no  Claims or
legal,  administrative  or  arbitral  Proceedings,  hearings  or  investigations
pending or, to the  Knowledge  of  Purchaser,  threatened  against or  involving
Purchaser, or any outstanding Orders, judgments,  injunctions, awards or decrees
of any court, governmental or regulatory body or arbitration tribunal against or
involving Purchaser, which, if adversely determined,  would affect the legality,
validity or  enforceability  of this Agreement or any  Transaction  Documents or
would  materially  impair  Purchaser's  ability to consummate  the  transactions
contemplated hereby or thereby.

                  Section 4.7 Brokers.  Except as set forth on Schedule  4.6, no
broker,  finder or investment  banker is entitled to any brokerage,  finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement or the  Transaction  Documents based upon  arrangements  made by or on
behalf of Purchaser.

                  Section  4.8  Validity of Shares.  The Shares,  and the shares
comprising  the  Earnout  Amount,  if any,  upon  issuance,  will be legally and
validly issued, fully paid and nonassessable.

                                   Article V

                      ADDITIONAL AGREEMENTS OF THE PARTIES

                  Section  5.1  Conduct of  Operations.  Except as  specifically
contemplated  by this  Agreement  or as set forth in  Schedule  5.1,  during the
period  from the date  hereof to the  Closing  Date,  Seller  shall  conduct the
Operations in the Ordinary  Course of Business,  maintain the Acquired Assets in
good  condition  (specifically  excluding  wear and tear),  preserve  intact its
business organizations and the business organization of the Operations, preserve
intact  relationships  with third  parties and maintain the goodwill  associated
with the Operations,  including, but not limited to, with customers,  suppliers,
and  employees,  keep  available  to Purchaser  the  services of its  employees,
continue in full force and effect  without  material  modification  all existing
policies or binders of insurance  currently  maintained in respect of Seller and
the  Operations,  exercise,  but only after notice to  Purchaser  and receipt of
Purchaser's prior written approval,  any rights of renewal pursuant to the terms
of any of the leases or subleases  set forth in Schedule  3.20(a) which by their
terms would  otherwise  expire,  and continue its  advertising  and  promotional
activities, and pricing and purchasing policies.

                  Section 5.2 Further  Assurances.  At any time and from time to
time after the Closing,  each of the parties  agree to cooperate  with the other
and to execute  and deliver  such other  documents,  instruments  of transfer or
assignment,  files, Books and Records and do all such further acts and things as
may be reasonably  required to carry out the  transactions  contemplated by this
Agreement and the other Transaction  Documents.  Without limiting the generality
of the  foregoing,  Purchaser and Seller shall  cooperate with each other in the
conduct  of any  audit or other  proceeding  relating  to  Taxes  involving  the
Acquired  Assets.  If either party  becomes  aware of any pending or  threatened
assessment,  official inquiry, examination or proceeding that could result in an
official  determination  with respect to Taxes due or payable the responsibility
for which rests with the other party hereto, such party shall promptly so notify
the other party in writing.


                                      -35-



                  Section 5.3 Certain Notifications.  At all times from the date
hereof until the Closing Date, Seller shall promptly notify Purchaser in writing
of the occurrence of any event or circumstance that will or could (a) render any
statement, representation or warranty of Seller in this Agreement (including the
Schedules hereto) untrue,  inaccurate or incomplete in any material respect, (b)
constitute  or result in the breach by Seller  of, or a failure to comply  with,
any  agreement  or covenant  in this  Agreement  applicable  to Seller or (c) be
reasonably expected to cause a Material Adverse Effect.

                  Section 5.4 Access to Records and Facilities; Confidentiality.
Prior to the Closing Date, and upon  reasonable  prior notice,  Seller shall (i)
afford  Purchaser and its officers,  employees,  agents,  accountants,  counsel,
financing sources and  representatives,  through Seller's employees,  directors,
officers  and  representatives,  to make  such  investigation  of the  premises,
assets,  properties,  plants,  business and  operations of Seller,  and to those
officers,  directors,  employees,  agents, accountants,  managers, personnel and
counsel of Seller who have any  knowledge  relating to the  Operations  and (ii)
furnish to the officers,  employees,  agents,  accountants,  counsel,  financing
sources and representatives of Purchaser such additional financial and operating
data and other  information  regarding the assets,  properties,  liabilities and
goodwill of Seller and the Operations  (or legible copies  thereof) as Purchaser
may from time to time reasonably  request and such examination of the facilities
and Books and Records at reasonable  times and during  Seller's  normal business
hours.

                  Section  5.5  Preservation  of  Records.  Until five (5) years
after the date hereof or until the  expiration  of the record  retention  period
under  relevant  federal or state  requirements,  if  longer,  none of Seller or
Purchaser will destroy or otherwise dispose of any of the books, records,  files
or documents that relate to the Operations without giving the other party hereto
at least  ninety (90) days' prior  written  notice and an  opportunity,  at such
other  party's cost and expense,  to take  possession or make extracts or copies
thereof.  "Books,  records,  files or  documents"  shall  include  copies of any
insurance  policies,   testing  logs,  application  records,   personnel  files,
financial   statements,    operational   reports,   policies   and   procedures,
correspondence,  all reports prepared for or provided to any Governmental  Body,
all records retained pursuant to relevant Governmental Body requirements and any
other books,  records,  files or documents.  After the Closing Date,  each party
hereto shall permit the other party,  its  officers,  counsel,  accountants  and
other  authorized  representatives  during  normal  business  hours and on prior
written  notice,  to have  access to and  examine  and make copies of any books,
records,  files or documents,  in its  possession  that relate to or concern the
Operations or its  operations,  provided that such access does not  unreasonably
interfere  with the  operations of the party  providing such access and provided
further  that the party  requesting  access  to such  books,  records,  files or
documents  will bear any  costs,  other  than wages and  salaries  and  employee
benefits of relevant personnel, of obtaining such access

                  Section 5.6 Non-Competition and  Non-Solicitation  Covenant of
Seller.

         (a) For a period of five (5) years after the Closing  (the  "Restricted
Period"),  Seller  shall  not and shall  cause  Louis R.  Matson to not  engage,
directly or indirectly,  in any business anywhere in the world, including the 58
counties  in the State of  California  that  produces  or  supplies  products or
services of the kind  produced or supplied by the  Operations as of the Closing.
In addition,  Seller  shall not and shall cause Louis R. Matson to not,  without
the prior


                                      -36-



written  consent of  Purchaser,  directly or  indirectly,  own an  interest  in,
manage,  operate,  join,  control,  lend  money  or  render  financial  or other
assistance to or participate in or be connected  with, as an officer,  employee,
partner,  stockholder,  consultant or  otherwise,  any Person that competes with
Purchaser or the Operations in manufacturing, producing or supplying products or
services of the kind manufactured,  produced or supplied by the Operations as of
the Closing.

         (b)  As  a  separate  and  independent  covenant,  Seller  agrees  with
Purchaser  that,  for a period of five (5) years  following the Closing,  Seller
will not and  shall  cause  Louis R.  Matson  to not,  in any way,  directly  or
indirectly,  call  upon,  solicit,  advise or  otherwise  do, or  attempt to do,
business with any customers of the Operations with whom the Operations or Seller
had any dealings during the period of time in which the Operations were owned by
Seller or take away or interfere or attempt to interfere with any custom, trade,
business  or  patronage  of the  Operations  or  interfere  with or  attempt  to
interfere  with  any  officers,  employees,  representatives  or  agents  of the
Operations  or induce or  attempt  to induce  any of them to leave the employ of
Purchaser  or  violate  the  terms  of  their   contracts,   or  any  employment
arrangements, with Purchaser.

         (c) The Restricted Period shall be extended by the length of any period
during which Seller or Louis R. Matson is in breach of the terms of this Section
5.6. Seller acknowledges that the covenants set forth in this Section 5.6 are an
essential element of this Agreement and that, but for the agreement of Seller to
comply  with  these  covenants,  Purchaser  would  not have  entered  into  this
Agreement.  Seller  acknowledges  that  (i)  this  Section  5.6  constitutes  an
independent covenant that shall not be affected by performance or nonperformance
of any other provision of this Agreement by Purchaser, and (ii) a portion of the
Purchase Price shall be consideration  allocable to such  independent  covenant.
Seller  acknowledges  that they have  independently  consulted  with counsel and
after such  consultation  agree that the covenants set forth in this Section 5.6
are reasonable and proper.

                  Section 5.7 Employees.  Purchaser  shall assume the employment
agreement,  effective immediately after the Closing, between Seller and Louis R.
Matson,  dated as of [_____ __,] 2005,  the form of which is attached as Exhibit
H, and  shall  retain  the  services  of  Gerald P.  McNamara.  Seller  shall be
responsible  for any  Liability  arising  under the WARN Act and  other  similar
statutes or regulations of any  jurisdiction  with respect to any termination by
Seller of employment of any employee of Seller,  including,  any  termination of
employment  that occurs in connection  with the  transactions  described in this
Agreement,  on or prior to the Closing Date, and Seller shall be responsible for
the  issuance of any notices  required by the WARN Act with  respect to any such
termination.

                  Section 5.8 Satisfaction of Conditions Precedent.  The parties
hereto will use reasonable efforts to satisfy (or cause to be satisfied) all the
conditions   precedent  to  their  respective   obligations  to  consummate  the
transactions contemplated hereby as set forth in Article VI.

                  Section 5.9 Expenses and  Apportioned  Obligations.  Except as
otherwise provided in this Agreement,  each party shall bear its own expenses in
connection with the preparation, execution and performance of this Agreement and
transactions contemplated hereby, including costs of their respective attorneys,
accountants,  investment bankers, brokers and other representatives,  whether or
not the Closing shall have occurred; provided, however, that all


                                      -37-



excise, sales, use, registration,  stamp,  recording,  documentary,  conveyance,
franchise,  property,  transfer,  gains and similar  Taxes and fees  (including,
without  limitation,  penalties and  interest),  levies and charges  incurred in
connection  with  this  Agreement  and  the  other  Transaction  Documents  (but
excluding  Taxes  assessed  solely on or by reference to income,  which shall be
borne  by  Seller)  and  the  transactions   contemplated   hereby  and  thereby
(collectively, "Transfer Taxes") shall be borne equally by Purchaser and Seller.
Purchaser and Seller shall use reasonable  efforts to minimize the amount of all
Transfer Taxes and shall  cooperate in providing each other with any appropriate
resale exemption certificates and other similar documentation. The party that is
required  by  applicable  Law to make the  filings,  reports,  or returns and to
handle any audits or controversies with respect to any applicable Transfer Taxes
shall do so,  and the other  party  shall  cooperate  with  respect  thereto  as
necessary.

                  Section  5.10 Bulk Sales  Compliance.  Each of  Purchaser  and
Seller shall waive  compliance  with the provisions of the  applicable  statutes
relating to bulk transfers or bulk sales.

                  Section  5.11  Public  Announcements.  Neither  Purchaser  nor
Seller shall issue any report,  statement or press release or otherwise make any
public  statement  with  respect  to this  Agreement  or the  other  Transaction
Documents  and the  transactions  contemplated  hereby and  thereby  without the
written  consent of the other  party (not to be  unreasonably  withheld)  hereto
prior to taking  any such  action,  except as may be  required  by Law or may be
necessary  in  order to  comply  with  disclosure  requirements  imposed  by any
Governmental  Bodies,  in which case such party  nevertheless  shall  advise the
other party and discuss the contents of the  disclosure  before issuing any such
report, statement or press release.

                  Section 5.12 Use of Name and Logo.  Seller  acknowledges  that
from and after the Closing,  the name "Surgica  Corporation," and all similar or
related names, marks and logos shall be owned by Purchaser,  that neither Seller
nor  any  of  its  Affiliates  shall  have  any  rights  in  the  name  "Surgica
Corporation," and all similar or related names, marks and logos and that neither
Seller nor any of its  Affiliates  will contest the ownership or validity of any
rights of Purchaser in or to the name "Surgica  Corporation," and all similar or
related names, marks and logos. Within three (3) Business Days after the Closing
Date,  Seller shall amend its  organizational  documents  and make any necessary
filings with the Delaware  Secretary of State (and within  Thirty (30)  Business
Days after the Closing Date,  Seller shall make all  necessary  filings with all
other relevant  Governmental  Bodies) to change any corporate name from any name
incorporating "Surgica Corporation" or any confusingly similar designations to a
name that does not incorporate "Surgica  Corporation" or any confusingly similar
designation.

                  Section  5.13  Excluded  Liabilities.  Seller  shall  pay  and
discharge the Excluded Liabilities as and when the same become due and payable.

                  Section 5.14 Competing Offers;  Merger or Liquidation.  Seller
agrees  that  between  the date of this  Agreement  and the  earlier  of (a) the
Closing and (b) the termination of this Agreement, neither Seller nor any of its
Affiliates,  officers,  directors,  representatives  or agents will, without the
prior written consent of Purchaser, (i) solicit, initiate,  consider,  encourage
or accept any other  proposals or  submissions of bids or offers from any Person
(A) relating to any acquisition or purchase of all or any portion of the capital
stock of Seller or assets of Seller, (B) to enter into any merger, consolidation
or other business combination or


                                      -38-



similar  transaction  with  Seller  or the  Operations  or (C) to  enter  into a
recapitalization, reorganization or any other extraordinary business transaction
involving or otherwise relating to Seller or the Operations, (ii) participate in
any discussions, conversations,  negotiations or other communications regarding,
or furnish to any other  Person any  information  with  respect to, or otherwise
cooperate in any way,  assist or  participate  in,  facilitate  or encourage any
effort or  attempt  by any other  Person to seek to do any of the  foregoing  or
(iii) commence any proceeding to merge,  consolidate or liquidate or dissolve or
obligate  itself  to do so.  Seller  immediately  shall  cease  and  cause to be
terminated  all  existing  discussions,  conversations,  negotiations  and other
communications with any Persons conducted  heretofore with respect to any of the
foregoing. Seller shall notify Purchaser promptly if any such proposal or offer,
or any inquiry or other  contact with any Person with respect  thereto,  is made
and shall,  in any such notice to Purchaser,  indicate in reasonable  detail the
identity of Person making such proposal, offer, inquiry or contact and the terms
and conditions of such proposal,  offer, inquiry or other contact. Seller agrees
not to release, without the prior written consent of Purchaser, any Person from,
or waive any provision of, any confidentiality or standstill  agreement to which
Seller is a party.

                  Section 5.15  Exemption  from  Registration  or Securities Act
Registration;   Preparation  of  Notice  of  Meeting  and  Proxy   Statement  or
Information Statement.

         (a) Seller  and PPT shall use their  commercial  reasonable  efforts to
prepare,  execute  and file all  necessary  documents  in order to  qualify  the
conveyance  of the Shares  and the shares  comprising  the  Earnout  Amount as a
private  placement of securities (the "Private  Placement  Documents") such that
neither this Agreement nor any of the Transaction Documents nor any transactions
contemplated hereunder and thereunder, involve any public offering of securities
within the meaning of Section 4(2) of the Securities Act, and accordingly, under
Rule 506 of Regulation D, render the registration provisions of Section 5 of the
Securities  Act  inapplicable  to  such  transactions  (the  "Private  Placement
Alternative").

         (b) However, notwithstanding the foregoing, if Seller and PPT determine
that the Private  Placement  Alternative is  unavailable or undesirable  for any
reason,  then, as promptly as practicable after such  determination,  Seller and
PPT shall  prepare,  and PPT shall file with the SEC,  a Form S-4 which may,  or
shall  if  required  by  applicable  law,  include  Seller's  preliminary  proxy
materials or consent of solicitation relating to the approval of this Agreement,
the  Transaction  Documents  and the  transactions  contemplated  hereunder  and
thereunder by the stockholders of Seller and a prospectus  relating to the offer
and sale of the Shares and the shares  comprising  the Earnout  Amount (the "S-4
Alternative") which complies in form with applicable SEC requirements and Seller
shall use all  reasonable  efforts to cause the Form S-4 to become  effective as
soon after the receipt of final  comments  from the SEC thereon as  practicable.
Such proxy statement/prospectus shall include the recommendation of the Board of
Directors of Seller in favor of this Agreement,  the  Transaction  Documents and
the transactions contemplated hereunder and thereunder.  Seller shall furnish to
PPT all information  concerning  Seller and the stockholders of Seller as may be
reasonably  requested in connection with any action contemplated by this Section
5.15(c).

         (c) As soon as  practicable  after  the  execution  of this  Agreement,
Seller,  in  consultation  with PPT,  shall  prepare (a) a Notice of Meeting and
Proxy Statement or (b) Information  Statement (as applicable,  the  "Statement")
for the stockholders of Seller to approve


                                      -39-



this Agreement,  the  Transaction  Documents and the  transactions  contemplated
hereunder and thereunder.  The Statement and Private  Placement  Documents shall
constitute  a  disclosure  document for the offer and sale of Common Stock to be
received by the  stockholders of Seller under this  Agreement.  Seller shall use
commercially  reasonable  efforts,  with the  cooperation  of PPT, to cause such
statement to be distributed to the stockholders of Seller promptly following the
actions contemplated by the Private Placement Alternative.  PPT and Seller shall
each use commercially  reasonable  efforts to cause the Statement to comply with
applicable federal and state securities laws requirements.  PPT and Seller agree
to provide  promptly to the other such  information  concerning its business and
financial  statements and affairs as in the reasonable judgment of the providing
party or its  counsel,  may be  required or  appropriate  for  inclusion  in the
Statement, or in any amendments or supplements thereto, and to cause its counsel
and  auditors  to  cooperate  with  the  other's  counsel  and  auditors  in the
preparation of the Statement.  PPT and Seller agree to provide  promptly  advise
the other,  in writing if at any time prior to the Closing Date either Seller or
PPT shall  obtain  knowledge  of any  facts  that  might  make it  necessary  or
appropriate to amend or supplement the Statement in order to make the statements
contained or incorporated by reference  therein not misleading or to comply with
applicable law. The Statement shall contain the  recommendation  of the Board of
Directors of Seller that the stockholders of Seller approve this Agreement,  the
Transaction Documents and the transactions contemplated hereunder and thereunder
and the  conclusion  of the  Board of  Directors  of  Seller  that the terms and
conditions of this  Agreement,  the Transaction  Documents and the  transactions
contemplated hereunder and thereunder are fair and reasonable to Sellers and the
stockholders  of Seller.  Seller shall  otherwise use its best efforts to obtain
the requisite stockholder approval from the stockholders of Seller.  Anything to
the contrary contained herein  notwithstanding,  Seller shall not include in the
Statement any information  with respect to PPT,  Acquisition Co. or any of their
affiliates or  associates  the form and content of which  information  shall not
have been  approved  by PPT or  Acquisition  Co., as  applicable,  prior to such
inclusion.

         (d) Unless an Information Statement and an Action By Written Consent of
the  Stockholders in lieu of a meeting is used,  Seller shall promptly after the
date  hereof take all action  necessary  in  accordance  with  Delaware  General
Corporation Law and its Certificate of Incorporation and Bylaws, in each case as
amended and/or restated, to convene a stockholders' meeting (the "Seller Special
Meeting").  If the Private  Placement  Alternative is accomplished,  such Seller
Special  Meeting  will  follow as promptly as  practicable  thereafter  or after
effectiveness  of the Form S-4, if applicable.  Seller shall consult with PPT as
to the date of the Seller Special  Meeting and/or the Action by Written  Consent
of the  Stockholders  in lieu of a meeting  and shall not  postpone  or  adjourn
(other than for the absence of a quorum) the Seller Special  Meeting without the
consent of PPT.  Following the Private Placement  Alternative,  Seller shall use
its best efforts to solicit from the stockholders of Seller,  proxies or actions
by written consent in favor of this Agreement, the Transaction Documents and the
transactions  contemplated  hereunder  and  thereunder  and shall take all other
action  necessary or advisable to secure the vote or consent of the stockholders
of Seller  required by Delaware law to effect this  Agreement,  the  Transaction
Documents and the transactions contemplated hereunder and thereunder.

         (e) Seller, acting through its Board of Directors, shall include in the
proxy statement/  prospectus the  recommendation  of its Board of Directors that
the stockholders of Seller vote in favor of the adoption of this Agreement,  the
Transaction Documents and the transactions


                                      -40-



contemplated hereunder and thereunder,  and shall otherwise use its best efforts
to obtain the requisite stockholder approval from the stockholders of Seller.

         (f) If the Private  Placement  Alternative is not chosen and Seller and
PPT proceed with the S-4 Alternative,  none of the information supplied or to be
supplied  by or on behalf of Seller  for  inclusion  in the Form S-4 to be filed
with the SEC by PPT in  connection  with the issuance of Common Stock in or as a
result  of this  Agreement,  the  Transaction  Documents  and  the  transactions
contemplated hereunder and thereunder,  including the proxy statement,  will, at
the  date  such   information   is  supplied  and,  as  thereafter   amended  or
supplemented,  at the time of the Company  Special  Meeting,  contain any untrue
statement  of a material  fact or omit to state any material  fact  necessary in
order to make the statements  therein, in light of the circumstances under which
they are made, not misleading or, as thereafter  amended or supplemented,  will,
in the case of the Form S-4,  at the time the Form S-4 becomes  effective  under
the Securities Act,  contain any untrue  statement of a material fact or omit to
state any material fact required to be stated therein,  or necessary to make the
statements therein not misleading.

                  Section  5.16  Support of  Operations.  If the Closing  occurs
prior to June 30, 2007,  absent a Material Adverse Effect,  as determined by and
in the sole discretion of Purchaser,  Purchaser shall provide  support,  as more
fully  described in Schedule  5.16,  to the  Operations to be  transferred  from
Seller to Purchaser as provided  herein in order to, in the reasonable  judgment
of Purchaser, enable the Minimum Revenue Trigger to be met.

                                   Article VI

                              CONDITIONS TO CLOSING

                  Section  6.1  Conditions  to   Obligations   of  Seller.   The
obligations  of Seller  to  consummate  the  transactions  contemplated  by this
Agreement are subject to the  fulfillment or waiver,  prior to or on the Closing
Date, of each of the following conditions:

         (a) Regulatory  Authorizations.  All Consents of Governmental Bodies to
the transfer or assignment of the Material  Permits shall have been obtained and
all such  Consents  shall be in full  force  and  there  shall be in  effect  no
preliminary  or  permanent  injunction,  writ,  judgment,  decree,  stipulation,
determination,  award or other order entered by or with any Governmental Body of
competent   jurisdiction   (collectively,   an  "Order")   directing   that  the
transactions contemplated herein or therein, or any of them, not be consummated.

         (b)  Representations  and  Warranties;  Agreements and  Covenants.  The
representations  and warranties of Purchaser  contained in this Agreement and in
any certificate  delivered by any officer of Purchaser  pursuant hereto (i) that
are not qualified by  "materiality"  or "Material  Adverse Effect" (or a similar
concept) shall have been true and correct in all material respects when made and
as of the Closing  Date,  with the same force and effect as if made at and as of
the Closing  Date,  and (ii) that are  qualified by  "materiality"  or "Material
Adverse  Effect" (or a similar  concept) shall have been true and correct in all
material  respects  when made and at and as of the Closing  Date,  with the same
force and effect as if made at and as of the Closing Date (except, in each case,
for those representations and warranties that relate to a particular date, which
shall be true and correct as of such date).  Purchaser  shall have  performed or
complied


                                      -41-



with all material  covenants  and  agreements,  and  satisfied  all  conditions,
required by this  Agreement to be performed or complied  with or satisfied by it
on or prior to the Closing Date in all material respects.

         (c)   Certificates.   Purchaser   shall  have  delivered  to  Seller  a
certificate,  dated the Closing  Date,  of an officer of Purchaser to the effect
that the conditions specified in Section 6.1(b) have been satisfied.

         (d) Execution and Delivery. Purchaser shall have executed and delivered
the documents set forth in Section 2.10 hereof to which it is a party.

         (e) Stockholder Approval.  This Agreement and the Transaction Documents
to which Seller is a party and the consummation of the transactions contemplated
hereby  and  thereby  shall  have been  approved  by  Seller's  stockholders  in
accordance with Seller's  Certificate of Incorporation  and Bylaws, in each case
as amended and/or restated, and as required by applicable Law.

                  Section  6.2  Conditions  to  Obligations  of  Purchaser.  The
obligations of Purchaser to consummate  the  transactions  contemplated  by this
Agreement are subject to the  fulfillment or waiver,  prior to or on the Closing
Date, of each of the following conditions:

         (a)  Authorizations  and  Consents.  Purchaser  and  Seller  shall have
received, each in form and substance reasonably  satisfactory to Purchaser,  all
authorizations,  Consents, orders and approvals of all third parties and Persons
and estoppel certificates that Purchaser reasonably deems necessary or desirable
for the consummation of the transactions  contemplated by this Agreement and the
Transaction  Documents,  including all third party  consents  required under any
Contracts, and all Consents of Governmental Bodies to the transfer or assignment
of the Material  Permits and all Consents  listed on Schedule  6.2(a) shall have
been obtained and all such Consents shall be in full force and there shall be no
Order in effect.

         (b)  Representations  and  Warranties;  Agreements and  Covenants.  The
representations  and warranties of Seller contained in this Agreement and in any
certificate  delivered by any officer of Seller pursuant hereto (i) that are not
qualified by "materiality"  or "Material  Adverse Effect" (or a similar concept)
shall have been true and correct in all  material  respects  when made and as of
the  Closing  Date,  with the same  force and effect as if made at and as of the
Closing Date, and (ii) that are qualified by "materiality" or "Material  Adverse
Effect" (or a similar  concept) shall have been true and correct in all material
respects  when made and at and as of the Closing  Date,  with the same force and
effect as if made at and as of the Closing Date (except, in each case, for those
representations  and warranties that relate to a particular date, which shall be
true and correct as of such date).  Seller shall have performed or complied with
all material covenants and agreements, and satisfied all conditions, required by
this  Agreement to be performed or complied  with or satisfied by it on or prior
to the Closing Date in all material respects,  and Purchaser shall have received
a certificate of Seller to such effect signed by Louis R. Matson or another duly
authorized officer thereof.

         (c) Permits.  Except as set forth in Section 3.8, all Material  Permits
required for the conduct of the  Operations  and the  ownership and operation of
the Acquired  Assets shall have


                                      -42-



been  transferred to Purchaser and shall be in full force and effect without any
material  limitation or  restrictions,  and Purchaser  shall have been furnished
with evidence thereof reasonably satisfactory to it.

         (d)   Certificates.   Seller   shall  have   delivered   to   Purchaser
certificates,  dated the Closing  Date, of officers of Seller to the effect that
the conditions  specified in paragraphs (a) through (c) of this Section 6.2 have
been satisfied.

         (e) Execution  and  Delivery.  Seller shall have executed and delivered
the documents set forth in Section 2.9 hereof to which it is a party;

         (f) Employees.  The employment agreement between Purchaser and Louis R.
Matson, the form of which is set forth on Exhibit H, shall have been executed by
each party  thereto  and  Purchaser  shall have  reached  mutually  satisfactory
employment  arrangements with Gerald P. McNamara and such of Seller's  employees
as Purchaser elects to hire.

         (g)  Release  and  Repayment  of Debt.  Purchaser  shall have  received
evidence  reasonably  satisfactory  to  Purchaser  that all Debt  (except to the
extent that it constitutes  an Assumed  Liability) has been paid in full and all
Liens on the Acquired Assets have been released.

         (h)  No  Proceeding.   No  Proceeding  shall  have  been  commenced  or
threatened  by or before any  Governmental  Body or by any other Person  against
Seller or  Purchaser,  seeking to prevent,  delay,  restrain or  materially  and
adversely  alter the  transactions  contemplated  by this Agreement that, in the
reasonable judgment of Purchaser,  is likely to render it impossible or unlawful
to consummate such  transactions or that could have a Material Adverse Effect or
otherwise  render  inadvisable,   in  the  sole  discretion  of  Purchaser,  the
consummation of the transactions contemplated by this Agreement.

         (i) Resolutions of the Seller. Purchaser shall have received a true and
complete copy,  certified by the Secretary or an Assistant  Secretary of Seller,
of the resolutions duly and validly adopted by the stockholders and the board of
directors of Seller  evidencing its  authorization of the execution and delivery
of this Agreement and the  Transaction  Documents to which Seller is a party and
the consummation of the transactions contemplated hereby and thereby.

         (j) No Material Adverse Effect. No event or events shall have occurred,
or be reasonably likely to occur, which, individually or in the aggregate, have,
or could have, a Material Adverse Effect.

         (k) Conversion of Seller's  Preferred Stock. All outstanding  shares of
the Seller's  preferred stock shall have been converted into the Seller's common
stock.

         (l) Exemption from  Registration  or Securities Act  Registration.  The
Private Placement  Alternative shall have been completed if chosen in accordance
with Section  5.15(a),  or, if not chosen,  then the SEC shall have declared the
Form S-4 effective in accordance  with the provisions of the Securities Act, and
no stop  order  suspending  the  effectiveness  of the Form S-4 shall  have been
issued by the SEC and remain in effect.


                                      -43-



         (m) Non-Competition of Louis R. Matson. The  non-competition  agreement
between Purchaser and Louis R. Matson, the form of which is set forth on Exhibit
I, shall have been executed by each party thereto.

         (n) Side Letter.  The side letter agreement between Purchaser and Louis
R. Matson, the form of which is set forth on Exhibit J, shall have been executed
by each party thereto.

                                  Article VII

                                   TERMINATION

                  Section  7.1  Termination.  Notwithstanding  anything  in this
Agreement to the contrary, this Agreement may be terminated prior to the Closing
as follows:

         (a) by the mutual written consent of Seller and Purchaser;

         (b) by  Purchaser,  by  delivery  of written  notice to Seller,  if the
Closing shall not have occurred prior to the close of business on the date which
is ninety (90) days  subsequent to the date hereof,  other than by reason of the
failure by Purchaser to perform in all material respects any of the covenants or
agreements contained in this Agreement;

         (c) at the  election  of Seller,  (i) if  Purchaser  has  breached  any
representation or warranty contained in this Agreement, which breach would cause
the  condition  set  forth in  Section  6.1(b) to not be  satisfied,  or (ii) if
Purchaser  has breached any covenant or agreement  contained in this  Agreement,
which breach  would cause the  condition  set forth in Section  6.1(b) to not be
satisfied,  in each case,  which breach has not been cured on or prior to thirty
(30) days  following  delivery  of  written  notice of such  breach by Seller to
Purchaser;

         (d) at the  election  of  Purchaser,  (i) if Seller  has  breached  any
representation or warranty contained in this Agreement, which breach would cause
the condition set forth in Section 6.2(b) to not be satisfied, or (ii) if Seller
has breached any covenant or agreement contained in this Agreement, which breach
would cause the  condition set forth in Section  6.2(b) to not be satisfied,  in
each  case  which  breach  has not been  cured on or prior to  thirty  (30) days
following delivery of written notice of such breach by Purchaser to Seller; or

         (e) at the  election  of  Seller  on the one hand or  Purchaser  on the
other,  if any legal  proceeding is commenced or threatened by any  Governmental
Body directed against the  consummation of the Closing or any other  transaction
contemplated  under this  Agreement and Purchaser or Seller (as the case may be)
reasonably  and in good faith deems it  impractical or inadvisable to proceed in
view of such legal  proceeding  or threat  thereof or by either the Purchaser or
Seller in the event that any  Governmental  Body  shall have  issued an Order or
taken any other  action  restraining,  enjoining or  otherwise  prohibiting  the
transactions contemplated by this Agreement and such Order or other action shall
have become final and nonappealable.

         If this Agreement so terminates, it shall become null and void and have
no further force or effect except as provided in Section 7.2.


                                      -44-



                  Section  7.2  Effect  of  Termination.  In  the  event  of the
termination  of this  Agreement  pursuant to Section 7.1, this  Agreement  shall
thereafter  become  void and have no further  force or effect,  except  that the
obligations  provided for in this Section 7.2, Section 5.9, the  confidentiality
provisions  contained  in Section  5.4 and  Article  IX and any  confidentiality
agreements  between  Purchaser and Seller shall survive any such  termination of
this Agreement.  Neither party hereto shall have any liability in respect of the
termination  of this  Agreement  except (a) as set forth in this Section 7.2 and
under those provisions of this Agreement that survive such termination,  and (b)
such termination shall not relieve either party from liability for any breach of
any provision of this Agreement.

                                  Article VIII

                                 INDEMNIFICATION

                  Section  8.1  Indemnification  by  Seller.  Seller  agrees  to
indemnify  Purchaser  against and hold Purchaser and its  Affiliates,  officers,
directors,   employees,  agents,  successors  and  assigns  (each  a  "Purchaser
Indemnified  Party") harmless from and against, in the manner and subject to the
limitations  and  qualifications  set  forth in this  Section  8.1,  any and all
Liabilities,  losses,  diminution in value, damages, Claims, costs and expenses,
interest,  awards,  judgments and penalties  (including  reasonable  attorneys',
experts' and consultants'  fees and expenses)  actually  suffered or incurred by
them  (including  any Action brought or otherwise  initiated by any  Indemnified
Party) (hereinafter "Losses"), arising out of or resulting from:

         (a) the  breach  of any  representation  or  warranty  made  by  Seller
contained in this Agreement or any of the Transaction  Documents to which Seller
is a party; or

         (b) the breach of any covenant or agreement by Seller contained in this
Agreement or in any of the Transaction Documents to which Seller is a party; or

         (c) any and all Losses suffered or incurred by a Purchaser  Indemnified
Party by  reason  of or in  connection  with any Claim or cause of action of any
third party  (including  claims for  compensation,  commissions  or expenses for
services  as a broker  or  finder)  to the  extent  arising  out of any  action,
inaction,  event,  condition,  Liability or  obligation  of Seller  occurring or
existing prior to the Closing; or

         (d) Excluded Assets;

         (e) Liabilities, whether arising before or after the Closing Date, that
are not expressly assumed by the Purchaser pursuant to this Agreement, including
the Excluded Liabilities (including any Liabilities arising under Section 5.9 of
this Agreement and any  Liabilities for Taxes now or hereafter owed by Seller or
any  Affiliate  of  Seller,  or  attributable  to  the  Acquired  Assets  or the
Operations,  relating to any period, or any portion of any period,  ending on or
prior to the Closing Date); or

         (f) any failure to comply with Laws relating to bulk  transfers or bulk
sales  with  respect  to  the   transactions   contemplated  by  this  Agreement
(notwithstanding the waiver contained in Section 5.10).


                                      -45-



                  Section 8.2 Indemnification by Purchaser.  Purchaser agrees to
indemnify  Seller  against  and  hold  Seller  and  its  Affiliates,   officers,
directors, employees, agents, successors and assigns (each a "Seller Indemnified
Party") harmless from and against,  in the manner and subject to the limitations
and qualifications  set forth in this Article VIII, any and all Losses,  arising
out of or resulting from:

         (a) the breach of any  representation  or  warranty  made by  Purchaser
contained  in  this  Agreement  or any of the  Transaction  Documents  to  which
Purchaser is a party; or

         (b) the breach of any covenant or  agreement by Purchaser  contained in
this  Agreement  or any of the  Transaction  Documents  to which  Purchaser is a
party; or

         (c) the Assumed Liabilities; or

         (d) any and all Losses  suffered or  incurred  by a Seller  Indemnified
Party by  reason  of or in  connection  with any Claim or cause of action of any
third party  (including  claims for  compensation,  commissions  or expenses for
services  as a broker  or  finder)  to the  extent  arising  out of any  action,
inaction,  event, condition,  Liability or obligation of the Purchaser occurring
or existing after to the Closing.

                  Section 8.3 Defense of Claims. An Indemnified Party shall give
the Indemnifying  Party written notice of any action,  claim,  suit or demand (a
"Claim") of which such  Indemnified  Party has  knowledge and as to which it may
request indemnification hereunder, within sixty (60) days of such determination,
stating the amount of the Loss, if known, method of computation  thereof, and in
reasonable  detail  the  factual  basis of such Claim  with a  reference  to the
provisions of this  Agreement in respect of which such right of  indemnification
is claimed or arises.  The obligations and Liabilities of the Indemnifying Party
under this Article VIII with respect to Losses  arising from claims of any third
party that are subject to the indemnification  provided for in this Article VIII
("Third Party Claims") shall be governed by and be contingent upon the following
additional terms and conditions: if an Indemnified Party shall receive notice of
any Third Party Claim, the Indemnified  Party shall give the Indemnifying  Party
written  notice of such Third Party Claim within thirty (30) days of the receipt
by the Indemnified Party of notice of such Third Party Claim; provided, however,
that the  failure to provide  such  notice to the  Indemnifying  Party shall not
release the  Indemnifying  Party from any of its obligations  under this Article
VIII except to the extent that the Indemnifying  Party is materially  prejudiced
by such  failure  and shall not relieve  the  Indemnifying  Party from any other
obligation or Liability that it may have to any Indemnified Party otherwise than
under this Article VIII. If the Indemnifying  Party  acknowledges in writing its
obligation to indemnify the Indemnified  Party hereunder against any Losses that
may result from such Third Party  Claim,  then the  Indemnifying  Party shall be
entitled  to assume and  control  the  defense of such Third  Party Claim at its
expense and through counsel of its choice if it gives notice of its intention to
do so to the  Indemnified  Party  within  ten (10) days of the  receipt  of such
notice from the Indemnified  Party;  provided,  however,  if such Claim seeks an
injunction or other equitable relief against the Indemnified  Party,  subject to
the last  sentence of this  Section 8.3,  the  Indemnified  Party shall have the
right to participate  in and jointly  control the defense of any portion of such
Claim  and to  retain  its  own  counsel  in each  jurisdiction  for  which  the
Indemnified  Party  determines  counsel  is  required,  which  counsel  shall be
reasonably acceptable to the


                                      -46-



Indemnifying  Party, at the expense of the Indemnifying Party. In the event that
the Indemnifying Party exercises the right to undertake any such defense against
any such Third  Party  Claim as  provided  above,  the  Indemnified  Party shall
cooperate with the Indemnifying  Party in such defense and make available to the
Indemnifying  Party,  at  the  Indemnifying   Party's  expense,  all  witnesses,
pertinent  records,   materials  and  information  in  the  Indemnified  Party's
possession  or under the  Indemnified  Party's  control  relating  thereto as is
reasonably  required  by the  Indemnifying  Party.  Similarly,  in the event the
Indemnified Party is, directly or indirectly, conducting the defense against any
such  Third  Party  Claim,  the  Indemnifying  Party  shall  cooperate  with the
Indemnified  Party in such defense and make available to the Indemnified  Party,
at the Indemnifying Party's expense, all such witnesses,  records, materials and
information in the  Indemnifying  Party's  possession or under the  Indemnifying
Party's control  relating  thereto as is reasonably  required by the Indemnified
Party. If the Indemnifying  Party elects and is entitled to compromise or defend
such Claim,  it shall within  thirty (30) days (or sooner,  if the nature of the
Claim so  requires)  notify  the  Indemnified  Party of its intent to do so. The
Indemnified  Party shall have the right to employ  separate  counsel in any such
Claim and participate in the defense thereof,  but the fees and expenses of such
counsel  shall  be at the  expense  of the  Indemnified  Party  unless  (i)  the
Indemnifying  Party  shall fail to assume the  defense of such Claim as provided
herein or (ii) the  Indemnified  Party shall have been  advised by such  counsel
that there is or is likely to  develop a conflict  of  interest  for  counsel in
representing both the indemnifying  party and the indemnified party with respect
to such Claim in which case the fees and  expenses of counsel  shall be borne by
the Indemnifying  Party. If the  Indemnifying  Party elects not to compromise or
defend such Claim or fails to notify the  Indemnified  Party of its  election as
herein provided,  the Indemnified Party may pay, compromise or defend such Claim
at the  Indemnifying  Party's  expense,  subject to the limitations set forth in
this Article VIII.  Except as set forth in the immediately  preceding  sentence,
the Indemnifying Party shall have no indemnification obligations with respect to
any such Claim which shall be settled by the Indemnified Party without the prior
written  consent  of  the  Indemnifying   Party  (which  consent  shall  not  be
unreasonably withheld or delayed).  The Indemnifying Party's right to direct the
defense,  if applicable,  shall include the right to compromise or enter into an
agreement settling any Claim by a third party; provided, that no such compromise
or  settlement  shall be entered into without the prior  written  consent of the
Indemnified  Party (which may be withheld in its sole  discretion  /unreasonably
withheld) (i) if such compromise or settlement  provides for injunctive or other
nonmonetary or equitable relief affecting the Indemnified  Party or (ii) if such
compromise or settlement does not include as an  unconditional  term thereof the
giving by each  claimant or  plaintiff  to such  Indemnified  Party of a general
release from any and all liability  with respect to such Claim.  Notwithstanding
the foregoing,  in the event that the Indemnified Party withholds its consent to
a settlement  proposal that involves  nothing other than the payment of monetary
damages for which the  Indemnifying  Party will be responsible,  the Indemnified
Party shall  indemnify  and hold  harmless the  Indemnifying  Party  against any
Losses suffered by the Indemnifying Party as a result of the Indemnified Party's
withholding of its consent to such settlement  proposal.  The Indemnifying Party
will make  promptly  any payment  required  to be made by it to the  Indemnified
Party under this Article VIII.

                  Section 8.4 Survival of Representations and Warranties.

         (a) The  representations  and  warranties  of Seller  contained in this
Agreement and the Transaction Documents to which Seller is a party shall survive
the Closing for a period of twelve


                                      -47-



(12)  months  from  the  Closing   Date;   provided,   however,   that  (i)  the
representations  and  warranties  made  pursuant to Section  3.1,  Section  3.2,
Section  3.7  and  Section  3.22  shall  survive   indefinitely   and  (ii)  the
representations  and  warranties  made  pursuant to Section  3.16 and 3.17 shall
survive the Closing until thirty (30) calendar days  following the expiration of
the applicable  statute of  limitations  governing such claims (giving effect to
any  waiver or  extension  thereof).  Neither  the  period of  survival  nor the
liability of Seller with respect to the Seller's  representations and warranties
shall  be  reduced  by any  investigation  made at any time by or on  behalf  of
Purchaser.  Notwithstanding the foregoing,  if written notice of any Claim under
this Article VIII has been given prior to the expiration of the period  covering
the applicable  representations  and warranties by Purchaser to Seller, then the
relevant  representations  and  warranties  shall survive as to such Claim until
such Claim has been finally resolved.

         (b) The  representations  and warranties of Purchaser contained in this
Agreement  and the  Transaction  Documents  to which  Purchaser is a party shall
survive the Closing  until twelve (12) months from the Closing  Date;  provided,
however,  that the  representations and warranties made pursuant to Section 4.1,
Section 4.2, Section 4.5 and Section 4.7 shall survive indefinitely. Neither the
period of survival nor the  liability of Purchaser  with respect to  Purchaser's
representations and warranties shall be reduced by any investigation made at any
time by or on behalf of Seller. Notwithstanding the foregoing, if written notice
of any Claim under this Article VIII has been given prior to the  expiration  of
the period covering the applicable  representations  and warranties by Purchaser
to Seller, then the relevant  representations and warranties shall survive as to
such Claim until such Claim has been finally resolved.

                  Section 8.5 Offset.  The parties  agree that the amount of any
Losses  payable or  reimbursable  to  Purchaser  under this  Article VIII may be
satisfied,  in the sole and absolute discretion of Purchaser,  out of Shares and
the shares  comprising the Earnout Amount, if any, issued by Purchaser to Seller
under this Agreement.

                                   Article IX

                                  MISCELLANEOUS

                  Section 9.1 Amendments; Non-Contractual Remedies; Preservation
of Remedies.  This Agreement may be amended,  superseded,  canceled,  renewed or
extended,  and the terms  hereof  may be  waived,  only by a written  instrument
signed by Purchaser and Seller or, in the case of a waiver,  in accordance  with
Section  9.2, by or on behalf of the party  waiving  compliance.  The rights and
remedies of any party based upon,  arising out of or otherwise in respect of any
inaccuracy in or breach of any representation,  warranty,  covenant or agreement
contained in this Agreement or any document delivered pursuant to this Agreement
shall in no way be limited  by the fact that the act,  omission,  occurrence  or
other  state of facts upon which any claim of any such  inaccuracy  or breach is
based may also be the  subject  matter of any  other  representation,  warranty,
covenant or  agreement  contained in this  Agreement  or any document  delivered
pursuant to this Agreement as to which there is no inaccuracy or breach.

                  Section 9.2 Waiver.  Any party  hereto may (a) extend the time
for the  performance  of any of the  obligations or other acts of another party,
(b) waive any  inaccuracies  in the  representations  and  warranties of another
party  contained  herein or in any document


                                      -48-



delivered by another party pursuant  hereto or (c) waive  compliance with any of
the  agreements  of another  party or  conditions  to such  party's  obligations
contained herein.  Any such extension or waiver shall be valid only if set forth
in an instrument in writing signed by the party to be bound thereby. The failure
of any party to assert any of its rights hereunder shall not constitute a waiver
of any of such  rights.  No  delay on the part of any  party in  exercising  any
right, power or privilege hereunder shall operate as a waiver thereof. Nor shall
any waiver on the part of any party of any such right,  power or privilege,  nor
any single or partial exercise of any such right,  power or privilege,  preclude
any further exercise  thereof or the exercise of any other such right,  power or
privilege.  Any  waiver of any term or  condition  shall not be  construed  as a
waiver  of any  subsequent  breach  or a  subsequent  waiver of the same term or
condition,  or a waiver of any other term or  condition of this  Agreement.  All
rights and remedies  existing  under this  Agreement are  cumulative to, and not
exclusive of, any rights or remedies otherwise available.

                  Section 9.3 Governing Law. THIS  AGREEMENT  SHALL BE DEEMED TO
BE MADE IN AND IN ALL RESPECTS SHALL BE  INTERPRETED,  CONSTRUED AND GOVERNED BY
AND IN  ACCORDANCE  WITH THE  INTERNAL  LAW, AND NOT THE LAW OF CONFLICTS OF THE
STATE OF CALIFORNIA  APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED  ENTIRELY
WITHIN SUCH STATE.

                  Section 9.4 Submission of Jurisdiction;  Waiver of Jury Trial.
The parties hereto irrevocably submit to the exclusive jurisdiction of any state
or federal court sitting in the County of San Diego,  in the State of California
over any suit, action or Proceeding arising out of or relating to this Agreement
or  the  transactions  contemplated  hereby.  To the  fullest  extent  they  may
effectively do so under applicable Law, the parties hereto irrevocably waive and
agree not to assert, by way of motion, as a defense or otherwise, any claim that
they are not subject to the  jurisdiction of any such court,  any objection that
they may now or  hereafter  have to the  laying of the  venue of any such  suit,
action or proceeding brought in any such court and any claim that any such suit,
action  or  Proceeding  brought  in  any  such  court  has  been  brought  in an
inconvenient  forum.  EACH PARTY  ACKNOWLEDGES  AND AGREES THAT ANY  CONTROVERSY
WHICH MAY ARISE  UNDER  THIS  AGREEMENT  IS LIKELY TO  INVOLVE  COMPLICATED  AND
DIFFICULT   ISSUES,   AND   THEREFORE   EACH  PARTY   HEREBY   IRREVOCABLY   AND
UNCONDITIONALLY  WAIVES ANY RIGHT  SUCH PARTY MAY HAVE TO A TRIAL BY JURY.  EACH
PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO  REPRESENTATIVE,  AGENT OR ATTORNEY
OF ANY OTHER PARTY HAS  REPRESENTED,  EXPRESSLY  OR  OTHERWISE,  THAT SUCH OTHER
PARTY  WOULD NOT,  IN THE EVENT OF  LITIGATION,  SEEK TO ENFORCE  THE  FOREGOING
WAIVER,  (ii) SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS
WAIVER,  (iii) SUCH PARTY MAKES THIS WAIVER  VOLUNTARILY AND (iv) SUCH PARTY HAS
BEEN INDUCED TO ENTER INTO THIS  AGREEMENT  BY, AMONG OTHER  THINGS,  THE MUTUAL
WAIVERS, AGREEMENTS AND CERTIFICATIONS IN THIS Section 9.4.

                  Section 9.5 Specific Performance. Each party hereto agrees and
acknowledges  that remedies at law for any breach of its obligations  under this
Agreement are  inadequate and will cause  irreparable  harm and that in addition
thereto, the non-breaching parties


                                      -49-



shall be entitled to seek equitable  relief,  including  injunction and specific
performance, in the event of any such breach.

                  Section 9.6 Notices. Any notices, requests, claims, demands or
other communications required under this Agreement shall be in writing and shall
be given or made (and  shall be  deemed  to have  been  duly  given or made upon
receipt) by delivery  in person,  by  nationally  recognized  overnight  courier
service, by telecopy,  by electronic mail,  facsimile or registered or certified
mail (postage prepaid,  return receipt  requested) to the respective  parties at
the following addresses,  facsimile numbers, or electronic mail addresses (or at
such  other  address  for a party  as shall be  specified  in a notice  given in
accordance with this Section 9.6):

         (a) if to Seller on or before the Closing Date:

                           Surgica Corporation
                           5090 Robert J. Mathews Parkway #4
                           El Dorado Hills, Ca 95762
                           Facsimile: 916.933.5260
                           Attention: Louis R. Matson

                           with a copy to:

                           Bullivant Houser Bailey PC
                           1331 Garden Hwy, Suite 300
                           Sacramento, CA 95833
                           Facsimile: 916.442.3442
                           Email eric.stiff@bullivant.com
                           Attention: Eric J. Stiff, Esq.

                           if to Seller after the Closing Date:

                           [___________________]
                           [___________________]
                           [___________________]
                           Facsimile:  [___________________]
                           Email: [___________________]
                           Attention:  [___________________]

         (b) if to the Purchaser:

                           Protein Polymer Technologies, Inc.
                           10655 Sorrento Valley Road
                           San Diego, CA  92121
                           Facsimile: 858.558.6477
                           Email:   wnp@ppti.com; jtp@ppti.com
                           Attention:  William N. Plamondon, Chief Executive
                           Officer and J. Thomas Parmeter, Chairman


                                      -50-



                           with a copy to:

                           Paul, Hastings, Janofsky & Walker LLP
                           515 South Flower Street
                           Los Angeles, CA 90071-2228
                           Facsimile: 213.996.3254
                           Attention: Robert A. Miller Jr., Esq.

                  Section  9.7  Section  Headings.  The  section  and  paragraph
headings  contained in this Agreement are for reference  purposes only and shall
not in any way  affect  the  meaning  or  interpretation  of this  Agreement.  A
reference  to a Section  or an Exhibit or  Schedule  will mean a Section  in, or
Exhibits or Schedule to, this Agreement unless otherwise explicitly set forth.

                  Section 9.8 Construction.  As used herein,  unless the context
otherwise  requires:  references  to "Article" or "Section" are to an article or
section hereof;  "include," "includes" and "including" are deemed to be followed
by "without  limitation"  whether or not they are in fact followed by such words
or words of like import;  "hereof,"  "herein,"  "hereunder" and comparable terms
refer to the  entirety  of this  Agreement  and not to any  particular  article,
section or other  subdivision  hereof or  attachment  hereto;  references  to an
agreement or other  instrument or law,  statute or regulation are referred to as
amended  and  supplemented  from time to time (and,  in the case of a statute or
regulation,  to any  successor  provision)  and  all  regulations,  rulings  and
interpretations  promulgated  pursuant thereto;  and the headings of the various
articles,  sections  and  other  subdivisions  hereof  are  for  convenience  of
reference  only and  shall  not  modify,  define  or limit  any of the  terms or
provisions hereof.

                  Section 9.9  Counterparts.  This Agreement may be executed and
delivered (including by facsimile transmission) in one (1) or more counterparts,
and by the different parties hereto in separate counterparts, each of which when
executed  shall be deemed to be an  original,  but all of which  taken  together
shall constitute one and the same agreement.

                  Section 9.10 Assignments.  This Agreement may not be assigned,
by  operation of law, or otherwise  without the express  written  consent of the
parties hereto (which consent may be granted or withheld in the sole  discretion
of such non-assigning  party),  except that Purchaser may assign, in whole or in
part,  any of its rights and  obligations  under this Agreement to an Affiliate;
provided,  that  Purchaser  shall remain  obligated  for payment of the Purchase
Price  and  the  performance  of its  obligations  under  this  Agreement.  This
Agreement  shall be  binding  upon and inure to the  benefit of  successors  and
permitted assigns of the parties hereto.

                  Section   9.11   Entire    Agreement,    Enforceability    and
Miscellaneous.  This  Agreement,  including the Exhibits and Schedules  attached
hereto,  together with the other  Transaction  Documents:  (a)  constitutes  the
entire agreement among the parties with respect to the transactions contemplated
hereby and supersedes all prior agreements and understandings,  both written and
oral, among the parties, with respect to the subject matter hereof; (b) shall be
binding upon,  and is solely for the benefit of, each of the parties  herein and
nothing in this  Agreement,  express or implied,  is intended to confer or shall
confer upon any other  Persons,  including  any union or any  employee or former
employee  of  Seller,  any legal or  equitable  right,  benefit or remedy of any
nature whatsoever, including any rights of employment for any


                                      -51-



specified period,  hereunder or by reason of this Agreement; and (c) in case any
provision  in this  Agreement  shall  be or shall be held  invalid,  illegal  or
unenforceable  (other than  Purchaser's  obligation to pay the Purchase Price or
Seller's obligation to deliver the Acquired Assets), the validity,  legality and
enforceability  of the remaining  provisions shall not in any way be affected or
impaired  thereby so long as the economic or legal substance of the transactions
contemplated by this Agreement is not affected in any manner materially  adverse
to any party.  There are no third party  beneficiaries  to this Agreement or the
transactions contemplated hereunder, and, except for certain indemnified Persons
as set  forth in  Article  VIII of this  Agreement,  in no event  shall  Seller,
Purchaser or their respective  Affiliates have any liability to, or be under any
obligation to, any other Person.

                  Section 9.12  Interpretation.  The parties hereto  acknowledge
and agree that:  (i) each party hereto and its counsel  reviewed and  negotiated
the terms and provisions of this the Transaction  Documents and have contributed
to their  revision  and (ii) the rule of  construction  to the  effect  that any
ambiguities are resolved against the drafting party shall not be employed in the
interpretation  of the  Transaction  Documents.  Whenever  a party's  consent or
acceptance  hereunder is qualified by a standard of reasonableness  (including a
requirement to not unreasonably withhold such consent or acceptance), such party
may not unreasonably withhold or delay such consent or acceptance.

                           [Signature page to follow]


                                      -52-



         IN WITNESS WHEREOF,  Seller and Purchaser have caused this Agreement to
be executed by their  respective  officers  thereunto duly  authorized as of the
date first written above.





                                       [___________ ACQUISITION, LLC]
                                       By :  Its Manager

                                             Protein Polymer Technologies, Inc.

                                             By: _______________________________
                                                 Name:
                                                 Title:


                                       PROTEIN POLYMER TECHNOLOGIES, INC.


                                       By:  ____________________________________
                                            Name:
                                            Title:


                                       SURGICA CORPORATION


                                       By:  ____________________________________
                                            Name:
                                            Title:


                  [Signature  Page  to  Asset  Purchase  Agreement]

Exhibit D

FORM OF CONSENT TO ASSIGNMENTS AND OBLIGATIONS

[Surgica Corporation Letterhead]

[Date]

_______________

_______________

_______________

Re: Assignment of Distributor Agreement dated June 28, 2002, by and

between Surgica Corporation and Angiodynamics, Inc. (the “Assignment”)

Ladies and Gentlemen:

Surgica Corporation, a Delaware corporation (the “Company”), intends to enter into an option agreement (“Option Agreement”) that shall include (i) an immediate license of certain Company technologies and intellectual property to Protein Polymer Technologies, Inc. (“PPTI”) and (ii) an option to PPTI to acquire all or substantially all of the assets of the Company. In connection with the execution of the Option Agreement, the Company intends to assign all of its rights and obligations under the Distributor Agreement, dated June 28, 2002, by and between the Company and Angiodynamics, Inc. (the “Agreement”) to PPTI.

Pursuant to Section 17.5 of the above-referenced Agreement, the Company needs to secure your approval of the Assignment. By your signature below, you acknowledge that (i) the Agreement is valid and in full force and effect, (ii) you have waived any right to terminate, or claim a default or breach of, the Agreement in connection with the consummation of the Assignment, and (iii) you have consented to the assignment of the Agreement by the Company to PPTI. Please return your signed copy of this letter to us in the enclosed self addressed envelope at your earliest convenience.

Thank you for your cooperation and assistance in this matter.

Very truly yours,

SURGICA CORPORATION,

a Delaware corporation

By:

Name:

Title:

Letter to

Date

Page 2

Acknowledged and Agreed this

____ day of November, 2005

ANGIODYNAMICS, INC.,

a Delaware corporation

By:

Name:

Title:

Exhibit E

FORM OF VOTING AGREEMENT

Exhibit F

FORM OF EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of December 19, 2005 between SURGICA CORPORATION, a Delaware corporation (the "Company"), and LOUIS R. MATSON (the "Employee").

RECITAL

The Company desires to employ the Employee, and the Employee desires to be so employed by the Company, on the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this Agreement, the Company and the Employee hereby agree as follows:

1. Employment.

(a)Subject to the terms and conditions contained herein, the Company hereby agrees to employ the Employee, and the Employee accepts such employment, from the date hereof until the earlier of (i) December 31, 2007 or (ii) the date such employment is terminated pursuant to Section 4 of this Agreement (the “Term”). During the Employee's employment under this Agreement, the Employee shall perform such duties for the Company as may from time to time be assigned to the Employee by the Board of Directors of the Company (the "Board"). The Employee shall have the title of President, or such other title or titles, if any, as from time to time may be assigned to the Employee by the Board.

(b)The Employee will devote his or her entire business time, energy, attention and skill to the services of the Company and its affiliates and to the promotion of their interests. So long as the Employee is employed by the Company, the Employee shall not, without the written consent of the Company:

(i)engage in any other activity for compensation, profit or other pecuniary advantage, whether received during or after the term of this Agreement;

(ii)render or perform services of a business, professional, or commercial nature other than to or for the Company, either alone or as an employee, consultant, director, officer, or partner of another business entity, whether or not for compensation, and whether or not such activity, occupation or endeavor is similar to, competitive with, or adverse to the business or welfare of the Company; or

(iii)invest in or become a shareholder of another corporation or other entity; provided, that the Employee's investment solely as a shareholder in another

corporation shall not be prohibited hereby so long as such investment is not in excess of one percent (1%) of any class of shares that are traded on a national securities exchange.

(c)Prior to or concurrently with the execution of this Agreement, the Employee has executed an Employee Proprietary Information, Trade Secret and Confidentiality Agreement (the "Confidentiality Agreement").

2.Location of Employment. The Employee's principal place of employment shall be at the executive offices of the Company located in El Dorado Hills, California; provided, that at the direction of the Board, the Employee may from time to time be required to travel to various domestic and foreign locations.

3. Compensation.

(a)In exchange for full performance of the Employee's obligations and duties under this Agreement, the Company shall pay the Employee an annual base salary (the "Base Salary") equal to ________, payable in monthly installments in accordance with the Company's standard payroll practices. In any month in which the Employee shall be employed for less than the entire number of days in such month, the compensation payable under this Section 3(a) shall be prorated on the basis of the number of days during which the Employee was actually employed divided by the number of days in such month.

(b)The Base Salary is a gross amount, and the Company shall be required to withhold from such amount deductions with respect to Federal, state and local taxes, FICA, unemployment compensation taxes and similar taxes, assessments or withholding requirements.

(c)During the Employee's employment under this Agreement, the Employee shall also be reimbursed by the Company for reasonable business expenses actually incurred or paid by the Employee, consistent with the policies established by the Board, in rendering to the Company the services provided for in this Agreement, upon presentation of expense statements or such other supporting information as is consistent with the policies of the Company.

(d)The Employee shall be entitled to 20 business days vacation for each full year of employment under this Agreement, which vacation time will accrue in accordance with the vacation policy of the Company.

(e)The Employee shall be entitled to participate in all benefit plans (including deferred compensation plans and any medical, dental or life insurance plans) which shall be available from time to time to the domestic management employees of the Company generally, except to the extent such participation in any plan would, in the opinion of the Board, alter the intended tax treatment of such plan; provided, however, that the Employee shall have no right under this Agreement to participate in any stock purchase

or other plan relating to shares of capital stock of the Company or its affiliates. The Employee acknowledges and agrees that the Board may in its discretion terminate at any time or modify from time to time any such benefit plans.

(f)Other than as expressly set forth in this Section 3 or Sections 4(f) and 4(g) below, the Employee shall not receive any other compensation or benefits except to the extent provided by the Board.

4. Termination.

(a)Disability. The employment of the Employee under this Agreement may be terminated by the Company immediately upon giving the Employee notice if (i) the Board determines that the Employee is unable to discharge his or her essential job duties by reason of illness or injury or (ii) the Employee has been unable to discharge his or her essential job duties by reason of illness or injury for either (A) a period of two consecutive months or (B) twelve weeks in any twelve-month period. In the event of such termination, the Company shall have no further obligation to pay any unaccrued compensation or unaccrued benefits to the Employee for periods after the date of such termination, except for those payments that would be required under Section 4(c) hereof on a termination for cause.

(b)Death. The employment of the Employee under this Agreement shall terminate on the date of the Employee's death. In the event of such termination, the Company shall have no further obligation to pay any unaccrued compensation or unaccrued benefits to the Employee for periods after the date of such termination, except for those payments that would be required under Section 4(c) hereof on a termination for cause.

(c)Termination for Cause. The employment of the Employee under this Agreement may be terminated by the Company upon written notice from the Board that, in the opinion of the Board, the Employee has:

(i)refused or failed (after reasonable notice that such refusal or failure would result in termination of the Employee's employment) to perform, to the satisfaction of the Board, any duties assigned to the Employee by the Board;

(ii)committed a breach of the terms of this Agreement or any other legal obligation to the Company;

(iii)failed to perform any of the Employee's obligations under the Confidentiality Agreement;

(iv)demonstrated negligence or willful misconduct in the execution of the Employee's assigned duties;

(v)been convicted of or pleaded nolocontendere to a felony or other serious crime;

(vi) repeatedly and intemperately used alcohol or drugs;

(vii)engaged in business practices which, in the opinion of the Board, are unethical or reflect adversely on the Company;

(viii) misappropriated assets of the Company; or

(ix)been repeatedly absent from work during normal business hours for reasons other than disability.

Subject to the Employee’s rights under Section 4(e) of this Agreement, upon termination of the Employee’s employment for cause, the Company shall have no further obligation to pay any compensation to the Employee for periods after the effective date of the termination for cause, except for (1) compensation and benefits earned or accrued by the Employee pursuant to Section 3 of this Agreement as of the termination date, and (2) such benefits, if any, as may be required to be provided by the Company under the Employee Retirement Income Security Act of 1974 (“ERISA”) including but not limited to the Comprehensive Omnibus Budget Reconciliation Act (COBRA).

(d)Termination by Employee Without Good Reason. In the event the Employee terminates his or her employment with the Company other than for Good Reason (as defined below), the Company shall have no further obligation to pay any unaccrued compensation or unaccrued benefits to the Employee for periods after receipt by the Board of a written notice of resignation signed by the Employee or, if no such notice is given, on the date on which the Employee voluntarily terminates his or her employment relationship with the Company for other than Good Reason, except for those payments that would be required under Section 4(c) hereof on a termination for cause.

(e)Termination by Company without Cause or Termination by Employee For Good Reason. In the event either (i) the Company terminates the employment of the Employee, other than pursuant to subsections (a), (b) or (c) above, or (ii) the Employee terminates his or her employment, other than pursuant to subsections (d) or (e) above,for Good Reason, the Company shall provide to the Employee or any other assignee as provided in Section 10 below, continued payment to the Employee of the Base Salary then in effect at intervals in accordance with the Company’s standard payroll practice until the later of (i) three (3) months from the date of such termination, or (ii) the expiration of the Term of this Agreement. Good Reason defined. For purposes of this Agreement, the term “Good Reason” shall mean a termination by the Employee after the occurrence of any of the following events:

(i) any reduction in Base Salary;

(ii)a reduction in the Employee's job function, duties or responsibilities, or a similar change in the Employee's reporting relationships; or

(iii)any material breach of the terms of this Agreement by the Company;

provided, however, that a termination shall not be treated as a termination for Good Reason (i) if Employee shall have specifically consented in writing to the occurrence of the event giving rise to the claim of termination for Good Reason or (ii) unless Employee, within thirty (30) days after receiving written notice from the Company specifying in reasonable detail the occurrence of one of such events, shall have delivered a written notice to the Company stating that he or she intends to terminate his or her employment for Good Reason and specifying the factual basis for such termination and such event, if capable of being cured, shall not have been cured within thirty (30) days of the receipt by the Company of such notice.

5. Employee's Representations.

(a)The Employee represents that he or she has full authority to enter into this Agreement and that he or she is free to enter into this Agreement and not under any contractual restraint which would prohibit the Employee from satisfactorily performing his or her duties to the Company under this Agreement.

(b)The Employee hereby agrees to indemnify and hold harmless the Company, its officers, directors and stockholders from and against any losses, liabilities, damages or costs (including reasonable attorney's fees) arising out of a breach, or claimed breach, of any of the representations, warranties and covenants of the Employee set forth in this Agreement.

(c)The Employee acknowledges that he or she is free to seek advice from independent counsel with respect to this Agreement. The Employee has either obtained such advice or, after carefully reviewing this Agreement, has decided to forego such advice. The Employee is not relying on any representation or advice from the Company or any of its officers, directors, attorneys or other representatives regarding this Agreement, its content or effect.

6.Arbitration. Any controversy or claim arising out of or relating to this Agreement or any breach hereof or the Employee's employment by the Company or termination thereof, shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of San Diego or such other place as may be agreed upon at the time by the parties to the arbitration.

7.Equitable Relief. The Employee acknowledges that the Company is relying for its protection upon the existence and validity of the provisions of this Agreement, that the services to be rendered by the Employee are of a special, unique and extraordinary character, and that irreparable injury will result to the Company from any violation or continuing violation of the provisions of this Agreement for which damages may not be an adequate remedy. Accordingly, the Employee hereby agrees that in addition to the remedies available to the Company by law or under this Agreement, the Company shall be entitled to obtain such equitable relief as may be permitted by law in a court of competent jurisdiction including, without limitation, injunctive relief from any violation or continuing violation by the Employee of any term or provision of this Agreement.

8.Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws (and not the laws of conflicts) of the State of California.

9.Entire Agreement. This Agreement constitutes the whole agreement of the parties hereto in reference to any employment of the Employee by the Company and in reference to any of the matters or things herein provided for or hereinabove discussed or mentioned in reference to such employment; all prior agreements, promises, representations and understandings relative thereto being herein merged.

10. Assignability.

(a)In the event the Company shall merge or consolidate with any other corporation, partnership or business entity, or all or substantially all of the Company's business or assets shall be transferred in any manner to any other corporation, partnership or business entity, then such successor to the Company shall thereupon succeed to, and be subject to, all rights, interests, duties and obligations of, and shall thereafter be deemed for all purposes hereof to be, the "Company" under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die, any amounts payable to him or her hereunder shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to his or her estate.

(b)This Agreement is personal in nature and the Employee shall not, except as set forth in subsection (a) hereof, without the written consent of the Company, assign or transfer this Agreement or any rights or obligations hereunder.

(c)Except as set forth in subsection (a) above, nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any person, other than the parties to this Agreement, any right, remedy or claim under or by reason of this Agreement or of any term, covenant or condition of this Agreement.

11.Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants of this Agreement may be waived only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. Any such written instrument must be approved bay the Board to be effective as against the Company. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.

12.Notice. All notices, requests or consents required or permitted under this Agreement shall be made in writing and shall be given to the other parties by personal delivery, overnight air courier (with receipt signature) or facsimile transmission (with "answerback" confirmation of transmission), sent to such parties' addresses or telecopy numbers as are set forth below such parties' signatures to this Agreement, or such other addresses or telecopy numbers of which the parties have given notice pursuant to this Section 12. Each such notice, request or consent shall be deemed effective upon the date of actual receipt, receipt signature or confirmation of transmission, as applicable.

13.Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

14.Survival. The representations and agreements of the Employee set forth in Sections 5, 6 and 7 of this Agreement shall survive the expiration or termination of this Agreement (irrespective of the reason for such expiration of termination).

15.Attorney's Fees. If any party to this Agreement seeks to enforce his or her or its rights under this Agreement, the prevailing party or parties shall be entitled to recover reasonable fees, costs and expenses incurred in connection therewith including, without limitation, the fees, costs and expenses of attorneys, accountants and experts, whether or not litigation is instituted, and including such fees, costs and expenses of appeals.

[Signature page to follow]

IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment Agreement as of the date first above written.

SURGICA CORPORATION

By _________________________

	Louis R. Matson
President and Chief Executive Officer

Address for Notices:

_______________________________

_______________________________

_______________________________

___________________________

LOUIS R. MATSON

Address for Notices:

_______________________________

_______________________________

_______________________________

[Signature Page to Employment Agreement]

Exhibit G

FORM OF SIDE LETTER

[Date]

Protein Polymer Technologies, Inc.

10655 Sorrento Valley Road

San Diego, California

Facsimile: (858) 558-6467

Phone: (858) 558-6064

Attention: William N. Plamondon, III

Re: Representations and Warranties

Gentlemen:

Reference is made to that certain Asset Purchase Option Agreement (the “Agreement”), dated as of November 23, 2005, by and between Protein Polymer Technologies, Inc., a Delaware corporation (“Buyer”), and Surgica Corporation, a Delaware corporation (“Seller”). This letter (the “Side Letter”) is to confirm my understanding with respect to the matters set forth below. Capitalized terms used in this Side Letter, unless otherwise defined herein, shall have the meanings ascribed to such terms in the Agreement. The provisions of this Side Letter shall apply solely to the undersigned, Louis R. Matson (“Matson”), and Buyer notwithstanding any provisions to the contrary in the Agreement.

1.Representations and Warranties. Matson represents and warrants to Buyer that, to his actual knowledge, each of the representations and warranties of Seller set forth in the Agreement is true and correct at and as of the date the Agreement was executed.

2.Liability. Buyer and Matson acknowledge and certify that in no event shall Matson’s liability for any claims by Buyer with respect to Matson’s representations and warranties pursuant to Section 1 of this Side Letter exceed the aggregate amount of consideration paid by Buyer to Matson or by Buyer to Seller for purposes of paying Matson as specifically provided for and pursuant to Schedules B and C of that certain License Agreement attached to the Agreement as Exhibit A.

3.Amendment. This Side Letter may be amended only by a written instrument executed by Buyer and Matson. Any amendment effected pursuant to this Section 3 shall be binding upon all parties hereto.

4.Entire Agreement. Except as specifically set forth herein, this Side Letter and other documents referred to herein contain the entire understanding of the parties hereto in respect of their subject matter and supersede all prior and contemporaneous agreements and understandings, oral and written, among the parties with respect to such subject matter.

5.Successors and Assigns. This Side Letter shall be binding upon and inure to the benefit of the Buyer and Matson, and their respective successors, heirs and assigns; provided, however, that Matson shall not directly or indirectly delegate, transfer or assign any of his obligations or duties hereunder in whole or in part without the prior written consent of Buyer, and any such transfer or assignment without said consent shall be void abinitio.

6.Counterparts. This Side Letter may be executed in one or more counterparts, including by facsimile, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same Side Letter.

7.Governing Law. This Side Letter shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of California.

Please indicate your acceptance of the terms of this letter by signing below.

Very Truly Yours,

_________________________________

Louis R. Matson

Agreed & Acknowledged:

PROTEIN POLYMER TECHNOLOGIES, INC.

By:____________________________

Name: William N. Plamondon, III

Title: Chief Executive Officer

[Signature page to Side Letter]

Schedule 2.4

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Schedule 2.8

FEES

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Schedule 4.8

CONTEMPLATED FUNDING OF OPERATIONS BY OPTIONEE

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

EX-10

                                                                   Exhibit 10.41


                                LICENSE AGREEMENT


         This Agreement entered into and effective as of December 19, 2005 (the
"Effective Date") is between PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware
corporation (hereinafter referred to as "Company"), and SURGICA CORPORATION, a
Delaware corporation (hereinafter referred to as "Licensor"). Company and
Licensor are each hereinafter referred to as a "Party" and collectively as the
"Parties".


                              W I T N E S S E T H:

         WHEREAS, the Licensor and Company entered into an Asset Purchase Option
Agreement, dated as of November 23, 2005 (the "Option Agreement"), pursuant to
which Company, among other things, obtained the right to purchase from Licensor
substantially all of the assets of Licensor then existing or thereafter acquired
through the date of the exercise of the Option (as that term is defined in the
Option Agreement);

         WHEREAS, as partial consideration offered by Licensor to induce Company
to enter into the Option Agreement, Licensor desires to grant to Company, and
Company desires to obtain from Licensor, an exclusive license to Licensor's
intellectual property rights; and

         WHEREAS, in connection with the Option Agreement and this Agreement,
the Parties are entering into a separate Supply Agreement (defined below),
pursuant to which Licensor shall supply to Company certain manufactured Product,
services and cooperation and Company shall provide to Licensor certain services
and cooperation.

         NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein set forth and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the Parties hereto
hereby agree as follows:

1.       DEFINITIONS.
         -----------

         In this Agreement  (including  the recitals) the following  expressions
shall have the following meanings unless the context otherwise requires:

                  "Affiliate" shall mean, in relation to either Party, (a) any
         corporation, partnership, limited liability company, or other entity
         ("Entity") in which the relevant Party directly or indirectly holds 50%
         or more of the voting interests, (b) any Entity which holds directly or
         indirectly 50% or more of the voting stock or shares of the relevant
         Party, (c) any other Entity in which 50% or more of the voting
         interests is directly or indirectly held by any Entity described in
         clause (b), or (d) any Entity in which the relevant Party directly or
         indirectly holds less than 50% of the voting interests but has
         management control of such Entity in that it has the ability to appoint
         or remove the majority of the directors or managers of such Entity. For
         the purpose of this definition, Licensor shall not be an Affiliate of
         Company, and Company shall not be an Affiliate of Licensor.





                  "Assumed Liability Matters" shall mean those specified
         liabilities of the Licensor set forth in Schedule B.

                  "Calendar Quarter" shall mean the usual and customary calendar
         quarters, the first quarter being the months of January, February and
         March, the second quarter being the months of April, May and June, the
         third quarter being the months of July, August and September, and the
         fourth quarter being the months of October, November and December.

                  "Copyrights" shall mean all copyright and rights in the nature
         of copyright now or subsequently owned or controlled by Licensor or its
         Subsidiaries at any time prior to or during the term of this Agreement
         relating to or embodying any part of the Know-How, including without
         limitation any materials consisting of or containing software or
         databases.

                  "Cost of Goods Sold" shall mean, for any applicable period,
         Company's cost of goods for Products sold determined in accordance with
         generally accepted accounting principles, consistently applied.

                  "ECA" means the European Competent Authorities, any Notified
         Bodies, or any successor agencies responsible for European Regulatory
         Approvals.

                  "FDA" shall mean the United States Food and Drug
         Administration or any successor agency vested with administrative and
         regulatory authority to approve testing and commercial distribution of
         products for human and veterinary use in the United States.

                  "Field" shall mean any and all human or veterinary
         applications.

                  "Fully-Burdened Cost" shall mean all of the direct and
         proportional indirect costs and expenses for providing the specified
         Product or services, including but not limited to raw materials and
         supplies, labor, equipment, utilities, facilities and overhead as
         determined according to generally accepted accounting principles (GAAP)
         consistently applied.

                  "Governmental Body" means any: (a) nation, principality,
         state, commonwealth, province, territory, county, municipality,
         district or other jurisdiction of any nature; (b) federal, state,
         local, municipal, foreign or other government; (c) governmental or
         quasi-governmental authority of any nature (including any governmental
         division, subdivision, department, agency, bureau, branch, office,
         commission, council, board, instrumentality, officer, official,
         representative, organization, unit, body or Entity and any court or
         other tribunal); (d) multi-national organization or body; or (e)
         individual, entity or body exercising, or entitled to exercise, any
         executive, legislative, judicial, administrative, regulatory, police,
         military or taxing authority or power of any nature.

                                       2





                  "Gross Margin" shall mean, for a Product, the invoiced price
         of such Product upon the sale by Company or any Affiliate of the
         Company to another entity, less the Cost of Goods Sold of such Product
         for the applicable accounting period.

                  "Intellectual Property" shall mean all Patents, Know-How,
         Trademarks and Copyrights.

                  "Know-How" shall mean all trade secrets, inventions, methods,
         processes, know-how and negative know-how, techniques, products,
         designs, cultures, other biological materials and other materials and
         compositions, information, data or experience whether patentable or
         not, useful in the Field that are (i) owned or controlled by Licensor
         or its Subsidiaries as of the Effective Date or (ii) developed,
         acquired or that otherwise become controlled by Licensor or its
         Subsidiaries at any time during the term of this Agreement, including
         without limitation, processes, techniques, methods, operating
         instructions, machinery designs, raw material or product
         specifications, drawings, blue prints, laboratory books, notes, records
         and any other technical and commercial information relating to
         research, design, development, manufacture, assembly, use or sale of
         the Products in the Field.

                  "Know How Documentation" shall mean complete and accurate
         written documentation concerning all Confidential Information of
         Licensor necessary or desirable to use, practice and/or otherwise
         exploit the Know-How and related Intellectual Property, including but
         not limited to the Device Master Record, Device History Record, Design
         History File, and Quality System Record (as those terms are defined in
         21 CFR 820, Quality System Regulation) for each of PVA Plus(TM),
         MaxiStat(TM), and MicroStat(TM) (510(k) clearance numbers K001678,
         K020033, and K032619, respectively), the 510(k) submissions as
         supplemented or amended resulting in such clearances, internal audit
         reports, reports and communications associated with an inspection or
         audit of Licensor's operations by a Governmental Body, and laboratory
         notebooks, experimental reports, batch records, invention disclosures,
         and patent applications.

                  "Net Profit" shall mean Net Sales less (i) the amount paid by
         Company for goods pertaining to the Products sold by Company that are
         obtained by Company pursuant to the Supply Agreement or other similar
         arrangement, (ii) other monies paid to Licensor by Company under the
         Supply Agreement, and (iii) Company's Fully Burdened Cost in providing
         the services and cooperation to Licensor as set forth in the Supply
         Agreement and/or the applicable Project Plan (as that term is defined
         in the Supply Agreement).

                  "Net Sales" shall mean the gross invoice price of Products
         sold by Company to any other entities, less (i) quantity and/or cash
         discounts actually allowed or taken; (ii) freight, postage and
         insurance; (iii) amounts repaid or credited by reasons of rejections or
         return of goods or because of retroactive price reductions specifically
         identifiable to Products; (iv) amounts payable resulting from
         governmental (or agency thereof) mandated rebate programs; (v)
         third-party rebates to the extent actually allowed; (vi) custom duties
         and taxes (excluding income, value-added and similar taxes), if any,
         directly related to the sale; and (vii) any other specifically
         identifiable amounts included

                                       3





         in such Product gross sales that will be credited for reasons
         substantially equivalent to those listed hereinabove.

                  "Patent(s)" shall mean:

                       (a) any and all patents and applications for patents
                  owned or controlled by Licensor as of the Effective Date which
                  are useful in the Field including, but not limited to, those
                  that are identified in Schedule A, attached hereto, along with
                  any and all foreign counterparts thereof, all continuations,
                  continuations-in-part, divisions and renewals thereof, all
                  patent supplementary protection certificates and similar
                  rights that are based on or derive priority from any of the
                  foregoing or which may be granted thereon, and all reissues,
                  re-examinations, extensions, patents of addition and patent of
                  importation thereof;

                       (b) any and all patent applications by Licensor or its
                  Subsidiaries useful in the Field that are filed, acquired or
                  that otherwise become controlled by Licensor during the term
                  of this Agreement, all continuations, continuations-in-part or
                  divisions of any such applications, any patents which shall
                  issue based on such applications, continuations,
                  continuations-in-part, or divisions and any and all patents,
                  patent supplementary protection certificates and similar
                  rights that are based upon or derive priority from any of the
                  foregoing or which may be granted thereon and all reissues,
                  renewals or extensions thereof or patents of addition thereto;
                  and

                       (c) all such patent applications, patent certificates and
                  rights, a Valid Claim of which would be infringed by the
                  manufacture, marketing, use or sale of Product (but for the
                  license granted herein).

                  "Product(s)" shall mean any product which (i) if made, used or
         sold would infringe one or more Valid Claims in an issued Patent but
         for the License granted pursuant to Section 3.1 of this Agreement, or
         (ii) otherwise uses, incorporates or was conceived, developed or
         reduced to practice using the Patents or Know-How that comprise, in
         part, the Intellectual Property subject to the License set forth in
         Section 3.1 hereof.

                  "Regulatory Agency" means (a) the FDA, (b) the ECA, or (c) any
         other Governmental Body with regulatory authority similar to the FDA or
         ECA in any other jurisdiction anywhere in the world.

                  "Regulatory Approval" shall mean with respect to any country,
         filing for and receipt of all regulatory agency or other registrations,
         clearances and approvals required in such country in respect of Product
         for any purpose specified in this Agreement or, if no purpose is
         specified, to enable Product to be manufactured, offered for sale, sold
         and distributed, and for Non-Clinical Use or Clinical Use to take
         place, in such country.

                  "Subsidiary" shall mean a corporation, limited liability
         company or partnership of which a Party holds 50% or more of the voting
         or economic interest. For the purpose of this definition, Licensor
         shall not be a Subsidiary of Company.

                                       4





                  "Supply Agreement" shall mean that certain Supply and Services
         Agreement entered into between Licensor and Company of even date
         herewith.

                  "Third Party" shall mean a person other than Licensor, Company
         or their respective Affiliates.

                  "Trademarks" shall mean any and all trademarks, trade names,
         service marks, service names, logos and similar proprietary right
         owned, controlled or licensed by Licensor to be used in connection with
         the Licensor's Intellectual Property or Products.

                  "Valid Claim" shall mean a claim in any unexpired Patent which
         has not been held invalid by a decision of a court or other appropriate
         body of competent jurisdiction against which there is no appeal or
         where any period for appealing against such decision has expired
         without an appeal having been validly submitted.

2.       CONDITIONS TO LICENSE.
         ---------------------

         2.1   Licensor hereby represents and warrants that, as a condition
precedent to entering into this Agreement, Licensor has:

               (a) Successfully obtained Angiodynamics, Inc.'s ("Angiodynamics")
written consent, the form of which is attached as Exhibit D to the Option
Agreement, to the assignment to Company of all of Licensor's rights and
obligations under the Distributor Agreement dated June 28, 2002 by and between
Licensor and Angiodynamics; and

               (b) Received an unconditional and irrevocable assignment of all
rights, title and interest of its employees, officers and/or directors
(including, without limitation, Louis R. Matson) in and to all inventions
pertaining or applicable to the Field.

3.       ASSIGNMENT OF 510(K) CLEARANCES; GRANT OF LICENSE.
         -------------------------------------------------

         3.1   Rights Granted.
               --------------

               (a) Subject to the terms and conditions of this Agreement
(including, without limitation, Company's payment of the License Fee), Licensor
hereby sells, assigns, transfers, conveys, grants, and delivers and Company
hereby accepts from Licensor all of Licensor's right, title and interest in and
to its 510(k) Clearances, including numbers: K001678 relating to PVA Plus(TM),
K020033 relating to MaxiStat(TM) and K032619 relating to MicroStat(TM), filed
with the United States Food and Drug Administration and all information
submitted along with such applications ("510(k) Clearances").

               (b) Upon execution and delivery of this Agreement, Licensor shall
effectuate the sale, assignment, transfer, conveyance, grant and delivery of the
510(k) Clearances to Company by delivering to Company (or its designees) a duly
executed bill of sale and assignment for the 510(k) Clearances in substantially
the form of Exhibit A, attached hereto, and shall notify the FDA of the same by
delivering to Company (or its designees) a duly executed letter of notification
in substantially the form of Exhibit B, attached hereto.

                                       5





               (c) Subject to the terms and conditions of this Agreement
(including, without limitation, Company's payment of the License Fee), Licensor
hereby grants to Company and Company hereby accepts from Licensor an exclusive
(even as against Licensor), worldwide license, with the right to sublicense, to
the Intellectual Property to make, have made, modify, import, use, offer to
sell, sell and have sold Products and perform and have performed all processes
under the Intellectual Property, solely in the Field in all countries in the
world (the "License").

               (d) Solely with respect to the License of Trademarks set forth
herein, (i) Company may utilize and exploit such Trademarks only in connection
with the Products, (ii) Licensor may from time to time request samples of
Company's use of the Trademarks in commerce, and (iii) Company shall comply with
the reasonable written use standards and requirements imposed by Licensor
concerning the use of its Licensor's Trademarks.

               (e) Licensor hereby agrees that it shall not, without the prior
written consent of Company, use, make, have made, modify, import, use, perform,
offer to sell, sell or have sold any products, compositions or methods in the
Field, or license or transfer to any Third Party (including without limitation,
any Affiliate) any of such rights in the Field.

               (f) With respect to any Intellectual Property developed or
acquired by Licensor after the Effective Date, Company agrees that the License
with respect to such after-acquired Intellectual Property shall be subject to
any contractual obligations of Licensor under bona fide arm's length third party
agreements; provided that, in the event the License is restricted or limited by
any such contractual obligations of Licensor, then Licensor shall use reasonable
commercial efforts to exclude or, where applicable, to minimize any such
restriction or limitation.

               (g) Licensor acknowledges and agrees that the License set forth
in Section 3.1 above, includes, without limitation, a license to make, have
made, modify, import, use, offer to sell, sell and have sold any and all of
Licensor's Products that have received, or during the term of this Agreement
will receive, Regulatory Approval from any applicable Regulatory Agency.

               (h) To the extent permissible under the terms of any and all
marketing and/or distribution agreements in effect as of the Effective Date, or
in effect during the term of this Agreement, Licensor shall sublicense all of
its rights under such agreements to Company for the duration of this Agreement.
To the extent that such a sublicense requires the consent of the other
contractual party, Licensor shall reasonably cooperate with Company to obtain
such consent.

4.       TRANSFER OF LICENSED TECHNOLOGY.
         -------------------------------

         No later than ten (10) days after the Effective  Date,  Licensor  shall
provide to Company a copy of the current Device Master Record and Quality System
Record for each of PVA Plus(TM), MaxiStat(TM), and MicroStat(TM),  together with
a copy  of the  submissions  as  amended  or  supplemented  resulting  in  their
respective  510(k)  clearances.  Thereafter,  Licensor  shall  provide  Know How
Documentation as requested in writing by Company within ten (10) days.

                                       6





5.       PAYMENT TO LICENSOR.
         -------------------

5.1      License Fee; Indemnification Against Certain Claims.
         ---------------------------------------------------

               (a) Upon execution and delivery of this Agreement and no later
than five (5) calendar days after the Effective Date, Licensor shall provide
Company written, complete and accurate records specifying Licensor's total debt
concerning the categories set forth in Schedule C, attached hereto.

               (b) Promptly upon Company receipt and diligent review of
Licensor's records concerning its outstanding debts, Company shall deliver to
Licensor, or to Licensor's designee(s), the "License Fee" in full satisfaction
of its license fee obligations hereunder, which shall consist of (i) the
assumption of "Assumed Liability Matters" by the Company as of the Effective
Date as set forth in Schedule B and (ii) an aggregate amount of up to Three
Hundred and Ninety One Thousand and Zero Cents ($391,000.00) as set forth in
Schedule C, to satisfy Licensor's outstanding debts and/or liabilities.

               (c) Company's License Fee obligations shall consist of assuming
and repaying Company's outstanding debt as provided in Section 5.1(b) above as
of the Effective Date in an aggregate amount not to exceed the amount specified
in Section 5.1(b). Company agrees to take all commercially reasonable steps
necessary to assume, pay, perform and discharge when due, all of Company's
outstanding debt as provided in Section 5.1(b) as of the Effective Date in an
aggregate amount not to exceed the amount specified in Section 5.1(b)

               (d) Company shall indemnify, hold harmless and defend Licensor
from and against and will pay or reimburse Licensor with respect to any and all
claims by Sapphire Group LLC against Licensor to which Licensor may become
subject, directly arising out of or in connection with any fees found by a court
of competent jurisdiction to be actually owed by Licensor to Sapphire Group LLC
arising solely pursuant to that certain engagement letter signed by Sapphire
Group LLC and agreed to by Licensor, dated as of July 7, 2003, as amended
pursuant to that amendment letter signed by Sapphire Group LLC and agreed to by
Licensor, dated as of July 6, 2004, and as supplemented by that supplement
letter signed by Sapphire Group LLC and agreed to by Licensor, dated as of June
3, 2005, solely in connection with Licensor entering into and executing the
Option Agreement, the License Agreement and/or the Asset Purchase Agreement, as
to each, if and when entered into and executed by Licensor and Company (a
"Sapphire Claim"). Notwithstanding the foregoing, the Licensor's right to
defense of such claims as set forth in this Section 5.1(d) shall not be
dependent upon any finding by any court of competent jurisdiction with respect
to any such Sapphire Claim. All Sapphire Claims shall be resolved pursuant to
those procedures set forth in Section 7.3. In no event, shall Company's total
liability pursuant to this Section 5.1(d) exceed Two Hundred Thousand Dollars
and Zero Cents ($200,000.00), such total liability shall not be reduced by any
reasonable attorneys' fees incurred by Company in defense of Licensor to any
such Sapphire Claim as provided herein.

5.2      Royalties.
         ---------

                                       7





               (a) Subject to the provisions of this Agreement, Company shall
pay Licensor, no later than forty-five (45) days after the close of each
Calendar Quarter throughout the term of this Agreement, a royalty equal to
twenty-five (25%) of Company's Net Profit from Products for the Calendar Quarter
(or part thereof in the case of the first or last Calendar Quarter for which a
royalty is payable if not a full quarter) then ended (the "Surgica Royalty").

               (b) In the event any Product or Products are sold pursuant to a
sales agreement, marketing agreement, distribution agreement or similar
arrangement to which the Company is a party with any entity ("Net Distributor
Revenue"), Company shall pay Licensor, no later than forty-five (45) days after
the close of each Calendar Quarter, the royalty specified in Section 5.2(a) as
applied to the Company's share or interest in the Product or Product-related
revenue from said entity's sale of Products; provided, however, that in no case
shall Company have any obligation to pay any amounts to Licensor under this
Section 5.2(b) for the sale of Products by Company to any other entities.

               (c) Company shall deliver to Licensor written reports of Net
Profit, Net Sales and Net Distributor Revenue during the preceding Calendar
Quarter on or before the forty-fifth (45th) day following the end of each
Calendar Quarter. Such reports shall include a calculation of the earned royalty
due and shall be accompanied by the monies due. If no earned royalties are due,
then Company shall indicate such on its written report.

6.       CONFIDENTIALITY.
         ---------------

         6.1   Subject to Section 6.3, during the term of this Agreement and for
a period of five (5) years thereafter (except with respect to trade secrets, for
which the obligations of non-use and non-disclosure shall continue for so long
as such trade secrets are protected by their owner as trade secrets), each Party
shall maintain in confidence and shall not disclose to any Third Party any
know-how, trade secrets, business or technical information or other information
("Confidential Information") received from the other Party relating to any
Product, and shall not use the other Party's Confidential Information except for
the purposes of this Agreement without the prior written consent of such other
Party. These confidentiality and non-use obligations shall not apply to any
Confidential Information that the receiving Party can demonstrate:

               (a) at the time of disclosure to the receiving Party was, or
thereafter becomes, a part of the public domain through no fault of the
receiving Party, its Affiliates, distributors or sublicensees;

               (b) was subsequently lawfully disclosed to the receiving Party by
a Third Party not under an obligation of confidentiality with or through the
disclosing Party;

               (c) was in the lawful possession of the receiving Party prior to
disclosure by the disclosing Party; or

               (d) is required to be disclosed by judicial or administrative
order, provided that notice is given to the disclosing Party and the disclosing
Party has an opportunity, if reasonable under the circumstances, to seek a
protective order, and further provided, that disclosure is limited solely to
compliance with the judicial or administrative order.

                                       8





         6.2   During the term of this Agreement, each Party shall take all
reasonable steps to:

               (a) prevent any disclosure in breach of Section 6.1 of
Confidential Information of the other which would be materially prejudicial to
the interests of the other Party;

               (b) limit the disclosure of information to such of its
Affiliates, distributors and sub-licensees and their respective employees that
require the information for the purposes of this Agreement; and

               (c) ensure that the persons referred to in Section 6.2(b) enter
into appropriate confidentiality agreements containing use and disclosure
restrictions at least as restrictive as those set forth herein.

         6.3   Notwithstanding the foregoing provisions of this Section, the
Parties and their Affiliates, distributors and sublicensees shall be entitled to
disclose Confidential Information of the other Party which would otherwise be
protected by the provisions of Section 6.1 to actual or potential customers for
any Product in so far as such disclosure is reasonably necessary to
commercialize such Product.

7.       INDEMNIFICATION.
         ---------------

         7.1   Company Indemnification. Except as otherwise provided in this
Agreement, Company shall indemnify and hold harmless, pursuant to the provisions
of this Section 7, Licensor and each of its officers, directors, employees,
agents and Affiliates (collectively, the "Licensor Indemnitees"), from and
against, and will reimburse each such Licensor Indemnitee with respect to, any
and all Third Party claims, actions, demands, losses, damages, liabilities,
costs and expenses to which such Licensor Indemnitee may become subject,
including reasonable fees and disbursements of counsel and expenses of
reasonable investigation (collectively, "Licensor Losses"), arising out of,
based upon or caused by: (a) the inaccuracy of any representation or the breach
of any warranty, covenant or agreement of Company contained in this Agreement,
the Supply Agreement or the Option Agreement; (b) any failure by Company to
conduct its obligations arising hereunder in a diligent and professional manner
and in accordance with all applicable laws and regulations; or (c) any gross
negligence or intentional wrongdoing by Company in the performance of its
obligations (except in each case, and solely to the extent, that any Licensor
Loss is due to (x) the gross negligence or willful misconduct of one or more
Licensor Indemnitees); provided, however, that, in each case, Company shall not
be obligated to indemnify the Licensor Indemnitees for claims arising out of any
Product's infringement of any intellectual property right of a Third Party
unless such claim results from Company's (i) misuse or mishandling of the
Product or (ii) unauthorized modification of the Product.

         7.2   Licensor Indemnification. Licensor shall indemnify and hold
harmless, pursuant to the provisions of this Section 7, Company and each of its
officers, directors, employees, agents and Affiliates (collectively, the
"Company Indemnitees"), from and against, and will reimburse each such Company
Indemnitee with respect to, any and all Third Party claims, actions, demands,
losses, damages, liabilities, costs and expenses to which such Company
Indemnitee may become subject, including reasonable fees and disbursements of

                                       9





counsel and expenses of reasonable investigation (collectively, "Company
Losses"), arising out of, based upon or caused by: (a) the inaccuracy of any
representation or the breach of any warranty, covenant or agreement of Licensor
contained in this Agreement, the Supply Agreement or the Option Agreement; (b)
the manufacture or supply of Products; (c) any failure by Licensor to conduct
its obligations arising hereunder in a diligent and professional manner and in
accordance with all applicable laws and regulations; or (d) any gross negligence
or intentional wrongdoing by Licensor in the performance of its obligations
(except in each case, and solely to the extent, that any Company Loss is due to
the gross negligence or willful misconduct of one or more Company Indemnitees);
provided, however, that Licensor shall not be obligated to indemnify the Company
Indemnitees for claims arising out of any Product's infringement of any
intellectual property right of a Third Party resulting from such Company
Indemnitee's: (i) misuse or mishandling of the Product or (ii) unauthorized
modification of the Product.

         7.3   Indemnification Procedures. Each Party, on behalf of itself and
its respective Licensor Indemnitees or Company Indemnitees (each such Person, an
"Indemnitee"), agrees to provide the indemnifying Party prompt written notice of
any action, claim, demand, discovery of fact, proceeding or suit (collectively,
a "Claim") for which such Indemnitee intends to assert a right to
indemnification under this Agreement; provided, however, that failure to give
such notification shall not affect each applicable Indemnitee's entitlement to
indemnification (or the corresponding indemnifying Party's indemnification
obligations) hereunder except to the extent that the indemnifying Party shall
have been prejudiced as a result of such failure. The indemnifying Party shall
have the initial right (but not obligation) to defend, settle or otherwise
dispose of any Claim for which an Indemnitee intends to assert a right to
indemnification under this Agreement as contemplated in the preceding sentence
if, and for so long as, the indemnifying Party has recognized in a written
notice to the Indemnitee provided within thirty (30) days of such written notice
its obligation to indemnify the Indemnitee for any Licensor Losses or Company
Losses (as the case may be) relating to such Claim; provided, however, that if
the indemnifying Party assumes control of the defense, settlement or disposition
of a Claim, the indemnifying Party shall obtain the written consent of each
applicable Indemnitee prior to ceasing to defend, settling or otherwise
disposing of the Claim. If the indemnifying Party fails to state in a written
notice during such thirty (30) day period its willingness to assume the defense
of such a Claim, the Licensor Indemnitee(s) or Company Indemnitee(s), as the
case may be, shall have the right to defend, settle or otherwise dispose of such
Claim, subject to the applicable provides of Sections 7.1 and 7.2.

8.       LIMITED LIABILITY. EXCEPT WITH RESPECT TO EACH PARTY'S INDEMNIFICATION
AND CONFIDENTIALITY OBLIGATIONS (SET FORTH IN SECTIONS 6 AND 7), NOTWITHSTANDING
ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY SHALL BE LIABLE OR
OBLIGATED UNDER ANY SECTION OF THIS AGREEMENT OR UNDER ANY CONTRACT, NEGLIGENCE,
STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY SPECIAL, EXEMPLARY,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.

                                       10





9.       OWNERSHIP.
         ---------

         9.1   Ownership of Inventions.
               -----------------------

               (a) As between the Parties, all right, title and interest to any
inventions or discoveries ("Inventions") made by Company employees or agents
with or without inventive contribution by Licensor employees or agents and
conceived or first reduced to practice under this Agreement or the Supply
Agreement shall belong to Company. As between the Parties, all right, title and
interest to any Inventions made by Licensor employees or agents without
inventive contribution by Company employees or agents and conceived or first
reduced to practice under the Supply Agreement ("Licensor Inventions") shall
belong to Licensor pending the successful exercise of the Option pursuant to the
Option Agreement at which such time such Licensor Inventions, to the extent
applicable to the Field, shall be included in the purchased assets. All right,
title and interest in and to any Inventions made jointly by employees or agents
of Licensor and Company shall belong exclusively to Company; provided, however,
that Licensor shall, and hereby does, receive a nonexclusive, royalty-free,
fully paid-up, non-transferable license (without the right to sublicense) to use
such Inventions in the fulfillment of its obligations under the Supply
Agreement.

               (b) Licensor hereby grants and agrees to grant to Company a
nonexclusive, transferable, royalty-free, fully paid-up, irrevocable, worldwide
right and license (with right to sublicense) to the Licensor Inventions solely
for applications within the Field.

               (c) Each Party hereby makes any assignments necessary to
accomplish the foregoing ownership provisions. Each Party agrees that from time
to time such Party shall promptly execute and deliver all further instruments
and documents, and take all further action, that may be necessary or desirable
in order to execute, confirm, memorialize or otherwise document the assignments
and ownership rights described herein.

         9.2   Records. Each Party shall require its employees or agents
responsible for conducting research in performance of this Agreement to keep
contemporaneous records of their results and findings in sufficient detail to
document any inventions of discoveries made by such employees and agents under
this Agreement in bound notebooks (that shall be reviewed and signed by a
witness on a regular basis). Except with respect to records pertaining
exclusively to Licensor Inventions, all such records shall be the exclusive
property of Company; provided, however, that Licensor may retain for its files a
copy of records concerning Inventions made with inventive contribution of
Licensor.

10.      TERM AND TERMINATION.
         --------------------

         10.1  Term.
               ----

               (a) The term of this Agreement shall commence as of the date it
is executed and delivered by both Parties, and, unless terminated earlier in
accordance with its terms, shall continue for the greater of twenty (20) years
from the Effective Date or the date upon which the last of the Patents expires.

                                       11





               (b) Notwithstanding the foregoing Section 10.1(a), if Company
exercises the Option (as defined in, and pursuant to, the Option Agreement),
this Agreement shall automatically terminate upon the effective assignment to
Company of the purchased assets (including, without limitation, the Intellectual
Property) pursuant to the terms of the Option Agreement and the Asset Purchase
Agreement attached thereto.

               (c) Notwithstanding the foregoing Section 10.1(a), if Company
does not exercise the Option (as defined in, and pursuant to, the Option
Agreement) for any reason whatsoever except as a result of (i) a default by
Licensor under this Agreement, which is not cured within forty-five (45) days of
notice of such default as provided in Section 10.2(b) below, or (ii) the failure
of Licensor to satisfy all of the closing conditions for which it is responsible
as set forth in Article 6 of the Asset Purchase Agreement, upon request of
Licensor, each Party hereto shall agree to negotiate in good faith with the
other Party the reconveyance of the License to the Licensor and the termination
of this Agreement.

         10.2  Rights of Termination.
               ---------------------

               (a) Company's Right of Termination. Company may terminate this
Agreement at any time, with respect to one or more of the Products or Patents by
giving at least thirty (30) days' prior written notice to Licensor.

               (b) Licensor's Right of Termination. If Company breaches any of
its obligations set forth in Section 5, and such breach is not cured within
forty-five (45) days after Licensor provides Company with written notice of such
breach, Licensor may terminate this Agreement.

               (c) Material Breach. Except as set forth in Section 10.2(b),
Licensor and Company shall have the right to terminate this Agreement, including
the licenses granted herein, in the event that any material term or condition of
this Agreement is breached by the other Party, and such breach is not remedied
within a period of thirty (30) days after the non-breaching Party transmits
written notice of such breach. If such material breach is corrected within the
applicable thirty (30) day period, this Agreement and the rights granted
hereunder shall continue in full force and effect.

         10.3  Termination For Cause. Any termination pursuant to Sections
10.2(b) or 10.2(c) shall be deemed a termination for "Cause".

         10.4  Effect of Termination.
               ---------------------

               (a) Except if this Agreement is terminated by Company pursuant to
Section 10.2(a), or for Cause by Licensor, all rights licensed to Company
hereunder shall become irrevocable and fully-paid upon payment of any amounts
due that have accrued hereunder prior to effective date of such termination, and
thereafter Company shall have, except (1) in such countries where restricted by
applicable law or (2) (i) for all Intellectual Property that Licensor does not
own but licenses from a Third Party or (ii) to which it does not have a
royalty-free license (as licensee), an irrevocable, fully paid-up license, with
the right to sublicense, under the Intellectual Property licensed pursuant to
Sections 2 and 8 hereof, to make, have made, use, sell, offer to sell and import
Products. For licenses that are not royalty free, Licensor shall use its best

                                       12





efforts to obtain for Company the rights of Licensor under such licenses,
provided that Company agrees to pay and pays on a going forward basis, any
payments to Third Parties required under any such license.

               (b) If this Agreement is terminated by Company for Cause or as a
result of the successful exercise of the Option pursuant to the Option Agreement
as described in Section 10.1(b), all rights licensed hereunder to Licensor
pursuant to Section 9.1(a) shall become irrevocable and fully-paid, and
thereafter Licensor shall have, except (1) in such countries where restricted by
applicable law or (2) (i) for all intellectual property that Company does not
own but licenses from a Third Party or (ii) to which it does not have a
royalty-free license (as licensee), an irrevocable, fully paid-up, non-exclusive
license to make, have made, use, sell offer to sell, and import Product.

               (c) If this Agreement is terminated prior to the expiration of
its term, except with respect to termination resulting from Licensor's breach of
the Agreement, effective on such termination date, Company shall assign the
510(k) Clearances back to Licensor.

         10.5  Sublicensees. In the event this Agreement terminates for any
reason, each of Company's sublicensees at such time shall continue to have the
rights and license set forth in their sublicense agreements; provided, however,
that such sublicensee agrees in writing that Licensor is entitled to enforce all
relevant terms and conditions of such sublicense agreement directly against such
sublicensee.

         10.6  Survival. All provisions of this Agreement which in order to give
effect to their meaning need to survive its termination or expiration shall
remain in full force and effect thereafter, including without limitation
Sections 1, 6-9, 10.4, 113-17, and 19-26. All then-outstanding payment and
reimbursement obligations shall survive any termination or expiration of this
Agreement.

11.      PATENTS.
         -------

         11.1  As between the Parties hereto, all obligations concerning the
prosecution and maintenance of patents shall be governed by Section 3.3 of the
Supply Agreement.

12.      INFRINGEMENT.
         ------------

         12.1

               (a) If a Third Party asserts that a patent or other right owned
by it is infringed by the manufacture, import, marketing, use, sale, offer for
sale and/or supply of any Product, the Party first obtaining knowledge of such
claim shall promptly provide the other Party written notice of such claim and
the related facts in reasonable detail. Notwithstanding any provision in this
Agreement to the contrary, except subject to indemnification obligations of
Licensor, the defense of any such claim (including without limitation, the
institution and prosecution of any counterclaims thereto) shall be controlled by
Company. However, nothing in this Section 12.1 will prevent Licensor from
engaging its own counsel in any such matter if there shall exist a bona fide
conflict between the rights and interest of Licensor and Company.

                                       13





               (b) Without its prior written consent, Licensor will not be
responsible for or bound by any compromise made by Company. Without its prior
written consent, Company will not be responsible for or bound by any compromise
made by Licensor.

               (c) If it is necessary to obtain a license from such Third Party,
Licensor and Company in negotiating such a license shall, to the extent
practicable, use their reasonable efforts to minimize the license fees and/or
royalty payable to such Third Party.

         12.2

               (a) In the event that there is infringement or misappropriation
of any Intellectual Property by a Third Party, Licensor and Company shall notify
each other in writing to that effect immediately upon becoming aware of the
same, including if practicable with said written notice evidence establishing a
case of infringement or misappropriation by such Third Party.

               (b) Company shall have the right, in its sole discretion, but not
the obligation to bring an infringement or misappropriation suit(s) against one
or more Third Parties at its own expense and in its own name, if possible, or
jointly in its name and in the name of Licensor or if necessary in Licensor's
sole name if such infringement involves the use of Intellectual Property in the
Field.

               (c) Company shall bear all the expenses of any suit brought by it
and shall retain all damages or other monies awarded or received in settlement
of such suit; provided, however, that at Company's option exercised by notice in
writing to Licensor before it commences such suit Licensor may contribute to the
expenses of any such suit and, in such event, Company and Licensor shall share
proportionately to their respective contributions all damages or other monies
awarded or received in settlement of such suit.

               (d) Licensor will cooperate with Company in any such suit and
shall have the right to consult with Company and, if it elects pursuant to the
proviso to paragraph (c) of this Section, to be separately represented by its
counsel at its own expense.

13. ARBITRATION OF DISPUTES.
    -----------------------

         13.1  Excepting only actions and claims relating to actions commenced
by a Third Party against Licensor or Company (including, without limitation, for
injuries caused by a Product or in respect to a trademark or patent infringement
claim), any controversy or claim arising out of or relating to the terms and
conditions of this Agreement, or the decision to agree upon these terms, or the
breach thereof, including questions of validity, infringement, or termination
hereof, shall be settled exclusively by arbitration in accordance with the rules
of the American Arbitration Association. If such controversy or claim relates to
patent validity or infringement, then the Patent Arbitration Rules of the AAA
shall apply; otherwise the International Arbitration Rules of the AAA shall
apply. Notwithstanding the foregoing to the contrary or in the arbitration rules
invoked or in this Section 13, the Parties retain the right to request a
judicial authority to invoke interim measures of protection, and such request
shall not be deemed incompatible with this agreement to arbitrate or a waiver of
the right to arbitrate.

                                       14





         13.2  There shall be one (1) arbitrator to be mutually agreed upon by
the Parties and to be selected from the Regional Panel of Distinguished
Neutrals. If the Parties are unable to agree upon such an arbitrator who is
willing to serve within ten (10) days of receipt of the demand by the other
Party, the Parties shall within three (3) days select one of the four largest
international public accounting firms (excluding those providing services to the
Parties) and engage the managing partner or senior officer of its County office
located in the county containing the principal place of business of the Party
who did not initiate the arbitration to designate a partner of such firm to
serve as the arbitrator. Failing that, then the AAA shall appoint an arbitrator
willing to serve from the Regional Panel of Distinguished Neutrals, or if no
such panel exists, then from an appropriate AAA panel. It shall be the duty of
the arbitrator to set dates for preparation and hearing of any dispute and to
expedite the resolution of such dispute.

         13.3

               (a) The arbitration shall be held in the city in which the
principal place of business of the Party who did not initiate the arbitration is
located and the arbitrator shall apply the substantive law of California except
that the interpretation and enforcement of this arbitration provision shall be
governed by the Federal Arbitration Act.

               (b) The arbitrator shall permit and facilitate discovery, which
will be conducted in accordance with the Federal Rules of Civil Procedure,
taking into account the needs of the Parties and the desirability of making
discovery expeditious and cost-effective.

               (c) The arbitrator will set a discovery schedule with which the
Parties will comply and attend depositions if requested by either Party.

               (d) The arbitrator will entertain such presentation of sworn
testimony or evidence, written briefs and/or oral argument as the Parties may
wish to present, but no testimony or exhibits will be admissible unless the
adverse party was afforded an opportunity to examine such witness and to inspect
and copy such exhibits during the pre-hearing discovery phase.

               (e) The arbitrator shall among his other powers and authorities,
have the power and authority to award interim or preliminary relief.

               (f) The arbitrator shall not be empowered to award either Party
exemplary or punitive damages or any enhanced damages for willful infringement
and the Parties shall be deemed to have waived any right to such damages.

               (g) A qualified court reporter will record and transcribe the
proceeding.

               (h) The decision of the arbitrator will be in writing and
judgment upon the award by the arbitrator may be entered in any court having
jurisdiction thereof.

               (i) Prompt handling and disposal of the issue is important.
Accordingly, the arbitrator is instructed to assume adequate managerial
initiative and control over discovery and other aspects of the proceeding to
schedule discovery and other activities for substantially continuous work,
thereby expediting the arbitration as much as is deemed reasonable to him, but

                                       15





in all events to effect a final award no later than 365 days after the
arbitrator's selection or appointment and no later than 20 days after the close
of evidence.

               (j) The proceedings shall be confidential and the arbitrator
shall issue appropriate protective orders to safeguard both Parties'
confidential information.

               (k) The fees of the arbitrator and the AAA shall be paid as
designated by the arbitrator or, if he shall not so designate, they shall be
split equally between the Parties.

14.      NOTICES.
         -------

         14.1  Notices hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or when sent by facsimile or other
telegraphic means. Such notices shall be effective upon receipt, if by personal
delivery, or if by facsimile, on the date of the confirmation of "ok"
transmission. Addresses and persons to be notified may be changed by either
Party by giving written notice thereof to the other Party.

               For Licensor:

                      Surgica Corporation
                      5090 Robert J. Mathews Parkway #4
                      El Dorado Hills, CA 95762
                      Facsimile:  916.933.5260
                      Attention:  Louis R. Matson

                      with a copy to:

                      Bullivant Houser Bailey
                      1331 Garden Hwy, Suite 300
                      Sacramento, CA 95833
                      Facsimile:  916.442.3442
                      Email eric.stiff@bullivant.com
                      Attention:  Eric J. Stiff, Esq.

               For Company:

                      Protein Polymer Technologies, Inc.
                      10655 Sorrento Valley Road
                      San Diego, CA  92121
                      Facsimile:  858.558.6477
                      Email:   wnp@ppti.com; jtp@ppti.com
                      Attention:  William N. Plamondon, Chief Executive Officer
                      and J. Thomas Parmeter, Chairman

                                       16





                      with a copy to:

                      Paul, Hastings, Janofsky & Walker LLP
                      515 South Flower Street
                      Los Angeles, CA  90071-2228
                      Facsimile:  213.996.3254
                      Attention:  Robert A. Miller Jr., Esq.


15.      FORCE MAJEURE.
         -------------

         15.1

               (a) Subject to compliance with paragraph (b) of this Section 15.1
any delays in or failure of performance by either Party under this Agreement
shall not be considered a breach of this Agreement if and to the extent caused
by any occurrences beyond the reasonable control of the Party affected,
including but not limited to: acts of God; acts, regulations or laws of any
government; strikes or other concerted acts of workers; fires; floods;
explosions; riots; wars; rebellion; embargo; and sabotage; and any time for
performance hereunder shall be extended by the actual time of delay caused by
such occurrence

               (b) Any Party affected by such force majeure who wishes to rely
on the provisions of paragraph (a) of this Section shall as soon as reasonably
practicable give written notice to the other Party specifying the matters
constituting force majeure together with such evidence thereof as it can
reasonably give and specifying the period for which it is estimated that the
such delay will continue.

16.      SAVINGS PROVISION.
         -----------------

         16.1  The invalidity of any provision of this Agreement shall not
impair the validity of any other provision; and any provision hereof which might
otherwise be invalid or contravene any applicable law shall hereby be deemed to
be amended to the extent necessary to remove the cause of such invalidity and to
the extent practicable to continue the intent of such provision and of this
Agreement, and such provision, as so amended, shall remain in full force and
effect as a part hereof.

17.      RELATIONSHIP OF PARTIES.
         -----------------------

         17.1  Each Party shall act as an independent contractor in carrying out
its obligations under this Agreement. Nothing contained in this Agreement shall
be construed to imply a joint venture, partnership or principal-agent
relationship between the Parties, and neither Party by virtue of this Agreement
shall have the right, power or authority to act or create any obligation,
express or implied, on behalf of the other Party. This Agreement shall not be
construed to create rights, express or implied, on behalf of or for the use of
any party aside from Company and Licensor, and neither Party shall be obligated,
separately or jointly, to any Third Parties by virtue of this Agreement.

                                       17





18.      WARRANTIES.
         ----------

         18.1  Company warrants that it shall use its reasonable and diligent
efforts to comply with all laws applicable to the purchase, storage, transport,
labeling, distribution or commercialization by it of Products, shall comply with
the U.S. Export Administration laws and regulations and shall not export or
re-export any technical data or Intellectual Property, or the direct products of
such technical data or Intellectual Property, or Products to any prohibited
country listed in the U.S. Export Administration Regulations unless properly
authorized to do so by the U.S. government.

         18.2  Licensor represents and warrants to Company that the following
statements are true and accurate in all material respects as follows:

               (a) It has sufficient right and title to and ownership of, and is
sufficiently free and clear of all liens, claims and encumbrances of any nature
on, the Intellectual Property to grant to Company the various rights and
licenses granted to Company under this Agreement;

               (b) It has not done, will not do nor agree to do during the term
of this Agreement, any of the following things if to do so would be materially
inconsistent with the exercise by Company of the rights granted to it under this
Agreement, including assign, mortgage, hypothecate, or otherwise transfer any of
the Intellectual Property, including without limitation, the Patents, or any of
its rights or obligations under this Agreement;

               (c) Except for standard rights granted to the United States
government in connection with Small Business Innovation Research grants, no
Third Party owns any rights in the Intellectual Property that would adversely
affect any of the rights and licenses granted to Company under this Agreement;

               (d) No Third Party owns any rights which would be infringed by
the use of the Products or the exercise of Company rights under the License to
the Intellectual Property in accordance with provisions of this Agreement.

               (e) In the event Company consults with Licensor regarding future
intended uses of the Products, Licensor shall, in good faith, disclose to
Company any Third Party rights of which it is aware which might be infringed by
such uses of the Products.

               (f) It is duly authorized and empowered to enter into and perform
this Agreement; and the execution and performance of this Agreement by Licensor
does not and will not conflict with or violate any contract, agreement,
indenture, mortgage, instrument, writ, judgment, or order of any court, arbiter
or governmental or quasi-governmental body to which Licensor is a party or by
which Licensor is bound.

19.      INTEGRATION AND CONFLICT.
         ------------------------

         19.1

               (a) It is the mutual desire and intent of the Parties to provide
certainty as to their future rights and remedies against each other by defining
the extent of their mutual

                                       18





undertakings provided herein. This Agreement and the related Supply Agreement
and Option Agreement:

                    (i) constitute the entire agreement and understanding
between the Parties with respect to the subject matter contained herein, and
there are no promises, representations, conditions, provisions or terms related
thereto other than as set forth in this Agreement and the related Supply
Agreement and Option Agreement; and

                    (ii) supersede all previous understandings and agreements,
and representations between the Parties, whether written or oral, relating to
the subject matter.

               (b)  The Parties may from time to time during the term of this
Agreement modify any of its provisions by mutual agreement in writing.

               (c)  The Parties agree that each has had the opportunity to be
represented by counsel of it choosing including the negotiations that preceded
this Agreement.

               (d)  In the event of any conflict between the provisions of this
Agreement and the Supply Agreement, unless expressly stated in this Agreement,
the provisions of this Agreement shall prevail.

20.      GOVERNING LAW.
         -------------

         20.1  This Agreement shall be construed and the rights of the Parties
shall be determined in accordance with the substantive laws of the State of
California, without regard to its conflict of laws principles, except that the
Arbitration provisions contained herein shall be governed as stated in Section
13.

21.      ASSIGNMENT.
         ----------

         21.1  Licensor shall not assign or otherwise transfer this Agreement or
any part hereof (and any attempt to do so will be void) to any Third Party
without the prior written permission of Company, except to an entity that
acquires all or substantially all of such Party's assets or operations.

22.      BANKRUPTCY.
         ----------

         22.1  The Parties hereto acknowledge and agree that it is their mutual
intention and agreement that should Licensor become a debtor in case under title
11 of the United States Code (the "Bankruptcy Code"), then the Company shall be
entitled to all the benefits accorded a licensee under Bankruptcy Code Section
365(n). Furthermore, it is hereby acknowledged and agreed that this Agreement
shall be "such contract" as that phrase is used in Section 365(n) and that:

               (a) the Supply Agreement, any subsequent supply agreement which
may be entered into by the Parties, and any other agreement executed pursuant to
the Supply Agreement or in order to allow the Company to exploit the
Intellectual Property shall each be considered an "agreement supplementary to
such contract" as that phrase is used in said Section 365(n);

                                       19





               (b) upon rejection of this Agreement, the Company shall be deemed
to have requested of Licensor as debtor in possession (or of Licensor's trustee,
if any) that Licensor as debtor in possession or such trustee (i) immediately
provide and deliver to the Company or any Affiliate as the Company may
subsequently designate in writing, all embodiments of the Intellectual Property,
without further notice or seeking relief from the automatic stay or other leave
from any court; and (ii) not interfere with the rights of the Company, its
Affiliates, and/or any sublicensee under this Agreement, the Supply Agreement,
or any other agreement supplementary to the Supply Agreement, including any
right to obtain Intellectual Property or any embodiment of the Intellectual
Property from another entity; and

               (c) unless and until Licensor as debtor in possession or
Licensor's trustee (if any) rejects this agreement or any agreement
supplementary to this Agreement, then upon the written request of the Company,
and pursuant to Bankruptcy Code Section 365(n)(4), Licensor as debtor in
possession or Licensor's trustee (if any) shall: (i) at Company's option either
perform this Agreement, or provide and deliver to Company all embodiments of the
Intellectual Property, held by either Licensor as debtor in possession or
Licensor's trustee (if any); and (ii) not interfere with the rights of Company,
its Affiliates, and/or any sublicensee under this Agreement, the Supply
Agreement, or any other agreement supplementary to the Supply Agreement,
including any right to obtain rights to or embodiments of the Intellectual
Property, or any embodiment of the Intellectual Property from another entity.

23.      NONSOLICITATION.
         ---------------

         During  the term of this  Agreement,  neither  Party will  solicit  any
employee to leave the employ of the other;  the foregoing does not prohibit mass
media advertising or retained or contingency searches not specifically  directed
towards employees of a Party.

24.      PRESS RELEASES.
         --------------

         Except as required by law or as  expressly  set forth  herein,  neither
Party  shall  make any public  statement,  press  release or other  announcement
relating  to  the  terms  or  existence  of  this  Agreement,  or  the  business
relationship  of the  Parties,  without the prior  written  consent of the other
Party.

25.      AMENDMENTS AND WAIVERS.
         ----------------------

         No terms or provisions of this Agreement shall be varied or modified by
any prior,  contemporaneous or subsequent statement, conduct or act of either of
the  Parties,  whether  oral or written,  except that the Parties may amend this
Agreement by written  instrument  specifically  referring to this Agreement.  No
waiver of any right or remedy  hereunder shall be effective  unless in a writing
signed by the Party to be bound, nor shall any waiver in one instance constitute
a waiver of the same or any other right or remedy in any other instance.

26.      COUNTERPARTS.
         ------------

         This Agreement may be executed in counterparts  and by facsimile,  each
of  which  shall be  deemed  an  original,  and all of such  counterparts  taken
together shall constitute one and the same instrument.

                                       20





                           [Signature page to follow]

                                       21





                                                                 EXECUTION COPY


         IN WITNESS WHEREOF,  Licensor and Company have caused this Agreement to
be executed as of the date first written above.

PROTEIN POLYMER TECHNOLOGIES, INC.       SURGICA CORPORATION


By:/s/ William N. Plamondon, III         By:/s/ Louis R. Matson
   -----------------------------            -----------------------------------
     William N. Plamondon, III              Louis R. Matson
     Chief Executive Officer                Present and Chief Executive Officer


                      [Signature Page to License Agreement]

EXHIBIT A

FORM OF BILL OF SALE AND ASSIGNMENT

Ex.A - 1

BILL OF SALE AND ASSIGNMENT OF 510(k) CLEARANCES

ASSIGNMENT OF 510(k) CLEARANCES (this “Bill of Sale and Assignment”), dated as of December 19, 2005, by and between SURGICA CORPORATION, a Delaware corporation (“Assignor”), and PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (“Assignee”).

WHEREAS, pursuant to that certain License Agreement, dated as of even date herewith, by and between Assignor and Assignee (the “License Agreement” unless otherwise defined herein, capitalized terms shall be used herein as defined in the License Agreement), Assignee, among other things, was granted an exclusive license to Assignor’s intellectual property rights;

WHEREAS, as a condition to execution of the License Agreement, Assignor and Assignee agreed to enter into this Bill of Sale and Assignment pursuant to which Assignor shall assign to Assignee all of its right, title and interest in the 510(k) Clearances (as defined below).

NOW THEREFORE, in consideration of the premises, the mutual agreements and covenants set forth in the License Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee agree as follows:

1.Bill of Sale and Assignment. Assignor hereby sells, assigns, transfers, conveys, grants and delivers to the Assignee and its successors and assigns exclusively, forever, good and marketable title, to all of Assignor’s right, title, and interest in and to PVA Plus™, MaxiStat™, and MicroStat™ 510(k) Clearances issued by the FDA (510(k) clearance numbers K001678, K020033, and K032619, respectively; collectively, the “510(k) Clearances”), free and clear of all encumbrances, except for those permitted encumbrances listed on Schedule A, attached hereto.

2.Obligations and Liabilities Not Assumed. Nothing expressed or implied in this Bill of Sale and Assignment shall be deemed to be an assumption by the Assignee or its affiliates of any liabilities of the Assignor. Neither the Assignee nor its affiliates by this Bill of Sale and Assignment agree to assume or agree to pay, perform or discharge any liabilities of the Assignor of any nature, kind or description whatsoever.

3.Action by Assignor. The Assignor shall immediately forward to the Assignee any communication received in respect of the 510(k) Clearances.

4.Assignor Representations and Warranties. Assignor represents and warrants:

(a) that it owns, free and clear of all encumbrances (other than those listed on Schedule A, attached hereto), all right, title and interest in all of the 510(k)

Clearances, has not previously transferred the 510(k) Clearances, either in their current form or any previous form, to any other Person, and is entitled to use such 510(k) Clearances on an unrestricted basis in the Operations;

(b)that the existing 510(k) Clearances are legally adequate for the devices as currently manufactured and distributed, taking into account all modifications, if any, to the devices after such clearances such that no new 510(k) notice will be required for post-clearance modifications through the Effective Date, if any;

(c)that it has all authorizations, identification numbers, waivers, and registrations, including and shall have the approvals of, and has properly and timely made all required registrations with the FDA and other relevant Governmental Bodies, the absence of which could reasonably be expected to cause a Material Adverse Effect on the ability of Assignee to use, practice and/or otherwise exploit the 510(k) Clearances;

(d)that the 510(k) Clearances are in effect in accordance with their terms; no notices of violations have been issued by the FDA or any other Governmental Body in respect of any of the 510(k) Clearances; and no proceeding is pending or, to the knowledge of Assignor, threatened to revoke or limit any of the 510(k) Clearances; and

(e)that Assignor is in compliance with the terms of such 510(k) Clearances in all respects material to the Operations.

5.Further Assurances. The Assignor hereby covenants and agrees that, at any time and from time to time after the execution of the License Agreement, at the Assignee’s request, the Assignor will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, any and all further acts, conveyances, transfers, assignments, and assurances as necessary to grant, sell, convey, assign, transfer, set over to or vest in the Assignee any of the 510(k) Clearances.

6.No Third Party Beneficiaries. This Bill of Sale and Assignment shall be binding upon and inure solely to the benefit of the Assignee and its permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person, any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Bill of Sale and Assignment.

7.Severability. If any term or other provision of this Bill of Sale and Assignment is invalid, illegal or incapable of being enforced by any Laws or public policy, all other terms and provisions of this Bill of Sale and Assignment shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either the Assignor or the Assignee. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Bill of Sale and Assignment so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that

- 2 -

the transactions contemplated by this Bill of Sale and Assignment are consummated as originally contemplated to the greatest extent possible.

8.Governing Law. This Bill of Sale and Assignment shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts executed in and to be performed in that State without regard to its conflicts or choice of law principles and regulations.

9.Counterparts. This Bill of Sale and Assignment may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by Assignor and Assignee in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.

[Signature page to follow]

- 3 -

IN WITNESS WHEREOF, Assignor and Assignee have executed this Bill of Sale and Assignment to be made effective as of the date first written above.

SURGICA CORPORATION	PROTEIN POLYMER TECHNOLOGIES, INC.
By:_____________________________	By:_____________________________
Name: Louis R. Matson	Name: William N. Plamondon, III
Title: President & Chief Executive Officer	Title: Chief Executive Officer

[Signature Page to Bill of Sale and Assignment]

EXHIBIT B

FORM OF 510(K) CLEARANCE ASSIGNMENT NOTICE TO FDA

Ex.B - 1

[SURGICA LETTERHEAD]

[Date]

Division of General and Restorative and

Neurological Devices (HFZ-410)

Center for Devices and Radiological Health

Food and Drug Administration

9200 Corporate Boulevard

Rockville, MD 20850

RE: §510(k) Premarket Notifications Nos. K001678, K020033, and K032619

To Whom It May Concern:

This correspondence is intended to advise the agency that, effective immediately, Surgica Corporation (Establishment Registration No. 2953190), is assigning all rights to the three 510(k)s identified above, and to the products described therein and cleared by FDA for commercial distribution in the United States thereby, to:

Protein Polymer Technologies, Inc. [PPTI]

10655 Sorrento Valley Road

San Diego California 92121

Establishment Registration No.: (Applied For)

The products that are the subject of the 510(k) submissions referenced above are Pva-Plus™ Foam Embolization Particles (K001678), MaxiStat™ Pva Foam Embolization Particles (K020033), and MicroStat™ Pva Foam Embolization Particles (K032619). Henceforth, all rights to the 510(k)s, and to distribute the subject devices, are assigned exclusively to PPTI, by Surgica. The Official Correspondent for PPTI is Steve Reitzler, who can be reached by telephone at (858) 558-6064, by telefacsimile at (858) 558-6477, or by e-mail at sreitzler@ppti.com.

Sincerely,

Louis R. Matson

President & CEO

cc:	Steve Reitzler, RAC, Vice President, Regulatory Affairs & Quality Assurance
	Protein Polymer Technologies, Inc.

SCHEDULE A

SCHEDULE OF PATENTS

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Sc.A - 1

SCHEDULE B

LICENSE FEE - ASSUMPTION OF DEBT

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Sc.B - 1

SCHEDULE C

LICENSE FEE - CASH PAYMENTS

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Sc.C - 1

EX-10

                                                                   Exhibit 10.42

                                                                  EXECUTION COPY

                          SUPPLY AND SERVICES AGREEMENT

         THIS SUPPLY AND SERVICES AGREEMENT is entered into as of December 19,
2005 (the "Effective Date") by and between PROTEIN POLYMER TECHNOLOGIES, INC., a
Delaware corporation ("Company") and SURGICA CORPORATION, a Delaware corporation
("Surgica"). Company and Surgica are each hereinafter referred to as a "Party"
and collectively as the "Parties".

                              W I T N E S S E T H:

         WHEREAS, Company and Surgica have entered into an Asset Purchase Option
Agreement, dated as of November 23, 2005 (the "Option Agreement"), pursuant to
which Company, among other things, obtained the right to purchase from Surgica
substantially all of the assets of Surgica then existing or thereafter acquired
through the date of the exercise of the Option (as that term is defined in the
Option Agreement);

         WHEREAS, in connection with the Option Agreement and this Agreement,
the Parties are entering into a separate License Agreement of even date herewith
(the "License Agreement") wherein Company acquires from Surgica an exclusive
license to Intellectual Property for use in the Field;

         WHEREAS, Surgica has experience in the development of Products and has,
or will have as a result of the Parties fulfilling their obligations hereunder,
the facilities, equipment, employees, materials and other resources to
accomplish development and manufacturing activities, on behalf of Company, with
respect to the Intellectual Property; and

         WHEREAS, as partial consideration offered by Surgica to induce Company
to enter into the Option Agreement, Surgica desires to supply certain services
and manufactured goods and materials to Company and receive certain services
from Company.

         NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein set forth and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the Parties hereto
hereby agree as follows:

1.    Definitions. All capitalized terms used but not defined in this Agreement
shall have the meanings ascribed thereto in the License Agreement. The following
terms shall have the meanings set forth below:

      1.1   "Clinical Use" shall mean use in humans.

      1.2   "Deliverable" shall mean services, materials or items to be
delivered by one Party to the other under this Agreement pursuant to a Project
Plan.

      1.3 "Delivery Dates" shall mean the delivery dates for specific orders of
Product as may be specified by Company in its reasonable discretion in a Project
Plan or Order.

      1.4 "ECA" means the European Competent Authorities, any Notified Bodies,
or any successor agencies responsible for European Regulatory Approvals.





      1.5 "Surgica Financial Difficulty" shall mean the occurrence of: (a)
filing in any court pursuant to any statute, a petition in bankruptcy or
insolvency or for reorganization in bankruptcy or for an arrangement or for the
appointment of a receiver or trustee for such Party of its assets; (b) being
served with an involuntary petition against it, filed in any insolvency
proceeding, and where such petition has not been dismissed within sixty (60)
days after the filing thereof; (d) proposing or being a party to any
dissolution; or (e) making an assignment for the benefit of creditors.

      1.6 "Fully-Burdened Cost" shall mean all of the direct and proportional
indirect costs and expenses for providing the specified Product or services,
including but not limited to raw materials and supplies, labor, equipment,
utilities, facilities and overhead as determined according to generally accepted
accounting principles (GAAP) consistently applied. Specifically, with respect to
Company's Fully-Burdened Costs, such Fully-Burdened Costs shall include, without
limitation, amounts paid to Surgica pursuant to the applicable budgets provided
for herein.

      1.7 "Governmental Body" means any: (a) nation, principality, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; (c) governmental or quasi-governmental authority of any nature
(including any governmental division, subdivision, department, agency, bureau,
branch, office, commission, council, board, instrumentality, officer, official,
representative, organization, unit, body or entity and any court or other
tribunal); (d) multi-national organization or body; or (e) individual, entity or
body exercising, or entitled to exercise, any executive, legislative, judicial,
administrative, regulatory, police, military or taxing authority or power of any
nature.

      1.8 "Non-Clinical Use" shall mean use other than in humans.

      1.9 "Company Facilities" shall mean Company's offices and laboratory space
located at 10655 Sorrento Valley Road, San Diego, California 92121 or, in the
event Company no longer maintains offices and laboratory space at such address,
such new address as Company shall maintain offices and/or laboratory space.

      1.10 "Company's Technology" shall mean all inventions, discoveries,
know-how, works of authorship, methods, processes, data, information,
technology, research tools, techniques, processes, methods, compositions,
tangible materials (including, without limitation, vectors, proteins, assays and
the like), formulas and all other scientific or technical information or
materials, in whatever form, and all rights embodied in intellectual property
therein and thereto anywhere in the world, that are owned, controlled or
licensed-in by Company (excluding any Intellectual Property licensed-in from
Surgica or its Affiliates) and Company's Confidential Information, and all
embodiments thereof.

      1.11 "Cost of Goods Sold" or "COGS" shall have the definition set forth in
Section 5.5.1.3.

                                       2





      1.12 "Product" shall mean Products as defined in the License Agreement
provided by Surgica to Company that are set forth in the applicable Project Plan
or Order under this Agreement.

      1.13 "Project" shall mean a project referred to in Section 2 below and as
further defined in each Project Plan (defined in Section 2.2 below).

      1.14 "Project Technology" shall mean all inventions, discoveries,
know-how, works of authorship, methods, processes, data, information,
technology, research tools, techniques, processes, methods, compositions,
tangible materials, formulas and all other scientific or technical information
or materials, in whatever form, that are invented, discovered, developed or
otherwise generated by either Party, their respective Affiliates or both Parties
jointly during and in the course of the obligations set forth herein and in each
Project Plan hereunder, and conducted pursuant hereto and thereto, and all
rights embodied in intellectual property therein and thereto anywhere in the
world.

      1.15 "Regulatory Agency" means (a) the FDA, (b) the ECA, or (c) any other
Governmental Body with regulatory authority similar to the FDA or ECA in any
other jurisdiction anywhere in the world.

      1.16 "Regulatory Approval" shall mean with respect to any country, filing
for and receipt of all regulatory agency or other registrations, clearances and
approvals required in such country in respect of Product for any purpose
specified in this Agreement or, if no purpose is specified, to enable Product to
be manufactured, offered for sale, sold and distributed, and for Non-Clinical
Use or Clinical Use to take place, in such country.

      1.17 "Surgica's Technology" shall mean all inventions, discoveries,
know-how, works of authorship, methods, processes, data, information,
technology, research tools, techniques, processes, methods, compositions,
tangible materials, formulas and all other scientific or technical information
or materials, in whatever form, and all rights embodied in Intellectual Property
therein and thereto anywhere in the world, that are owned, controlled or
licensed-in by Surgica (excluding any intellectual property licensed-in from
Company or its Affiliates) and Surgica's Confidential Information, and all
embodiments thereof.

      1.18 "Surgica Budget" shall mean the currently approved budget for
Surgica's operations under approved Project Plans.

2.    Project Development.

      2.1  Management Committee; Project Coordinators. As of the Effective Date,
the Parties have formed a Management Committee (the "Committee") to oversee the
Parties' rights and obligations under this Agreement. Each Party shall designate
in Exhibit A attached hereto one (1) individual who will be the initial "Project
Coordinator" for such Party and up to two (2) representatives (each, a
"Representative"). Together, the Project Coordinators shall (a) serve on the
Committee, (b) have management authority, (c) facilitate day-to-day
communications between the Parties, (d) monitor the schedules and progress of,
and have responsibility for, the work performed under this Agreement, (e)
receive and submit requests for information and/or assistance, (f) supervise the
exchange of Confidential Information (defined in Section 10 below),

                                       3





and (g) designate its authority to one or more of the responsibilities listed in
clauses (a) through (f) above to its respective representative(s). Company's
Project Coordinator shall serve as the chair person of the Management Committee.
The Project Coordinators will meet (including telephonically) as is required by,
or reasonably desirable to, Company to discuss the progress of the development
effort for each Project and, if applicable, to exchange information and
Deliverables. Neither Party's Project Coordinator is authorized to amend, alter
or extend this Agreement in any manner. All disputes concerning one or more
Projects shall be resolved by the chair person of the Management Committee. Each
Party may change its Project Coordinator and/or Representative(s) at any time,
and from time to time, by giving the other Party prior written notice.

      2.2  Preparation of Project Plan. For each Project that the Parties
undertake under this Agreement, the Committee shall prepare a project plan
("Project Plan") setting forth the goals and objectives of, and Surgica's budget
for, the Project, identified with respect to the Parties' responsibilities. The
Parties agree that the Project Plan shall automatically, without any further
action by the Parties, incorporate the terms and conditions of this Agreement.
The Project Plan shall be reviewed quarterly by the Committee and may be
amended, but only if such amendment is in writing and signed by each Project
Coordinator. In the event of any conflict between any terms of this Agreement
and the terms set forth in any Project Plan, the terms of this Agreement shall
govern.

      2.3  Project Plan No. 1. Prior to the Effective Date, the Parties shall
agree upon a Project Plan (which shall be adopted by the Committee upon the
Effective Date) under which Surgica shall [*****] as more specifically set
forth in Schedule 2.3 attached hereto ("Project Plan No. 1"). Surgica shall use
commercially reasonable efforts to (i) collaborate with and assist Company with
obtaining all necessary certifications and Regulatory Approval concerning
Project Plan No. 1; and (ii) provide data and technical support as reasonably
requested by Company in connection with Company's fulfillment of its obligations
under Project Plan No. 1.

      2.4  Surgica Budget. As of the Effective Date, the Parties agree that the
Project Plan No. 1 Budget shall be the Surgica Budget for the first year under
this Agreement. Every six (6) months, the Committee shall prepare an updated
budget for the succeeding twelve (12) months, taking into consideration progress
against the Sales Forecast and each Project Plan. The updated Surgica Budget
shall be approved in writing by the Company's Project Coordinator.
Notwithstanding the foregoing, the Surgica Budget may be adjusted from time to
time, and at any time, upon the prior written approval of Company's Project
Coordinator. According to the Surgica Budget then in effect, Surgica shall
invoice company monthly in advance and Company shall pay Surgica the invoiced
amount within ten (10) days.

      2.5  Surgica Budget Reconciliation. No later than fifteen (15) days after
the conclusion of each calendar quarter, Surgica shall complete a review of its
actual expenses under the applicable Project Plan(s) and reconcile and compare
such actual expenses against the sum of all payments (including, without
limitation, any credits that result from the reconciliation of the Surgica
Budget from any prior calendar quarter(s)) made during the calendar quarter just


[*****] Material is confidential and has been omitted and filed separately with
the Securities and Exchange Commission.

                                       4





concluded by Company (i) pursuant to the Surgica Budget, and (ii) that were made
to Surgica or on behalf of Surgica, to a third party, that, in Company's sole
discretion, were reasonably necessary or desirable to reduce the risk of an
event of a Surgica Financial Difficulty ("Budget Payments"). Surgica shall
provide an accurate report of the results of its review to Company upon
completion. If Company's Budget Payments exceed Surgica's actual expenses
(including any amounts paid by Company on behalf of Surgica) during the reviewed
calendar quarter, Company may apply the difference (i.e., the amount of Budget
Payments that was in excess of Surgica's actual expenses during the reviewed
period) to its next Budget Payment(s) to Surgica.

      2.6  Submission of Project Proposals for Additional Projects. Either Party
may submit to the Project Coordinators a project proposal describing the
Project, the work to be performed, and to the extent then determinable, a
preliminary development schedule. The Project Coordinators shall each promptly
review and evaluate the project proposal. If the Project Coordinators each agree
to pursue the subject matter of the proposal, the Committee shall prepare a
Project Plan. Approval of a Project Plan shall be effective only if the
president and/or chief executive officer of each Party approves the Project Plan
in writing. Each Project Coordinator will notify the other of approval or
rejection of a Project Plan or may propose modifications to a Project Plan. Any
Project Plan not approved by both Parties within thirty (30) days following
submission shall be deemed rejected. Upon the approval of any additional Project
Plan, the Surgica Budget shall be revised as required, subject to the prior
written approval of Company's Project Coordinator.

      2.7  Development Obligations. Each Party shall use its commercially
reasonable efforts to undertake and complete each Project in accordance with,
and substantially on the schedule specified in, the applicable Project Plan.
Notwithstanding the foregoing, prior to the expiration of the Option Period (as
that term is defined in the Option Agreement), Surgica shall prioritize and
utilize one hundred percent of its resources to and for the work performed under
this Agreement. Company shall provide Surgica with a monthly statement
describing Company's Fully-Burdened Costs incurred under this Agreement.

      2.8  Acceptance by Company.
           ---------------------

           2.8.1 When Surgica has completed a Deliverable due under a Project
Plan, Surgica shall deliver it to Company. Company may reject a Deliverable by
providing Surgica with a written notice describing the Deliverable's failure to
meet a material requirement stated in the applicable Project Plan (a
"Nonconformity").

           2.8.2 Following rejection of a Deliverable pursuant to this Agreement
due to a Nonconformity, Surgica will use commercially reasonable efforts to
promptly correct such Nonconformity. When it has made the necessary corrections,
Surgica will again deliver the Deliverable to Company and the
acceptance/rejection/correction provisions of Section 2.6.1 above shall be
reapplied until the Deliverable is accepted; provided, however, that upon the
third or any subsequent rejection, Company may terminate this Agreement by
thirty (30) days prior written notice unless the Deliverable is accepted during
the notice period.

      2.9  Costs and Expenses. Except as otherwise provided herein, each Party
shall bear its own costs and expenses incurred by it in performing work under
this Agreement.

                                       5





      2.10  Site Visits. For purposes of reviewing the progress of any Project,
the Parties may facilitate an exchange of technical personnel to work on-site at
each other's facilities. Company shall be free to visit those portions of
Surgica's facilities where work on the Project is being conducted. Such visits
shall be at reasonable intervals following reasonable notice during regular
business hours. Each Party shall indemnify and hold the other Party harmless
from and against any liability arising from the activities of its employees in
the other Party's facilities.

      2.11 Project Delays; Project Failure. If at any time during the course of
any Project, either Party (the "Delaying Party") anticipates that it will not be
able to meet any milestone or other target or deadline for which it is
responsible by the date set forth on the applicable Project Plan or established
by the Management Committee, the Delaying Party shall so notify the other Party
(the "Affected Party") in writing specifying the reasons for delay. From and
after such notice, the Parties shall cooperate and use diligent efforts to solve
the problems identified, and the milestone dates or other deadlines may, with
the Affected Party's written approval, be set back for as long a period as is
required to solve the problems so identified; provided, however, that if for any
reason other than due to the fault of Company, Surgica fails or will fail to
complete a milestone or other target or deadline, then Company may terminate
this Agreement immediately on written notice pursuant to Section 12 below.

      2.12 Inventory Services. Surgica shall provide inventory services to
Company including, without limitation, reasonable facilities to store inventory
of Product developed and/or manufactured hereunder.

3.    Ownership.

      3.1  Company's Technology and Project Technology. Except as expressly and
unambiguously licensed herein or in the License Agreement, as between the
Parties, Company shall retain and exclusively own all rights, title and interest
(including all intellectual property and proprietary rights throughout the
world) in and to Company's Technology and the Project Technology, and any and
all improvements, modifications and derivative works thereof created hereunder
(by whomever produced).

           3.1.1 Assignment. Surgica agrees to assign and does hereby assign to
Company all rights, title and interest including, without limitation, copyright
rights, patent rights, trade secret rights, mask work rights and all other
intellectual property and proprietary rights that Surgica may have or acquire
throughout the world in and to any improvements, modifications and derivative
works of Company's Technology or the Project Technology made, conceived or
reduced to practice, alone or with others, during the course of development
under this Agreement or any Project Plan. The foregoing shall apply to all
rights of every kind and character whatsoever throughout the world, whether or
not such rights are now existing or come into existence hereafter, and whether
or not such rights are now known, recognized or contemplated. Surgica agrees to
perform, during and after the term of this Agreement, all acts deemed necessary
or desirable by Company to permit and assist it in evidencing, recording and
perfecting such assignment and to enforce, maintain and defend the rights being
assigned hereunder. In connection with such assignment, Surgica irrevocably
designates and appoints Company its agent and attorney-in-fact to act for and in
its behalf to execute, register and file any applications, and to perform all
other lawfully permitted acts, to further the registration,

                                       6





prosecution and issuance of copyrights, patents, trademarks and similar
protections with the same legal force and effect as if executed by Surgica.

      3.2  Surgica's Technology. As between the Parties, Surgica shall retain
and exclusively own all title to and, except as expressly and unambiguously
licensed herein or in the License Agreement, all rights and interest (including
all intellectual property and proprietary rights throughout the world) in
Surgica's Technology and any and all improvements, modifications and derivative
works thereof (by whomever produced).

      3.3  Protective Filings. Company shall have the exclusive right and be
responsible for determining whether and to what extent to file applications for
copyrights, patents, trademarks and similar protections and to maintain any
issued copyrights, trademarks, patents and similar protections (and all
divisions, continuations, continuations in part, reissues, reexaminations or
extensions thereof) anywhere in the world relating to Company's Technology, the
Project Technology and, to the extent it is licensed to Company hereunder or
pursuant to the License Agreement, Surgica's Technology. Surgica shall fully
cooperate with Company as may be necessary for the preparation, filing and
prosecution of each such application and for maintenance, renewal and defense of
each copyright, trademark, patent or similar protection granted, including
executing all documents and maintaining and furnishing all records reasonably
necessary to perform such acts concerning the Project Technology and/or
Surgica's Technology. Company shall provide Surgica with a complete copy of each
patent application and all communications received from, or sent to, the United
States Patent and Trademark Office and foreign government patent offices
concerning Surgica's Technology, to the extent applicable.

      3.4  Regulatory Approvals. Company shall be responsible for all filings
with Regulatory Agencies related to Product throughout the world. All regulatory
submissions and Regulatory Approvals concerning Company's Technology, the
Project Technology and, to the extent it is licensed to Company hereunder or
pursuant to the License Agreement, Surgica's Technology, shall be held by and in
the name of Company or its designees.

4.    License Grant.

      4.1  By Company. Subject to all of the terms and conditions of this
Agreement and any Project Plan, Company hereby grants to Surgica a royalty-free,
non-exclusive, non-transferable, non-sublicensable and worldwide license for the
term of this Agreement to:

           4.1.1 make, use, reproduce, modify and create any derivative works of
any Project Technology; and

           4.1.2 make, use, reproduce, modify and create derivative works of
Company's Technology solely for the purpose of performing its development
obligations pursuant to this Agreement and strictly in accordance with, and
subject to the limitations set forth in, the applicable Project Plan.

      4.2 By Surgica. Subject to all of the terms and conditions of this
Agreement and any Project Plan, Surgica hereby grants to Company:

                                       7





           4.2.1 a non-exclusive, non-transferable, non-sublicensable,
royalty-free and worldwide license for the term of this Agreement to make, have
made, use, reproduce, modify and create derivative works of Surgica's Technology
for the purpose of performing its development obligations pursuant to this
Agreement and strictly in accordance with the applicable Project Plan.

5.    Supply of Products; Post-Supply Obligations.

      5.1 Supply. Surgica, within the limitations contained in this Section 5,
shall exclusively sell to Company such quantities of Product for Clinical Use as
Company may order through a purchase order ("Order"), subject to the terms
thereof. Surgica shall provide to Company Product for Non-Clinical Use as may be
reasonably requested by Company from time to time.

      5.2  Quantity.
           --------

           5.2.1 Within ten (10) days of Effective Date, with respect to each
Product described in Project Plan No. 1, Company shall deliver to Surgica a
good-faith forecast of Company's estimated quantity requirements for such
Product for the succeeding twelve (12) months (the "Sales Forecast"), which
Company shall update quarterly. With respect to Product developed pursuant to
additional Project Plans, Company shall provide such forecast no later than
three (3) months prior to the anticipated date of Regulatory Approval. Surgica
shall reasonably manage its capacity, resources and inventory to ensure a supply
of Product in inventory to completely and timely satisfy Company's estimates and
forecasts. The failure of Surgica to supply Company with Product pursuant to the
Sales Forecast shall be a material breach of this Agreement.

      5.3  Delivery.
           --------

           5.3.1 Prior to the release of any Product lot into Surgica's
inventory for Clinical Use, Surgica shall (a) provide to Company all documents
necessary (or reasonably requested by Company) to permit Company to confirm that
the applicable lot meets the applicable specifications, including without
limitation copies of all certificates, reports, test results or other
information produced by Surgica, or by a third party consultant or contractor at
Surgica's request, and (b) obtain written approval from Company that Company has
reviewed and is satisfied that the applicable lot meets such specifications.

           5.3.2 All Products ordered pursuant to an Order shall be delivered to
Company or its designee(s) as specified in the Order, F.O.B. Surgica's plant or
other place of shipment. Surgica shall deliver Product by the applicable
Delivery Dates and assist Company in arranging any desired insurance (in amounts
that Company shall determine) and transportation. All customs, duties, costs,
taxes, insurance premiums, and other expenses relating to such transportation
and delivery shall be at Company's expense.

           5.3.3 Surgica will package Product for shipment in accordance with
the specifications set forth in applicable Project Plan or Order, as applicable.

      5.4  Rejection of Product in Case of Nonconformity.
           ---------------------------------------------

                                       8





           5.4.1 Company may reject any lot of Product which is (i) not
conforming with the specifications for the applicable Product or (ii)
adulterated or misbranded within the meaning of the Federal Food, Drug and
Cosmetic Act (the "Act").

                 5.4.1.1 In order to reject a Product lot, Company must (i) give
notice to Surgica of Company's intent to reject the lot within fifteen (15) days
of receipt of the documentation specified in 5.3.1 (a) together with a written
indication of the reasons for such rejection. After notice of intent to reject
is given, Company shall cooperate with Surgica in determining whether rejection
is necessary or justified. In the case of Products having latent defects which
upon diligent examination by Company could not have been discovered, Company
must give notice of Company's intent to reject within five (5) days after
discovery of such defects, provided that such notice may in no event be given
later than one hundred and eighty (180) days after Company's approval of the lot
for release to inventory. In the event that any Product is found to be defective
within such one hundred and eighty (180) day period by Company, a Company
customer or subcontractor, Surgica shall credit Company against any royalty
payments due for the total cost of the defective Product, plus all other costs
incurred, including, but not limited to the costs of other materials, subsequent
processing costs, transportation costs, and the costs of product recalls.

                 5.4.1.2 In any event, Company shall pay for the Product as
otherwise provided herein and shall be entitled to a refund of the purchase
price (together with insurance and freight charges) of properly rejected
Products at the time they are ultimately rejected, provided that if Surgica
disputes the rejection, credit shall be made against the royalty due Surgica, if
at all, at the time the dispute is finally resolved. Surgica shall notify
Company as promptly as reasonably possible whether it accepts Company's basis
for any rejection and, in no event, later than fifteen (15) days after receipt
of Company's notice of rejection.

           5.4.2 Whether or not Surgica accepts Company's basis for rejection,
promptly on receipt of a notice of rejection, Surgica shall use its best
efforts, at Company's request, to provide replacement Product which shall be
purchased by Company as provided in this Agreement.

           5.4.3 Unless Surgica requests the return to it of a defective lot
within thirty (30) days of receipt of Company's notice of rejection, Company
shall destroy such lot promptly and provide Surgica with certification of such
destruction. Company shall, upon receipt of Surgica's request for return,
promptly dispatch said lot to Surgica, at Surgica's cost, expense and risk, such
cost and expense to be credited against any royalty due Surgica.

                                       9





      5.5  Price and Payments.
           ------------------

           5.5.1 Price.
                 -----

                 5.5.1.1 Non-Clinical Use Product. Surgica shall [*****] for
reasonable amounts of Product for Non-Clinical Use.

                 5.5.1.2 Interim Period. Until Company's Net Sales of Product
for Clinical Use exceeds its Fully-Burdened Costs, the price for Product for
Clinical Use shall be the price set in the applicable Project Plan, as may be
amended from time to time by mutual written agreement of the Parties.

                 5.5.1.3 Post-Interim Period. If Company's Net Sales of Product
exceeds its Fully-Burdened Costs, the Parties shall mutually determine the Cost
of Goods Sold ("Cost of Goods Sold" or "COGS"), which shall be based upon a
rigorous analysis of relevant overhead and actual labor in production. Upon
determination and mutual written agreement of COGS for each applicable Product
for Clinical Use, the applicable Project Plan shall be amended to include such
definition and all applicable Product for Clinical Use supplied pursuant to this
Agreement shall bear such COGS price.

                 5.5.1.4 Reconciliation. From time to time, the Product
Coordinators shall meet and reconcile the operational definition of COGS against
the actual cost of goods sold. Unless otherwise agreed to in writing, any
amounts paid by Company in excess of the actual cost of goods sold may be (i)
credited against future purchases of Product for Clinical Use or future payments
to be made to Surgica pursuant to the applicable Surgica Budget or (ii) credited
against any royalty due Surgica, at the discretion of Company.

           5.5.2 Method of Payment. Unless otherwise provided for herein, all
payments due hereunder to Surgica shall be paid to Surgica not later than thirty
(30) days following the date of the applicable invoice.

           5.5.3 Records; Examination of Books. Surgica shall keep and maintain
adequate and compete records and books of account documenting all of its
expenses related to the respective Project Plans and Products provided to
Company hereunder. Company shall have the right, at its own expense, for any
period during which Company purchases Product hereunder and for three (3) years
thereafter, to have an independent public accountant, reasonably acceptable to
Surgica, examine the relevant financial books and records of account of Surgica
during normal business hours, upon reasonable notice, to determine or verify the
appropriate Fully-Burdened Cost of Product purchased hereunder. If an error of
two percent (2%) or more in Company's favor (i.e., if Surgica had overcharged
for the supplied Product in an amount equal to 2% or more of the actual
Fully-Burdened Cost of such Product) are discovered as a result of such
examination, the expense of such examination and the deficiency (including
interest on the delinquent amount of not less than one percent (1%) per month)
shall be credited against any royalty due Surgica. The opinion of such
independent public accountant shall be binding on the parties hereto with
respect to Fully-Burdened Cost hereunder.

[*****] Material is confidential and has been omitted and filed separately with
the Securities and Exchange Commission.

                                       10






      5.6  Production and Quality Control.
           ------------------------------

           5.6.1 Surgica warrants, represents and covenants that all Product
produced for or supplied to Company hereunder shall (a) be manufactured free
from defects in materials and workmanship; (b) with respect to Product for
Clinical Use, (i) meet the specifications in all applicable Regulatory Approvals
of all applicable Regulatory Agencies including, without limitation, compliance
with applicable ISO 13485 Standards, Council Directive Concerning Medical
Devices 93/42/EEC, and Quality Systems Regulations in effect at the time of
production and/or such other lawful and appropriate standards as the parties may
agree upon in writing. Each Party acknowledges that production specifications
may be modified from time to time to comply with applicable laws and
regulations.

           5.6.2 Surgica shall retain samples of all ingredients, packaging
materials, records and data as may be in accordance with the sample and record
retention policies which Surgica uses (or used) in connection with manufacture
of Product for its own account; provided such retention shall at all times be in
accordance with all applicable Regulatory Approvals, Quality System Regulations,
Council Directive Concerning Medical Devices 93/42/EEC, and ISO 13485 Standards.
Company shall have the right, no more frequently than once every six (6) months,
to review Surgica's manufacturing procedures and operations and its records
relating to the manufacture and shipment of Product. Additionally, Company may
from time to time audit Surgica's compliance with all applicable Regulatory
Approvals (including, without limitation, Quality System Regulations, Council
Directive Concerning Medical Devices 93/42/EEC, and ISO 13485). Surgica shall
notify Company in writing of any contemplated changes to, or modifications of,
its facilities, methods, processes, specifications, or other aspect of its
manufacturing operations that may have an impact on the efficacy or safety of
the Product and shall seek and, subject to Company's discretion, obtain
Company's written approval of such changes or modifications before implementing
the contemplated changes and/or modifications. No inspection or testing of
Product by Company, or failure to test or inspect, nor any audit, or failure to
audit, shall relieve Surgica of its obligations hereunder. Copies of all
certificates, reports, test results or other information produced by Surgica, or
by a third party consultant or contractor at Surgica's request, that directly
relate to lots of Product supplied to Company or its designee(s) shall, upon the
written request of Company, be furnished to Company and may be relied upon by
it.

      5.7  Title to Product. Surgica hereby covenants, represents and warrants
to Company that title to all Product supplied hereunder shall pass to Company
and all Company customers and subcontractors as provided herein (or in the
applicable Project Plan or Order) free and clear of any security interest, lien,
or other encumbrance.

      5.8  Post-Supply Obligations.

           5.8.1 Complaints. Company and Surgica shall develop a protocol for
exchanging information on product complaints concerning each of the Products of
which either Party becomes aware, so as to allow each of Company and Surgica to
comply with its respective regulatory obligations. At a minimum, such protocol
shall provide that if either Party receives a complaint or information regarding
a Product with respect to which would be required under applicable law to be
disclosed to a Regulatory Agency, it shall promptly, but in any event not

                                       11





later than seventy-two hours (72) hours after receipt, advise the other Party in
writing of the details of such complaint or information. Promptly thereafter,
Company shall report such complaint or information to the appropriate Regulatory
Agencies. The Party initially receiving the complaint or information shall
provide the other Party with all available follow-up information related to such
incident (including any information in such Party's possession as may be
reasonably required by the other Party to satisfy its regulatory filing
obligations). Surgica will provide Company with any information in its
possession that may facilitate prompt and favorable resolution of any customer
complaints pertaining to the Product.

           5.8.2 Recalls. Recalls shall be directed by Company in its sole
discretion. If Company, in its sole discretion , by order of a government or
government agency, or at the direction of Surgica, determines to recall any
Product, Company shall notify Surgica promptly by telephone or electronic mail
or telecopy. Company shall give Surgica reasonable opportunity to comment in
advance on any public announcement to be made by Company regarding any recall.
In the event any Product is recalled, Company shall assume complete
responsibility for conducting such recall; however, Surgica shall timely provide
Company with all information that may be in Surgica's possession or control
concerning the manufacture of the Product which Company reasonably may require
to conduct such recall. Company and Surgica shall fully cooperate with each
other to identify and correct deficiencies, if any, in the manufacture,
shipment, storage or distribution of Product.

6.    General Representations and Warranties; Disclaimer.

      6.1  Representations and Warranties. Each Party represents and warrants to
the other that:

           (i) this Agreement has been duly authorized, executed and delivered
and constitutes a valid and binding obligation of such Party, enforceable in
accordance with its terms;

           (ii) there are no outstanding agreements, assignments, claims or
encumbrances inconsistent with the provisions of this Agreement;

           (iii) it has the full power and right to grant the licenses,
sublicenses and rights herein and that it will obtain agreements with its
employees and consultants sufficient to allow it to provide the assignments
granted herein; and

           (iv) performance of all the terms of this Agreement shall not breach
any agreement entered into prior to the execution of this Agreement to keep
proprietary information acquired by it in confidence or in trust.

      6.2  Warranty Disclaimer. EXCEPT FOR SUCH REPRESENTATIONS AND WARRANTIES
AS ARE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY OTHER
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT WITH RESPECT TO ANY DEVELOPED PRODUCT, ANY LICENSE GRANTED
HEREIN OR SERVICES PERFORMED HEREUNDER.

                                       12





7.    Limited Liability.

      EXCEPT WITH RESPECT TO EACH PARTY'S INDEMNIFICATION AND CONFIDENTIALITY
OBLIGATIONS (SET FORTH IN SECTIONS 2.8, 9, 10 AND 14), NOTWITHSTANDING ANYTHING
ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY SHALL BE LIABLE OR OBLIGATED
UNDER ANY SECTION OF THIS AGREEMENT OR UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY SPECIAL, EXEMPLARY,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.

8.    Insurance.

      Company and Surgica shall, prior to commencement of activities involving
Clinical Use of Product, and at all times thereafter until twelve (12) months
after the expiration or termination of this Agreement, each carry such products
liability and comprehensive general liability insurance, premises and
operations, naming the other party as an insured under such policy, and in such
amounts and subject to such other requirements and restrictions as may be
customary in the United States; provided, however, that Surgica shall not be
required to carry product liability insurance during the period commencing on
the Effective Date and continuing until the earlier of (i) the Effective Date of
the Purchase Agreement pursuant to Company exercising the Option (as that term
is defined in the Option Agreement) and (ii) the expiration or earlier
termination of the Option Agreement. Surgica and Company shall have the right to
audit the other party to ensure compliance with this obligation. [*****] The
parties agree that any failure to comply with the obligations of this Section 8
shall be deemed a material breach of this Agreement.

9.    Indemnification.

      9.1  Company Indemnification. Company shall indemnify and hold harmless,
pursuant to the provisions of this Section 9, Surgica and each of its officers,
directors, employees, agents and Affiliates (collectively, the "Surgica
Indemnitees"), from and against, and will reimburse each such Surgica Indemnitee
with respect to, any and all Third Party claims, actions, demands, losses,
damages, liabilities, costs and expenses to which such Surgica Indemnitee may
become subject, including reasonable fees and disbursements of counsel and
expenses of reasonable investigation (collectively, "Surgica Losses"), arising
out of, based upon or caused by: (a) the inaccuracy of any representation or the
breach of any warranty, covenant or agreement of Company contained in this
Agreement, the License Agreement or the Option Agreement; (b) any failure by
Company to conduct its obligations arising hereunder in a diligent and
professional manner and in accordance with all applicable laws and regulations;
or (c) any gross negligence or intentional wrongdoing by Company in the
performance of its obligations (except in each case, and solely to the extent,
that any Surgica Loss is due to the gross negligence or willful misconduct of
one or more Surgica Indemnitees).

      9.2  Surgica Indemnification. Surgica shall indemnify and hold harmless,
pursuant to the provisions of this Section 9, Company and each of its officers,
directors, employees, agents

[*****] Material is confidential and has been omitted and filed separately with
the Securities and Exchange Commission.

                                       13





and Affiliates (collectively, the "Company Indemnitees"), from and against, and
will reimburse each such Company Indemnitee with respect to, any and all Third
Party claims, actions, demands, losses, damages, liabilities, costs and expenses
to which such Company Indemnitee may become subject, including reasonable fees
and disbursements of counsel and expenses of reasonable investigation
(collectively, "Company Losses"), arising out of, based upon or caused by: (a)
the inaccuracy of any representation or the breach of any warranty, covenant or
agreement of Surgica contained in this Agreement, the License Agreement or the
Option Agreement; (b) the manufacture or supply of Products; (c) any failure by
Surgica to conduct its obligations arising hereunder in a diligent and
professional manner and in accordance with all applicable laws and regulations;
(d) infringement by Surgica's Technology or Project Technology developed by
Surgica in connection with this Agreement or any Project Plan of any Patent
issued as of the date of delivery of such of Surgica's Technology or Project
Technology or any Copyright or Trademark or misappropriation of any trade
secret; or (e) any gross negligence or intentional wrongdoing by Surgica in the
performance of its obligations (except in each case, and solely to the extent,
that any Company Loss is due to the gross negligence or willful misconduct of
one or more Company Indemnitees); provided, however, that Surgica shall not be
obligated to indemnify the Company Indemnitees for claims arising out of any
Product's infringement of any intellectual property right of a Third Party
resulting from such Company Indemnitee's: (i) misuse or mishandling of Product
or (ii) unauthorized modification of Product.

      9.3  Indemnification Procedures. Each Party, on behalf of itself and its
respective Surgica Indemnitees or Company Indemnitees (each such Person, an
"Indemnitee"), agrees to provide the indemnifying Party prompt written notice of
any action, claim, demand, discovery of fact, proceeding or suit (collectively,
a "Claim") for which such Indemnitee intends to assert a right to
indemnification under this Agreement; provided, however, that failure to give
such notification shall not affect each applicable Indemnitee's entitlement to
indemnification (or the corresponding indemnifying Party's indemnification
obligations) hereunder except to the extent that the indemnifying Party shall
have been prejudiced as a result of such failure. The indemnifying Party shall
have the initial right (but not obligation) to defend, settle or otherwise
dispose of any Claim for which an Indemnitee intends to assert a right to
indemnification under this Agreement as contemplated in the preceding sentence
if, and for so long as, the indemnifying Party has recognized in a written
notice to the Indemnitee provided within thirty (30) days of such written notice
its obligation to indemnify the Indemnitee for any Surgica Losses or Company
Losses (as the case may be) relating to such Claim; provided, however, that if
the indemnifying Party assumes control of the defense, settlement or disposition
of a Claim, the indemnifying Party shall obtain the written consent of each
applicable Indemnitee prior to ceasing to defend, settling or otherwise
disposing of the Claim. If the indemnifying Party fails to state in a written
notice during such thirty (30) day period its willingness to assume the defense
of such a Claim, the Surgica Indemnitee(s) or Company Indemnitee(s), as the case
may be, shall have the right to defend, settle or otherwise dispose of such
Claim, subject to the applicable provides of Sections 9.1 and 9.2.

10.   Confidentiality.

      10.1 Subject to Section 10.3, during the term of this Agreement and for a
period of five (5) years thereafter (except with respect to trade secrets, for
which the obligations of non-use and non-disclosure shall continue for so long
as such trade secrets are protected by their owner as

                                       14





trade secrets), each Party shall maintain in confidence and shall not disclose
to any Third Party any know-how, trade secrets, business or technical
information or other information ("Confidential Information") received from the
other Party relating to any Product, and shall not use the other Party's
Confidential Information except for the purposes of this Agreement without the
prior written consent of such other Party. These confidentiality and non-use
obligations shall not apply to any Confidential Information that the receiving
Party can demonstrate:

           10.1.1 at the time of disclosure to the receiving Party was, or
thereafter becomes, a part of the public domain through no fault of the
receiving Party, its Affiliates, distributors or sublicensees;

           10.1.2 was subsequently lawfully disclosed to the receiving Party by
a Third Party not under an obligation of confidentiality with or through the
disclosing Party;

           10.1.3 was in the lawful possession of the receiving Party prior to
disclosure by the disclosing Party; or

           10.1.4 is required to be disclosed by judicial or administrative
order, provided that notice is given to the disclosing Party and the disclosing
Party has an opportunity, if reasonable under the circumstances, to seek a
protective order, and further provided, that disclosure is limited solely to
compliance with the judicial or administrative order.

      10.2 During the term of this Agreement, each Party shall take all
reasonable steps to:

           10.2.1 prevent any disclosure in breach of Section 10.1 of
Confidential Information of the other which would be materially prejudicial to
the interests of the other Party;

           10.2.2 limit the disclosure of information to such of its Affiliates,
distributors and sub-licensees and their respective employees that require the
information for the purposes of this Agreement; and

           10.2.3 ensure that the persons referred to in Section 10.2.2 enter
into appropriate confidentiality agreements containing use and disclosure
restrictions at least as restrictive as those set forth herein.

      10.3 Notwithstanding the foregoing provisions of this Section, the Parties
and their Affiliates, distributors and sublicensees shall be entitled to
disclose Confidential Information of the other Party which would otherwise be
protected by the provisions of Section 10.1 to actual or potential customers for
any Product in so far as such disclosure is reasonably necessary to
commercialize such Product.

      10.4 Equitable Relief. Each Party acknowledges and agrees that, due to the
unique nature of the other's Proprietary Information, there can be no adequate
remedy at law for any breach of its obligations hereunder and, therefore, that
upon any breach of Section 10.1 or threat thereof, the other Party shall be
entitled to injunctive relief and other appropriate equitable relief, without
the posting of any bond, in addition to whatever remedies it may have at law.

                                       15





11.   Non-Solicitation. During the term of this Agreement and for one (1) year
thereafter, neither Party shall, directly or indirectly, encourage, solicit or
participate in the solicitation of any employee or consultant of the other Party
to terminate such employee's or consultant's employment with such other Party;
provided, however, that such prohibition shall not apply to mass-media
advertisements directed toward the general public.

12.   Term and Termination.

      12.1 Term. The term of this Agreement shall commence as of the date hereof
and, unless terminated earlier pursuant to the provisions of this Agreement,
shall expire upon the expiration or termination of the License Agreement.

      12.2 Termination. The obligations of a Party under this Agreement (but not
its rights hereunder) may be terminated by such Party if, subject to Section 13
below, the other Party fails to perform any material term, provision, covenant
or obligation imposed upon it under this Agreement, which failure or refusal
shall continue for thirty (30) days following written notice thereof from the
non-defaulting party specifying the event of default.

           12.2.1 The failure of a Party to terminate its obligations under this
Agreement by reason of the breach of any of the provisions by the other Party
shall not be construed as a waiver of the rights or remedies available for any
subsequent breach of the terms and provisions of this Agreement.

           12.2.2 A Party electing to terminate its obligations under this
Agreement shall also be entitled to pursue such additional remedies at law or in
equity that it may have as a result of a breach of or default under this
Agreement by the other Party.

           12.2.3 Any Party bringing action to enforce the obligations of the
other Party or its rights under this Agreement shall be entitled to recover all
costs and expenses (including reasonable attorneys' fees and court costs)
incurred by it in such enforcement action.

      12.3 Effect of Termination. Upon termination of this Agreement by either
Party or naturally at the end of the term of this Agreement all rights and
licenses granted hereunder, except as otherwise expressly provided by the terms
hereof, shall terminate.

      12.4 Not Sole Remedy. Termination is not the sole remedy under this
Agreement and, whether or not termination is effected, all other remedies shall
remain available.

      12.5 Survival. Following expiration or termination of this Agreement,
Sections 3, 4.2, 5.4, 5.5, 5.6, 5.7, 6 through 12, 11 (for one (1) year only),
12.3, 12.5, 17, and 18, and such provisions of Section 1 as are necessary to
implement the surviving provisions shall remain in full force and effect in
accordance with their terms.

                                       16





13.   Force Majeure.

      13.1 Subject to compliance with paragraph (b) of this Section 13 any
delays in or failure of performance by either Party under this Agreement shall
not be considered a breach of this Agreement if and to the extent caused by any
occurrences beyond the reasonable control of the Party affected, including but
not limited to: acts of God; acts, regulations or laws of any government;
strikes or other concerted acts of workers; fires; floods; explosions; riots;
wars; rebellion; embargo; and sabotage; and any time for performance hereunder
shall be extended by the actual time of delay caused by such occurrence. The
Party suffering from a force majeure event shall take reasonable measures to
remove the disability or restriction and resume operations at the earliest
possible date.

      13.2 Any Party affected by such force majeure who wishes to rely on the
provisions of Section 13.1 shall as soon as reasonably practicable give written
notice to the other Party specifying the matters constituting force majeure
together with such evidence thereof as it can reasonably give and specifying the
period for which it is estimated that the such delay will continue.

14.   Relationship of the Parties. Notwithstanding any provision hereof, for all
purposes of this Agreement each Party shall be and act as an independent
contractor and not as partner, joint venturer, or agent of the other and shall
not bind nor attempt to bind the other to any contract. Each Party (the
"Responsible Party") shall indemnify and hold harmless the other Party (the
"Protected Party") from any and all claims, liabilities, damages, debts,
settlements, costs, attorneys' fees, expenses and liabilities of any type
whatsoever that may arise on account of the activities of the Responsible
Party's employees or agents, including, without limitation, providing
unauthorized representations or warranties (or failing effectively to disclaim
all warranties and liabilities on behalf of the Protected Party) to its
customers.

15.   Assignment. Surgica shall not assign or otherwise transfer this Agreement
or  any part hereof (and any attempt to do so will be void) to any Third Party
without the prior written permission of Company, except to an entity that
acquires all or substantially all of such Party's assets or operations. The
provisions of this Agreement shall inure to the benefit of, and be binding upon,
Company and Surgica and their respective successors and assigns.

16.   Publicity and Press Releases. Except to the extent necessary under
applicable laws, the Parties agree that no press releases or other publicity
relating to the substance of the matters contained herein will be made without
joint approval.

17.   Arbitration.

      17.1 Excepting only actions and claims relating to actions commenced by a
Third Party against Surgica or Company (including, without limitation, for
injuries caused by a Product or in respect to a trademark or patent infringement
claim), any controversy or claim arising out of or relating to the terms and
conditions of this Agreement, or the decision to agree upon these terms, or the
breach thereof, including questions of validity, infringement, or termination
hereof, shall be settled exclusively by arbitration in accordance with the rules
of the American Arbitration Association. If such controversy or claim relates to
patent validity or infringement, then the

                                       17





Patent Arbitration Rules of the American Arbitration Association ("AAA") shall
apply; otherwise the International Arbitration Rules of the AAA shall apply.
Notwithstanding the foregoing to the contrary or in the arbitration rules
invoked or in this Section 17, the Parties retain the right to request a
judicial authority to invoke interim measures of protection, and such request
shall not be deemed incompatible with this agreement to arbitrate or a waiver of
the right to arbitrate.

      17.2 There shall be one (1) arbitrator to be mutually agreed upon by the
Parties and to be selected from the Regional Panel of Distinguished Neutrals. If
the Parties are unable to agree upon such an arbitrator who is willing to serve
within ten (10) days of receipt of the demand by the other Party, the Parties
shall within three (3) days select one of the four largest international public
accounting firms (excluding those providing services to the Parties) and engage
the managing partner or senior officer of its County office located in the
county containing the principal place of business of the Party who did not
initiate the arbitration to designate a partner of such firm to serve as the
arbitrator. Failing that, then the AAA shall appoint an arbitrator willing to
serve from the Regional Panel of Distinguished Neutrals, or if no such panel
exists, then from an appropriate AAA panel. It shall be the duty of the
arbitrator to set dates for preparation and hearing of any dispute and to
expedite the resolution of such dispute.

      17.3 The arbitration shall be held in the city in which the principal
place of business of the Party who did not initiate the arbitration is located
and the arbitrator shall apply the substantive law of California except that the
interpretation and enforcement of this arbitration provision shall be governed
by the Federal Arbitration Act.

      17.4 The arbitrator shall permit and facilitate discovery, which will be
conducted in accordance with the Federal Rules of Civil Procedure, taking into
account the needs of the Parties and the desirability of making discovery
expeditious and cost-effective.

      17.5 The arbitrator will set a discovery schedule with which the Parties
will comply and attend depositions if requested by either Party.

      17.6 The arbitrator will entertain such presentation of sworn testimony or
evidence, written briefs and/or oral argument as the Parties may wish to
present, but no testimony or exhibits will be admissible unless the adverse
party was afforded an opportunity to examine such witness and to inspect and
copy such exhibits during the pre-hearing discovery phase.

      17.7 The arbitrator shall among his other powers and authorities, have the
power and authority to award interim or preliminary relief.

      17.8 The arbitrator shall not be empowered to award either Party exemplary
or punitive damages or any enhanced damages for willful infringement and the
Parties shall be deemed to have waived any right to such damages.

      17.9 A qualified court reporter will record and transcribe the proceeding.

      17.10 The decision of the arbitrator will be in writing and judgment upon
the award by the arbitrator may be entered in any court having jurisdiction
thereof.

                                       18





      17.11 Prompt handling and disposal of the issue is important. Accordingly,
the arbitrator is instructed to assume adequate managerial initiative and
control over discovery and other aspects of the proceeding to schedule discovery
and other activities for substantially continuous work, thereby expediting the
arbitration as much as is deemed reasonable to him, but in all events to effect
a final award no later than 365 days after the arbitrator's selection or
appointment and no later than 20 days after the close of evidence.

      17.12 The proceedings shall be confidential and the arbitrator shall issue
appropriate protective orders to safeguard both Parties' confidential
information.

      17.13 The fees of the arbitrator and the AAA shall be paid as designated
by the arbitrator or, if he shall not so designate, they shall be split equally
between the Parties.

18.   Miscellaneous.

      18.1 Entire Agreement. This Agreement (and all Exhibits hereto and Project
Plan(s) pursuant to this Agreement) constitutes the entire and only agreement
between the Parties relating to the subject matter hereof, and supersedes all
proposals, prior negotiations, representations, understandings and agreements
between the Parties relating to the subject matter of this Agreement and of past
dealings or industry custom.

      18.2 Notices.

           18.2.1 Notices hereunder shall be in writing and shall be deemed to
have been duly given if personally delivered or when sent by facsimile or other
telegraphic means. Such notices shall be effective upon receipt, if by personal
delivery, or if by facsimile, on the date of the confirmation of "ok"
transmission. Addresses and persons to be notified may be changed by either
Party by giving written notice thereof to the other Party.

           For Surgica:

                  Surgica Corporation
                  5090 Robert J. Mathews Parkway #4
                  El Dorado Hills, Ca 95762
                  Facsimile:  916.933.5260
                  Attention:  Louis R. Matson

                  with a copy to:

                  Bullivant Houser Bailey
                  1331 Garden Hwy, Suite 300
                  Sacramento, CA 95833
                  Facsimile:  916.442.3442
                  Email eric.stiff@bullivant.com
                  Attention:  Eric J. Stiff, Esq.

                                       19





           For Company:

                  Protein Polymer Technologies, Inc.
                  10655 Sorrento Valley Road
                  San Diego, CA  92121
                  Facsimile:  858.558.6477
                  Email:   wnp@ppti.com; jtp@ppti.com
                  Attention:  William N. Plamondon, Chief Executive Officer
                  and J. Thomas Parmeter, Chairman

                  with a copy to:

                  Paul, Hastings, Janofsky & Walker LLP
                  515 South Flower Street
                  Los Angeles, CA  90071-2228
                  Facsimile:  213.996.3254
                  Attention:  Robert A. Miller Jr., Esq.

      18.3 Governing Law and Legal Actions. This Agreement shall be governed by
and construed under the laws of the State of California and the United States,
without regard to the conflicts of laws provisions thereof. Subject to Section
17 above, the sole jurisdiction and venue for actions related to the subject
matter hereof shall be the Superior Court of the State of California for San
Diego County or the United States District Court for the Southern District of
California. Both Parties consent to the jurisdiction of such courts and agree
that process may be served in the manner provided herein for giving of notices
or otherwise as allowed by California state or U.S. federal law. In any action
or proceeding to enforce rights under this Agreement, the prevailing Party shall
be entitled to recover costs and attorneys' fees.

      18.4 Savings Provision. The invalidity of any provision of this Agreement
shall not impair the validity of any other provision; and any provision hereof
which might otherwise be invalid or contravene any applicable law shall hereby
be deemed to be amended to the extent necessary to remove the cause of such
invalidity and to the extent practicable to continue the intent of such
provision and of this Agreement, and such provision, as so amended, shall remain
in full force and effect as a part hereof.

      18.5 Amendments and Waivers. No terms or provisions of this Agreement
shall be varied or modified by any prior, contemporaneous or subsequent
statement, conduct or act of either of the Parties, whether oral or written,
except that the Parties may amend this Agreement by written instrument
specifically referring to this Agreement. No waiver of any right or remedy
hereunder shall be effective unless in a writing signed by the Party to be
bound, nor shall any waiver in one instance constitute a waiver of the same or
any other right or remedy in any other instance.

      18.6 Headings. Headings included herein are for convenience only and shall
not be used to interpret or construe this Agreement.

      18.7 Remedies; Injunctive Relief. The rights and remedies of a Party set
forth herein with respect to failure of the other Party to comply with the terms
of this Agreement are not

                                       20





exclusive, the exercise thereof shall not constitute an election of remedies and
the aggrieved Party shall in all events be entitled to seek whatever additional
remedies may be available in law or in equity (including, without limitation,
appropriate injunctive relief).

      18.8 Counterparts. This Agreement may be executed in counterparts and by
facsimile, each of which shall be deemed an original, and all of such
counterparts taken together shall constitute one and the same instrument.

                           [Signature page to follow]

                                       21





                                                                  EXECUTION COPY

         IN WITNESS WHEREOF, Company and Surgica have caused this Agreement to
be executed as of the date first written above.

PROTEIN POLYMER TECHNOLOGIES, INC.        SURGICA CORPORATION


By:/s/ William N. Plamondon, III          By:/s/ Louis R. Matson
   ------------------------------            -----------------------------------
       William N. Plamondon, III             Louis R. Matson
       Chief Executive Officer               Present and Chief Executive Officer



                [Signature Page to Supply and Services Agreement]

EXHIBIT A

MANAGEMENT COMMITTEE; PROJECT COORDINATORS

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Ex.A - 1

SCHEDULE 2.3

PROJECT PLAN NO. 1

[*****]

[*****] Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission.

Sc.2.3 - 3

EX-10

                                                                   Exhibit 10.43

                                                                  EXECUTION COPY


                                VOTING AGREEMENT

         This Voting Agreement ("Agreement") is made and entered into as of
November 23, 2005, by and between Protein Polymer Technologies, Inc., a Delaware
corporation ("Purchaser"), and the undersigned stockholder ("Stockholder") of
Surgica Corporation, a Delaware corporation (the "Company"). Certain capitalized
terms used in this Agreement are defined in Section 6 hereof and certain other
capitalized terms used in this Agreement that are not defined herein shall have
the meaning given to such terms in the Option Agreement (as defined below).

                                    RECITALS

         WHEREAS, Stockholder is the holder of record and the "beneficial owner"
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) of certain shares of common stock and/or preferred stock of the
Company;

         WHEREAS, concurrently with the execution and delivery of this
Agreement, Purchaser and the Company are entering into an Asset Purchase Option
Agreement (the "Option Agreement") which provides, upon the terms and subject to
the conditions set forth therein, the Purchaser the right to purchase from the
Company substantially all of the assets of the Company (the "Acquisition") then
existing or thereafter acquired through the date of the exercise of the Option
pursuant to the Purchase Agreement attached thereto, between the Purchaser, its
wholly-owned subsidiary and the Company.

         WHEREAS, as a condition and inducement to Purchaser's willingness to
enter into the Option Agreement, Stockholder has agreed to execute and deliver
this Agreement.

                                    AGREEMENT

         NOW, THEREFORE, the parties to this Agreement, intending to be legally
bound, agree as follows:

         1. Agreement to Vote Shares. Prior to the Termination Date (as defined
in Section 6), at every meeting of the stockholders of the Company called with
respect to any of the following, and at every adjournment or postponement
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, Stockholder shall vote the
Subject Securities: (a) in favor of the adoption of the Option Agreement and the
grant of the Option contemplated thereby (b) in favor of adoption of the
Purchase Agreement and approval of the Acquisition, (c) against any proposal for
any acquisition transaction, other than the Acquisition, between the Company and
any Person other than Purchaser and/or a wholly-owned subsidiary of Purchaser,
and (d) against any other action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or agreement of
the Company under the Option Agreement or Purchase Agreement or which would
result in any of the conditions to the consummation of the effectiveness of the
Option under the Option Agreement or the Acquisition under the Purchase
Agreement not being fulfilled.





         2. Irrevocable Proxy. Concurrently with the execution of this
Agreement, Stockholder agrees to deliver to Purchaser a proxy in the form
attached hereto as Exhibit A (the "Proxy"), which shall be irrevocable to the
fullest extent permitted by law, with respect to the shares referred to therein.

         3. Agreement to Retain Shares.

            (a) Restriction on Transfer. Except as otherwise provided in
Schedule A, attached hereto, and Section 3(c), during the period from the date
of this Agreement through the Termination Date, Stockholder shall not, directly
or indirectly, cause or permit any Transfer of any of the Subject Securities to
be effected.

            (b) Restriction on Transfer of Voting Rights. During the period from
the date of this Agreement through the Termination Date, Stockholder shall
ensure that: (a) none of the Subject Securities is deposited into a voting
trust; and (b) no proxy (other than the Proxy granted herein) is granted, and no
voting agreement or similar agreement is entered into, with respect to any of
the Subject Securities.

            (c) Permitted Transfers. Section 3(a) shall not prohibit a Transfer
of Company Common Stock by Stockholder (i) upon the death of Stockholder, or
(ii) if Stockholder is a partnership or limited liability company, to one or
more partners or members of Stockholder or to an affiliated corporation under
common control with Stockholder; provided, however, that a Transfer referred to
in this sentence shall be permitted only if, as a precondition to such Transfer,
the transferee agrees in a writing, reasonably satisfactory in form and
substance to Purchaser, to be bound by the terms of this Agreement and delivers
a Proxy to Purchaser in substantially the form of Exhibit A.

4. Representations, Warranties and Covenants of Stockholder. Stockholder hereby
represents and warrants to Purchaser as follows:

            (a) Due Authorization, Etc. All consents, approvals, authorizations
and orders necessary for the execution and delivery by Stockholder of this
Agreement and the Proxy have been obtained, and Stockholder has full right,
power and authority to enter into this Agreement and the Proxy. This Agreement
and the Proxy have been duly executed and delivered by Stockholder and
constitute valid and binding agreements of Stockholder enforceable in accordance
with their terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditors' rights generally and subject to general principles of equity.

            (b) No Conflict. The execution and delivery of this Agreement and
the Proxy by Stockholder do not, and the performance of this Agreement and the
Proxy by Stockholder will not conflict with or violate any law, rule,
regulation, order, decree or judgment applicable to the Subject Securities held
by the Stockholder.

            (c) Title to Securities. As of the date of this Agreement: (a)
Stockholder holds of record (free and clear of any encumbrances or restrictions)
the number of outstanding shares of Company Common Stock and Company Preferred
Stock set forth under the heading "Shares Held of Record" on the signature page
hereof; (b) Stockholder holds (free and clear of





any encumbrances or restrictions) the options, warrants and other rights to
acquire shares of Company Common Stock set forth under the heading "Options and
Other Rights" on the signature page hereof; (c) Stockholder Owns the additional
securities of the Company set forth under the heading "Additional Securities
Beneficially Owned" on the signature page hereof; and (d) Stockholder does not
directly or indirectly Own any shares of capital stock or other securities of
the Company, or any option, warrant or other right to acquire (by purchase,
conversion or otherwise) any shares of capital stock or other securities of the
Company, other than the shares and options, warrants and other rights set forth
on the signature page hereof.

         5. Additional Covenants of Stockholder.

            (a) Further Assurances. From time to time and without additional
consideration, Stockholder shall (at Stockholder's sole expense) execute and
deliver, or cause to be executed and delivered, such additional transfers,
assignments, endorsements, proxies, consents and other instruments, and shall
(at Stockholder's sole expense) take such further actions, as Purchaser may
request for the purpose of carrying out and furthering the intent of this
Agreement.

         6. Certain Definitions. For purposes of this Agreement,

            (a) "Company Common Stock" shall mean the common stock, par value
$0.001 per share, of the Company.

            (b) "Company Preferred Stock" shall mean the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, each having a par
value of $0.001 per share, and any other series of preferred stock of the
Company.

            (c) Stockholder shall be deemed to "Own" or to have acquired
"Ownership" of a security if Stockholder is the "beneficial owner" of such
security within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934, as amended.

            (d) "Person" shall mean any (i) individual, (ii) corporation,
limited liability company, partnership or other entity, or (iii) Governmental
Body.

            (e) "Subject Securities" shall mean: (i) all securities of the
Company (including all shares of Company Common Stock, Company Preferred Stock
and all options, warrants and other rights to acquire shares of Company Common
Stock or Company Preferred Stock) Owned by Stockholder as of the date of this
Agreement; and (ii) all additional securities of the Company (including all
additional shares of Company Common Stock, Company Preferred Stock and all
additional options, warrants and other rights to acquire shares of Company
Common Stock or Company Preferred Stock) of which Stockholder acquires Ownership
during the period from the date of this Agreement through the Termination Date.

            (f) "Termination Date" means the earlier to occur of the date (i)
the Acquisition shall become effective in accordance with the terms and
provisions of the Purchase Agreement, or (ii) the Option Agreement terminates in
accordance with its terms without the exercise of the Option.





            (g) A Person shall be deemed to have a effected a "Transfer" of a
security if such Person directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such security or any
interest in such security to any Person other than Purchaser or a wholly-owned
subsidiary of Purchaser; (ii) enters into an agreement or commitment
contemplating the possible sale of, pledge of, encumbrance of, grant of an
option with respect to, transfer of or disposition of such security or any
interest therein to any Person other than Purchaser or a wholly-owned subsidiary
of Purchaser; or (iii) reduces such Person's beneficial ownership of, interest
in or risk relating to such security.

         7. Miscellaneous.

            (a) Assignment; Binding Effect. Except as provided herein, neither
this Agreement nor any of the interests or obligations hereunder may be assigned
or delegated by Stockholder, and any attempted or purported assignment or
delegation of any of such interests or obligations shall be void. Subject to the
preceding sentence, this Agreement shall be binding upon Stockholder and his
heirs, estate, executors and personal representatives and his successors and
assigns, and shall inure to the benefit of Purchaser and its successors and
assigns. Without limiting any of the restrictions set forth in Section 3(a) or
elsewhere in this Agreement, this Agreement shall be binding upon any Person to
whom any Subject Securities are transferred. Nothing in this Agreement is
intended to confer on any Person (other than Purchaser and its successors and
assigns) any rights or remedies of any nature.

            (b) Specific Performance. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement or the
Proxy were not performed in accordance with its specific terms or were otherwise
breached and in the event of any breach or threatened breach by Stockholder of
any covenant or obligation contained in this Agreement or in the Proxy,
Purchaser shall be entitled (in addition to any other remedy that may be
available to it, including monetary damages) to seek (a) a decree or order of
specific performance to enforce the observance and performance of such covenant
or obligation, and (b) an injunction restraining such breach or threatened
breach.

            (c) Waiver. No failure on the part of Purchaser to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the part
of Purchaser in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Purchaser shall not be deemed to have waived any
claim available to Purchaser arising out of this Agreement, or any power, right,
privilege or remedy of Purchaser under this Agreement, unless the waiver of such
claim, power, right, privilege or remedy is expressly set forth in a written
instrument duly executed and delivered on behalf of Purchaser; and any such
waiver shall not be applicable or have any effect except in the specific
instance in which it is given.

            (d) Governing Law; Venue. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts or
choice of law. Any legal action or other legal proceeding relating to





this Agreement or the Proxy or the enforcement of any provision of this
Agreement or the Proxy may be brought or otherwise commenced in any state or
federal court located in the State of California.

            (e) Counterparts. This Agreement may be executed in two or more
counterparts (including by facsimile), each of which shall be deemed an original
and all of which together shall constitute one instrument.

            (f) Entire Agreement. This Agreement and the Proxy constitute the
entire agreement between the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings between the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon either party unless made in writing and signed
by both parties.

            (g) Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed facsimile, or
forty-eight (48) hours after being deposited in the regular mail as certified or
registered mail (airmail if sent internationally) with postage prepaid, if such
notice is addressed to the party to be notified at such party's address or
facsimile number as set forth below, or as subsequently modified by written
notice.




                                                                  EXECUTION COPY


         The parties have caused this Agreement to be duly executed on the date
first above written.

                           PURCHASER:

                           PROTEIN POLYMER TECHNOLOGIES,  INC.


                           By:    /s/ William N. Plamondon, III
                                  --------------------------------------------
                           Name:  William N. Plamondon, III
                                  --------------------------------------------
                           Title: Chief Executive Officer
                                  --------------------------------------------

                           Address for notices:

                           Protein Polymer Technologies, Inc.
                           10655 Sorrento Valley Road
                           San Diego, CA  92121
                           Facsimile:  858.558.6477
                           Email: wnp@ppti.com; jtp@ppti.com
                           Attention:  William N. Plamondon, Chief Executive
                           Officer and J. Thomas Parmeter, Chairman

                           STOCKHOLDER:


                           By:    /s/ Louis R. Matson
                                  --------------------------------------------
                           Name:  Louis R. Matson
                                  --------------------------------------------
                           Title: President and Chief Executive Officer
                                  --------------------------------------------

                                  Address for notices:

                                  Surgica Corporation
                                  5090 Robert J. Mathews Parkway #4
                                  El Dorado Hills, Ca 95762
                                  Facsimile:  916.933.5260
                                  Attention:  Louis R. Matson, President and
                                  Chief Executive Officer




Company Common Stock          Company Preferred                                         Additional Securities
   Held of Record           Stock Held of Record         Options and Other Rights         Beneficially Owned
   --------------           --------------------         ------------------------         --------------------
      5,732,000                       0                             0                              0




                      [Signature Page to Voting Agreement]

EXHIBIT A

IRREVOCABLE PROXY

Ex.A - 3

SCHEDULE A

PERMITTED TRANSFERS

As of the date of this Agreement, Stockholder has represented that it holds Subject Securities in the amount of 5,732,000 which represents approximately 38.38% of the outstanding shares of the Company on a fully-diluted basis. Purchaser hereby agrees that Stockholder may, during the period from the date of this Agreement through the Termination Date, cause or permit a transfer by gift of not more than 350,000 shares of the Subject Securities (provided that such transfer is in compliance with all applicable securities laws) to be effected and only to the extent that such transfer does not reduce Stockholder’s holdings of Subject Securities to an amount whereby Stockholder holds less than 36% of the outstanding shares of the Company on a fully-diluted basis as of the date hereof. The permitted transfer by gift and release of up to 350,000 shares of the Subject Securities shall in no way affect the rights and obligations of either Purchaser or Stockholder pursuant to this Agreement.

Sc.A - 1

EX-23

Exhibit 23.1

CONSENT OF PETERSON & CO., LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements on Forms S-2 (Nos. 333-125096, 333-108923, 333-105656, 333-37676, 333-63468, 333-73906, 333-84766), Forms S-3 (Nos. 333-19695, 333-62761, 333-45759, 333-07861) and Forms S-8 (Nos. 333-105854, 033-61704, 033-61708, 033-63046, 333-24991, 333-26319, 333-60011) of our report dated March 24, 2006 included in the Annual Report on Form 10-KSB of Protein Polymer Technologies, Inc. for the year ended December 31, 2005, with respect to the financial statements, included in this Form 10-KSB.

/s/ PETERSON & CO., LLP

PETERSON & CO., LLP

San Diego, California

March 31, 2006

EX-31

Exhibit 31.1

SECTION 302 CERTIFICATION

of the Chief Executive Officer

I, William N. Plamondon, III, the Chief Executive Officer of Protein Polymer Technologies, Inc., certify that:

1. I have reviewed this annual report on Form 10-KSB of Protein Polymer Technologies, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: March 31, 2006

/s/ William N. Plamondon, III                    

William N. Plamondon, III

Chief Executive Officer

EX-31

Exhibit 31.2

SECTION 302 CERTIFICATION

of the Director of Finance (Principal Financial Officer)

I, Janis Y. Neves, the Director of Finance of Protein Polymer Technologies, Inc., certify that:

6. I have reviewed this annual report on Form 10-KSB of Protein Polymer Technologies, Inc.;

7. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

8. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

9. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

10. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: March 31, 2006

/s/ Janis Y. Neves                  

Janis Y. Neves

Director of Finance

EX-32

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Protein Polymer Technologies, Inc. (the “Company”) on Form 10-KSB for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ William N. Plamondon, III

William N. Plamondon, III

Chief Executive Officer

March 31, 2006

In connection with the Annual Report of Protein Polymer Technologies, Inc. (the “Company”) on Form 10-KSB for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Janis Y. Neves            

Janis Y. Neves

Director of Finance and Assistant Secretary

March 31, 2006

-i-