UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ____________________

Commission file number 0-19724

PROTEIN POLYMER TECHNOLOGIES, INC.

(Exact name of small business issuer as specified in its charter)

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

10655 Sorrento Valley Road, San Diego, CA 92121

(Address of principal executive offices)

(858) 558-6064

(Issuer's telephone number)

(former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of July 27, 2007, 67,809,204 shares of common stock were outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x

PROTEIN POLYMER TECHNOLOGIES, INC.

FORM 10-QSB

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 30, 2007 and December 31, 2006	3
Statements of Operations
For three and six months ended June 30, 2007 and 2006	4
Statements of Cash Flows
For the six months ended June 30, 2007 and 2006.	5
Notes to Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Controls and Procedures	17
PART II. OTHER INFORMATION
Item 6. Exhibits	18
Signatures	18

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Protein Polymer Technologies, Inc.

Balance Sheets

(unaudited)

	June 30,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	105,483		$	73,495
Contract receivable		95,547			21,068
Current portion of rent receivable		9,527			39,527
Prepaid expenses and other current assets		42,729			49,940
Total current assets		253,286			184,030
Deposits		31,279			29,679
Equipment and leasehold improvements, net		177,866			228,475
Investment, at cost		520,000			520,000
Total assets	$	982,431		$	962,184
Liabilities and stockholders' deficit equity
Current liabilities:
Accounts payable	$	787,332		$	1,098,820
Accrued liabilities		567,020			422,730
Secured note payable - related party		5,157,416			3,461,516
Current maturities of notes payable		161,667			146,697
Total current liabilities		6,673,435			5,129,763
Notes payable, net of current maturities		357,404			372,374
Deferred rent		13,269			13,269
Total liabilities		7,044,108			5,515,406
Commitments and contingencies
Stockholders' deficit:
Convertible preferred stock, $.01 par value; 5,000,000 shares authorized; 65,645 shares issued and outstanding at June 30, 2007 and December 31, 2006 - liquidation preference of $6,564,500 at June 30, 2007 and December 31, 2006		6,019,917			6,019,917
Common stock, $.01 par value; 120,000,000 shares authorized; 67,809,204 and 67,409,204 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		678,092			674,092
Additional paid-in capital		55,934,985			55,760,511
Accumulated deficit		(68,694,671	)		(67,007,742	)
Total stockholders' deficit		(6,061,677	)		(4,553,222	)
Total liabilities and stockholders' deficit	$	982,431		$	962,184

See accompanying notes.

3

Protein Polymer Technologies, Inc.

Statements of Operations

(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues:
Contract revenue	$	131,530		$	189,613		$	267,618		$	410,532
Product and other income		--			18,616			--			37,174
Total revenues		131,530			208,229			267,618			447,706
Operating expenses:
Cost of sales		--			838			--			1,640
Research and development		628,131			1,148,418			1,273,152			2,184,858
Selling, general and administrative		351,596			729,902			671,299			2,617,214
Total expenses		979,727			1,879,158			1,944,451			4,803,712
Net loss from operations		(848,197	)		(1,670,929	)		(1,676,833	)		(4,356,006	)
Other income (expense):
Interest income		145			56			145			2,580
Interest expense		(111,051	)		(90,941	)		(205,343	)		(101,842	)
Gain (loss) on derivative liability		(898	)		--			9,510			--
Gain on settlement		-			--			193,917			--
Total other income (expense)		(111,804	)		(90,885	)		(1,771	)		(99,262	)
Net loss		(960,001	)		(1,761,841	)		(1,678,604	)		(4,455,268	)
Undeclared, imputed and/or paid dividends on preferred stock		69,219			69,220			146,003			226,628
Net loss applicable to common shareholders	$	(1,029,220	)	$	(1,831,034	)	$	(1,824,607	)	$	(4,681,896	)
Basic and diluted net loss per common share	$	(0.02	)	$	(0.03	)	$	(0.03	)	$	(0.07	)
Shares used in computing basic and diluted net loss per common share		67,809,204			67,350,633			67,665,558			67,331,227

See accompanying notes.

4

Protein Polymer Technologies, Inc.

Statements of Cash Flows

(unaudited)

	Six months ended
	June 30
	2007			2006
Operating activities
Net loss	$	(1,678,604	)	$	(4,455,268	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		50,609			80,960
Share based compensation expense		109,082			1,341,765
Gain on warrant derivative liability		9,510			--
Amortization of loan fees		--			69,608
Changes in operating assets and liabilities:
Deposits		(1,600	)		(800	)
Prepaid expenses and other current assets		7,211			1,422
Current portions of rent receivable		30,000			58,428
Contracts receivable		(74,479	)		(68,846	)
Accounts payable		(311,488	)		944,042
Accrued liabilities		205,357			(26,123	)
Deferred rent		--			4,425
Net cash used for operating activities		(1,663,912	)		(2,050,387	)
Investing activities
Purchase of equipment and improvements		--			(35,641	)
Issuance of notes receivable		--			(7,058	)
Net cash used for investing activities		--			(42,699
Financing activities
Net proceeds from exercise of options and warrants and sale of common stock		--			3,177
Net proceeds from issuance of secured note payable - related party		1,695,900			946,700
Net cash provided by financing activities		1,695,900			949,877
Net increase (decrease) in cash and cash equivalents		31,988			(1,143,209	)
Cash and cash equivalents at beginning of the period		73,495			1,211,748
Cash and cash equivalents at end of the period	$	105,483		$	68,539
Supplemental disclosures of cash flow information
Interest paid	$	3,834		$	3,282
Non cash investing and financing activity
Imputed dividend on extension of warrants	$	8,325		$	88,950
Issuance of common stock in settlement of indemnification obligation	$	61,067		$	40,000
Warrants issued for loan fees	$	–		$	69,608

See accompanying notes.

5

PROTEIN POLYMER TECHNOLOGIES, INC.

Notes to Unaudited Financial Statements

1. Basis of Presentation and Significant Accounting Policies

Interim Financial Statements

The financial statements of Protein Polymer Technologies, Inc. (the "Company") as of June 30, 2007 and for the three and six months ended June 30, 2007 are unaudited. These financial statements reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary to present fairly, in all material respects, the financial position, results of operations and cash flows for the interim period presented. The balance sheet as of December 31, 2006 was derived from the Company's audited financial statements. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007. These financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the Securities and Exchange Commission.

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 six months ended June 30, 2007, the Company incurred a net loss of approximately $1,679,000 and had a working capital deficit of approximately $6,420,000 at June 30, 2007. Our cash and cash equivalents of approximately $105,000 in combination with anticipated additional contract and license payments are insufficient to meet our anticipated capital requirements.

Since April 2006 the Company has relied primarily on borrowings pursuant to a note payable from a related party for capital needed to fund its operations and working capital requirements (see Note 4). Prior to the commercialization of its products, substantial additional capital resources will be required to fund continuing operations related to the Company’s research, development, manufacturing, clinical testing, and business development activities. The Company believes there may be a number of alternatives available to meet the continuing capital requirements of its operations, such as collaborative agreements and public or private financings. Further, the Company is exploring other potential financing source 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 additional funding from the related party note payable will be available or that any of these other potential sources of funds will be realized in the time frames needed for continuing operations or on terms favorable to the Company, if at all. 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, or obtain a secured private financing or 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.

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.

Investments

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

Warrant Derivative Liability

The Company accounts for warrants issued in accordance with EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) (“EITF 00-19”). Pursuant to EITF 00-19, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as a derivative liability. The fair value of warrants classified as derivative liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded in current period earnings.

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.

6

Excluded from diluted loss per common share for the six months ended June 30, 2007 and 2006 were 26,341,157 and 19,730,678 shares, respectively, issuable upon conversion of convertible preferred stock, and options and warrants to purchase 29,073,074 and 29,758,076 shares of common stock, respectively, because the effect would be anti-dilutive. For purposes of this calculation, net loss in 2007 and 2006 has been adjusted for imputed, accumulated and/or paid dividends on the preferred stock.

Recently Issued Accounting Pronouncements

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

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

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," (FIN 48). FIN 48 clarifies the accounting for uncertainty in tax positions and requires that a Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of this standard, effective January 1, 2007, did not have any impact on the Company's financial position, results of operation or cash flows.

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Adoption is required for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS Statement No. 159.  The Company is currently evaluating the impact of adopting SFAS No. 159 on our financial statements.

7

2. Technology License Agreement

In March 2007, the Company determined to discontinue its efforts to further develop and commercialize products licensed from Surgica Corporation (‘Surgica”) and the Company received notification from Surgica that Surgica was terminating the License Agreement due to alleged breaches of the agreement by the Company. Accordingly, the Company recorded an impairment charge of $1,046,503 at December 31, 2006 to reduce the carrying value of the License Agreement to $0.

3. Accrued Liabilities

Accrued liabilities consist of the following:

	June 30,   2007		December 31, 2006
Payroll and employee benefits	$	117,000	$	94,000
Accounting and professional fees		25,000		25,000
Accrued interest		349,000		147,000
Property tax		30,000		21,000
Insurance premium financing		20,000		39,000
Indemnification obligation		-		61,000
Warrant derivative liability		26,000		36,000
	$	567,000	$	423,000

4. Secured Note Payable, Related Party

On April 13, 2006, an accredited investor loaned $1,000,000 (the “Loan”) to the Company ($500,000 in cash and an additional $500,000 deposited with an escrow agent as a line of credit) represented by a note (the “Note”) issued by the Company to the investor in the principal amount of $1,000,000 (the “Principal”). The Note was originally due on July 7, 2006 (the “Maturity Date”) and bears annual interest at the rate of 8% payable on the Maturity Date. It is secured, in accordance with the terms of a security agreement (the “Security Agreement”), by a continuing security interest in and a general lien upon (i) 1,000,000 shares of Spine Wave, Inc. common stock owned by the Company; (ii) a warrant to purchase 1,000,000 shares of Spine Wave, Inc. common stock owned by the Company which has since been exercised; and (iii) all U.S. patents owned by the Company. The Note and the Security Agreement are both dated April 13, 2006. As consideration for the Loan, the Company granted a warrant to the investor to purchase an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $0.30 per share. The investor’s counsel acts as the escrow agent and now serves as our outside general counsel.

On August 9, 2007, the Note has been amended for the sixth time so that the Principal is now $5.7 Million and the Maturity Date is now November 10, 2007. The outstanding indebtedness subject to the Note and Security Agreement was $5,157,000 and accrued interest payable was $297,000 at June 30, 2007.

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

8

5. 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 June 30, 2007, the current and long term note balances were $162,000 and $357,000, respectively.

Based on the termination of the Surgica License Agreement in March 2007 the Company believes that it will be relieved of its liability for the assumed notes payable. However, until a final settlement agreement is reached between the Company and Surgica with respect to the disposition of the notes, the Company will continue to carry the notes on its balance sheet.

6. Issuance of Common Stock

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

7. Stock Options

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

Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized for the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested on, January 1, 2006, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS No. 123R, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Prior periods were not restated to reflect the impact of adopting the new standard. During the three and six month periods ended June 30, 2007 the Company recorded $28,000 and $109,000, respectively, in non-cash compensation expense related to previously issued stock options. The charges in the comparable periods ended June 30, 2006 were $303,000 and $1,342,000, respectively. As of June 30, 2007, there was approximately $84,000 of total unrecognized compensation costs related to unvested options.

The Company did not grant options during the six months ended June 30, 2007. The fair value of stock options granted in 2006 were estimated using the Black-Scholes model. Expected volatility is based on the historical volatilities of the Company's common stock. The expected life of employee stock options is determined using historical data of employee exercises and represents the period of time that stock options are expected to be outstanding. The risk free interest rate is based on U.S. Treasury constant maturity for the expected life of the stock option. The following assumptions were used in the Black-Scholes model:

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

9

Stock option activity for the six months ended June 30, 2007 is as follows:

	Options Outstanding			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2006		12,454,582		$	0.66				$	—
Issued		—			—					—
Cancelled		(50,000	)		(2.58	)				—
Exercised		—			—					—
Outstanding at June 30, 2007		12,404,582		$	0.65			6.01		—
Exercisable at June 30, 2007		12,126,782		$	0.65			6.01	$	—

8. Warrants to Purchase Common Stock

Prior to their expiration date of January 31, 2007, the Board of Directors extended the expiration date of warrants to acquire 855,303 shares of the Company’s common stock from January 31, 2007 to January 31, 2008. The Company recorded an imputed dividend of approximately $8,000 during the quarter ended March 31, 2007 to reflect additional benefit created for the preferred stockholders in connection with the extension.

No warrants were exercised during the three and six months ended June 30, 2007.

A summary of warrant activity for the three months ended June 30, 2007 is as follows:

	Number of Warrants Outstanding and Exercisable			Weighted- Average Exercise Price
Outstanding, December 31, 2006	17,178,494		$	0.55
Granted	—		$	—
Exercised	—		$	—
Expired	(510,000	)	$	1.65
Outstanding, June 30, 2007	16,668,494		$	0.52

At June 30, 2007, the weighted-average remaining contractual life of the warrants was approximately 19 months.

9. Warrant Derivative Liability

In accordance with EITF 00-19, warrants classified as derivative liabilities are adjusted to estimated fair market value each reporting period with the corresponding non-cash gain or loss reflected in the current period. At June 30, 2007, the estimated fair value of the warrant derivative liability was $26,000, and during the six months ended June 30, 2007, the Company recorded a net gain of $10,000 based on the change in the estimated fair value during the period.

10. Commitments and Contingencies

In March 2007, the Company received notification from Surgica’s legal counsel alleging that the Company had breached the Technology License Agreement and the Supply Agreement, and based thereon, Surgica was terminating these agreements. In connection with its allegations, Surgica demanded that the Company reassign the 510K Clearances, as defined in the Technology License Agreement, back to Surgica. The Company does not believe it has breached these agreements, nor that they are obligated to reassign the 510K Clearances back to Surgica.

10

The Company recorded impairment charges at December 31, 2006 related to the capitalized costs of the Technology License Agreement and notes receivable entered into in connection with the Surgica Agreements of $1,046,503 and $257,133, respectively, in order to reduce the carrying value of these assets to $-0-. Additional costs may be incurred by the Company in connection with the resolution this matter with Surgica, and there is a possibility that litigation between the two companies may occur. In the event that litigation in this matter does transpire, the Company intends to vigorously defend it position and to seek the recovery of costs and other amounts expended pursuant to the Surgica Agreements.

11. Subsequent Events

The Company’s Board of Directors has tentatively scheduled a meeting of shareholders for September 20, 2007. In addition to electing members of the Board of Directors and ratifying the selection of our independent registered public accountants, the Board is seeking shareholder approval to increase the number of authorized shares of common stock from 120 million to 1 billion.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Certain statements contained or incorporated by reference in this Quarterly Report on Form 10-QSB 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 that 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 have been unprofitable to date, and as of June 30, 2007 had an accumulated deficit of approximately $68.7 million.

Results of Operations

Operating Results for the Three and Six Months Ended June 30, 2007 as compared to the Three and Six Months Ended June 30, 2006

Contract, Licensing and Product Revenue. Our revenues were $268,000 in for the six months ended June 30, 2007 as compared to $448,000 in the comparable period of 2006. For the quarter ended June 30, 2007 our revenues were $132,000 as compared to $208,000 the three months ended June 30, 2006. In the second quarter of 2007, revenues were earned substantially from supplying products to potential partners in their evaluation of certain of our products. During the first quarter of 2007 revenues included $100,000 in licensing fess from our contractual relationship with Genencor International. Future payments arising from the Genencor agreement, if any, are subject to future commercialization of products. Contract revenue in 2006 was earned by primarily from providing materials and services in the development of an adhesive product for the repair of spinal discs laboratory services for Spine Wave, Inc.

11

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2007 were $628,000, compared to $1,148,000 for the comparable period in 2006. Research and development expenses for the six months ended June 30, 2007 were $1,273,000, compared to $2,185,000 for the comparable period in 2006. The decline from 2006 resulted from significantly reduced activity levels in 2007 of clinical testing and regulatory consulting costs. Additionally, we only funded one month’s operating expenses for Surgica Corporation in 2007 as the result of our determination in March 2007 to discontinue our efforts to develop and commercialize the Surgica products. We expect our research and development expenses will increase in the future, to the extent additional capital is obtained, due to the expansion of product-directed development efforts including preclinical development of our surgical sealants. We do not anticipate that any additional operating expenses with respect to Surgica will be incurred in 2007.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended June 30, 2007 were $352,000, as compared to $730,000 in 2006. For the six months ended June 30, 2007 these expenses were $671,000 as compared to $2,617,000 in the comparable period of 2006. We made significant reductions in administration expenses in the second half of 2006. Several highly compensated positions were eliminated and all non-mission sensitive expenses were reviewed and either eliminated or reduced. Additionally, during the three and six months ended June 30, 2006, we recognized non-cash charges aggregating $1,038,000 and $1,342,000, respectively, as the result of adopting SFAS 123R for expenses related to stock options, compared to $28,000 and $109,000 for the respective three and six months ended June 30, 2007.

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.

Interest Income and Expense. Interest expense increased from $91,000 in the three months ended June 30, 2006 to $111,000 for the three months ended June 30, 2007. For the six month periods ended June 30, 2007 interest expense increased from $102,000 to $205,000. These increases resulted directly from incurring approximately $5,200,000 of secured financing from a stockholder to sustain our operations since April 2006 and the assumption of $519,000 of promissory notes in connection with the Surgica transaction during December 2005. At June 30, 2007, the Company had accrued interest expense $349,000 in connection with these financings.

Gain on Settlement During the first quarter 2007, management negotiated a settlement agreement with a certain creditor that relieved the Company of the obligation to pay previously accrued expenses totalling approximately $269,000 in exchange for a cash payment of $75,000. The settlement resulted in a gain of $194,000 that is included in the accompanying statement of operations for the six months ended June 30, 2007.

Operating Losses. For the three months ended June 30, 2007, we recorded a net loss applicable to common shareholders of $1,029,000 or $0.02 per share, as compared to $1,831,000 or $0.03 per share in 2006. For the six months ended June 30, 2007, we recorded a net loss applicable to common shareholders of $1,825,000 or $0.03 per share, as compared to $4,682,000 or $0.07 per share in 2006. The difference in the net losses is as discussed in detail previously. The undeclared or imputed dividends in the six months ended June 30, 2006 was greater than the comparable period in 2007 as the result of a non-cash imputed dividend that resulted from repricing and extending the term of certain warrants in 2006.

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.

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Liquidity and Capital Resources

As of June 30, 2007, we had cash and cash equivalents totaling $105,000 and we had a working capital deficit of $6,420,000 as compared to $4,946,000 at December 31, 2006.

We do not have any off balance sheet financing activities and do not have any special purpose entities. We had no long-term capital lease obligations as of June 30, 2007 or December 31, 2006. For the six month period ended June 30, 2007, we had no cash expenditures for capital equipment and leasehold improvements, as compared to $36,000 for the comparable period in the prior year. We do not anticipate any significant capital expenditures in 2007. We may enter into capital equipment lease arrangements in the future if available at appropriate rates and terms.

On April 13, 2006, an accredited investor loaned us $1,000,000 (the “Loan”) ($500,000 in cash and an additional $500,000 deposited with an escrow agent as a line of credit) represented by a note (the “Note”) issued by us to the investor in the principal amount of $1,000,000 (the “Principal”). The Note was originally due on July 12, 2006 (the “Maturity Date”) and bears annual interest at the rate of 8%,  payable on the Maturity Date. It is secured, in accordance with the terms of a security agreement (the “Security Agreement”), by a continuing security interest in and a general lien upon (i) 1,000,000 shares of Spine Wave, Inc. common stock owned by us (ii) a warrant to purchase 1,000,000 shares of Spine Wave, Inc. common stock owned by us which has since been exercised; and (iii) all U.S. patents owned by us. The Note and the Security Agreement are both dated April 13, 2006. As consideration for the Loan we granted a warrant to the investor to purchase an aggregate of 500,000 shares of our common stock at an exercise price of $0.30 per share. The investor’s counsel acts as the escrow agent and now serves as our outside general counsel.

The Note has subsequently been amended six times so that as of August 9, 2007, the principal balance is approximately $5.7 million and the maturity date is November 10, 2007. At June 30, 2007, the outstanding indebtedness subject to the Note and Security Agreement was $5,157,000.

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

We believe our existing available cash and cash equivalents as of June 30, 2007, in combination with continuing contractual commitments, will be sufficient to meet our anticipated capital requirements only through August 2007. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. 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. 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 other sources of funding will be consummated in the timeframes needed for continuing operations or on terms favorable to us, if at all. 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.

Risk Factors

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

If we continue to incur operating losses, we may be unable to continue our operations at planned levels and be forced to curtail or cease our operations.

We have incurred operating losses since our inception in 1988, and will continue to do so for at least several more years. As of June 30, 2007, our accumulated deficit was approximately $68,700,000 and we have continued to incur losses since that date. The losses have resulted principally from expenses of research and development and to a lesser extent, from general and administrative expenses. If these losses continue, they could cause the value of our stock to decline.

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We believe our existing available cash, cash equivalents and accounts receivable, in combination with anticipated contract research payments and revenues received from the transfer of clinical testing materials, will be sufficient to meet our anticipated capital requirements only through August 2007. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. If we do not raise adequate funds, we will be required to significantly curtail or cease our operations, and may have to sell or license out significant portions of our technology or potential products.

We believe there may be a number of alternatives to meeting the continuing capital requirements of our operations, including additional collaborative agreements and public or private financings. However, these alternatives may not be consummated in the necessary time frames needed for continuing operations or on terms favorable to us. Since April, 2006, one of our stockholders has been providing financing to us to support our operations. As of the date hereof we have borrowed and aggregate of $5,700,000 from this stockholder. We cannot assure that this stockholder will continue to provide financing to us when needed. Our business and financial condition will be materially adversely affected in the event that he ceases to provide this financing if needed.

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

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

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

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

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

collaboration and marketing partners, and have not generated any significant revenues from product sales.

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

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

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

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

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

· the product candidates will result in marketable products.

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

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

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

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

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

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

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

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

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· Occupational Safety and Health Act;

· Food, Drug & Cosmetic Act, as amended;

· FDA's Good Laboratory Practices; and

· FDA Quality System Regulations.

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

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

As of August 1, 2007, we had fourteen full-time employees, two of whom hold Ph.D. degrees. Our success will depend largely upon the efforts of our scientists and certain of our executive officers who have been employed by us since the early stages of our business and understand our technology and business objectives. The loss of the services of any one of these individuals would seriously harm our business opportunities and prospects. Our success also depends on the recruitment and retention of additional qualified management and scientific personnel. We may not be able to attract and retain required personnel on acceptable terms, due to the competition for experienced personnel from other biotechnology, pharmaceutical and chemical companies, universities and non-profit research institutions. We do not maintain "key-man" or similar life insurance policies with respect to these persons to compensate us in the event of their deaths, which may harm our business.

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

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

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

We have 26 United States patents, 14 foreign patents, and five additional United States patent applications are pending. We have not yet marketed, sold or developed our products outside the United States, except for limited amounts of ProNectin(R) F, ProNectin(R) L and SmartPlastic(R) cell culture products. The patent position of biotechnology companies, such as ours, is highly uncertain and involves complex legal, scientific and factual questions. For example:

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

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

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

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

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

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

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

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

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

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

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

ITEM 3. Controls and Procedures

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including its Chief Executive Officer (the principal executive officer) and the principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, and taking into consideration the material weaknesses identified in the letter from the Company’s auditor as discussed below, the Chief Executive Officer and the Principal Financial Officer concluded, based on the disclosures set forth below, that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective for the purposes of recording, processing, summarizing and timely reporting of material information relating to the Company required to be included in its periodic reports.

We received a letter dated May 23, 2007 from Squar Milner, Peterson, Miranda & Williamson, LLP (“Squar Milner”), our auditors, addressed to the Chairman of the Audit Committee of our Board of Directors in connection with the audit of our financial statements as of December 31, 2006, which identified certain matters involving internal control and our operations that Squar Milner considered to be significant deficiencies or material weaknesses under the standards of the Public Company Accounting Oversight Board. These material weaknesses were:

(1) lack of fulltime staff dedicated to accounting and financial reporting;

(2) insufficient personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters;

(3) ineffective controls over period end financial close and reporting processes;

(4)	inadequate procedures for appropriately identifying, assessing and applying accounting principles; and
(5)	Inadequate documentation and support for certain transactions.

Our management and our Audit Committee discussed this letter among them and discussed it with Squar Milner.

We have effected certain changes to improve our controls over all cash disbursements, including:

1. Weekly forecasting of cash receipts and disbursements reviewed and approved by a senior officer;

2. Approval by senior officers of all disbursements; and

3. Approval by senior officers of all purchase orders and invoices.

We have retained the services, on a third party basis, of a person experienced in financial supervision matters with sufficient experience to:

1. Oversee the daily accounting function, including cash receipts and disbursements, billing, payroll and month end bookkeeping processes;

2. Identify and resolve non-routine or complex accounting matters;

3. Control period end financial closing and reporting processes; and

4. Identify, assess and apply accounting principles.

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

We notified the members of our Audit Committee of the facts set forth in this report.

Internal Control Over Financial Reporting

Other than noted above, there have been 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 Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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PART II.

OTHER INFORMATION

Item 6. Exhibits

10.6 Amendment No. 6 to Secured Promissory Note issued to Matthew J. Szulik dated, August 9, 2007.

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

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

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

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

SIGNATURES

In accordance with the requirements 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.
Date: August 20, 2007	By:	/s/ William N. Plamondon, III
		William N. Plamondon, III
		Chief Executive Officer
Date: August 20, 2007	By:	/s/ William N. Plamondon, III
		William N. Plamondon, III
		Principal Financial Officer

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EXHIBIT INDEX

10.6 Amendment No. 6 to Secured Promissory Note issued to Matthew J. Szulik dated, August 9, 2007.

 

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

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

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

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