Summary of PROTEIN POLYMER TECHNOLOGIES INC

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

The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2007, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-KSB for the year ended December 31, 2007. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. When used herein, the words "believe," "anticipate," "expect," "estimate" and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption "Risk Factors" in the Form 10-KSB for the year ended December 31, 2007 and the caption "Risk Factors" in this Form 10-Q for the quarter ended June 30, 2008. We undertake no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

Company and Technology Background

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

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

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

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

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 extra-cellular 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.

Results of Operations

Contract and Licensing Revenue. Revenues from product sales for the three and six months ended June 30, 2008 were $7,000, compared to $132,000 and $268,000 respectively for contract and licensing revenue for the comparable periods in 2007. Future revenues are subject to future collaborative development and licensing agreements.

We cannot forecast with any degree of certainty which potential product lines will be subject to future collaborations or other strategic transactions, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. As a result, we cannot be certain when and to what extent we will receive cash inflows from the commercialization of product candidates or collaboration agreements, if at all.

Research and Development Expenses. Research and development expenses for the three and six months ended June 30, 2008 were $574,000 and $1,125,000 respectively, compared to $628,000 and $1,273,000, respectively, for the comparable periods in 2007. We expect further decline from 2007 as a result of significantly reduced activity levels of clinical testing and regulatory consulting costs in 2008. We expect our research and development expenses will increase in the future only to the extent that additional capital is obtained or future collaborative development and licensing agreements are secured.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and six months ended June 30, 2008 were $302,000 and $511,000, respectively, as compared to $352,000 and $671,000, respectively, for the comparable periods in 2007. We made significant reductions in administration expenses in the first two quarters of 2008. Several highly compensated positions were eliminated and all non-mission sensitive expenses were reviewed and either eliminated or reduced, including the cost of facilities. To the extent possible, we continue to concentrate on controlling costs in this area. We expect our selling, general and administrative expenses will increase in the future only to the extent that additional capital is obtained or future collaborative development and licensing agreements are secured.

Operating Losses. For the three months ended June 30, 2008, we recorded a net loss applicable to common shareholders of $1,106,000 or $0.01 per share, as compared to a loss of $1,029,000 or $0.02 per share for the comparable period in 2007. For the six months ended June 30, 2008, we recorded a net loss applicable to common shareholders of $2,106,000 or $0.02 per share, as compared to a loss of $1,825,000 or $0.03 per share for the comparable period in 2007. The undeclared or imputed dividends in the six months ended June 30, 2008 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 January 2008.

Inflation

To date, we believe that inflation and changing prices have not had a material impact on our continuing operations.

Liquidity and Capital Resources

As of June 30, 2008, we had cash totaling $8,000, as compared to $22,000 at December 31, 2007. As of June 30, 2008, we had a working capital deficit of $8,474,000 compared to working capital of $7,862,000 at December 31, 2007.

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, 2008. During the six months ended June 30, 2008, we did not purchase any capital equipment or leasehold improvements and do not anticipate that expenditures for these items will be increased significantly in 2008.

Our existing available cash as of June 30, 2008, and continuing contractual commitments, are insufficient to meet our anticipated funding requirements. Substantial additional capital resources are required to fund continuing expenditures related to our operating, research, development, manufacturing and business development activities. As discussed in Note 6 to the financial statements, the Company entered into a common stock purchase agreement (hereafter "SPA") in September 2007 and has raised $1,790,000 as of June 30, 2008, as a result of that SPA. Pursuant to the SPA, which has been our only source of external financing since September 2007, the investors purchase shares of our common stock at the closing price of the stock on the day the investment is made. In addition, we issued a five-year warrant to each investor to purchase the same number of shares as those purchased by such investor at 110% of the price at which the shares are purchased. As of November 28, 2007, the SPA was amended so that warrants issued on and after that date are exercisable at 100% of the price at which the shares are purchased. We have also granted the investors demand and piggy-back registration rights covering the shares purchased and the sharers issuable upon exercise of the warrants. Prior to the SPA, required funding was provided to us through a note payable agreement (known as the Szulik Loan) by Matthew Szulik, one of our stockholders. This loan was outlined in previous filings and is further described in Note 4 to the financial statements. As with the Escrow Agreement relating to the Szulik Loan, the Stock Purchase Agreement provides that TAG Virgin Islands, Inc. (hereafter "TAG"), as agent for the equity investors, will advise the Board as to which of the Company's expenses will be paid with the funds invested by these investors.

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

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

As noted above, we believe our existing available cash as of June 30, 2008 will not be sufficient to meet our anticipated capital requirements during 2008. We are unable to pay certain vendors in a timely manner and remain over 90 days past due with certain critical vendors, such as outside laboratories and law firms. We currently owe our former chief executive officer's firm, R. I. Heller & Co., LLC, $175,000 for his services. Additionally, we are currently outsourcing administrative and accounting functions as a result of cutbacks necessitated by insufficient monetary resources. We are attempting to remedy this problem. Our ability to continue operating is dependent on the receipt of additional funding and substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. If adequate funds are not available, we will be required to significantly curtail our operating plans and most likely cease operations. We are still in discussions with other potential financing sources and collaborative partners, and are seeking additional funding in the form of equity investments, license fees, loans, milestone payments or research and development payments. We cannot assure that any of these other sources of funding will be consummated in the timeframes needed for continuing operations or on terms favorable to us, if at all.

Caution on Forward-Looking Statements

Any statements in this report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should" or "would." Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation:
the potential for the FDA to impose non-clinical, clinical or other requirements to be completed before or after use of any of our intellectual property or methodology; our ability to demonstrate to the satisfaction of potential collaborative development partners of the feasibility of utilizing our intellectual property or methodology; the failure to generate the potential to enter into and the terms of any strategic transaction relating to our intellectual property or methodology; the scope, validity and duration of patent protection and other intellectual property rights for our intellectual property or methodology ; estimates of the potential markets for our intellectual property or methodology and our ability to compete in these markets; our products, our expected future revenues, operations and expenditures and projected cash needs; our ability to raise sufficient capital and other risks detailed in this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.