<PAGE>

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-QSB

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

(Mark One)
|X|             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

                           For the quarterly period ended September 30, 2006

                                                              OR

|_|             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934
                For the transition period from ______________ to ______________

                        Commission file number 000-32849

                                  PROTEO, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

                    NEVADA                                     88-0292249
        (STATE OR OTHER JURISDICTION OF                     (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NO.)

2102 BUSINESS CENTER DRIVE, IRVINE, CALIFORNIA                   92612
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)

         Issuer's telephone number, including area code: (949) 253-4616

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 |_|.

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

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.

           CLASS                            NUMBER OF SHARES OUTSTANDING
--------------------------------    --------------------------------------------
Common Stock, $0.001 par value       22,379,350 shares of common stock as
                                     November 10, 2006

Transitional Small Business Disclosure Format
(Check one):
Yes |_|    No |X|.

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

<PAGE>

                                  PROTEO, INC.
                                 AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements:

         Unaudited Condensed Consolidated Balance Sheet as of
         September 30, 2006                                                   1

         Unaudited Condensed Consolidated Statements of Operations
         and Comprehensive Loss for the Nine-month Periods Ended
         September 30, 2006 and 2005, and for the Period From
         November 22, 2000 (Inception) Through September 30, 2006             2

         Unaudited Condensed Consolidated Statements of Cash Flows
         for the Nine-month Periods Ended September 30, 2006 and 2005,
         and for the Period From November 22, 2000 (Inception) Through
         September 30, 2006                                                   3

         Notes to Unaudited Condensed Consolidated Financial Statements       4

Item 2.  Management's Discussion and Analysis or Plan of Operations          11

Item 3.  Controls and Procedures                                             15

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                   16

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds         16

Item 3.  Defaults Upon Senior Securities                                     16

Item 4.  Submission of Matters to a Vote of Security Holders                 16

Item 5.  Other Information                                                   16

Item 6.  Exhibits                                                            16

SIGNATURES                                                                   17

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<CAPTION>

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                                PROTEO, INC. AND SUBSIDIARY
                               (A DEVELOPMENT STAGE COMPANY)
                            CONDENSED CONSOLIDATED BALANCE SHEET
                                     SEPTEMBER 30, 2006

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

                                         UNAUDITED

                                           ASSETS
<S>                                                                       <C>
CURRENT ASSETS
     Cash and cash equivalents                                            $      231,799
     Research supplies inventory                                                  85,063
     Prepaid expenses and other current assets                                    51,665
                                                                          ----------------
                                                                                 368,527

PROPERTY AND EQUIPMENT, NET                                                      385,839
                                                                          ----------------

                                                                          $      754,366
                                                                          ================

                           LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Accounts payable and accrued liabilities                             $       51,194
     Accrued licensing fees                                                      803,000
     Settlement liability                                                         86,526
                                                                          ----------------
                                                                                 940,720

MINORITY INTEREST                                                                 63,471

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
     Preferred stock, par value $0.001 per share;
         10,000,000 shares authorized; no shares issued and
         outstanding                                                                   -
     Common stock, par value $0.001 per share; 300,000,000
         shares authorized; 22,379,350 shares issued and
         outstanding                                                              22,380
     Additional paid-in capital                                                4,069,734
     Stock subscriptions receivable                                             (150,991)
     Accumulated other comprehensive income                                      250,372
     Deficit accumulated during development stage                             (4,441,320)
                                                                          ----------------
                                                                                (249,825)
                                                                          ----------------

                                                                          $      754,366
                                                                          ================

------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                             1
<PAGE>

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

                                                  PROTEO, INC. AND SUBSIDIARY
                                                 (A DEVELOPMENT STAGE COMPANY)
                                        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    AND COMPREHENSIVE LOSS
                         FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005
                       AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH SEPTEMBER 30, 2006

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

                                                           UNAUDITED

                                                                                                                 NOVEMBER 22,
                                                                                                                    2000
                                                THREE-MONTHS    THREE-MONTHS    NINE-MONTHS     NINE-MONTHS      (INCEPTION)
                                                   ENDED           ENDED           ENDED           ENDED           THROUGH
                                                SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                                    2006            2005            2006            2005             2006

REVENUES                                       $           -   $           -   $           -   $           -   $           -
                                               --------------  --------------  --------------  --------------  --------------

EXPENSES
  General and Administrative                         234,828          89,880         402,275         313,535       3,030,638
  Research and Development, net of grants             36,971         302,177          76,378         706,730       1,458,865
                                               --------------  --------------  --------------  --------------  --------------
                                                     271,799         392,057         478,653       1,020,265       4,489,503
                                               --------------  --------------  --------------  --------------  --------------

INTEREST AND OTHER INCOME (EXPENSE)                    1,480          12,650         (31,180)         94,826          48,183
                                               --------------  --------------  --------------  --------------  --------------

NET LOSS (AVAILABLE TO COMMON STOCKHOLDERS)         (270,319)       (379,407)       (509,833)       (925,439)     (4,441,320)

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS               5,023           4,216          31,718        (135,100)        250,372
                                               --------------  --------------  --------------  --------------  --------------

COMPREHENSIVE LOSS                             $    (265,296)  $    (375,191)  $    (478,115)  $  (1,060,539)  $  (4,190,948)
                                               ==============  ==============  ==============  ==============  ==============

BASIC AND DILUTED LOSS AVAILABLE TO
  COMON STOCKHOLDERS PER COMMON SHARE          $       (0.01)  $       (0.02)  $       (0.02)  $       (0.04)
                                               ==============  ==============  ==============  ==============

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING                              22,379,350      22,079,350      22,379,350      22,079,350
                                               ==============  ==============  ==============  ==============



-----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                                               2
<PAGE>

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                                       PROTEO, INC. AND SUBSIDIARY
                                      (A DEVELOPMENT STAGE COMPANY)
                             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                    FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005, AND
              FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH SEPTEMBER 30, 2006

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

                                                UNAUDITED

                                                                                          NOVEMBER 22,
                                                                                             2000
                                                       NINE-MONTHS       NINE-MONTHS      (INCEPTION)
                                                          ENDED              ENDED          THROUGH
                                                       SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                                           2006              2005             2006
                                                      ---------------  ---------------  ---------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                              $    (509,833)   $    (925,439)   $  (4,441,320)
Adjustments to reconcile net loss to net cash used
  in operating activities:
    Depreciation                                             40,666           35,574          208,382
    Unrealized foreign transaction loss (gain)               49,000          (72,000)          92,000
    Changes in operating assets and liabilities:
       Research supplies inventory                           10,068                -         (111,919)
       Prepaid expenses and other current assets            (23,388)           2,519          (50,898)
       Accounts payable and accrued liabilities             (42,256)         154,047           29,220
       Accrued licensing fees                               103,000          102,000          711,000
       Settlement liability                                  86,526                -           86,526
                                                      ---------------  ---------------  ---------------
NET CASH USED IN OPERATING ACTIVITIES                      (286,217)        (703,299)      (3,477,009)
                                                      ---------------  ---------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment                             -           (7,767)        (601,728)
Cash of reorganized entity                                        -                -           27,638
                                                      ---------------  ---------------  ---------------
NET CASH USED IN INVESTING ACTIVITIES                             -           (7,767)        (574,090)
                                                      ---------------  ---------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock                            -                -        1,792,610
Proceeds for subscribed stock                               225,680          350,001        2,140,004
Capital contributions                                        63,471                -           63,471
                                                      ---------------  ---------------  ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                   289,151          350,001        3,996,085
                                                      ---------------  ---------------  ---------------

NET EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH            1,088          (90,198)         286,813
                                                      ---------------  ---------------  ---------------

NET INCREASE (DECREASE) IN CASH                               4,022         (451,263)         231,799

CASH AND CASH EQUIVALENTS - beginning of period             227,777          916,054                -
                                                      ---------------  ---------------  ---------------

CASH AND CASH EQUIVALENTS - end of period             $     231,799    $     464,791    $     231,799
                                                      ===============  ===============  ===============


-------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                                    3
</TABLE>

<PAGE>

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

                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

1.  NATURE OF BUSINESS AND BASIS OF PRESENTATION

BASIS OF PRESENTATION

The management of Proteo, Inc. ("Proteo" or the "Company") and its wholly owned
subsidiary Proteo Biotech, AG, without audit, prepared the condensed
consolidated financial statements for the three-month and the nine-month periods
ended September 30, 2006 and 2005 and for the period from November 22, 2000
(Inception) through September 30, 2006. In the opinion of management, all
adjustments necessary to present fairly, in accordance with accounting
principles generally accepted in the United States of America, the Company's
financial position as of September 30, 2006, and the results of operations and
cash flows for the nine-month periods ended September 30, 2006 and 2005 and for
the period from November 22, 2000 (Inception) through September 30, 2006, have
been made. Such adjustments consist only of normal recurring adjustments.

Certain note disclosures normally included in our annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to
instructions for Form 10-QSB. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto which are included in Proteo, Inc.'s Form 10-KSB
filed with the Securities and Exchange Commission on March 31, 2006.

The results of operations for the three-month and nine-month periods ended
September 30, 2006 are not necessarily indicative of the results to be expected
for the full year.

NATURE OF BUSINESS

The Company and its subsidiary intend to develop, manufacture, promote and
market pharmaceuticals and other biotech products. The Company is focused on the
development of pharmaceuticals based on the human protein Elafin. Elafin is a
human protein that naturally occurs in human skin, lungs, and mammary glands.
The Company believes Elafin may be useful in the treatment of cardiac
infarction, serious injuries caused by accidents, post surgery damage to tissue
and complications resulting from organ transplantations. The Company's common
stock is currently quoted on the OTC Bulletin Board of the National Association
of Securities Dealers under the symbol "PTEO.OB".


                                        4
<PAGE>

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                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

1.  NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)

NATURE OF BUSINESS (continued)

Since its inception, the Company has primarily been engaged in the research and
development of its proprietary product Elafin. Once the research and development
phase is complete, the Company intends to manufacture and obtain the various
governmental regulatory approvals for the marketing of Elafin. The Company is in
the development stage and has not generated any significant revenues from any
product sales. The Company believes that none of its planned products will
produce sufficient revenues in the near future. As a result, the Company plans
to identify and develop other potential products. There are no assurances,
however, that the Company will be able to produce such products, or if produced,
that they will be accepted in the marketplace.

DEVELOPMENT STAGE AND GOING CONCERN CONSIDERATIONS

The Company has been in the development stage since it began operations on
November 22, 2000, and has not generated any significant revenues from
operations, and there is no assurance of any future revenues.

The Company will require substantial additional funding for continuing research
and development, obtaining regulatory approval and for the commercialization of
its product. There can be no assurance that the Company will be able to obtain
sufficient additional funds when needed, or that such funds, if available, will
be obtainable on terms satisfactory to the Company.

Management has taken action to address these matters. They include:

      o     Retention of experienced management personnel with particular skills
            in the commercialization of such products.
      o     Attainment of technology to develop additional biotech products.
      o     Raising additional funds through the sale of debt and equity
            securities.
      o     Applying for additional research grants.

The Company's products, to the extent they may be deemed drugs or biologics, are
governed by the Federal Food, Drug and Cosmetics Act and the regulations of
State and various foreign government agencies. The Company's proposed
pharmaceutical products to be used with humans are subject to certain clearance
procedures administered by the above regulatory agencies. There can be no
assurance that the Company will receive the regulatory approvals required to
market its proposed products elsewhere or that the regulatory authorities will
review the product within the average period of time.


                                        5
<PAGE>

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

                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

1.  NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)

DEVELOPMENT STAGE AND GOING CONCERN CONSIDERATIONS (continued)

Management plans to obtain revenues from product sales, but there is no
commitment by any persons for purchase of any of the proposed products. In the
absence of significant sales and profits, the Company may seek to raise
additional funds to meet its working capital requirements through the additional
sales of debt and equity securities. There is no assurance that the Company will
be able to obtain sufficient additional funds when needed, or that such funds,
if available, will be obtainable on terms satisfactory to the Company.

These circumstances, among others, raise concerns about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and its majority owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements discussed in the Notes to the December 31, 2005
consolidated financial statements filed previously with the Securities and
Exchange Commission in Form 10-KSB that are required to be adopted during the
year ending December 31, 2006 did not have, or are not expected by management to
have, a significant impact on the Company's consolidated financial statements.


                                        6
<PAGE>

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

                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

2.  EQUITY TRANSACTIONS

During the nine-month periods ended September 30, 2006 and 2005, the Company
received $225,680 and $350,001, respectively, in connection with stock
subscriptions receivable. Management expects the outstanding balance of the
stock subscriptions receivable to be received in installments through December
2006 and believes such balance to be fully collectible.

There have been no issuances of common stock or preferred stock during the
nine-month period ended September 30, 2006, nor have any stock options been
granted from inception to-date.

On September 28, 2006, a shareholder of the Company contributed 50,000 Euros
($63,471) to PBAG for a 15% non-voting interest in PBAG, in accordance with
certain provisions of the German Commercial Code. Such amount is presented as
minority interest in the accompanying condensed consolidated balance sheet.

3.  LOSS PER SHARE

The Company computes loss per common share using Statement of Financial
Accounting Standards ("SFAS") No. 128 "EARNINGS PER SHARE." Basic loss per
common share is computed based on the weighted average number of shares
outstanding for the period. Diluted loss per share is computed by dividing net
loss by the weighted average shares outstanding assuming all dilutive potential
common shares were issued. There were no dilutive potential common shares at
September 30, 2006 and 2005. Additionally, there were no adjustments to net loss
to determine net loss available to common shareholders. As such, basic and
diluted loss per share equals net loss, as reported, divided by the weighted
average common shares outstanding for the respective periods.

4.  FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's German operations are translated into
U.S. dollars at period-end exchange rates; equity transactions are translated at
historical rates; and income and expenses are translated at weighted average
exchange rates for the period. Net foreign currency exchange gains or losses
resulting from such translation are excluded from net earnings but are included
in comprehensive income and accumulated in a separate component of stockholders'
equity. Accumulated other comprehensive income approximated $250,000 at
September 30, 2006.


                                        7
<PAGE>

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

                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

5. FOREIGN CURRENCY TRANSACTIONS

The Company records payables related to a certain licensing agreement, in
accordance with SFAS No. 52, "FOREIGN CURRENCY TRANSLATION." Quarterly
commitments under such agreement are denominated in Euros. For each reporting
period, the Company translates the quarterly amount to US dollars at the
exchange rate effective on that date. If the exchange rate changes between when
the liability is incurred and the time payment is made, a foreign exchange gain
or loss results. The Company has made no payments under this licensing
agreement, and, therefore, has not realized any foreign currency exchanges gains
or losses during the nine-month periods ended September 30, 2006 and 2005.

Additionally, the Company computes a foreign exchange gain or loss at each
balance sheet date on all recorded transactions denominated in foreign
currencies that have not been settled. The difference between the exchange rate
that could have been used to settle the transaction on the date it occurred and
the exchange rate at the balance sheet date is the unrealized gain or loss that
is currently recognized. The Company recorded unrealized foreign currency
exchange (losses) gains of approximately ($49,000) and $72,000 for the
nine-months ended September 30, 2006 and 2005, respectively.

6.  SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION," establishes standards for the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers.
The Company considers itself to operate in one segment and has not generated
significant revenues since its inception. All fixed assets are located in
Germany.

7.  GRANTS

In May 2004, the German State of Schleswig-Holstein granted Proteo Biotech AG
approximately 760,000 Euros for further research and development of the
Company's pharmaceutical product Elafin. The new grant covers the period from
April 1, 2004 to March 31, 2007 if certain milestones have been reached by
September 30 of each year, with a possible extension as defined in the
agreement.


                                        8
<PAGE>

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

                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

7.  GRANTS (continued)

The new grant covers 49.74% of eligible research and development costs and is
subject to the Company's ability to cover the remaining 50.26% of the costs.
During the three-month period ended March 31, 2006, the New Grant was modified
so that the Company is eligible to receive the following amounts: 120,911 Euros
in 2004 (received); 197,316 Euros in 2005 (received); 341,773 Euros in 2006; and
100,000 Euros in 2007. Grant funds approximating 181,000 and 168,000 Euros
($226,000 and $213,000, respectively) have been recorded as a reduction of
research and development expenses for the nine-month periods ended September 30,
2006 and 2005, respectively. As of September 30, 2006, management believes that
all milestones required by the new grant have been satisfied.

8.  LICENSE AGREEMENT

On December 30, 2000, the Company entered into a 30-year license agreement,
beginning January 1, 2001, with Dr. Oliver Wiedow, MD, the owner and inventor of
several patents, patent rights and technologies related to Elafin. In exchange
for an exclusive worldwide license for the intellectual property, the Company
agreed to pay Dr. Wiedow a licensing fee of 110,000 Euros per year, for a term
of six years for a total obligation of 660,000 Euros. Such licensing fees shall
be reduced by payments to Dr. Wiedow during such term for any royalties and for
50% of any salary.

Royalties are to be paid quarterly, for the 30-year term of the agreement, to
Dr. Wiedow in the amount of 3% of gross revenues earned with products based on
the licensed technology. Dr. Wiedow has not been paid any salary since execution
of the agreement.

At September 30, 2006, the Company has accrued approximately $803,000 (633,000
Euros) of licensing fees payable to Dr. Wiedow. The Company has not made any
installment payments to Dr. Wiedow as required under the original agreement.
During 2004, the licensing agreement was amended to require annual payments of
30,000 Euros, to be paid on July 15 of each year, beginning on July 15, 2004.
Such amount can be increased up to 110,000 Euros by June 1 of each year based on
an assessment of the Company's financial ability to make such payments. The
annual payments will continue until the entire obligation of 660,000 Euros has
been paid. No payments have been made to Dr. Wiedow as of September 30, 2006,
and this is a technical breach of the agreement. Dr. Wiedow waived such breach
and deferred the 2004 and 2005 payments to later in 2006.


                                        9
<PAGE>

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

                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2006

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

9.  LEGAL CONTINGENCY

The Company's German subsidiary PBAG was sued and served with a summons in
February 2006 by its former President and CEO, Walter J. Thomsen, whose
employment was terminated effective as of November 7, 2005. The suit was filed
in Germany. Mr. Thomsen sought declaratory relief regarding the alleged early
and wrongful termination of his employment with the Company.

During the three -month period ended September 30, 2006, the Company settled the
lawsuit with Walter J. Thomsen for 100,000 Euros (approximately $125,000). The
Company made a deposit relating to the lawsuit in the amount of 31,805 Euros
(approximately $40,000) on May 11, 2006, 28,720 Euros of which was paid out to
Mr. Thomsen in September 2006. The Company is to pay 30,000 Euros no later than
October 2, 2006. The remainder of the settlement is to be paid by December 1,
2006. As this loss was not estimated by management to be probable as of June 30,
2006, the entire settlement amount was recorded as an expense during the
three-month period ended September 30, 2006. Such amount is included in general
and administrative expenses on the accompanying condensed consolidated
statements of operations. At September 30, 2006, the Company has included the
remaining settlement liability of $86,526 in settlement liability on the
accompanying condensed consolidated balance sheet.


                                       10

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

CAUTIONARY STATEMENTS:

THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY INTENDS THAT SUCH
FORWARD-LOOKING STATEMENTS BE SUBJECT TO THE SAFE HARBORS CREATED BY SUCH
STATUTES. THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACCORDINGLY, TO
THE EXTENT THAT THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING THE FINANCIAL CONDITION, OPERATING RESULTS, BUSINESS PROSPECTS OR ANY
OTHER ASPECT OF THE COMPANY, PLEASE BE ADVISED THAT THE COMPANY'S ACTUAL
FINANCIAL CONDITION, OPERATING RESULTS AND BUSINESS PERFORMANCE MAY DIFFER
MATERIALLY FROM THAT PROJECTED OR ESTIMATED BY THE COMPANY IN FORWARD-LOOKING
STATEMENTS. THE DIFFERENCES MAY BE CAUSED BY A VARIETY OF FACTORS, INCLUDING BUT
NOT LIMITED TO ADVERSE ECONOMIC CONDITIONS, INTENSE COMPETITION, INCLUDING
INTENSIFICATION OF PRICE COMPETITION AND ENTRY OF NEW COMPETITORS AND PRODUCTS,
ADVERSE FEDERAL, STATE AND LOCAL GOVERNMENT REGULATION, INADEQUATE CAPITAL,
UNEXPECTED COSTS AND OPERATING DEFICITS, AND INCREASES IN GENERAL AND
ADMINISTRATIVE COSTS, AND OTHER SPECIFIC RISKS THAT MAY BE ALLUDED TO IN THIS
QUARTERLY REPORT OR IN OTHER REPORTS ISSUED BY THE COMPANY. IN ADDITION, THE
BUSINESS AND OPERATIONS OF THE COMPANY ARE SUBJECT TO SUBSTANTIAL RISKS THAT
INCREASE THE UNCERTAINTY INHERENT IN THE FORWARD-LOOKING STATEMENTS. THE
INCLUSION OF FORWARD LOOKING STATEMENTS IN THIS QUARTERLY REPORT SHOULD NOT BE
REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.

The Company does not currently generate any revenue from its operations and does
not expect to report any significant revenue until the successful development
and marketing of its planned pharmaceutical and other biotech products.
Additionally, after the launch of the Company's products, there can be no
assurance that the Company will generate positive cash flow and there can be no
assurances as to the level of revenues, if any, the Company may actually achieve
from its planned operations.

PLAN OF OPERATIONS

The Company specializes in the research, development and marketing of drugs for
inflammatory diseases with Elafin as its first project. The Company's management
deems Elafin to be one of the most prospective substances in the treatment of
serious tissue and muscle damage. Independently conducted animal experiments
have indicated that Elafin may have benefits in the treatment of reperfusion
injuries due to myocardial infarction, severe injury, transplantation or other
tissue damage occurring on restoring blood circulation. Additionally, further
studies in animals have shown that Elafin may be effective in the treatment of
other diseases, particularly pulmonary diseases such as pulmonary hypertension,
chronic obstructive pulmonary disease (COPD) and cystic fibrosis. Due to its
mode of action Elafin may also have potential in the treatment of SIRS, acute
pancreatitis, periodontitis, assist in wound healing, and may be useful in
medical device coating and as ingredient in so-called cosmeceuticals.

The Company intends to implement Elafin as a drug in the treatment of serious
tissue and muscle damage, for example, due to traffic accidents, and intends to
achieve governmental approval in Europe first. Currently, management assumes
that it will take at least an additional four years to achieve its first
governmental approval for the use of Elafin as a drug in the treatment of
serious tissue and muscle damage. Further, the Company intends to develop
proprietary products targeting rare diseases such as pulmonary hypertension, and
cystic fibrosis, and obtain orphan drug status for such products. Orphan drug
status in the US and in Europe provide eased drug approval procedures and
protected market access for up to seven years and for up to ten years,
respectively. However, there can be no assurance that the Company will achieve
orphan drug status in the US or Europe, nor that the Company will be able to
develop marketable drugs for the treatment of such rare diseases.

The Company's success will depend on its ability to prove that Elafin is well
tolerated by humans and its efficiency in the indicated treatment. There can be
no assurance that the Company will be able to develop feasible production
procedures in accordance with Good Manufacturing Practices ("GMP") standards, or
that Elafin will receive any governmental approval for use as a drug in any of
the Company's intended applications.


                                       11
<PAGE>

In November 2004, we entered into an exclusive worldwide license and
collaboration agreement with ARTES Biotechnology GmbH ("ARTES"). This license
agreement enables us to economically produce Elafin on a large scale by using
the sublicensed yeast HANSENULA POLYMORPHA as a high performance expression
system. Rhein Biotech GmbH ("Rhein") has licensed the yeast to ARTES, who
in-turn sublicensed it to us. The agreement has a term of 15 years with an
annual license fee of 10,000 Euros per year or 2.5% royalties on the future
sales of Elafin. Should the license agreement between Rhein and ARTES terminate,
Rhein will assume the sublicense agreement with the Company under similar terms.

A necessary pre-requisite for the commencement of clinical trials was the
production of Elafin according to GMP Standards. In anticipation of commencing
clinical trials, on March 18, 2005 we entered into a contractual agreement with
Eurogentec S.A., located in Liege, Belgium, an experienced Contract
Manufacturing Organization (CMO) for the production of a required amount of
Elafin according to GMP standards. The authorities demand strict standards for
the manufacture of medicines for clinical testing, and the GMP production of
Elafin for the upcoming clinical trials has to comply with a large number of
rules and regulations. Eurogentec has completed its required production run of
Elafin.

In April 2005, we entered into an agreement with the German Institut fur
klinische Pharmakologie ("IKP"), an experienced Contract Research Organization
(CRO), to assist us with our initial clinical trial involving Elafin, to
evaluate the tolerability, safety, pharmacokinetic and dynamics of Elafin
pursuant to a clinical protocol e.g. with healthy young men. In November 2005 we
commenced, and in December 2005, we successfully completed our first Phase I
trial for Elafin. Elafin was tested on 32 healthy male volunteers in a
single-ascending-dose, double blind, randomized, placebo-controlled trial to
evaluate tolerability and safety at the IKP in Kiel, Germany. All intravenously
applied doses were well tolerated. No severe adverse events occurred. However,
we cannot be assured of the same results will be received in a later Phase or
with a larger test population.

In 2006, the Company has gathered and evaluated additional data from the results
of the Phase I study, and is in the process of planning a Phase II clinical
trial. In addition, during 2006, we established a procedure to incorporate
Elafin as an active ingredient in cream.

In September 2006 we filed an application with the EMEA (European Medicines
Agency) to achieve orphan drug status in the European markets for Elafin to be
used in the treatment of pulmonary hypertension.

In September 2006, Windhover Information, Inc., an established provider of
business information for decision makers in the biotechnology and pharmaceutical
industries, chose the Company's Elafin project as one of the top 10 most
interesting cardiovascular projects. We have been invited to present the Elafin
project at the "Windhover's Therapeutic Alliances Cardiovascular Conference" in
Chicago on November 16, 2006.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception we have raised a total of approximately $4,083,000 from the
sale of 18,565,428 shares of our common stock, of which 5,085,487 shares and
300,000 shares have been sold at $0.40 per share and at $0.84 per share,
respectively, under stock subscription agreements in the amount of approximately
$2,035,000 and of $252,000, respectively. Approximately $151,000 is owed to us
at September 30, 2006 under such subscription agreements.

In May 2004, our subsidiary, Proteo Biotech AG (PBAG) received another grant
from the German State of Schleswig-Holstein in the approximate amount of 760,000
Euros for further research and development of our pharmaceutical product Elafin.
The grant covers the period from April 1, 2004 to March 31, 2007 if certain
milestones have been reached by September 30 of each year, with a possible
extension as defined in the agreement. The new grant covers 49.74% of eligible
research and development costs and is subject to our ability to fund the
remaining 50.26 % of the costs. An additional condition of the grant is that the
product is to be developed and subsequently produced in the German state of
Schleswig-Holstein. We received approximately 167,000 Euros (approximately
$212,000) for the nine-month period and approximately 37,000 Euros
(approximately $47,000) for the three-month period ended September 30, 2006,
respectively, under the grant, and qualified for an additional amount
approximating 15,000 Euros (approximately $19,000), which we have recorded as a
receivable at period end. We reasonably believe that all milestones required by
the new grant had been satisfied as of September 30, 2006. There can be no
assurance that we will qualify for additional funds under the grant.


                                       12
<PAGE>

The Company has cash approximating $232,000 as of September 30, 2006. This is a
significant decrease over the September 30, 2005 cash balance of approximately
$465,000. The decrease is due in large part to expenses for research and
development related to Elafin production under GMP and on Phase I clinical trial
incurred in between September 30, 2005 and September 30, 2006.

On September 28 2006, Oliver Wiedow, M.D., a majority shareholder in the Company
and member of the Board of Directors invested 50,000 Euros (approximately
$63,000) in our subsidiary, PBAG, in exchange for a 15% non-voting equity
interest in PBAG. Pursuant to the agreement with the Company, Dr. Wiedow is
allocated 15% of PBAG's profits and losses on an annual basis provided that the
annual profit allocation cannot exceed 30% of the amount invested and he cannot
be allocated losses in excess of the amount invested plus allocated profits. The
agreement may be terminated upon six months notice prior to the end of any
calendar year, at which time Dr. Wiedow is to be paid an amount equal to the
initial investment, plus any allocated profits and less any allocated losses,
subject to the foregoing limitations. Dr. Wiedow invested the money to bridge a
gap in the Company's cash flows.

On November 15, 2004, the Company entered into an exclusive worldwide license
and collaboration agreement with ARTES Biotechnology GmbH ("ARTES"). This
license agreement enables us to economically produce Elafin on a large scale by
using the sublicensed yeast HANSENULA POLYMORPHA as a high performance
expression system. Rhein Biotech GmbH ("Rhein") has licensed the yeast to ARTES,
who in-turn sublicensed it to us. The agreement has a term of 15 years with an
annual license fee of 10,000 Euros per year or 2.5% royalties on the future
sales of Elafin. Should the license agreement between Rhein and ARTES terminate,
Rhein will assume the sublicense agreement with us Company under similar terms.

On April 25, 2005, the Company entered into a contractual agreement with the
Institut fur klinische Pharmakologie ("IKP"), a German organization, for
clinical testing of the Company's product Elafin. Such agreement required
payments approximating 118,000 Euros, payable upon the attainment of achieved
milestones, which were achieved during the fourth quarter of 2005. The Company
incurred expenses approximating 31,000 Euros (approximately $37,000) under this
contract during the nine-month period, and no expenses during the three-month
period ended September 30, 2006.

Management believes that the Company will not generate any significant revenues
in the next few years, nor will it have sufficient cash to fund operations. As a
result, the Company's success will largely depend on its ability to secure
additional funding through the sale of its Common Stock and/or the sale of debt
securities. There can be no assurance, however, that the Company will be able to
consummate debt or equity financing in a timely manner, or on a basis favorable
to the Company, if at all.

During the three -month period ended September 30, 2006, the Company settled a
lawsuit with Walter J. Thomsen, our former president and CEO, for 100,000 Euros
(approximately $125,000). The Company made a deposit relating to the lawsuit in
the amount of 31,805 Euros (approximately $40,000) on May 11, 2006 , 28,720
Euros of which was paid out to Mr. Thomsen in September 2006 . The Company is to
pay 30,000 Euros no later than October 2, 2006. The remainder of the settlement
is to be paid by December 1, 2006. As this loss was not estimated by management
to be probable as of June 30, 2006, the entire settlement amount was recorded as
an expense during the three-month period ended September 30, 2006. Such amount
is included in general and administrative expenses on the accompanying condensed
consolidated statements of operations. At September 30, 2006, the Company has
included the remaining settlement liability of $86,526 in settlement liability
on the accompanying condensed consolidated balance sheet.

GOING CONCERN

The Company's independent registered public accounting firm stated in their
Auditor's Report included in our Form 10-KSB for the year ended December 31,
2005 that the Company will require a significant amount of additional capital to
advance the Company's products to the point where they become commercially
viable and has incurred significant losses since inception. These conditions,
among others, raise substantial doubt about the Company's ability to continue as
a going concern.


                                       13
<PAGE>

The Company intends to fund operations through grant proceeds and increased
equity financing arrangements which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements for
the fiscal year ending December 31, 2006. Therefore, the Company will be
required to seek additional funds to fund its long-term operations. The
successful outcome of future activities cannot be determined at this time and
there is no assurance that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating results.

INFLATION

Management believes that inflation has not had a material effect on the
Company's results of operations.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not currently have any off balances sheet arrangements.

CAPITAL EXPENDITURES

None significant.




                                       14
<PAGE>

ITEM 3.    CONTROLS AND PROCEDURES

The Company's principal executive officer and chief financial officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(c) and 15d-15(e) under of the Securities Exchange
Act of 1934, as amended). Based on her most recent evaluation, she has concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2006. There have been no significant changes in the Company's
internal control over financial reporting during the quarter ended September 30,
2006 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.




                                       15
<PAGE>

                            PART II OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

The Company's German subsidiary PBAG was sued and served with a summons in late
February 2006 by its former President and CEO Walter J. Thomsen whose employment
was terminated. The suits were filed in the court Landgericht Kiel, Germany. Mr.
Thomsen was seeking declaratory relief regarding the alleged early and wrongful
termination of his employment with the Company.

During the three -month period ended September 30, 2006, the Company settled the
lawsuit with Walter J. Thomsen for 100,000 Euros (approximately $125,000). The
Company made a deposit relating to the lawsuit in the amount of 31,805 Euros
(approximately $40,000) on May 11, 2006, 28,720 Euros of which was paid out to
Mr. Thomsen in September 2006. The Company is to pay 30,000 Euros no later than
October 2, 2006. The remainder of the settlement is to be paid by December 1,
2006. As this loss was not estimated by management to be probable as of June 30,
2006, the entire settlement amount was recorded as an expense during the
three-month period ended September 30, 2006. Such amount is included in general
and administrative expenses on the accompanying condensed consolidated
statements of operations. At September 30, 2006, the Company has included the
remaining settlement liability of $86,526 in settlement liability on the
accompanying condensed consolidated balance sheet.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

           None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

           None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

           None.

ITEM 5.    OTHER INFORMATION.

           None.

ITEM 6.    EXHIBITS.

           Exhibits:

           31.1   Certification of the Chief Executive Officer pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

           31.2   Certification of the Chief Financial Officer pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

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


                                       16
<PAGE>

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                        PROTEO, INC.

Dated: November 13, 2006

                                        By: /s/ Birge Bargmann
                                            ---------------------------------
                                            Birge Bargmann
                                            Principal Executive Officer and
                                            Chief Financial Officer
                                            (signed both as an Officer duly
                                            authorized to sign on behalf of
                                            the Registrant and Principal
                                            Financial Officer and Chief
                                            Accounting Officer)


                                       17