<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 March 31, 2007

                                       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     23,879,350 shares of common stock as
                                   May 14, 2007

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

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




<PAGE>

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

                                TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements:

         Unaudited Condensed Consolidated Balance Sheet as of March 31, 2007

         Unaudited Condensed Consolidated Statements of Operations and
         Comprehensive Loss for the Three-month Periods Ended March 31, 2007 and
         2006, and for the Period From November 22, 2000 (Inception) Through
         March 31, 2007

         Unaudited Condensed Consolidated Statements of Cash Flows for the
         Three-month Periods Ended March 31, 2007 and 2006, and for the Period
         From November 22, 2000 (Inception) Through March 31, 2007

         Notes to Unaudited Condensed Consolidated Financial Statements

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

Item 3.  Controls and Procedures

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 3.  Defaults Upon Senior Securities

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

Item 5.  Other Information

Item 6.  Exhibits

SIGNATURES





<PAGE>

--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

                                    UNAUDITED

                                     ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                     $   355,215
     Research supplies inventory                                        91,605
     Prepaid expenses and other current assets                          23,750
                                                                   -----------
                                                                       470,570

PROPERTY AND EQUIPMENT, NET                                            380,346
                                                                   -----------

                                                                   $   850,916
                                                                   ===========

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Accounts payable and accrued liabilities                      $   137,526
     Accrued licensing fees                                            880,000
                                                                   -----------
                                                                     1,017,526

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
     Preferred stock, par value $0.001 per share;
         10,000,000 shares authorized; no shares
         issued or outstanding                                              -
     Common stock, par value $0.001 per share;
         300,000,000 shares authorized; 23,879,350
         shares issued and outstanding                                  23,880
     Additional paid-in capital                                      4,968,234
     Stock subscriptions receivable                                   (742,962)
     Accumulated other comprehensive income                            286,306
     Deficit accumulated during development stage                   (4,702,068)
                                                                   -----------
                                                                      (166,610)
                                                                   -----------

                                                                   $   850,916
                                                                   ===========

--------------------------------------------------------------------------------
PAGE F-1                               SEE ACCOMPANYING NOTES TO THESE CONDENSED
                                              CONSOLIDATED FINANCIAL STATEMENTS.





<PAGE>
<TABLE>
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                                      PROTEO, INC. AND SUBSIDIARY
                                     (A DEVELOPMENT STAGE COMPANY)
                            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                        AND COMPREHENSIVE LOSS
                       FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2007 AND 2006
             AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2007
------------------------------------------------------------------------------------------------------

                                               UNAUDITED

                                                                                          NOVEMBER 22,
                                                                                              2000
                                                                                           (INCEPTION)
                                                          THREE-MONTHS    THREE-MONTHS      THROUGH
                                                          ENDED MARCH     ENDED MARCH      MARCH 31,
                                                            31, 2007        31, 2006          2007
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
REVENUES                                                  $          -    $          -    $          -
                                                          ------------    ------------    ------------

EXPENSES
     General and Administrative                                 94,940          90,821       3,275,418
     Research and Development, net of grants                    22,652          42,884       1,505,629
                                                          ------------    ------------    ------------
                                                               117,592         133,705       4,781,047
                                                          ------------    ------------    ------------

INTEREST AND OTHER INCOME (EXPENSE)                             (7,069)        (10,196)         16,005
                                                          ------------    ------------    ------------

NET LOSS BEFORE MINORITY INTEREST                             (124,661)       (143,901)     (4,765,042)

MINORITY INTEREST IN LOSS OF CONSOLIDATED
     SUBSIDIARY, NET OF TAXES                                    3,948               -          62,974
                                                          ------------    ------------    ------------

NET LOSS (AVAILABLE TO COMMON STOCKHOLDERS)                   (120,713)       (143,901)     (4,702,068)

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS                         5,915          13,631         286,276
                                                          ------------    ------------    ------------

COMPREHENSIVE LOSS                                        $   (114,798)   $   (130,270)   $ (4,415,792)
                                                          ============    ============    ============

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

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING        23,879,000      22,379,350
                                                          ============    ============

------------------------------------------------------------------------------------------------------
PAGE F-2                  SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>




<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------
                                    PROTEO, INC. AND SUBSIDIARY
                                   (A DEVELOPMENT STAGE COMPANY)
                          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2007 AND 2006, AND
             FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2007
--------------------------------------------------------------------------------------------------

                                             UNAUDITED

                                                                                     NOVEMBER 22,
                                                                                         2000
                                                                                      (INCEPTION)
                                                     THREE-MONTHS    THREE-MONTHS      THROUGH
                                                     ENDED MARCH     ENDED MARCH      MARCH 31,
                                                       31, 2007        31, 2006          2007
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                             $   (120,713)   $   (143,901)   $ (4,702,068)
Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation                                          13,238          11,650         234,058
     Unrealized foreign transaction loss              9,000          13,000         133,000
     Changes in operating assets and liabilities:
         Research supplies inventory                            -               -        (113,904)
         Prepaid expenses and other current assets         24,878           1,886         (21,303)
         Accounts payable and accrued liabilities          42,318         (47,173)        109,458
         Accrued licensing fees                                 -          33,000         747,000
                                                     ------------    ------------    ------------

NET CASH USED IN OPERATING ACTIVITIES                     (31,279)       (131,538)     (3,613,759)
                                                     ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment                      (1,108)              -        (602,836)
Cash of reorganized entity                                      -               -          27,638
                                                     ------------    ------------    ------------

NET CASH USED IN INVESTING ACTIVITIES                      (1,108)              -        (575,198)
                                                     ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock                          -               -       1,792,610
Proceeds from subscribed stock                             119,119         107,957       2,448,033
                                                     ------------    ------------    ------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                 119,119         107,957       4,240,643
                                                     ------------    ------------    ------------

NET EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH           (999)          5,151         303,529
                                                     ------------    ------------    ------------

NET (DECREASE) INCREASE IN CASH                            85,733         (18,430)        355,215

CASH AND CASH EQUIVALENTS - beginning of period           269,482         227,777               -
                                                     ------------    ------------    ------------

CASH AND CASH EQUIVALENTS - end of period            $    355,215    $    209,347    $    355,215
                                                     ============    ============    ============

--------------------------------------------------------------------------------------------------
PAGE F-3             SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>




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                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

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 periods ended March 31,
2007 and 2006 and for the period from November 22, 2000 (Inception) through
March 31, 2007. 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 March 31,
2007, and the results of operations and cash flows for the three-month periods
ended March 31, 2007 and 2006 and for the period from November 22, 2000
(Inception) through March 31, 2007, have been made. Such adjustments consisted
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 30, 2007.

The results of operations for the three-month periods ended March 31, 2007 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, which 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
administered by Securities Dealers under the symbol "PTEO.OB".

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F-4




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                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

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 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. 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    Obtaining 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 by 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.

--------------------------------------------------------------------------------
F-5




<PAGE>

--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

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
funds to meet its future 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
("GAAP") and include the accounts of the Company and its wholly owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES,"
which supplements Statement of Financial Accounting Standards No. 109,
"ACCOUNTING FOR INCOME TAXES," by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. FIN 48
requires the tax effect of a position to be recognized only if it is
"more-likely-than-not" to be sustained based solely on its technical merits as
of the reporting date. If a tax position is not considered more-likely-than-not
to be sustained, no benefits of the position are recognized. This is a different
standard for recognition than was previously required. The more-likely-than-not
threshold must continue to be met in each reporting period to support continued
recognition of a tax benefit. At adoption, companies must adjust their financial
statements to reflect only those tax positions that are more-likely-than-not to
be sustained as of the adoption date. Any necessary adjustment is recorded
directly to opening retained earnings in the period of adoption and reported as
a change in accounting principle. The Company adopted the provisions of FIN 48
on January 1, 2007. As the Company has fully reserved its deferred tax assets,
the adoption of this standard had no material impact on the accompanying
condensed consolidated financial statements.

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F-6




<PAGE>

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                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

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

RECENT ACCOUNTING PRONOUNCEMENTS  (continued)

In July 2006, the FASB issued FASB Staff Position ("FSP") No. FAS 13-2,
"ACCOUNTING FOR A CHANGE OR PROJECTED CHANGE IN THE TIMING OF CASH FLOWS
RELATING TO INCOME TAXES GENERATED BY A LEVERAGED LEASE TRANSACTION," that
provides guidance on how a change or a potential change in the timing of cash
flows relating to income taxes generated by a leveraged lease transaction
affects the accounting by a lessor for the lease. We adopted the provisions of
FSP No. FAS 13-2 on January 1, 2007. The Company's adoption of this FSP did not
have a material impact on its consolidated financial position, results of
operations or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, "FAIR VALUE MEASUREMENTS," to define how the fair value of
assets and liabilities should be measured in several other accounting
standards where it is allowed or required. In addition to defining fair value,
the statement establishes a framework within GAAP for measuring fair value and
expands required disclosures surrounding fair-value measurements. While it will
change the way companies currently measure fair value, it does not establish any
new instances where fair-value measurement is required. SFAS No. 157 defines
fair value as an amount that a company would receive if it sold an asset or paid
to transfer a liability in a normal transaction between market participants in
the same market where the company does business. It emphasizes that the value is
based on assumptions that market participants would use, not necessarily only
the company that might buy or sell the asset. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years, with early adoption allowed. We are currently evaluating the
impact of adopting this Statement.

In February 2007, SFAS No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES" was released. SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 will be effective for the
Company beginning January 1, 2008. The Company is currently evaluating the
potential effect of SFAS No. 159 on its consolidated financial statements.

Other recent accounting pronouncements discussed in the notes to the December
31, 2006 audited consolidated financial statements, filed previously with the
Securities and Exchange Commission on Form 10-KSB, that were (or will be)
required to be adopted during the year ending December 31, 2007, did not have or
are not expected to have a significant impact on the Company's 2007 consolidated
financial statements.

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F-7




<PAGE>

--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

2. EQUITY TRANSACTIONS

During the three-month periods ended March 31, 2007 and 2006, the Company
received $119,119 and $107,957, respectively, in connection with stock
subscriptions receivable. Management expects the outstanding balance of the
stock subscriptions receivable to be received in installments through December
2007 and believes such balance to be fully collectible.

There have been no issuances of common stock or preferred stock during the
three-month period ended March 31, 2007, nor have any stock options been granted
from inception to-date.


3. LOSS PER COMMON SHARE

The Company computes loss per common share using 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 March 31, 2007 and 2006. Additionally, there were no
adjustments to net loss to determine net loss available to common shareholders.
As such, basic and diluted loss per common 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 the results of operations but
are included in other comprehensive income and accumulated in a separate
component of stockholders' equity. Accumulated comprehensive income approximated
$286,000 at March 31, 2007.

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F-8




<PAGE>

--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

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 U.S. 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 three-month periods ended March 31, 2007 and 2006.

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 gains (losses) of approximately $9,000 and $(13,000) for the
three-months ended March 31, 2007 and 2006, 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 operating 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 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.

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F-9




<PAGE>

--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2007
--------------------------------------------------------------------------------

7. GRANTS (continued)

The 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 2006, the grant was modified and extended through December 31, 2007,
so that the Company is eligible to receive the following amounts: 120,911 Euros
in 2004 (received); 197,316 Euros in 2005 (received); 225,000 Euros in 2006
(received) and approximately 217,000 Euros in 2007. Grant funds approximating
31,000 and 57,000 Euros ($41,000 and $68,000, respectively) have been recorded
as a reduction of research and development expenses for the three-month periods
ended March 31, 2007 and 2006, respectively. As of March 31, 2007, 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 from the sale of
products based on the licensed technology. Dr. Wiedow has not been paid any
salary since execution of the agreement.

At March 31, 2007, the Company has accrued $880,000 (660,000 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 March 31, 2007, and this is a technical
breach of the agreement. Dr. Wiedow waived such breach and deferred the 2004,
2005 and 2006 payments to later in 2007.

--------------------------------------------------------------------------------
F-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 tissue and
muscle damage caused by insufficient oxygen supply and therefore may be useful
in the treatment of heart attacks, serious injuries and in the course of organ
transplants. Other applications have yet to be determined.

The Company intends to implement Elafin as a drug in the treatment of serious
tissue and muscle damage, e.g. due to traffic accidents, and intends to achieve
governmental approval in Europe first. Currently, management assumes that it
will take at least four years to achieve first governmental approval for the use
of Elafin as a drug in the treatment of serious tissue and muscle damage.

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 the use as drug in any of
the intended applications.

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 us 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.


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<PAGE>

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, a 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.

During 2006, the Company 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 obtain orphan drug status in the European markets for Elafin to be
used in the treatment of pulmonary hypertension. Subsequent to the year's end,
the Committee for Orphan Medical Products (COMP) of the European Agency for the
Evaluation of Medicinal Products (EMEA) adopted a positive opinion recommending
the granting of orphan medicinal product designation for Elafin for treatment of
pulmonary arterial hypertension and chronic thromboembolic pulmonary
hypertension. The orphan drug designation became effective on March 20, 2007
upon adoption of this recommendation by the European Commission.

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 presented 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 $4,983,000 from the
sale of 20,065,428 shares of our common stock, of which 6,585,487 shares,
300,000 shares and 1,500,000 shares have been sold at $0.40 per share, $0.84 per
share and $0,60 per share, respectively, under stock subscription agreements in
the amount of approximately $2,035,000, $252,000 and $900,000, respectively. We
received $119,119 and $107,957, respectively, in connection with such
subscription agreements during the three-month periods ended March 31, 2007 and
2006, respectively. Approximately $743,000 is owed to us at March 31, 2007 under
such subscription agreements. We expect to receive the outstanding balance in
installments through December 2007 and believe such balance to be fully
collectible.

In May 2004, the German State of Schleswig-Holstein granted Proteo Biotech AG
approximately 760,000 Euros (the "New Grant") for further research and
development of the Company's pharmaceutical product Elafin. The New Grant, as
amended, covers the period from April 1, 2004 to December 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 the Company's ability to
otherwise finance the remaining 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.

The Company qualified to receive approximately 217,000 Euros and 225,000 Euros
of the New Grant in 2007 and 2006, respectively. We received grant funds
approximating 31,000 Euros and 57,000 Euros (approximately $41,000 and $68,000,
respectively) under the new grant for the three-month periods ended March 31,
2007 and 2006, respectively. As of March 31, 2007, management believes that all
milestones required by the New Grant have been satisfied.

The Company has cash approximating $355,000 as of March 31, 2007. This is an
increase over the March 31, 2006 cash balance of approximately $210,000, due to
receipts from the grant and equity financing activities

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.

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,
2006 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.


                                        2




<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, 2007. 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 balance sheet arrangements.

CAPITAL EXPENDITURES

None significant.


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 March
31, 2007. There have been no significant changes in the Company's internal
control over financial reporting during the quarter ended March 31, 2007that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                        3




<PAGE>

                            PART II OTHER INFORMATION
                            -------------------------

ITEM 1.   LEGAL PROCEEDINGS.
-------   ------------------

          None.


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.


                                        4




<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: May 14, 2007

                                          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)


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