<PAGE>

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

                                   FORM 10-KSB

    |X|       ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended DECEMBER 31, 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: 000-30728

                                  PROTEO, INC.
                 (Name of Small Business Issuer 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, CA                            92612
(Address of principal executive offices)                         (Zip Code)

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

                                      NONE
              (Former name, former address and former fiscal year,
                         if changed since last report)

              Securities registered under Section 12(b) of the Act:

      Title of each class              Name of each exchange on which registered
----------------------------------     -----------------------------------------
              None                                       None

Securities registered under Section 12(g) of the Act: Common Stock, par value
$0.001

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

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

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

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

State issuer's revenues for its most recent fiscal year. $ -0-

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity as of a
specified date within the past 60 days (based upon 10,949,350 shares held by
non-affiliates and the closing price of $0.51 per share for the common stock on
the over-the counter market as of March 28, 2007): approximately $5,584,168.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 23,879,350 at March 28, 2007.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES |_| NO |X|

<PAGE>


                                  PROTEO, INC.
                          ANNUAL REPORT ON FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

              TABLE OF CONTENTS

                   PART I
Item  1.     Description of Business                                           1
Item  2.     Description of Property                                           6
Item  3.     Legal Proceedings                                                 6
Item  4.     Submission of Matters to a Vote of Security Holders               7

                   PART II
Item  5.     Market for Common Equity and Related Stockholder Matters and
                Small Business Issuer Purchases of Equity Securities           7
Item  6.     Management's Discussion and Analysis or Plan of Operation         8
Item  7      Financial Statements                                             12
Item  8.     Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure                         13
Item 8A      Controls and Procedures                                          13
Item 8B      Other Information                                                13

                  PART III
Item 9.      Directors, Executive Officers, Promoters, Control Persons and
                Corporate Governance; Compliance With Section 16(a) of the
                Exchange Act                                                  13
Item 10.     Executive Compensation                                           15
Item 11.     Security Ownership of Certain Beneficial Owners
               and Management and Related Stockholder Matters                 16
Item 12.     Certain Relationships and Related Transactions; Director
                Independence                                                  16
Item 13.     Exhibits                                                         16
Item 14.     Principal Accountant Fees and Services                           17

                  Signatures                                                  18


<PAGE>


PART I

This Annual Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements are based on management's beliefs and assumptions, and on information
currently available to management. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company set forth under the heading "Management's Discussion and Analysis or
Plan of Operations." Forward-looking statements also include statements in which
words such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used.

Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.

ITEM 1 - DESCRIPTION OF BUSINESS

COMPANY OVERVIEW- HISTORY

Proteo, Inc. is a Nevada corporation formed on December 18, 1992. Proteo, Inc.
has one wholly owned subsidiary, Proteo Biotech AG ("PBAG"), a German
corporation (Proteo, Inc. and PBAG are hereinafter collectively referred to as
the "Company"). The Company's common stock is currently quoted on the
Over-The-Counter Bulletin Board ("OTCBB") under the symbol "PTEO". Effective
December 31, 2004, the Company's other wholly owned subsidiary, Proteo
Marketing, Inc. ("PMI") was merged into the Company.

PMI was incorporated in the State of Nevada and began operations on November 22,
2000. In December 2000, PMI entered into a reorganization and stock exchange
agreement with PBAG, and as a result, PBAG became a wholly owned subsidiary of
PMI.

During 2001, PMI entered into a Shell Acquisition Agreement (the "Acquisition
Agreement") with Trivantage Group, Inc. ("Trivantage"), a public "shell"
company, in a transaction accounted for as a reverse merger. In accordance with
the Acquisition Agreement, PMI first acquired 176,660,280 shares (1,313,922 post
reverse split shares, as described below) of Trivantage's common stock
representing 90% of the issued and outstanding common stock of Trivantage, in
exchange for a cash payment of $500,000 to the sole shareholder of Trivantage.
Secondly, Trivantage completed a one for one-hundred-fifty reverse stock split.
Finally, effective April 25, 2002, the shareholders of PMI exchanged their
shares of PMI for an aggregate of 20,286,512 shares of Trivantage to effect a
reverse merger (the "Merger") between PMI and Trivantage. Subsequently,
Trivantage changed its name to Proteo, Inc.

DESCRIPTION OF BUSINESS

The Company seeks to identify potential drug candidates in the field of
inflammation. The Company's focus is on natural occurring compounds which have
proven superior biologic activity over almost all known compounds. The focus on
natural occurring compounds is driven by the assumption that these compounds
will have fewer side effects regarding metabolism and excretion. Whenever
possible, human peptides and proteins, which have no allergenic potential, will
be used.

The Company intends to develop, manufacture, promote, and market pharmaceuticals
and other biotech products. However, we do not believe that any of our planned
products will produce sufficient revenues in the next four years to support us
financially. We currently expect to sell only small quantities of these products
in the next few business years. As a result, we intend to identify and develop
other potential products. To achieve profitable operations, the Company,
independently or in collaboration with others, must successfully identify,
develop, manufacture, and market proprietary products. The products and
technologies we intend to develop will require significant commitments of
personnel and financial resources.

Our business strategy is focused on the development of pharmaceuticals based on
the body's own tools and weapons to fight inflammatory diseases. Specifically,
we are focusing our research on the development of drugs based on the human
protein Elafin. We strongly believe that Elafin will be useful in the treatment
of cardiac infarction, serious injuries caused by accidents, post-surgery damage
to tissue, and complications resulting from organ transplantation as well as
other diseases.


                                       1
<PAGE>

Elafin is a human protein that naturally occurs in human skin, lungs and the
mammary gland. Elafin is an elastase inhibitor which inhibits the activity of
two enzymes, elastase and proteinase 3. Both of these enzymes are known to be
involved in the breakdown of tissue in various inflammatory diseases. Elafin has
proven in animal tests, that it protects tissue against destruction by these
enzymes. We intend to utilize Elafin as a drug in the treatment of various
diseases and injuries.

We believe a major indication for Elafin is as a drug in the treatment of
cardiac infarction. Cardiac infarction appears as a result of deficiencies in
the blood supply of heart muscles caused by damage to the supplying coronary
vessels. As an immediate result, the heart weakens and the heart muscles are
destroyed. Damage to tissue caused by cardiac infarction will slowly form scars.
Current methods of treatment are aimed at restoring the blood supply to the
heart, either by replacement with new blood vessels (bypass surgery) or by
removal of blood-clots in the coronary vessels (lyse therapy). Animal
experiments have shown that Elafin may be effective in protecting the heart
muscles against destruction after blood supply was interrupted.

Elafin may also be useful in the treatment of the seriously injured. Similar to
damage of heart muscles as described above, much of the damage caused by serious
injuries appear after the injury causing event (e.g.: traffic accidents). In
emergency treatment following accidents, the blood supply, nerve fibers and the
stability of bones and joints are given priority. Due to blood supply
deficiencies, inflammation will occur in injured muscles and in injured vessels.
Because muscles may be destroyed by the inflammation, limbs may have to be
amputated despite successful surgeries. Elafin may protect muscles against
damage caused by inflammation. In animal experiments, rat legs treated with
Elafin remained almost unaffected, although the blood supply of the leg was cut
off for six hours.

Elafin may also be used in the course of heart transplantation. To transplant
hearts successfully, simultaneous treatment with anti-inflammatory drugs is
necessary. Inflammations of transplanted organs are mainly caused either by
rejection of the organ by the immune system or by blood supply deficiencies
during the transplantation. Although various drugs are used today to avoid the
rejection of the organ, such rejections still occur quite often. Therefore,
additional anti-inflammatory drugs are needed, which may potentially prevent
damages caused by blood supply deficiencies. Tests carried out on rabbits at the
University of Toronto have demonstrated the effectiveness of an infusion with
Elafin after a heart transplant. In cases where Elafin was not administered, a
substantial thickening of the coronary vessel walls occurred due to temporary
circulation reduction. Thus, frequently the heart was not sufficiently supplied
with blood. Inflammation and destruction of the heart musculature, which was
partly replaced by functionless scar tissue, was the result. Treatment with
Elafin has been shown to reduce such damage to a minimal level.

Other preliminary data indicate that Elafin may be useful in a broad range of
other applications whether pharmaceutical or not. Therefore, we will attempt to
encourage other scientists, research centers as well as other companies to do
research and development on Elafin for applications other than those described
above. For example, Elafin may also be effective in the treatment of lung
diseases and defects, dermatological diseases and defects, or as an ingredient
to coat medical devices, such as stents, or in cosmetics.

Proteo owns licenses to exclusively develop products based on patents and
filings relating to Elafin, including fourteen issued patents. Of these issued
patents, three were issued in the U.S.

Further, Proteo intends to engage in the research and development of other drugs
and biotechnical products based on natural proteins. We may also be able to
implement unique technologies and biotechnological production procedures that
may enable the Company to offer related services to other companies. Additional
research and development has already begun in the areas of Leech-derived
Tryptase Inhibitors (LDTI), and Bis-acyl ureas. LDTI has been successfully
expressed in yeast, and is an inhibitor of human mast cell tryptase. LDTI
inhibits tryptase-induced human fibroblast proliferation. LDTI may be a drug
candidate for the treatment of keloid formation, scleroderma and asthma.

Bis-acyl ureas have been identified as a relevant compound in yeasts able to
induce inflammation. It activates human neutrophils in vitro and may be a
potential candidate for immune system stimulation. Methods for isolation of
bis-acyl urea from yeasts as well as synthetic production have been established.
Bis-acyl ureas and LDTIs are in the early pre-clinical stage.

Proteo works closely with the interdisciplinary research unit at the University
of Kiel in the identification of drug targets for the prevention and treatment
of infections.


                                       2
<PAGE>

In 2001 we received a grant from the German State of Schleswig-Holstein in the
approximate amount of 790,000 Euros for the research and pre-clinical
development of our pharmaceuticals based on the human protein Elafin. The grant,
as amended, covered the period from February 1, 2001 to March 31, 2004 if
certain milestones were reached by November 15 of each year, with a possible
extension as defined in the agreement. The grant required that we prove our
economic ability to otherwise finance at least 52% of the projected costs on our
own.

In May 2004 we 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 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. The new grant has been extended through December 31,
2007. The new grant covers 49.74% of eligible research and development costs and
is subject to our ability to otherwise finance 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 qualified to receive approximately 197,000 Euros (approximately $245,000)
under the new grant in 2005, of which approximately 181,000 Euros ($225,000) was
received by December 31, 2005 and approximately 225,000 Euros (approximately
$283,000) in 2006, of which approximately 225,000 Euros ($283,000) had been
received by December 31, 2006. As of December 31, 2006, we believe that all
milestones required by the new grant had been satisfied.

After developing a production procedure for Elafin, Proteo has initiated
clinical trials to achieve governmental approval for the use of Elafin as a drug
in Europe. For this purpose, Proteo has contracted Eurogentec, an experienced
Contract Manufacturing Organization (CMO) located in Belgium to produce Elafin
in accordance with GMP standards as required for clinical trials. In December
2005, Proteo 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 its tolerability and safety at
the Institut fur Klinische Pharmakologie in Kiel, Germany. All intravenously
applied doses were well tolerated. No severe adverse events occurred.

In 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) has issued 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.

On November 15, 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 or 2.5% royalties on the future sales of
Elafin, if greater. Should the license agreement between Rhein and ARTES
terminate, Rhein will assume the sublicense agreement with the Company under
similar terms.

Our goal for German approval on our initial product is targeted for 2010
followed by United States Food and Drug Administration ("FDA") approval one or
two years later. It should be noted that this specialized application, if
successfully developed, would have a market potential substantially smaller than
the overall market of Elafin for more widespread applications such as for the
treatment of cardiac infarction.


                                       3
<PAGE>

OUR SUBSIDIARY

PBAG, our operating subsidiary, was formed in Kiel, Germany, on April 6, 2000.
PBAG is in the business of developing pharmaceutical products based on the human
protein called Elafin and possible by-products thereof as well as related
technologies. The President and CEO of PBAG is currently Birge Bargmann. The
directors of PBAG are Oliver Wiedow, MD, Barbara Kahlke, PhD and Florian Wegner.
PBAG has five full-time employees as of December 31, 2006.

To date, the Company has not had profitable operations. Furthermore, we do not
anticipate that we will have profitable operations in the near future.

COLLABORATION WITH OTHER COMPANIES

In an effort to provide the Company with some revenue which will be utilized in
the implementation of our business plan, our Subsidiary plans periodically to
provide research and development and manufacturing services as a sub-contractor
and/or consultant to unaffiliated companies which do not compete with the
Company. We plan to explore such opportunities if deemed advantageous to the
Company.

Further, the Company actively seeks outlicensing partners, co-development
partnerships and other collaborations with third parties to generate revenues
and/or to expedite the Company's product development. However, there can be no
assurance that the Company's efforts to build such alliances will be successful
at any time or in any way.

COMPETITION

The market for our planned products and technologies is highly competitive, and
we expect competition to increase. We compete with many other health care
research product suppliers, most of which are larger than Proteo. Some of our
anticipated competitors offer a broad range of equipment, supplies, products and
technology, including many of the products and technologies contemplated to be
offered by us. To the extent that customers exhibit loyalty to the supplier that
first supplies them with a particular product or technology, our competitors may
have an advantage over us with respect to such products and technologies.
Additionally, many of our competitors have, and will continue to have, greater
research and development, marketing, financial and other resources than us and,
therefore, represent and will continue to represent significant competition in
our anticipated markets. As a result of their size and the breadth of their
product offering, certain of these companies have been and will be able to
establish managed accounts by which, through a combination of direct computer
links and volume discounts, they seek to gain a disproportionate share of orders
for health care products and technologies from prospective customers. Such
managed accounts present significant competitive barriers for us. It is
anticipated that we will benefit from their participation in selected markets,
which, as they expand, may attract the attention of our competitors. The
business of research and development of pharmaceuticals for the treatment of
cardiac infarction is intensely competitive. Major companies with immense
financial and personal resources are also engaged in this field.

Elastase inhibitors such as Elafin, have been under research and development in
the pharmaceutical industry for more than ten years. Currently, there have been
more than 200 related patents granted. Most of these substances are produced
synthetically, and are not applicable in the treatment of cardiac infarctions.
Three other elastase inhibitors, secretory leukoprotease inhibitor (SLPI),
alpha-1-antitrypsin and recombinant monocyte/neutrophil elastase inhibitor
(rM/NEI), are similar to Elafin in that they are of human descent and may be
applied like Elafin principally. From the human protein inter-alpha-trypsin
inhibitor a highly elastase inhibitor, depelestat, has been engineered. Four
other substances, ZD8321, ZD0892, SSR69071, and ONO-5046, are artificial
elastase inhibitors which may have effectiveness comparable to that of Elafin.

SECRETORY LEUKOPROTEASE INHIBITOR (SLPI)

Amgen, Inc. is the owner of the patent for SLPI. Amgen purchased this patent by
acquiring Synergen, Inc. SLPI is quite similar to Elafin. Nevertheless, SLPI has
some disadvantages in its intended application in the treatment of cardiac
infarctions and in the treatment of serious injuries. It is only effective
against one (leukocyte-elastase) of the two (leukocyte-elastase and proteinase
3) major enzymes which destroy tissue, while Elafin has shown effectiveness
against both. Therefore, Elafin is probably more effective. Furthermore, SLPI is
not as stable as Elafin, which is a disadvantage in its distribution as a drug.
SLPI was discovered much earlier than Elafin, therefore, the remaining term of
the covering patent should be shorter than that related to Elafin. Amgen does
not mention further development of SLPI as a drug in its annual report of 1998.


                                       4
<PAGE>

ALPHA-1-ANTITRYPSIN

Human blood contains relatively large amounts of alpha-1-antitrypsin naturally.
Research into the use of alpha-1-antitrypsin for the treatment of cardiac
infarctions, shock and of other serious inflammations has been ongoing for the
last twenty years. Compared to Elafin, however, there are some substantial
problems related to alpha-1-antitrypsin. For example, alpha-1-antitrypsin is not
as stable as Elafin, and therefore, from the scientific point of view it is
probably not as effective as Elafin. Alpha-1-antitrypsin has received approval
for the use as a drug in genetic deficiency of alpha-1-antitrypsin and is
currently produced from pooled human sera. Recombinant production of
alpha-1-antitrypsin has been established by Arriva Pharmaceuticals Inc., and
clinical trials for the use as an aerosol for the treatment of
alpha-1-antitrypsin deficiency have been conducted by Baxter Bioscience.

RECOMBINANT MONOCYTE/NEUTROPHIL ELASTASE INHIBITOR (RM/NEI)

This compound of human descent is currently under development for the treatment
of cystic fibrosis and to be applied by inhalation devices. IVAX Corporation has
entered into a license option agreement with the Center for Blood Research, Inc.
(CBR), an affiliate of the Harvard Medical School, which holds the rights to
this compound.

ONO-5046 (SIVELESTAT)

Ono Pharmaceutical Co. Ltd., in Japan has developed the synthetic elastase
inhibitor ONO-5046 (Sivelestat). Ono received approval in 2002 to use Sivelestat
as a drug for the indication "Amelioration of acute lung disease accompanying
generalized inflammatory syndrome" in Japan.

DEPELESTAT

A further elastase inhibitor has been engineered from the Kunitz domain of human
inter-alpha-trypsin inhibitor. This peptide was found to be a potent inhibitor
of human elastase, however, other than in the case of Elafin, it is reported
that no other proteases, including proteinase 3, were inhibited. Currently
Depelestat is being clinically developed by Debiopharm for use as an aerosol in
the treatment of cystic fibrosis.

GOVERNMENT REGULATION

The Company is, and will continue to be, subject to governmental regulation
under the Occupational Safety and Health Act, the Environmental Protection Act,
the Toxic Substances Control Act, and other similar laws of general application,
as to all of which we believe we are in material compliance. Any future change
in, and the cost of compliance with, these laws and regulations could have a
material adverse effect on the business, financial condition, and results of
operation of the Company.

Because of the nature of our operations, the use of hazardous substances, and
our ongoing research and development and manufacturing activities, we are
subject to stringent federal, state and local and foreign laws, rules,
regulations and policies governing the use, generation, manufacturing, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. Although we believe that we are in material compliance with all
applicable governmental and environmental laws, rules, regulations and policies,
there can be no assurance that the business, financial conditions, and results
of operations of the Company will not be materially adversely affected by
current or future environmental laws, rules, regulations and policies, or by
liability occurring because of any past or future releases or discharges of
materials that could be hazardous.

Additionally, the clinical testing, manufacture, promotion and sale of a
significant majority of the products and technologies of the Company, if those
products and technologies are to be offered and sold in the United States, are
subject to extensive regulation by numerous governmental authorities in the
United States, principally the FDA, and corresponding state regulatory agencies.
Additionally, to the extent those products and technologies are to be offered
and sold in markets other than the United States, the clinical testing,
manufacture, promotion and sale of those products and technologies will be
subject to similar regulation by corresponding foreign regulatory agencies. In
general, the regulatory framework for biological health care products is more
rigorous than for non-biological health care products. Generally, biological
health care products must be shown to be safe, pure, potent and effective. There
are numerous state and federal statutes and regulations that govern or influence
the testing, manufacture, safety, effectiveness, labeling, storage, record


                                       5
<PAGE>

keeping, approval, advertising, distribution and promotion of biological health
care products. Non-compliance with applicable governmental requirements can
result in, among other things, fines, injunctions, seizures of products, total
or partial suspension of product marketing, failure of the government to grant
pre-market approval, withdrawal of marketing approvals, product recall and
criminal prosecution.

PATENTS, LICENSES & ROYALTIES

The Company owns licenses to exclusively develop products based on patents and
filings including fourteen patents already issued. The issued patents include
three patents which have been issued in the United States of America. The
Company does not have title to any patents; title to the patents rests with Dr.
Wiedow.

Dr. Wiedow will receive three percent (3%) of the gross revenues of the Company
from products based on patents of which he was the principal inventor. Further,
Dr. Wiedow will receive license fees in the amount of 110,000 Euros per year and
a refund for all expenses to maintain the patents (patent fees, legal fees,
etc.). Such license fees shall be reduced by any other royalties paid to Dr.
Wiedow. As of the date of this annual report, no fees have been paid to Dr.
Wiedow although $871,000 has been accrued.

AstraZeneca Inc. (formerly Zeneca Inc., formerly ICI Pharmaceuticals Inc.) had
held the patents for Elafin for several years and has significantly contributed
to the current knowledge. Therefore, AstraZeneca Inc. will receive two percent
(2%) of the net sales of the Company from products based on patents in which Dr.
Wiedow was the principal inventor. Proteo holds an exclusive license for the
following patents:

   --------------- ----- --------
   USA              US    5464822
   USA              US    6245739
   USA              US    6893843
   EU               EP    0402068
   Japan            JP    2989853
   Australia        AU     636148
   Canada           CA    2018592
   Finland          FI     902880
   Ireland          IE     070520
   Israel           IL     094602
   New Zealand      NZ     233974
   Norway           NO     177716
   Portugal         PT     094326
   South Africa     ZA    9004461
   --------------- ----- --------


EMPLOYEES

We currently have five full-time employees, all working at our offices in
Germany.

ITEM 2 - DESCRIPTION OF PROPERTY

In October 2001, the Company entered into several leases for office and
laboratory facilities in Germany beginning January 2002 and expiring at dates
through December 2011. One lease for office space at Kiel, Germany was canceled
as of October 31, 2005. In June 2004 and in August 2005, we entered into leases
for lab and office space and additional office space, respectively, expiring
through December 2008. Certain leases have a rental adjustment in 2007 based on
the consumer price index. The aggregate monthly rental under the foregoing
leases is approximately $2,100.

ITEM 3 - LEGAL PROCEEDINGS

The Company's German subsidiary PBAG was sued in late February 2006 by its
former President and CEO Walter J. Thomsen whose employment was terminated
effective November 7, 2005. The suit was 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.


                                       6
<PAGE>

In August 2006 the Company settled these lawsuits with Walter J. Thomsen for
payment of 100,000 Euros (approximately $125,000) payable in installments
through December 2006. All payments due under this settlement have been made in
due time through December 2006. The entire settlement amount was recorded as an
expense during the year ended December 31, 2006.

In addition to the foregoing, the Company may from time to time be involved in
various claims, lawsuits, and disputes with third parties, actions involving
allegations of discrimination, or breach of contract actions incidental to the
operation of its business. The Company is not currently involved in any other
litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.


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

None

                                     PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASER OF EQUITY SECURITIES

Our common stock is traded on the OTC Bulletin Board under the symbol PTEO.OB.
The table below gives the range of high and low bid prices of our common stock
for the fiscal years ended December 31, 2006 and 2005 based on information
provided by the OTC Bulletin Board. Such over-the-counter market quotations
reflect inter-dealer prices, without mark-up, mark-down or commissions and may
not necessarily represent actual transactions or a liquid trading market.

                               COMMON STOCK PRICES

            YEAR          PERIOD                HIGH          LOW
                                               -------      -------
            2006          First Quarter         $1.55        $0.56
                          Second Quarter         1.01         0.51
                          Third Quarter          0.98         0.41
                          Fourth Quarter         0.75         0.36


            2005          First Quarter         $0.95         0.40
                          Second Quarter         0.95         0.61
                          Third Quarter          1.06         0.70
                          Fourth Quarter         1.55         0.56

On March 28, 2007, the last sales price of our common stock was $0.51 per share.
No cash dividends have been paid on our common stock for the 2006 and 2005
fiscal years and no change of this policy is under consideration by the Board of
Directors. The payment of cash dividends in the future will be determined by the
Board of Directors in light of conditions then existing, including our Company's
earnings, financial requirements, and opportunities for reinvesting earnings,
business conditions, and other factors. There are otherwise no restrictions on
the payment of dividends.

NUMBER OF SHAREHOLDERS

As of March 28, 2007, the number of shareholders of record of the Company's
common stock was 1,860.

PENNY STOCK

Until our shares qualify for inclusion in the Nasdaq system, the public trading,
if any, of our common stock will be on the OTCBB. As a result, an investor may
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, our common stock. Our common stock is subject to provisions of Section
15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the "penny
stock rule." Section 15(g) sets forth certain requirements for transactions in
penny stocks, and Rule 15g-9(d) incorporates the definition of "penny stock"


                                       7
<PAGE>

that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines
"penny stock" to be any equity security that has a market price less than $5.00
per share, subject to certain exceptions. If our common stock is deemed to be a
penny stock, trading in the shares will be subject to additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. "Accredited investors" are
persons with assets in excess of $1,000,000 or annual income exceeding $200,000
or $300,000 together with their spouse. For transactions covered by these rules,
broker-dealers must make a special suitability determination for the purchase of
such security and must have the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the first
transaction, of a risk disclosure document, prepared by the SEC, relating to the
penny stock market. A broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information for the penny stocks held in an account and
information on the limited market in penny stocks. Consequently, these rules may
restrict the ability of a broker-dealer to trade and/or maintain a market in our
common stock and may affect the ability of our shareholders to sell their
shares.

DIVIDEND POLICY

To date, we have declared no cash dividends on its Common Stock, and does not
expect to pay cash dividends in the near term. We intend to retain future
earnings, if any, to provide funds for operation of its business.

EQUITY COMPENSATION PLAN INFORMATION

We have no equity compensation plans as of December 31, 2006.

RECENT SALES OF UNREGISTERED SECURITIES

On December 22, 2006, we entered into a Common Stock Purchase Agreement (the
"Agreement") with FIDEsprit AG, a Swiss corporation (the "Investor"). Pursuant
to the Agreement, we agreed to issue and sell to the Investor 1,500,000 shares
of our common stock at a purchase price of $0.60 per share, for an aggregate
purchase price $900,000. In payment of the purchase price, the Investor
delivered to us a promissory note in the principle amount of $900,000. The
promissory note does not bear any interest, and is payable in five installments
of $180,000, with the first payment due on the date the shares were issued, or
December 22, 2006, followed by four quarterly payments commencing on March 31,
2007. The promissory note is guaranteed by Axel J. Kutscher, the managing
director of the Investor. The Investor made a partial payment of $37,894 against
the note in December 2006.

In November 2005, the Company entered into a common stock purchase agreement to
sell 300,000 shares of the Company's restricted common stock at a price of $0.84
per share or $256,000 in exchange for a promissory note, bearing no interest.
Payments under the promissory note must be made in four equal installments of
$64,000 each, falling due on March 31, 2006, June 30, 2006, September 30, 2006
and December 31, 2006, respectively.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

CAUTIONARY STATEMENTS:

This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Exchange Act. 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 Annual
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,
increases in general and administrative costs, and other specific risks that may
be alluded to in this Annual 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 Annual 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.


                                       8
<PAGE>

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

We intend to specialize in the research, development and marketing of drugs for
the treatment of inflammatory diseases with Elafin as our first project. Our
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.

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

Our success will depend on our ability to implement efficient production
processes in accordance with Good Manufacturing Practices ("GMP") standards, to
examine toxicology in animal experiments, and to prove that Elafin is well
tolerated by humans and its efficacy in the indicated treatment. There can be no
assurance that we will be able to develop feasible production procedures in
accordance with GMP standards, or that Elafin will receive any governmental
approval for the use as drug in any of the intended applications.

As previously noted, 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 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.

Because a necessary pre-requisite for the commencement of clinical trials was
the production of Elafin according to GMP Standards, on March 18, 2005 we
entered into a contractual agreement with Eurogentec S.A., located in Liege,
Belgium. Eurogentec is an experienced Contract Manufacturing Organization (CMO)
which can produce the required amount of Elafin according to GMP Standards. The
German regulators demand compliance with strict standards for the manufacture of
medicines for clinical testing, and the GMP production of Elafin for the
clinical trials had to comply with a large number of rules and regulations.
Eurogentec has completed the required production run of Elafin accordingly.

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


                                       9
<PAGE>

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.
Approximately $862,000 is owed to us at December 31, 2006 under such
subscription agreements. The first installment on the most recent subscription
agreement, in the amount of $180,000, was due on December 22, 2006. We had
received partial payment approximating $38,000 by December 31, 2006, and
approximately $158,000 has been received as of March 28, 2007.

In addition we have received money from various grants. In 2001, PBAG received a
grant from the German State Schleswig-Holstein in the amount of approximately
790,000 Euros which covered the period from February 1, 2001 to March 31, 2004.

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 225,000 Euros and 197,000 Euros
(approximately $283,000 and $245,000, respectively) of the New Grant in 2006 and
2005, respectively. Grant funds approximating 225,000 Euros and 181,000 Euros
($280,000 and $225,000, respectively) have been received and reported as a
reduction of research and development expenses for the years ended December 31,
2006 and 2005. As of December 31, 2006, management believes that all milestones
required by the New Grant have been satisfied

The Company has cash of approximately $269,000 as of December 31, 2006. This is
a minor increase over the December 31, 2005 cash balance of approximately
$228,000. This increase is due to the fact that the aggregate proceeds from the
sale of securities and funds received from the grant exceeded costs and expenses
incurred during the year 2006, which again have been significantly lower
compared to costs and expenses incurred in 2005 due to the fact that we carried
out GMP production of Elafin and a clinical phase I trial in 2005.

On November 15, 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 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.

On March 18, 2005, we entered into a contractual agreement with Eurogentec S.A.,
a Belgium CMO, for the production of our product Elafin for clinical trials
according to good manufacturing practices. Such agreement required payments
approximating 400,000 Euros.

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 (approximately $145,000), payable upon the
attainment of achieved milestones, which were achieved during the fourth quarter
of 2005.


                                       10
<PAGE>

Management believes that the Company will not generate any significant revenues
in the next four 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 other
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.

CAPITAL EXPENDITURES

None significant.

GOING CONCERN

The Company's independent registered public accounting firm has stated in their
Auditor's Report included in this Form 10-KSB that the Company will require a
significant amount of additional capital to advance the Company's products to
the point where they may 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.

The Company intends to fund operations through grant proceeds and increased
equity financing arrangements which management believes may be insufficient to
finance 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 finance 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.

ACCOUNTING MATTERS

CRITICAL ACCOUNTING POLICIES

In December 2001, the SEC requested that all registrants list their three to
five most "critical accounting policies" in Item 6 of this Annual Report. The
SEC indicated that a "critical accounting policy" is one which is both important
to the portrayal of the Company's financial condition and results, and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. We believe that the following accounting policies fit this
definition:

GRANTS

The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment. Grants for
the reimbursement of research and development expenses are offset against
research and development expenses in the accompanying consolidated statements of
operations when the related expenses are incurred. Grants related to the
acquisition of tangible property are recorded as a reduction of the property's
historical cost.

Funds are available at the earliest from January 1 of each budget year with a
fund request submitted on or before December 5 of each year. Funds reserved for
each budget year may not be assigned and funds not requested by December 5 of
each budget year expire.


                                       11
<PAGE>

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's German operations are translated into
U.S. dollars at period-end exchange rates. Grants and expenses are translated at
weighted average exchange rates for the period. Net exchange gains or losses
resulting from such translation are excluded from net loss but are included in
comprehensive loss and accumulated in a separate component of stockholders'
equity. Such amount approximated $281,000 at December 31, 2006.

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 fluctuates 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 exchange losses.

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 at the date it occurred, and
the exchange rate at the balance sheet date, is the unrealized gain or loss
recognized in current operations. The Company recorded an unrealized foreign
currency exchange loss of approximately $81,000 for the year ended December 31,
2006. The Company recorded an unrealized foreign currency exchange gain of
approximately $84,000 for the year ended December 31, 2005.

RISKS AND UNCERTAINTIES

The Company maintains its cash in foreign accounts and not in bank depository
accounts insured by the Federal Deposit Insurance Corporation. The Company has
not experienced any losses in these accounts.

The Company's research and development activities and most of its assets are
located in Germany. The Company's operations are subject to various political,
economic, and other risks and uncertainties inherent in Germany and the European
Union ("EU").

COMPREHENSIVE INCOME (LOSS)

The Company adopted SFAS No. 130 "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income (loss)
and its components in a full set of general-purpose financial statements. Total
comprehensive income (loss) represents the net change in stockholders' equity
during a period from sources other than transactions with stockholders and as
such, includes net earnings or loss. For the Company, the components of other
comprehensive income (loss) are the changes in the cumulative foreign currency
translation adjustments that are recorded as components of stockholders' equity.

EXPIRATION OF THE OLD GRANT:

The 2001 grant from the German State of Schleswig-Holstein expired on March 31,
2004. PBAG has fulfilled all milestones and requirements of this grant.

CURRENT GRANTS:

In May 2004 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 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. In November 2006, the grant was extended through
December 31, 2007.

ITEM 7 - FINANCIAL STATEMENTS

The consolidated financial statements and corresponding notes to the
consolidated financial statements called for by this item appear under the
caption Index to Financial Statements (Page F-1 hereof).


                                       12
<PAGE>

ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 8A - CONTROLS AND PROCEDURES

Our principal executive officer and principal financial officer has evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
annual report on Form 10-KSB. Based on the foregoing, the principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls over financial reporting during the year ended
December 31, 2005, that have materially affected or are reasonably likely to
materially affect these controls.

ITEM 8B - OTHER INFORMATION

None.

                                    PART III

ITEMS 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table sets forth the names and ages of the current and incoming
directors and executive officers of the Company and the principal offices and
positions with the Company held by each person. The Board of Directors elects
the executive officers of the Company annually. The directors serve one-year
terms until their successors are elected. The executive officers serve terms of
one year or until their death, resignation or removal by the Board of Directors.

<TABLE>
<S>     <C>
      NAME                                 AGE     POSITIONS
      Birge Bargmann                       45      President, Chief Executive Officer, Chief Financial
                                                   Officer and Director

      Dr. Barbara Kahlke                   42      Secretary

      Joerg Alte                           46      Director

      Professor Oliver Wiedow, MD.         49      Director

      Holger Pusch                         50      Director

      Hartmut Weigelt, Ph.D.               61      Director
</TABLE>

BIOGRAPHICAL INFORMATION:

Birge Bargmann has served as our President, Chief Executive Officer and Chief
Financial Officer since November 2005 and a Director of the Company since
December 2000. In November 2005, she was appointed CEO and CFO of the Company
and its subsidiary. Ms. Bargmann was a member of the Supervisory Board of Proteo
Biotech AG from 2002 to 2005. Since 1989, Ms. Bargmann has worked as a medical
technique assistant engaged in the Elafin project at the dermatological clinic
of the University of Kiel. She co-developed and carried out procedures to detect
and to purify Elafin.

Dr. Barbara Kahlke has served as our Secretary since August 2004. She has been a
member of the Supervisory Board of Proteo Biotech AG since May 2002, and a
scientific researcher for Proteo Biotech AG since May 2000. Dr. Kahlke is a
biologist, having received her doctorate from Christian-Albrechts-University in


                                       13
<PAGE>

Kiel, Germany. Since 1994, Dr. Kahlke has worked for a medium-sized German
pharmaceutical company with responsibilities in molecular biology and in protein
production in compliance with GMP. She discovered the biological activity of
bis-acyl urea.

Joerg Alte has served as a Director of the Company since December 2000. Mr. Alte
served as our President, Chief Executive Officer and Chief Financial Officer
from 2000 to 2003. Mr. Alte is a German lawyer by training and practice. After
studying law and passing his second state examination, he worked for more than
three years at a German law office predominantly engaged in economic and
corporate laws with both public and private company clients engaged in
international business. Subsequently, Mr. Alte worked as a legal advisor with a
German diagnostic company, where he also practiced German and U.S. securities
laws. From November 1998 to April 2000, Mr. Alte served as President and CEO for
Sangui Biotech International, Inc., a publicly traded company.

Prof. Oliver Wiedow, M.D. has served as a Director of the Company since December
2000. Professor Wiedow served as our President, Chief Executive Officer and
Chief Financial Officer from January 2004 to June 2004 and has served as a
member of the Supervisory Board of Proteo Biotech AG since 2000. Since 1985
Professor Wiedow has served as physician and scientist at the University of
Kiel, Germany. Prof. Wiedow discovered Elafin in human skin and has researched
its biological effects.

Holger Pusch has served as a Director of the Company since December 2000. For
the last 23 years, Mr. Pusch worked in different marketing and sales functions
for major German companies. Mr. Pusch is currently the Managing Director of
Lupus Imaging & Media GmbH & Co. KG, a company in the photo business, a position
he has held since October 2006. From March 1, 2006 to October 2006, Mr. Pusch
worked for Connect Consulting GmbH, in Bonn Germany. From October 1989 to March
2006 he worked for Agfa Geveart AG and its successor as a result of a spin-off
in November 2004, AgfaPhoto GmbH.

Hartmut Weigelt, Ph.D. has served as a Director of the Company since December
2000. Dr. Weigelt was a member of the Supervisory Board of Proteo Biotech AG
from 2000 to 2003. Since 1996, Dr. Weigelt has served as the managing director
of Eco Impact GmbH which he co-founded. Dr. Weigelt was a co-founder of the
first German private university, Witten/Herdecke and he is currently a Director
of the Life Technologies Ruhr e.v. Mr. Weigelt studied chemistry and biology and
graduated with a M.Sc., Ph.D., and D.Sc. in biology.

AUDIT COMMITTEE AND FINANCIAL EXPERT:

Proteo, Inc. is not a "listed company" under SEC rules and is therefore not
required to have an audit committee comprised of independent directors. We do
not currently have an audit committee, however, for certain purposes of the
rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act
of 2002, our board of directors is deemed to be its audit committee and as such
functions as an audit committee and performs some of the same functions as an
audit committee including: (1) selection and oversight of our independent
accountant; (2) establishing procedures for the receipt, retention and treatment
of complaints regarding accounting, internal controls and auditing matters; and
(3) engaging outside advisors. Our board of directors has determined that its
members do not include a person who is an "audit committee financial expert"
within the meaning of the rules and regulations of the SEC.

The board of directors has determined that each of its members is able to read
and understand fundamental financial statements and has substantial business
experience that results in that member's financial sophistication. Accordingly,
the board of directors believes that each of its members have the sufficient
knowledge and experience necessary to fulfill the duties and obligations that an
audit committee would have.

FAMILY RELATIONSHIPS

There are no family relationships between or among the directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

To the best of the Company's knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer at the
time of the bankruptcy or within two years prior to that time; (2) any


                                       14
<PAGE>

conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities; and (4) being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended or vacated.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

Section 16(a) of the Exchange Act requires the Company's directors and executive
officers and persons who own more than ten percent of a registered class of the
Company's equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Officers, directors and greater than ten percent beneficial
owners of our common stock are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on the review of copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company has been informed that all Section 16(a) filing requirements applicable
to the Company's officers, directors and greater than ten percent beneficial
owners of our common stock were complied with.

CODE OF ETHICS

The Company maintains a code of ethical conduct applicable to all employees,
officers and directors. The Company will also provide to any person without
charge, and upon request, a copy of the Code of Ethics by making a request in
writing to: info@proteo.de.

ITEM 10 - EXECUTIVE COMPENSATION

The following table sets forth the overall compensation earned over each of the
past two fiscal years ending December 31, 2006 by each person who served as the
principal executive officer of Proteo during fiscal year 2006. There were no
other executive officers who had compensation of $100,000 or more during fiscal
year 2006.

<TABLE>
                                                     SUMMARY COMPENSATION TABLE

                                                                      NON-EQUITY          NON-
                                                                      INCENTIVE        QUALIFIED
                                                 STOCK     OPTION       PLAN            DEFERRED         ALL OTHER         TOTAL
NAME AND                     SALARY      BONUS   AWARDS    AWARDS      COMPEN-          COMPEN-           COMPEN-         COMPEN-
PRINCIPAL POSITION   YEAR      ($)        ($)     ($)       ($)       SATION(#)         SATION($)        SATION ($)      SATION ($)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>    <C>            <C>     <C>       <C>          <C>              <C>              <C>         <C>
Birge Bargmann       2006   $  6,000      -0-     -0-       -0-          -0-              -0-              -0-          $6,000
(Chief Executive
Officer, Chief
Financial Officer)   2005   $   -0- (1)   -0-     -0-       -0-          -0-              -0-              -0-            $0

Walter J. Thomsen    2005   $ 80,000      -0-     -0-       -0-          -0-              -0-              -0-          $80,000
(Chief Executive
Officer, Chief
Financial Officer)

         (1)      Ms. Bargmann became Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") in November 2005. She was
                  not compensated for her services as CEO or CFO in 2005.

         (2)      Mr. Thomsen became CEO and CFO in July 2004 and ceased to be CEO and CFO in November 2005.

</TABLE>

COMPENSATION OF DIRECTORS

The Directors have not received any compensation for serving in such capacity,
and the Company does not currently contemplate compensating its Directors in the
future for serving in such capacity.


                                       15
<PAGE>

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth, as of December 31, 2006, certain information
with respect to the Company's equity securities owned of record or beneficially
by (i) each director and executive officer; (ii) each person who owns
beneficially more than 5% of each class of the Company's outstanding equity
securities; and (iii) all directors and executive officers as a group. The
address for all of the following individuals is c/o Proteo, Inc., 2102 Business
Center Drive, Irvine, California 92612.

<TABLE>
                                                            Number of Shares              Percent of
Title of Class        Name  of Beneficial Owner             Beneficially Owned (1)        Class
----------------------------------------------------------------------------------------------------
<S>                                                                <C>                     <C>
Common Stock          Prof. Oliver Wiedow, M.D.                    10,680,000              44.8%
Common Stock          Birge Bargmann                                2,000,000               8.4%
Common Stock          Joerg Alte                                      140,000(2)               *
Common Stock          Dr. Barbara Kahlke                               10,000                  *
Common Stock          Holger Pusch                                     20,000                  *
Common Stock          Hartmut Weigelt, Ph.D.                           80,000                  *
Common Stock          All officers and directors as a              12,953,000               54.2%
                      group (6 persons)
</TABLE>
* less than 1%

(1)      Based on 23,879,350 shares outstanding as of March 28, 2007.

(2)      Mr. Alte has loaned all 140,000 shares to a broker, which shares must
         be returned to Mr. Alte on or before December 31, 2007.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; DIRECTOR INDEPENDENCE

The Company has agreed to pay Dr. Wiedow three percent of the gross revenues of
the Company from products based on patents where he was the principal inventor.
Furthermore, the Company has agreed to pay licensing fees of 110,000 Euro
(approximately $130,000 for each of the years ending December 31, 2004 and 2005
and $140,000 for the year ending December 31, 2006) per year through December
31, 2006, and a refund for all expenses needed to maintain such patents (e.g.,
patent fees, legal fees, etc). Payments due under this agreement have been
accrued and deferred.

On September 28, 2006, Dr. Wiedow entered into an agreement to contribute 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.

Dr. Wiedow will receive 15% of profits, as determined under the agreement, not
to exceed in any given year 30% of the capital contributed. Additionally, he
will be allocated 15% of losses, as determined under the agreement, not to
exceed the capital contributed. Dr. Wiedow is under no obligation to provide
additional capital contributions to the Company. During the year ended December
31, 2006, losses approximating $59,000 were allocated against the contributed
capital account, which is presented as minority interest in loss of consolidated
subsidiary on the accompanying statements of operations and comprehensive loss.
The remaining balance of $3,978 is presented as minority interest in the
accompanying consolidated balance sheet.

ITEM 13 - EXHIBITS

EXHIBIT NO.     DESCRIPTION

2.1*            Agreement and Plan of Share Exchange

3.1*            Articles of Incorporation, dated December 18, 1992

3.2*            Amendment to Articles of Incorporation, dated October 31,
                1996

3.3*            Amendment to Articles of Incorporation, dated February 12,
                1998

3.4*            Amendment to Articles of Incorporation, dated May 18, 1999

3.5*            Amendment to Articles of Incorporation, dated July 18, 2001

3.6*            Amendment to Articles of Incorporation, dated January 11,
                2002

3.7*            Articles of Share Exchange, dated April 25, 2002

3.8*            By-Laws, dated December 18, 1992

10.3*           Common Stock Purchase Agreement



                                  16
<PAGE>
10.4*           Promissory Note with Guaranty

10.5*           Common Stock Purchase Agreement

10.6*           Promissory Note

14.1*           Code of Ethics

31.1**          Certification of Chief Executive Officer Pursuant to Section
                302

31.2**          Certification of Chief Financial Officer Pursuant to Section
                302

32**            Certification of Chief Executive Officer and Chief Financial
                Officer Pursuant to 18 U.S.C. Section 1350

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

*    Previously filed.

**  Filed herewith.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES:

We were billed approximately $70,000 and $61,000 for the fiscal years ended
December 31, 2006 and 2005, respectively, for professional services rendered by
the principal accountant for the audit of our annual consolidated financial
statements and the review of our quarterly consolidated financial statements.

AUDIT RELATED FEES:

None

TAX FEES:

We were billed approximately $6,000 and $6,000 for the fiscal years ended
December 31, 2006 and 2005, respectively, for professional services rendered by
the principal accountant for tax compliance and tax advice.

ALL OTHER FEES:

There were no other professional services rendered by our principal accountant
during the last two fiscal years that were not included in the three categories
above.

All of the services provided by our principal accountant were approved by our
Board of Directors. No more than 50% of the hours expended on our audit for the
last fiscal year were attributed to work performed by persons other than
full-time employees of our principal accountant.


                                  17
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated:  March 29, 2007

                                  PROTEO, INC.
                                  (Registrant)



                                  BY: /S/ BIRGE BARGMANN
                                  ---------------------------
                                  BIRGE BARGMANN
                                  CHIEF EXECUTIVE OFFICER AND
                                  CHIEF FINANCIAL OFFICER

Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:


 Signature                       Capacity                        Date
 ------------------------------- ------------------------------- --------------

 /s/ Birge Bargmann              Chief Executive Officer and     March 29, 2007
 -----------------------------   Chief Financial Officer
 Birge Bargmann

 /s/ Joerg Alte                  Director                        March 29, 2007
 -----------------------------
 Joerg Alte

 /s/ Oliver Wiedow, M.D.         Director                        March 29, 2007
 -----------------------------
 Professor Oliver Wiedow, M.D.

 /s/ Holger Pusch                Director                        March 29, 2007
 -----------------------------
 Holger Pusch

 /s/ Hartmut Weigelt, Ph.D.      Director                        March 29, 2007
 -----------------------------
 Hartmut Weigelt, Ph.D.



                                  18
<PAGE>


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

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2006


<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm .................... F-1

Consolidated Balance Sheet ................................................. F-3

Consolidated Statements of Operations and Comprehensive Loss ............... F-4

Consolidated Statements of Stockholders' Equity (Deficit)  ................. F-5

Consolidated Statements of Cash Flows ..................................... F-10

Notes to Consolidated Financial Statements ................................ F-12


<PAGE>


                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Proteo, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Proteo, Inc. and
Subsidiary (collectively the "Company"), a Development Stage Company, as of
December 31, 2006, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity (deficit) and cash flows for the years
ended December 31, 2006 and 2005, and for the period from November 22, 2000
(Inception) to December 31, 2006. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Proteo,
Inc. and Subsidiary as of December 31, 2006, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2006 and
2005, and for the period from November 22, 2000 (Inception) to December 31,
2006, in conformity with accounting principles generally accepted in the United
States of America.


                                      F-1
<PAGE>

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company is a development stage enterprise
which has experienced significant losses since inception with no operating
revenues. As discussed in Note 1 to the consolidated financial statements, a
significant amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become
commercially viable. These conditions, among others, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

March 28, 2007
Newport Beach, California


                                      F-2
<PAGE>

--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


                                     ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                      $   269,482
     Research supplies inventory                                         90,697
     Prepaid expenses and other current assets                           48,582
                                                                    -----------
         Total Current Assets                                           408,761

PROPERTY AND EQUIPMENT, NET                                             388,812
                                                                    -----------

Total Assets                                                        $   797,573
                                                                    ===========

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Accounts payable and accrued liabilities                       $    93,526
     Accrued licensing fees                                             871,000
                                                                    -----------
         Total Current Liabilities                                      964,526

MINORITY INTEREST                                                         3,978

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
     Preferred stock, par value $0.001 per share; 20,000,000
         shares authorized; no shares issued and 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                                    (862,081)
     Accumulated other comprehensive income                             280,391
     Deficit accumulated during development stage                    (4,581,355)
                                                                    -----------
         Total Stockholders' Deficit                                   (170,931)
                                                                    -----------

Total Liabilities and Stockholders' Deficit                         $   797,573
                                                                    ===========


  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
                                  STATEMENTS.

                                      F-3
<PAGE>
<TABLE>

-------------------------------------------------------------------------------------------------
                                    PROTEO, INC. AND SUBSIDIARY
                                   (A DEVELOPMENT STAGE COMPANY)
                               CONSOLIDATED STATEMENTS OF OPERATIONS
                                      AND COMPREHENSIVE LOSS
                FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005, AND FOR THE PERIOD
                   FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2006
-------------------------------------------------------------------------------------------------


                                                                                     NOVEMBER 22,
                                                                                         2000
                                                                                     (INCEPTION)
                                                                                       THROUGH
                                                                                     DECEMBER 31,
                                                     2006               2005             2006
                                                 ------------      ------------      ------------
<S>                                              <C>               <C>               <C>
REVENUES                                         $         --      $         --      $         --

EXPENSES
     General and administrative                       552,115           474,006         3,180,478
     Research and development, net of grants          100,490           765,783         1,482,977
                                                 ------------      ------------      ------------
                                                      652,605         1,239,789         4,663,455

OTHER INCOME (EXPENSE)
     Interest income                                    3,192             1,914            34,424
     Miscellaneous income, net                         21,519            22,094           112,650
     Unrealized foreign currency transaction
         income (loss)                                (81,000)           84,000          (124,000)
                                                 ------------      ------------      ------------
                                                      (56,289)          108,008            23,074
                                                 ------------      ------------      ------------

NET LOSS BEFORE MINORITY INTEREST                    (708,894)       (1,131,781)       (4,640,381)

MINORITY INTEREST IN LOSS OF CONSOLIDATED
     SUBSIDIARY, NET OF TAXES
                                                       59,026                --            59,026
                                                 ------------      ------------      ------------

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
                                                     (649,868)       (1,131,781)       (4,581,355)

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS               61,737          (134,495)          280,391
                                                 ------------      ------------      ------------

COMPREHENSIVE LOSS                               $   (588,131)     $ (1,266,276)     $ (4,300,964)
                                                 ============      ============      ============

BASIC AND DILUTED LOSS AVAILABLE TO COMMON
     SHAREHOLDERS PER COMMON SHARE               $      (0.03)     $      (0.05)
                                                 ============      ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING                                   23,842,000        22,125,000
                                                 ============      ============


           THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
                                           STATEMENTS.


                                               F-4
<PAGE>

------------------------------------------------------------------------------------------------------------------------------------
                                                     PROTEO, INC. AND SUBSIDIARY
                                                    (A DEVELOPMENT STAGE COMPANY)
                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005, AND FOR THE PERIOD
                                    FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2006
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                           Deficit
                                                                                          Accumulated    Accumulated
                                           Common Stock      Additional       Stock         Other          During
                                 -------------------------     Paid-in    Subscriptions  Comprehensive   Development
                                   Shares         Amount       Capital      Receivable   Income (Loss)      Stage          Total
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------

BALANCE - NOVEMBER 22, 2000
     (INCEPTION)                          --   $        --   $        --   $        --    $        --    $        --    $        --
Common stock subscribed at
     $0.001 per share              4,800,000         4,800            --        (4,800)            --             --             --
Common stock issued for cash
     at $3.00 per share               50,000            50       149,950            --             --             --        150,000
Reorganization with Proteo
     Biotech AG                    2,500,000         2,500         6,009            --             --             --          8,509
Net loss                                  --            --            --            --             --        (60,250)       (60,250)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE - DECEMBER 31, 2000        7,350,000         7,350       155,959        (4,800)            --        (60,250)        98,259
Common stock issued for cash
     at $3.00 per share              450,000           450     1,349,550            --             --             --      1,350,000
Cash received for common
     stock subscribed at
     $0.001 per share                     --            --            --         4,800             --             --          4,800

                                                             (continued)

------------------------------------------------------------------------------------------------------------------------------------
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                F-5
<PAGE>

                                                                                                           Deficit
                                                                                          Accumulated    Accumulated
                                           Common Stock      Additional       Stock         Other          During
                                 -------------------------     Paid-in    Subscriptions  Comprehensive   Development
                                   Shares         Amount       Capital      Receivable   Income (Loss)      Stage          Total
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------

Common stock issued for cash
     at $0.40 per share              201,025   $       201   $    80,209   $        --    $        --    $        --    $    80,410
Common stock subscribed at
     $0.40 per share               5,085,487         5,086     2,029,109    (2,034,195)            --             --             --
Common stock issued for cash
     to related parties at
     $0.001 per share              7,200,000         7,200            --            --             --             --          7,200
Other comprehensive loss                  --            --            --            --        (20,493)            --        (20,493)
Net loss                                  --            --            --            --             --       (374,111)      (374,111)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE - DECEMBER 31, 2001       20,286,512        20,287     3,614,827    (2,034,195)       (20,493)      (434,361)     1,146,065
Common stock issued in
     connection with reverse
     merger                        1,313,922         1,314        (1,314)           --             --             --             --
Cash received for common stock
     subscribed at $0.40 per
     share                                --            --            --       406,440             --             --        406,440


                                                             (continued)
------------------------------------------------------------------------------------------------------------------------------------
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                F-6
<PAGE>

                                                                                                           Deficit
                                                                                          Accumulated    Accumulated
                                           Common Stock      Additional       Stock         Other          During
                                 -------------------------     Paid-in    Subscriptions  Comprehensive   Development
                                   Shares         Amount       Capital      Receivable   Income (Loss)      Stage          Total
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------

Other comprehensive income                --   $        --   $        --   $        --    $   116,057    $        --    $   116,057
Net loss                                  --            --            --            --             --     (1,105,395)    (1,105,395)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE -                         21,600,434        21,601     3,613,513    (1,627,755)        95,564     (1,539,756)       563,167
     DECEMBER 31, 2002
Common stock issued for cash
     at $0.60 per share               66,667            67        39,933            --             --             --         40,000
Cash received for common
     stock subscribed at
     $0.40 per share                      --            --            --       387,800             --             --        387,800
Other comprehensive income                --            --            --            --        164,399             --        164,399
Net loss                                  --            --            --            --             --       (620,204)      (620,204)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE - DECEMBER 31, 2003       21,667,101        21,668     3,653,446    (1,239,955)       259,963     (2,159,960)       535,162
Common stock issued for cash
     at $0.40 per share              412,249           412       164,588            --             --             --        165,000


                                                             (continued)
------------------------------------------------------------------------------------------------------------------------------------
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                F-7
<PAGE>

                                                                                                           Deficit
                                                                                          Accumulated    Accumulated
                                           Common Stock      Additional       Stock         Other          During
                                 -------------------------     Paid-in    Subscriptions  Comprehensive   Development
                                   Shares         Amount       Capital      Receivable   Income (Loss)      Stage          Total
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------

Cash received for common
     stock subscribed at
     $0.40 per share                      --   $        --   $        --   $   680,000    $        --    $        --    $   680,000
Other comprehensive income                --            --            --            --         93,186             --         93,186
Net loss                                  --            --            --            --             --       (639,746)      (639,746)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE - DECEMBER 31, 2004       22,079,350        22,080     3,818,034      (559,955)       353,149     (2,799,706)       833,602
Common stock subscribed at
     $0.84 per share                 300,000           300       251,700      (252,000)            --             --             --
Cash received for common
     stock subscribed at
     $0.40 per share                      --            --            --       435,284             --             --        435,284
Other comprehensive income                --            --            --            --       (134,495)            --       (134,495)
Net loss                                  --            --            --            --             --     (1,131,781)    (1,131,781)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE - DECEMBER 31, 2005       22,379,350        22,380     4,069,734      (376,671)       218,654     (3,931,487)         2,610


                                                            (continued)
------------------------------------------------------------------------------------------------------------------------------------
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                F-8
<PAGE>

                                                                                                           Deficit
                                                                                          Accumulated    Accumulated
                                           Common Stock      Additional       Stock         Other          During
                                 -------------------------     Paid-in    Subscriptions  Comprehensive   Development
                                   Shares         Amount       Capital      Receivable   Income (Loss)      Stage          Total
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------

Common stock subscribed at
     $0.60 per share               1,500,000   $     1,500   $   898,500   $  (900,000)   $        --    $        --    $        --
Cash received for common
     stock subscribed at
     $0.40 per share                      --            --            --       414,590             --             --        414,590
Other comprehensive income                --            --            --            --         61,737             --         61,737
Net loss                                  --            --            --            --             --       (649,868)      (649,868)
                                 -----------   -----------   -----------   -----------    -----------    -----------    -----------
BALANCE - DECEMBER 31, 2006       23,879,350   $    23,880   $ 4,968,234   $  (862,081)   $   280,391    $(4,581,355)   $  (170,931)
                                 ===========   ===========   ===========   ===========    ===========    ===========    ===========


------------------------------------------------------------------------------------------------------------------------------------
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                F-9
<PAGE>

-----------------------------------------------------------------------------------------------------
                                      PROTEO, INC. AND SUBSIDIARY
                                     (A DEVELOPMENT STAGE COMPANY)
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005, AND FOR THE PERIOD
                     FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2006
-----------------------------------------------------------------------------------------------------


                                                                                         NOVEMBER 22,
                                                                                             2000
                                                                                         (INCEPTION)
                                                                                           THROUGH
                                                                                         DECEMBER 31,
                                                          2006             2005              2006
                                                       -----------      -----------      -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                               $  (649,868)     $(1,131,781)     $(4,581,355)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
       Depreciation                                         53,104           49,063          220,820
       Unrealized foreign currency transaction
         (gain) loss                                        81,000          (84,000)         124,000
     Changes in operating assets and liabilities:
         Research supplies inventory                         8,083          (81,694)        (113,904)
         Prepaid expenses and other current assets         (18,671)          13,040          (46,181)
         Accounts payable and accrued liabilities           (4,335)          58,335           67,140
         Accrued licensing fees                            139,000          135,000          747,000
                                                       -----------      -----------      -----------
NET CASH USED IN OPERATING ACTIVITIES                     (391,687)      (1,042,037)      (3,582,480)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment                           --          (14,100)        (601,728)
Cash of reorganized entity                                      --               --           27,638
                                                       -----------      -----------      -----------
NET CASH USED IN INVESTING ACTIVITIES                           --          (14,100)        (574,090)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock                          --               --        1,792,610
Proceeds for subscribed stock                              414,590          435,284        2,328,914
                                                       -----------      -----------      -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                  414,590          435,284        4,121,524

EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH              18,802          (67,424)         304,528
                                                       -----------      -----------      -----------

NET INCREASE (DECREASE) IN CASH                             41,705         (688,277)         269,482

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

CASH - end of period                                   $   269,482      $   227,777      $   269,482
                                                       ===========      ===========      ===========

                                             (continued)

      THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                 F-10
<PAGE>

-----------------------------------------------------------------------------------------------------
                                      PROTEO, INC. AND SUBSIDIARY
                                     (A DEVELOPMENT STAGE COMPANY)
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005, AND FOR THE PERIOD
                     FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2006

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


                                                                                         NOVEMBER 22,
                                                                                             2000
                                                                                         (INCEPTION)
                                                                                           THROUGH
                                                                                         DECEMBER 31,
                                                          2006             2005              2006
                                                       -----------      -----------      -----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Common stock issued for subscriptions receivable       $   900,000      $   252,000      $ 1,627,755
                                                       ===========      ===========      ===========

Net assets (excluding cash) of reorganized entity
     received in exchange for equity securities        $        --      $        --      $     8,509
                                                       ===========      ===========      ===========


See the accompanying notes to consolidated financial statements for more
information on non-cash investing and financing activities during the years
ended December 31, 2006 and 2005, and for the period from November 22, 2000
(Inception) through December 31, 2006.


      THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                 F-11
<PAGE>

</TABLE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Proteo, Inc. (formerly TriVantage Group, Inc.) and Proteo Marketing, Inc.
("PMI"), a Nevada corporation which began operations in November 2000, entered
into a reorganization and stock exchange agreement in December 2000 with Proteo
Biotech AG, ("PBAG"), a German corporation, incorporated in Kiel, Germany.
Pursuant to the terms of the agreement, all of the shareholders of PBAG
exchanged their common stock for 2,500,000 shares of PMI common stock. As a
result, PBAG became a wholly owned subsidiary of PMI. Proteo Inc.'s common stock
is quoted on the Over-the-Counter Bulletin Board under the symbol "PTEO.OB".

During 2001, PMI entered into a Shell Acquisition Agreement (the "Acquisition
Agreement") with Trivantage Group, Inc. ("Trivantage"), a public "shell"
company, in a transaction accounted for as a "reverse merger." In accordance
with the Acquisition Agreement, PMI first acquired 176,660,280 shares (1,313,922
post reverse split shares, as described below) of Trivantage's common stock
representing 90% of the issued and outstanding common stock of Trivantage, in
exchange for a cash payment of $500,000 to the sole shareholder of Trivantage.
Secondly, Trivantage completed a one for one-hundred-fifty reverse stock split.
Finally, effective April 25, 2002, the shareholders of PMI exchanged their
shares of PMI for an aggregate of 20,286,512 shares of Trivantage to effect a
reverse merger (the "Merger") between PMI and Trivantage. Subsequently,
Trivantage changed its name to Proteo, Inc. (the "Company"). Effective December
31, 2004, PMI merged into the Company.

The Company intends 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 transplants.

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 will begin 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 revenues from 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.


                                      F-12
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

DEVELOPMENT STAGE AND GOING CONCERN

The Company has been in the development stage since it began operations on
November 22, 2000 and has not generated any 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.

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.

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.

Management plans to generate revenues from product sales, but there are no
purchase commitments for 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/or 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 substantial doubt 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.


                                      F-13
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RISKS AND UNCERTAINTIES

The Company's line of future pharmaceutical products being developed by its
German subsidiary are considered drugs or biologics, and as such, are governed
by the Federal Food and Drug and Cosmetics Act and by the regulations of state
agencies and various foreign government agencies. There can be no assurance that
the Company will obtain the regulatory approvals required to market its
products. The pharmaceutical products under development in Germany will be
subject to more stringent regulatory requirements because they are in vivo
products for humans. The Company has no experience in obtaining regulatory
clearance on these types of products. Therefore, the Company will be subject to
the risks of delays in obtaining or failing to obtain regulatory clearance and
other uncertainties, including financial, operational, technological, regulatory
and other risks associated with an emerging business, including the potential
risk of business failure.

As substantially all of the Company's operations are in Germany, they are
exposed to risks related to foreign currency fluctuations. The Company does not
utilize derivative instruments to hedge against such exposure.

PRINCIPLES OF CONSOLIDATION

The 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 Proteo, Inc. and its wholly owned
subsidiary. The operations of PBAG, acquired on December 30, 2000, are included
in the accompanying consolidated statements of operations and comprehensive loss
from such date. All significant intercompany accounts and transactions have been
eliminated in consolidation.

STARTUP ACTIVITIES

Statement of Position No. 98-5, "REPORTING THE COSTS OF STARTUP ACTIVITIES"
requires that all non-governmental entities expense the costs of startup
activities as incurred, including organizational costs. This standard has not
materially impacted the Company's financial position or results of operations.


                                      F-14
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

GRANTS

The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment (see Note
6). Grant receipts for the reimbursement of research and development expenses
are offset against such expenses in the accompanying consolidated statements of
operations and comprehensive loss when the related expenses are incurred. Grants
related to the acquisition of tangible property are recorded as a reduction of
such property's historical cost.

Funds are available at the earliest from January 1 of each budget year with a
fund request submitted on or before December 5 of each year. Funds reserved for
each budget year may not be assigned, and funds not requested by December 5 of
each budget year will expire.

USE OF ESTIMATES

The Company prepares its consolidated financial statements in conformity with
GAAP, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates made by management include, among others, realizability of long-lived
assets and estimates for deferred tax asset valuation allowances. Actual results
could materially differ from such estimates.

FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards ("SFAS") No. 107 "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS" requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. Management believes that the carrying amounts of the Company's financial
instruments, consisting primarily of cash and accounts payable and accrued
expenses, approximate their fair value at December 31, 2006 due to their
short-term nature.


                                      F-15
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's German operations are translated from
Euros (the functional currency) into U.S. dollars (the reporting currency) at
period-end exchange rates. Expense and grant receipts are translated at weighted
average exchange rates for the period. Net exchange gains or losses resulting
from such translation are excluded from the consolidated statements of
operations and are included in comprehensive loss and accumulated in a separate
component of stockholders' deficit. Such amount was $280,391 at December 31,
2006.

The Company records payables related to a licensing agreement (see Note 6) 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 years ended December 31, 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 gains (losses) of approximately $(81,000) and $84,000 for the years
ended December 31, 2006 and 2005, respectively.

CONCENTRATIONS

The Company maintains substantially all of its cash in bank accounts in Germany
and not in United States bank depository accounts insured by the Federal Deposit
Insurance Corporation. The Company has not experienced any losses in these
accounts.

The Company's research and development activities and most of its assets are
located in Germany. The Company's operations are subject to various political,
economic, and other risks and uncertainties inherent in Germany and the European
Union.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid temporary cash investments with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consist of deposits with banks and short-term certificates of
deposit.


                                      F-16
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RESEARCH SUPPLIES INVENTORY

Research supplies inventory is stated at cost, and is entirely comprised of
research supplies and materials that are expensed as consumed.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the
straight-line method over their expected useful lives, which range from 3 to 14
years. Leasehold improvements are amortized over either the expected useful life
of the improvement or the related lease term, whichever is shorter. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation and
amortization of assets are removed from the accounts upon retirement or other
disposition; any resulting gain or loss is reflected in the consolidated
statements of operations and comprehensive loss.

LONG-LIVED ASSETS

In July 2001, the Financial Accounting Statements Board ("FASB") issued SFAS No.
144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." SFAS No.
144 addresses financial accounting and reporting for the impairment or disposal
of certain long-lived assets. SFAS No. 144 requires that certain long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. If the cost basis
of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized. Impairment losses are
calculated as the difference between the cost basis of an asset and its
estimated fair value. SFAS No. 144 also requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
shareholders) or is classified as held for sale. Assets to be disposed are
reported at the lower of the carrying amount or fair value less costs to sell.
As of December 31, 2006, management believes that no impairment exists and
therefore, no adjustments have been made to the carrying values of long-lived
assets. There can be no assurance, however, that market conditions will not
change or demand for the Company's future products or services will develop,
which could result in impairment of long-lived assets in the future.


                                      F-17
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

REVENUE RECOGNITION

It is the Company's intent to recognize revenues from future product sales at
the time of product delivery. In December 2003, the Securities and Exchange
Commission released Staff Accounting Bulletin ("SAB") No. 104, "REVENUE
RECOGNITION," which provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements. The Company believes that
once significant revenues are generated, the Company's revenue recognition
accounting policies will conform to SAB No. 104.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as incurred. Grant
funds received are netted against research and development costs (see Note 6).

PATENTS AND LICENSES

The Company does not hold title to any patents or patents pending related to the
Elafin technology and instead operates under a technological license agreement
with a related party (see Note 6). Under such license agreement, the Company
does not hold title to any patents but must pay for all costs related to new
patents, patents pending, and patent maintenance associated with the Elafin
technology. The Company expenses such costs as incurred.

INCOME TAXES

The Company accounts for income taxes using the liability method in accordance
with SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." Deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.

ACCOUNTING FOR STOCK-BASED COMPENSATION

From inception to December 31, 2006, the Company has not granted any stock
options, stock warrants, or adopted any stock option plan.


                                      F-18
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

BASIC AND DILUTED 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 common 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 December 31, 2006 and 2005. Additionally,
for purposes of calculating diluted loss per common share, there were no
adjustments to net loss. See Note 7 for additional information.

COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, "REPORTING COMPREHENSIVE INCOME", established standards for
reporting and display of comprehensive income (loss) and its components in a
full set of general-purpose financial statements. Total comprehensive income
(loss) represents the net change in stockholders' equity (deficit) during a
period from sources other than transactions with stockholders and as such,
includes net earnings or loss. For the Company, the components of other
comprehensive income (loss) are the foreign currency translation adjustments,
which are recorded as components of stockholders' equity (deficit).

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION", established 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 had no operating
revenues from inception. See Note 2 for information on long-lived assets located
in Germany.


                                      F-19
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109."
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109,"Accounting for Income Taxes." FIN No. 48 prescribes a more-likely-than-not
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken (or expected to be taken) in
an income tax return. It also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The requirement to assess the need for a valuation
allowance on net deferred tax assets is not affected by FIN No. 48. This
pronouncement is effective for fiscal years beginning after December 31, 2006.
Management is in the process of evaluating this guidance, and therefore has not
yet determined the impact (if any) that FIN No.48 will have on the Company's
financial position or results of operation upon adoption.

In September 2006, the FASB issued SFAS No.157, "FAIR VALUE MEASUREMENTS," which
defines fair value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements. SFAS No. 157 simplifies
and codifies related guidance within GAAP, but does not require any new fair
value measurements. The guidance in SFAS No. 157 applies to derivatives and
other financial instruments measured at estimated fair value under SFAS No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" and related
pronouncements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Management does not expect the adoption of SFAS No. 157 to have a
significant effect on the Company's financial position or results of operation.

On February 15, 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115." This standard permits an entity to measure many financial
instruments and certain other items at estimated fair value. Most of the
provisions of SFAS No. 159 are elective; however, the amendment to SFAS No. 115
("Accounting for Certain Investments in Debt and Equity Securities") applies to
all entities that own trading and available-for-sale securities. The fair value
option created by SFAS No. 159 permits an entity to measure eligible items at
fair value as of specified election dates. Among others, eligible items exclude
(1) financial instruments classified (partially or in total) as permanent or
temporary stockholders' equity (such as a convertible debt security with a


                                      F-20
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

non-contingent beneficial conversion feature) and (2) investments in
subsidiaries and interests in variable interest entities that must be
consolidated. A for-profit business entity will be required to report unrealized
gains and losses on items for which the fair value option has been elected in
its statements of operations at each subsequent reporting date.

The fair value option (a) may generally be applied instrument by instrument, (b)
is irrevocable unless a new election date occurs, and (c) must be applied to the
entire instrument and not to only a portion of the instrument. SFAS No. 159 is
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (i) makes that choice in the first
120 days of that year, (ii) has not yet issued financial statements for any
interim period of such year, and (iii) elects to apply the provisions of SFAS
No. 157 ("Fair Value Measurements"). The adoption of SFAS No. 159 is not
expected to have a significant impact on future financial statements.

In December 2004, the FASB issued SFAS No. 123-R, "SHARE-BASED PAYMENT," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION," and supersedes Accounting Principles Board
("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Small
Business Issuers are required to apply SFAS No. 123-R in the first interim or
annual reporting period that begins after December 15, 2005. Thus, the Company's
consolidated financial statements will reflect an expense for (a) all
share-based compensation arrangements granted after December 31, 2005 and for
any such arrangements that are modified, cancelled, or repurchased after that
date, and (b) the portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-date estimated
fair value. The adoption of this standard had no effect on the Company's
consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.


                                      F-21
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


2.  PROPERTY AND EQUIPMENT

Property and equipment, all located in Kiel, Germany, consist of the following
at December 31, 2006:

Technical and laboratory equipment                                    $ 406,918
Plant                                                                   195,120
Leasehold improvements                                                    4,909
Office equipment                                                         25,153
                                                                      ---------
                                                                        632,100
Less accumulated depreciation and amortization                         (243,288)
                                                                      ---------

                                                                      $ 388,812
                                                                      =========


3.  STOCKHOLDERS' DEFICIT

COMMON STOCK

The Company is authorized to issue 300,000,000 shares of $0.001 par value common
stock. The holders of the Company's common stock are entitled to one vote for
each share held of record on all matters to be voted on by those stockholders.

In November 2000, the Company sold and issued 4,800,000 shares of restricted
common stock at $0.001 per share for $4,800 in cash, which was received in
fiscal 2001; therefore the issuance was accounted for as a stock subscription
receivable at December 31, 2000. During the year ended December 31, 2001, the
Company sold and issued an additional 7,200,000 shares of common stock to
related parties at $0.001 per share for $7,200 in cash.

In November 2000, the Company sold and issued 50,000 shares of restricted common
stock at $3.00 per share for $150,000 in cash.

In December 2000, the Company issued 2,500,000 shares of restricted common stock
in connection with the reorganization and stock exchange agreement with PBAG
(see "Nature of Business" in Note 1).

During the year ended December 31, 2001, the Company issued and sold 450,000
shares of restricted common stock at $3.00 per share to Euro-American GmbH for
$1,350,000 in cash.


                                      F-22
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


3. STOCKHOLDERS' DEFICIT (continued)

COMMON STOCK (continued)

During the year ended December 31, 2001, the Company entered into a subscription
agreement and note receivable for 6,000,000 shares of the Company's restricted
common stock with Euro-American GmbH, valued at $2,400,000. During the year
ended December 31, 2001, 5,286,512 shares of Company common stock were issued
under such subscription, of which approximately $435,000, $680,000, and $794,000
was received against this receivable during the years ended December 31, 2005,
2004, and the period from Inception through December 31, 2003, respectively. In
May 2003, FID-Esprit AG ("FID-Esprit") assumed the common stock subscription
agreement with Euro-American GmbH. The Company received the outstanding balance
in installments through March 28, 2006.

During the year ended December 31, 2002, the Company issued 1,313,922 shares of
restricted common stock in conjunction with the reverse merger with PMI (see
"Nature of Business" in Note 1).

Additionally, the Company entered into a common stock purchase agreement with
FID-Esprit to purchase up to 1,000,000 shares of the Company's restricted common
stock. Under the agreement, the Company agreed to sell its common stock at a
price per share equal to 40% of the average ask price for the 20 trading days
previous to the date of subscription, as quoted on a public market. However, the
price per share will be no less than $0.40. The agreement expired on December
31, 2004. During the years ended December 31, 2004 and 2003, the Company issued
412,249 and 66,667 shares, respectively, at $0.40 and $0.60 per share,
respectively, for cash. Such agreement was not renewed after December 31, 2004.

In November 2005, the Company entered into a common stock purchase agreement
with FID-Esprit to sell 300,000 of the Company's restricted common shares at
$0.84 per share, or $252,000. Concurrent with such transaction, FID-Esprit
issued a promissory note to the Company for $252,000 to be paid in four
installments of $63,000 each, due on March 31, 2006, June 30, 2006, September
30, 2006, and December 31, 2006. The promissory note was paid in full during the
year ended December 31, 2006.

In December 2006, the Company entered into a common stock purchase agreement
with FID-Esprit to sell 1,500,000 of the Company's restricted common shares at
$0.60 per share, or $900,000. Concurrent with such transaction, FID-Esprit
issued a promissory note to the Company for $900,000 to be paid in five
installments of $180,000 each through December 31, 2007. FID-Esprit made a
partial payment of $37,894 against the note in December 2006.


                                      F-23
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


3. STOCKHOLDERS' EQUITY (continued)

PREFERRED STOCK

The Company is authorized to issue 20,000,000 shares of non-voting, $0.001 par
value preferred stock. The Board of Directors has not designated any liquidation
value or dividend rates. No preferred stock has been issued as of December 31,
2006.

4.  MINORITY INTEREST

On September 28, 2006, a shareholder of the Company entered into and agreement
to contribute 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. The
party will receive 15% of profits, as determined under the agreement, not to
exceed in any given year 30% of the capital contributed. Additionally, the party
will be allocated 15% of losses, as determined under the agreement, not to
exceed the capital contributed. The party is under no obligation to provide
additional capital contributions to the Company. During the year ended December
31, 2006, losses approximating $59,000 were allocated against the contributed
capital account, which is presented as minority interest in loss of consolidated
subsidiary on the accompanying statements of operations and comprehensive loss.
The remaining balance of $3,978 is presented as minority interest in the
accompanying consolidated balance sheet.

5.  INCOME TAX PROVISION

There is no material income tax expense recorded for the years ended December
31, 2006 and 2005, due to the Company's net losses.

Income tax expense for the years ended December 31, 2006 and 2005 differed from
the amounts computed by applying the U.S. federal income tax rate of 34 percent
for the following reasons:

                                                            2006         2005
                                                         ---------    ---------

Income tax benefit at U.S. federal statutory rates       $(221,000)   $(385,000)
Change in valuation allowance                              221,000      385,000
State and local income taxes, net of federal income
        tax effect                                             800          800
                                                         ---------    ---------

                                                         $     800    $     800
                                                         =========    =========


                                      F-24
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


5. INCOME TAX PROVISION (continued)

The Company has a deferred tax asset and like amount of valuation allowance of
approximately $1,223,000 at December 31, 2006, relating primarily to tax net
operating loss carryforwards, as discussed below, and timing differences related
to the recognition of accrued licensing fees totaling $871,000.

As of December 31, 2006, the Company had tax net operating loss carryforwards
("NOLs") of approximately $632,000 and $2,847,000 (2,156,000 Euros) available to
offset future taxable Federal and foreign income, respectively. The federal
carryforward amount expires in varying years through 2024. The foreign net
operating loss relates to Germany and does not have an expiration date.

In the event the Company were to experience a greater than 50% change in
ownership, as defined in Section 382 of the Internal Revenue Code, the
utilization of the Company's tax NOLs could be severely restricted.

6.  COMMITMENTS AND CONTINGENCIES

GRANTS

In 2001, the German state of Schleswig-Holstein granted Proteo Biotech AG
approximately 760,000 Euros for the research and development of the Company's
pharmaceutical product Elafin. The grant, as amended, covered the period from
February 1, 2001 to March 31, 2004 if certain milestones were reached by
November 15 of each year, with a possible extension as defined in the agreement.
Such amounts have been reported as a reduction of research and development
expenses in the year of receipt. During the term of this Grant, the Company
received 100% of the expected funds.

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.


                                      F-25
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


6. COMMITMENTS AND CONTINGENCIES (continued)

GRANTS (continued)

The Company qualified to receive approximately 225,000 Euros and 197,000 Euros
(approximately $283,000 and $245,000, respectively) of the New Grant in 2006 and
2005, respectively. Grant funds approximating 225,000 Euros and 181,000 Euros
($283,000 and $225,000, respectively) have been received and reported as a
reduction of research and development expenses for the years ended December 31,
2006 and 2005, respectively. As of December 31, 2006, management believes that
all milestones required by the New Grant have been satisfied.

DR. WIEDOW 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 December 31, 2006, the Company has accrued $871,000 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 December 31, 2006, and this is a technical breach of the
agreement. Dr. Wiedow waived such breach and deferred the prior year payments to
2007. Expense related to such license totaling $139,000, $135,000, and $747,000
is included in general and administrative expense in the accompanying
consolidated statements of operations and comprehensive loss for the years ended
December 31, 2006 and 2005, and for the period November 22, 2000 (inception) to
December 31, 2006, respectively. Additionally, unrealized foreign currency
transaction gains (losses) related to accrued licensing fees, totaling $(81,000)
and $84,000, were recorded during the years ended December 31, 2006 and 2005,
respectively. No royalty expense has been recognized under the agreement since
the Company has yet to generate any related revenues.


                                      F-26
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


6. COMMITMENTS AND CONTINGENCIES (continued)

DR. WIEDOW LICENSE AGREEMENT

On October 4, 1999, Dr. Wiedow and AstraZeneca PLC (formerly Zeneca Limited)
entered into an agreement to assign all patents and technology to Dr. Wiedow in
exchange for a royalty of 2% of any future net sales from such patents and
technology. The Company, under its December 30, 2000 licensing agreement with
Dr. Wiedow discussed above, assumed such 2% royalty obligation.

ARTES BIOTECHNOLOGY LICENSE AGREEMENT

On November 15, 2004, the Company entered into an exclusive worldwide license
and collaboration agreement with ARTES Biotechnology GmbH ("ARTES"). This
agreement enables the Company 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 the Company. The agreement has a term of 15 years
with an annual license fee of the greater of 10,000 Euros 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.

EUROGENTEC AGREEMENT

On March 18, 2005, the Company entered into a contractual agreement with
Eurogentec S.A., a Belgium contract manufacturing organization, for the
production of the Company's product Elafin for clinical trials according to Good
Manufacturing Practices. Such agreement will require payments approximating
400,000 Euros (approximately $500,000), payable upon the attainment of achieved
milestones between April 2005 and July 2005. All milestones were achieved, and
the related expense is included in research and development in the accompanying
consolidated statements of operations and comprehensive loss.

IKP AGREEMENT

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 will equired
payments approximating 118,000 Euros (approximately $145,000), payable upon the
attainment of achieved milestones. This contact was substantially complete as of
December 31, 2005, and the related expense has been included in research and
development in the accompanying consolidated statements of operations and
comprehensive loss.


                                      F-27
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


6. COMMITMENTS AND CONTINGENCIES (continued)

LEASES

The Company has entered into several leases for office and laboratory facilities
in Germany, expiring at dates through December 2011. Certain leases have a
rental adjustment in 2007 based on the consumer price index.

Future minimum rental payments under non-cancelable operating leases, in Euros
and equivalent U.S. dollars (based on the December 31, 2006 exchange rate),
approximate the following for the years ending December 31:

                                                    (EURO)               $
                                               --------------      ---------

2007                                            (euro) 25,000      $  31,000
2008                                                   25,000         31,000
2009                                                   17,000         21,000
2010                                                   17,000         21,000
2011                                                   17,000         21,000
                                               --------------      ---------

                                               (euro) 101,000      $ 125,000
                                               ==============      =========

The Company also leases office space in Irvine, California on a month-to-month
basis. Total rental expense for all facilities for the years ended December 31,
2006 and 2005, and for the period November 22, 2000 (inception) to December 31,
2006 approximated $40,000, $44,000 and $252,000, respectively.

LEGAL

The Company's German subsidiary PBAG was sued 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. 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 consolidated
statements of operations and comprehensive loss. The balance was paid in full
prior to December 31, 2006.


                                      F-28
<PAGE>
--------------------------------------------------------------------------------
                           PROTEO, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
--------------------------------------------------------------------------------


6. COMMITMENTS AND CONTINGENCIES (continued)

LEGAL  (continued)

In addition to the matter discussed above, the Company may from time to time be
involved in various claims, lawsuits, disputes with third parties, actions
involving allegations of discrimination, or breach of contract actions
incidental to the operation of its business. The Company is not currently
involved in any such litigation which it believes could have a material adverse
effect on its financial condition or results of operations.

7.  LOSS PER COMMON SHARE

The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations for the years ended
December 31, 2006 and 2005:

<TABLE>
                                                                 2006              2005
                                                             ------------      ------------

<S>                                                          <C>               <C>
Numerator for basic and diluted loss per common share:
     Net loss charged to common stockholders                 $   (649,868)     $ (1,131,781)

Denominator for basic and diluted loss per common share:
     Weighted average number of common shares                  23,842,000        22,125,000
                                                             ------------      ------------

Basic and diluted loss per common share                      $      (0.03)     $      (0.05)
                                                             ============      ============

</TABLE>

                                      F-29