UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-K


(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2009.


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.


(Exact
Name of Registrant as Specified in Its Charter)


Nevada
            88-0292249(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer
              Identification
      Number)


2102
Business Center Drive


Irvine,
California 92612


(Address
of principal executive offices) (Zip Code)


Registrant’s
telephone number, including area code: (949) 253-4616


Securities
registered pursuant to Section 12(b) of the Act:





Title
      of Each Class
            Name
      of Each Exchange on Which Registered 
 None
            None





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




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.      
Yes   ̈
    No  þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.   Yes   ̈
No      þ





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days.    Yes  þ
    No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o   No o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405)is not contained herein, and will not 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-K or any
amendment to this Form 10-K.  þ





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer   ̈
            Accelerated
      filer   ̈Non-accelerated
      filer   ̈
            Smaller
      reporting company  þ





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





The aggregate market value of common
stock held by non-affiliates as of December 31, 2009 was $13,871,000.(1)





Number of shares of Common Stock
outstanding as of March 19, 2010:  23,879,350


____________


1) Excludes 12,782,500 shares of common
stock held by directors and officers, and any stockholder whose ownership
exceeds five percent of the shares outstanding as of December 31,
2009





Documents
Incorporated by Reference





None.





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










PROTEO,
INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009





TABLE
OF CONTENTS





CAUTIONARY
      STATEMENT
            1PART
      I
            
            1Item
      1.
            Business
            1Item
      1A.
            Risk
      Factors
            7Item
      1B.
            Unresolved
      Staff Comments
            7Item
      2.
            Properties
            8Item
      3.
            Legal
      Proceedings
            8Item
      4.
            [Removed
      and Reserved]
            8PART
      II
            
            8Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            8Item
      6.
            Selected
      Financial Data
            10Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            10Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            15Item
      8.
            Financial
      Statements and Supplementary Data
            15Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
            15Item
      9A.(T)
            Controls
      and Procedures
            15Item
      9B.
            Other
      Information
            16PART
      III
            
            16Item
      10.
            Directors,
      Executive Officers and Corporate Governance
            16Item
      11.
            Executive
      Compensation
            18Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management
            20Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            20Item
      14.
            Principal
      Accountant Fees and Services
            21PART
      IV
            
            21Item
      15.
            Exhibits
      and Financial Statement Schedules
            22SIGNATURES
            23













CAUTIONARY
STATEMENT





This
Annual Report includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Since we are a "penny stock" company (see Item 5
of Part II of this Annual Report), the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995 does
not apply to us. We note, however, that such forward-looking statements involve
assumptions, known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the "Company" (as that
term is defined below) to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements contained in this Form 10-K. Such potential risks and
uncertainties include, without limitation, Food and Drug Administration ("FDA")
and other regulatory approval of our products, patent protection on our
proprietary technology, product liability exposure, uncertainty of market
acceptance, competition, technological change, and other risk factors detailed
herein and in our other filings with the Securities and Exchange Commission (the
"SEC"). Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our Company
and our business made elsewhere in this annual report as well as other public
reports filed with the SEC. The forward-looking statements are made as of the
date of this Form 10-K, and we assume no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those projected in such forward-looking statements.





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 of Financial Condition and Results of Operations." Forward-looking
statements also include statements in which words such as "may," "should, "
"expect," "anticipate," "intend," "plan," "believe," "estimate," "consider,"
“hopes,” “project”, “will,” their opposites and similar expressions are
used.





Forward-looking
statements are not guarantees of future performance. They should not be
regarded as a representation by us or any other person that the objectives or
plans will be achieved. 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.





PART
I





ITEM
1 - 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 "we", "our",
the "Company" and "Proteo"). The Company's common stock is currently quoted on
the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "PTEO.OB".
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 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 several years to support
us financially. We currently expect to sell only small quantities of these
products in the next few 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.


1


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
post-surgery damage to tissue, complications resulting from organ
transplantation, pulmonary hypertension, serious injuries caused by accidents,
cardiac infarction, as well as other diseases.





Elafin is
a human protein that naturally occurs in human skin and 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.





The
company believes that it is favorable to target orphan drug indications first.
Orphan drugs are pharmaceuticals for the treatment of rare diseases, which do
not affect more than 200,000 people in the US and about 230,000 people in the
European Union according to the respective legislations. The advantage of
developing orphan drugs is seen in the fact that companies can apply for an
orphan drug designation in the United States (“US”) or European Union which not
only associated with reduced fees to regulatory agencies and facilitated drug
approval but also guarantees 7-year or 10-year monopoly in the US and European
Union, respectively, on drug sales for the first company to obtain FDA marketing
approval of a particular drug.





Proteo
has obtained Orphan drug designations within the European Union for the use of
Elafin in treatment of pulmonary arterial hypertension and for the treatment of
esophagus carcinoma. In the latter indication especially the postoperative
inflammation will be targeted by Elafin treatment.





The
excellent tolerability of recombinant Elafin for injection in human subjects was
demonstrated in a Phase I clinical trial. A Phase II clinical trial on patients
undergoing esophagectomy for esophagus carcinoma was started in the University
Hospital of Schleswig-Holstein, Campus Kiel in November 2008. In 2009 the
clinical trial was extended to two further University Hospitals, the University
Hospital of the Technical University Munich and the University Hospital of the
University Münster. The aim of the trial is to investigate the effectiveness of
Elafin at suppressing the postoperative inflammatory processes.





Elafin
may also be used in the course of transplantation. To transplant organs
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 damage 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.





The
University of Cairo will conduct a Phase II clinical trial to study the efficacy
of Elafin on kidney transplant patients. The Phase II clinical trial has already
been approved by the Ethical Committee of the University of Cairo. The study
will be conducted as a Phase II trial for prevention of acute and chronic
allograft nephropathy, which is a devastating complication of kidney
transplantation that is responsible for a significant portion of graft
loss.





We
believe a further 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), by stent
implantation 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 appears 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 to the leg was cut
off for six hours.


2


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 us 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.





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 (good manufacturing practices) 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,
we gathered and evaluated additional data from the results of the Phase I study.
In addition, during 2006, we established a procedure to incorporate Elafin as an
active ingredient in cream.





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.





3


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 December 31, 2006, the
Committee for Orphan Medical Products of the EMEA 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. On March 20, 2007 the orphan drug designation became
effective upon adoption of the recommendation by the European Commission. Orphan
Drug Designation of the European Commission assures exclusive marketing rights
for the treatment of this disease within the European Union for a period of up
to ten years after receiving market approval. Additionally, registration as an
Orphan Drug enables accelerated marketing approval in all member states of the
European Union.





In July
2007, we entered into an agreement with the University of Alberta, Canada to
cooperate in research on Elafin for the treatment of pulmonary diseases in
neonates. Animal experiments on newborn rats will be carried out by Dr. Bernard
Thebaud, associate professor at the Department of Pediatrics and
Neonatology.





In August
2007, our subsidiary entered into a license agreement with Rhein Minapharm
("Minapharm"), a well established Egyptian pharmaceutical company based in
Cairo, for clinical development, production and marketing of Elafin. We have
granted Minapharm the right to exclusively market Elafin in Egypt and certain
Middle Eastern and African countries. Minapharm received ethic approval for
conducting a Phase II clinical trial in December 2008. Minapharm will initiate a
Phase II clinical trial to study the efficacy of Elafin on kidney transplant
patients. The study will be conducted as a Phase II trial for prevention of
acute and chronic allograft nephropathy at the University of
Cairo.  Setup of the trial is currently ongoing.





In
January 2008, the Company entered into an agreement with Stanford
University in California, to cooperate in preclinical studies related to Elafin
treatment of pulmonary arterial hypertension. Proteo provides support for animal
experiments that are currently conducted by Marlene Rabinovitch, Research
Director of the Vera Moulton Wall Center for Pulmonary Vascular Disease at
Stanford University who is a renowned expert in the field, and her group at the
university.





In April
2008, we initiated a placebo-controlled randomized trial to evaluate the effect
of Elafin on cytokine profiles after major surgery (clinical phase II), which
was approved in May 2008 by the responsible Ethics Committee and in August 2008
by the German Federal Institute for Drugs and Medical Devices. In November 2008
the Phase II clinical trial on patients undergoing esophagectomy for esophagus
carcinoma was started in the Department for General and Thoracic Surgery at the
University Hospital of Kiel University, Germany. Since December 2009 the
clinical trial is ongoing with two additional clinical trial centers.
Approximately 75% of the patients have been treated so far.





In
September 2009, the Company’s subsidiary has signed a Memorandum of
Understanding with the University of Edinburgh. Within the framework of
collaboration, it is intended to investigate the effect of Elafin on the damage
and inflammation of cardiac muscle after coronary bypass operations in a Phase
II clinical trial at the University of Edinburgh.





In
January 2010, following the recommendation of the European Medicines Agency EMEA
as of November 2009, the European Commission has granted Orphan Drug Designation
for the protease inhibitor Elafin to be used in the treatment of esophagus
carcinoma. Orphan Drug Designation of the European Commission assures exclusive
marketing rights for the treatment of this disease within the European Union for
a period of up to ten years after receiving market approval. Additionally,
registration as an Orphan Drug enables accelerated marketing approval in all
member states of the European Union.





Our goal
is to obtain our first governmental regulatory approval for the first indication
of our initial product in 2012. It should be noted that the first indication, 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.





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, Chief Executive Officer and Chief Financial Officer of PBAG is
currently Birge Bargmann. The members of the Supervisory Board of PBAG are
Oliver Wiedow, MD, Barbara Kahlke, PhD and Florian Wegner. PBAG has six
employees as of December 31, 2009.





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





4


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 periodically may 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 out-licensing 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 companies involved in
the development of pharmaceuticals, 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 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 decades. Currently, hundreds of related patents have
been granted. Most of these substances are produced synthetically, and are not
applicable in the treatment of human diseases. Two other elastase inhibitors,
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 specific elastase inhibitor, Depelestat, has been engineered.
Sivelestat is a synthetic elastase inhibitor which may have effectiveness
comparable to that of Elafin.





Alpha-1-antitrypsin





Human
blood naturally contains relatively large amounts of alpha-1-antitrypsin.
Alpha-1-antitrypsin is marketed for more than 20 years currently by Talecris,
Behring and Baxter as a plasma-derived product to supply patients with
genetic deficiency of functional alpha-1-antitrypsin. Arriva Pharmaceuticals
Inc., is currently running clinical trials for the use of recombinant
alpha-1-antitrypsin as an aerosol for the treatment of hereditary
emphysema.





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.





5


Sivelestat





Ono
Pharmaceutical Co. Ltd., in Japan has developed the synthetic elastase inhibitor
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 and in Korea (Dong-A, Pharmaceutical Co., Ltd.,
Seoul) in 2006.





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 in the treatment
of cystic fibrosis and acute respiratory distress syndrome.





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
operations 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 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.  The Company’s rights with respect to patents are derived
pursuant to a license agreement between the Company and Dr. Wiedow (the “License Agreement”) dated
December 30, 2000, which was amended by an Amendment Agreement to the License
Agreement (the"Amendment") dated December 23, 2008.





Pursuant
to the License Agreement, the Company agreed to pay Dr. Wiedow an annual license
fee of 110,000 Euros for a period of six years. No payments were made through
fiscal year 2003 through 2006. In December 2007 the Company paid Dr. Wiedow
30,000 Euros.





6


Pursuant
to the Amendment, the Company and Dr. Wiedow have agreed that the Company would
pay the outstanding balance of 630,000 Euros to Dr. Wiedow as follows: for
fiscal years 2008 to 2012, the Company shall pay Dr. Wiedow 30,000 Euros per
year, and for fiscal years 2013 to 2016, the Company shall pay Dr. Wiedow
120,000 Euros per year. The foregoing payments shall be made on or before
December 31 of each fiscal year. In December 2008 the Company paid Dr. Wiedow
30,000 Euros.  No other payments have been made to Dr. Wiedow as of
December 31, 2009, which is a technical breach of the agreement. Dr. Wiedow
waived such breach and deferred the prior year payments to
2010.  While the total amount owed does not currently bear interest,
the Amendment provides that any late payment shall be subject to interest at an
annual rate equal to the German Base Interest Rate (0.12% as of January 1, 2010)
plus six percent. In the event that the Company's financial condition improves,
the parties can agree to increase and/or accelerate the payments.





The
Amendment also modified the royalty payment such that the Company will not only
pay a three percent (3%) royalty on gross revenues from the Company's sale of
products based on the licensed technology but also three percent of the
license fees (including upfront and milestone payments and running royalties)
received by the Company or its subsidiary from their sublicensing of the
licensed technology.





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 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, which expire between June 2010 and November 2012:





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




EMPLOYEES





As of
December 31, 2009, Proteo had six employees, all working at our offices in
Germany.





ITEM
1A. – RISK FACTORS





A smaller
reporting company (“SRC”) is not required to provide any information in response
to Item 503(c) of Regulation S-K.





ITEM
1B. – UNRESOLVED STAFF COMMENTS





None.





7


ITEM
2 - PROPERTIES





The
Company has entered into several leases for office and laboratory facilities in
Germany expiring at dates through December 2011. The aggregate monthly rental
under the foregoing leases was approximately $4,200.





ITEM
3 - LEGAL PROCEEDINGS





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 litigation which it believes could have
a materially adverse effect on its financial condition or results of
operations.





ITEM
4 – [REMOVED AND
RESERVED]





PART
II





ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock is quoted 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
each quarter during the fiscal years ended December 31, 2009 and 2008 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.








YEAR
            PERIOD
            HIGH
            
            LOW2009
            First
      Quarter
            $1.49
            
            $1.00Second
      Quarter
            1.49
            
            0.94Third
      Quarter
            1.38
            
            0.64Fourth
      Quarter
            1.25
            
            0.512008
            First
      Quarter
            $1.95
            
            $0.51Second
      Quarter
            3.65
            
            0.65Third
      Quarter
            2.49
            
            1.39Fourth
      Quarter
            1.70
            
            0.60




On March
19, 2010, the last sales price of our common stock was $1.00 per share. No cash
dividends have been paid on our common stock for the 2009 and 2008 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
(if any), financial requirements, and opportunities for reinvesting earnings (if
any), business conditions, and other factors. Except as described in the
"Preferred Stock" section of Note 3 to the Company's consolidated financial
statements included elsewhere herein, there are otherwise no restrictions on the
payment of dividends.





NUMBER
OF SHAREHOLDERS





As of
March 19, 2010, the number of shareholders of record of the Company's common
stock was 1,765.


8





PENNY
STOCK





Until we
satisfy the initial listing requirements for the Nasdaq Stock Market and
successfully apply to have our shares of common stock traded thereon, our
common stock will continue to be quoted 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" 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. Since our common stock is deemed to be a penny stock, trading
in our shares is subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors. "Accredited investors" include (i) certain
entities as defined in Rule 501(a) of Regulation D, (ii) directors and
executive officers of the issuer of the securities being offered or sold and
(iii) persons with a net worth exceeding $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse) in each of the two most
recent years and reasonably expect to reach the same income level in the
current year. 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 our common or preferred stock, and do not
expect to pay cash dividends on our common and preferred stock in the near
term. We intend to retain future earnings, if any, to provide funds for
operation of our business.





EQUITY
COMPENSATION PLAN INFORMATION





We have
no equity compensation plans as of December 31, 2009.





RECENT
SALES OF UNREGISTERED SECURITIES





On June
9, 2008, the Company entered into a Preferred Stock Purchase Agreement ("Stock
Purchase Agreement") with FIDEsprit AG (“Investor”). Pursuant to the Stock
Purchase Agreement, the Company sold and issued to the Investor 600,000 shares
of Series A Stock at a price of $6.00 per share, for an aggregate price of
$3,600,000 ("Purchase Price"). In payment of the Purchase Price, Investor
delivered to the Company a promissory note in the amount of $3,600,000
(“Promissory Note”). The Promissory Note, which  matured on March 31,
2009, is guaranteed by Axel J. Kutscher (the “Guarantor”).





On July
6, 2009, the Registrant and Investor entered into a Forbearance Agreement and
General Release (the “Forbearance Agreement”).
Pursuant to the Forbearance Agreement, the Investor acknowledged and agreed
that, as of July 6, 2009, it was obligated to the Registrant under the
Promissory Note for the aggregate sum of $1,940,208 (the “Indebtedness”), which
represents the unpaid principal amount as of such date plus a late charge equal
to three percent (3%) of the unpaid principal amount. In exchange for the
Registrant’s agreement to forbear from exercising its rights under the
Promissory Note and Guaranty, the Investor has agreed to pay the Indebtedness by
making monthly payments in the amount of $140,000 commencing on the first
business day of September 2009 and continuing on the first business day of each
succeeding month thereafter until the Indebtedness is paid in full. In
addition, as of December 31, 2009, the Company had only received
approximately $148,000 since the inception of the Forbearance Agreement, and
therefore the Investor was technically in default. The Company has not chosen to
enforce the remedies under the Forbearance Agreement or the Stock Purchase
Agreement as of the filing of this Form 10-K.





As of
February 11, 2010, Investor owed Registrant $1,803,632 pursuant to the
Promissory Note, in the original principal amount of $3,600,000, which was
issued in connection with the Stock Purchase Agreement, as modified by
the  Forbearance Agreement. On February 11, 2010, the Registrant
entered into an Agreement on the Assumption of Debt (“Agreement”) among the
Registrant, btd biotech development GmBH (“Assignee”), and Axel J. Kutscher
(“Guarantor”). Pursuant to the Agreement, Registrant consented to Assignee’s
assumption of the obligations owed to Registrant by Investor under the Note,
Stock Purchase Agreement, and Forbearance Agreement. The Guarantor consented to
the assumption of the obligations owed to Registrant by Investor and
acknowledged, agreed, and consented to the continuing validity of his
guaranty.





For
additional information see the "Preferred Stock" section of Note 3 to the
Company's consolidated financial statements included elsewhere
herein.





The other
information required by Item 701 of Regulation S-K relating to the transaction
described in the preceding paragraphs was included in the Company's Forms 8-K
filed with the SEC on June 11, 2008, July 6, 2009 and February 11,
2010.


9


ITEM 6. SELECTED FINANCIAL
DATA.





An SRC is
not required to provide any information in response to Item 301 of Regulation
S-K.





ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS





CAUTIONARY
STATEMENT





This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. 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 management 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 expenses, and other specific risks that
may be alluded to in this Annual Report or in other reports filed with the
SEC 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 management or any
other person that the objectives or plans of the Company will be
achieved.





See page
one for additional information regarding forward-looking
statements.





The
Company currently generates minor non-operating revenue from its out-licensing
activities and does not expect to report any significant operating 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 assurance as to the level of operating revenues, if any, the
Company may actually achieve from its planned principal operations.





OVERVIEW





The
Company specializes in the research, development and marketing of drugs for
inflammatory diseases with Elafin as its first project. The Company's management
deems Elafin to be one of the most prospective substances in the treatment of
serious tissue and muscle damage. Independently conducted animal experiments
have indicated that Elafin may have benefits in the treatment of tissue and
muscle damage caused by insufficient oxygen supply and therefore may be useful
in the treatment of heart attacks, serious injuries and in the course of organ
transplants. Other applications have yet to be determined.





10


The
Company intends to implement Elafin as a drug in the treatment of inflammatory
diseases, and intends to achieve governmental approval in Europe first.
Currently, management estimates that it will take at least three years to
achieve its first governmental approval for the use of Elafin as a drug for the
first indication.





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





In August
2007, the Company's subsidiary entered into an agreement with Minapharm for
clinical development, production and marketing of Elafin. We have granted
Minapharm the right to exclusively market Elafin in Egypt and certain Middle
Eastern and African countries. Proteo received an upfront payment, and will
receive milestone-payments and royalties on net product sales. In addition,
Minapharm will take over the funding of clinical research activities for the
designated region. In December 2008 the responsible authority in Cairo granted
approval for a Phase II clinical trial to study the efficacy of Elafin on kidney
transplant patients.





In
January 2008 we entered into an agreement with Stanford University in
California, to cooperate in preclinical studies related to Elafin's treatment of
pulmonary arterial hypertension. Proteo will provide support for animal
experiments conducted by Marlene Rabinovitch, Research Director of the Vera
Moulton Wall Center for Pulmonary Vascular Disease at Stanford University who is
a renowned expert in the field, and her group at the university.





In August
2008 the Company's subsidiary received the approval for a Phase II clinical
trial with Elafin by the German Federal Institute for Drugs and Medical Devices
(BfArM). In this randomized, placebo-controlled Phase II trial the effect of
Elafin on inflammatory parameters will be investigated in patients undergoing
esophagectomy for esophagus carcinoma. The trial will be performed at the
Department of General and Thoracic Surgery, University Medical Center
Schleswig-Holstein, Campus Kiel. Patient recruitment was started in November
2008. The trial conduct was initially planned for one year. In summer 2009 it
became apparent that the clinical trial center could not recruit sufficient
numbers of patients to meet the planning. Thus, the Company has extended the
monocentric trial to a multicentric trial. In December 2009 all regulatory
approvals were obtained to expand the trial. Two additional trial centers
started recruiting patients and the trial should be completed by
mid-2010.





In May
2009 the Company has submitted an application for Orphan Medicinal Product
Designation to the EMEA (the European FDA equivalent). Subsequent to November 5,
2009, the Committee for Orphan Medical Products of the EMEA issued a
positive opinion recommending the granting of orphan medicinal product
designation for recombinant human elafin for treatment of esophagus carcinoma.
On January 28, 2010 the orphan designation was granted by the European
Commission.





RESULTS
OF OPERATIONS





OPERATING
EXPENSES





The
Company's operating expenses for the year ended December 31, 2009 were
approximately $901,000, a decrease of approximately $93,000 over the year ended
December 31, 2008. This decrease is due to decreases in general and
administrative and research and development expenses during the year ended
December 31, 2009 of approximately$70,000 and $23,000,
respectively.   General and administrative expenses decreased
primarily due to decreased accounting and legal fees during 2009.





11





INTEREST
AND OTHER INCOME





Interest
and other income for the year ended December 31, 2009 was approximately $44,000,
a decrease of $61,000 from the year ended December 31, 2008. Interest income
decreased by approximately $38,000, miscellaneous income decreased by
approximately $51,000, and other expenses increased by approximately
$28,000.





FOREIGN
CURRENCY TRANSLATION ADJUSTMENTS





We
experienced a gain of approximately $37,000 in foreign currency translation
adjustments during the year ended December 31, 2009. For the year ended December
31, 2008, the Company recognized a loss of approximately $91,000. This
represents a net increase of approximately $128,000. The increase is primarily
due to a strengthening U.S. Dollar (our reporting currency) compared to the Euro
(our functional currency) during 2009.





INCOME
TAXES





The
Company has a deferred tax asset of approximately $1,879,000 and $1,593,000 at
December 31, 2009 and 2008, respectively, relating primarily to tax net
operating loss carryforwards, as discussed below, and timing differences related
to the recognition of accrued licensing fees.  Full valuation
allowances have been established against these deferred tax assets due to going
concern issues.





As of
December 31, 2009, the Company had tax net operating loss carryforwards ("NOLs")
of approximately $1,203,000 and $4,711,000 (3,287,000 Euros) available to offset
future taxable Federal and foreign income, respectively. The Federal NOL expires
in varying years through 2025. 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 Federal tax NOLs
could be restricted.





LIQUIDITY
AND CAPITAL RESOURCES





Since our
inception we have raised a total of (i) 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, and
(ii) $1,869,000 from the sale of 600,000 shares of the Company's non-voting
Series A Preferred Stock. The balance of the purchase price for the Series A
Preferred Stock is evidenced by a promissory note which, as of December 31,
2009, had a principal balance of $1,731,306. See Note 3 to the consolidated
financial statements included elsewhere herein for the payment terms under the
promissory note.





The
Company has cash and cash equivalents approximating $689,000 as of December 31,
2010. This is a decrease over the December 31, 2008 balance of approximately
$1,237,000, mainly due to operating and research and development
expenditures in excess of receipts on the promissory note receivable resulting
from the sale of the Company's Series A Preferred Stock.





Management
believes that the Company will not generate any significant operating revenues
for at least the next three years, nor will it have sufficient cash to fund
operations. As a result, the Company's success will largely depend on its
ability to generate revenues from out-licensing activities, secure additional
funding through the sale of its Common/Preferred Stock and/or the sale of debt
securities. There can be no assurance, however, that the Company will be able to
generate revenues from out-licensing activities and/or 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.





12


GOING
CONCERN





The
Company's independent registered public accounting firm has stated in their
Auditor's Report included in this Form 10-K 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.





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





The discussion
and analysis of our results of operations, liquidity and capital resources
is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.





The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. We base our
estimates on historical and anticipated results and trends and on various other
assumptions that we believe are reasonable under the circumstances, including
assumptions as to future events. These estimates form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. By their nature, estimates are subject to
an inherent degree of uncertainty. Actual results may differ from our
estimates.





The
following represents a summary of our critical accounting policies, defined as
those policies that we believe are: (a) the most important to the portrayal
of our financial condition and results of operations, and (b) that require
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the matters that are inherently
uncertain. We discuss each of these policies below, as well as the estimates and
judgments involved. We also have other policies that we consider key accounting
policies; however, these policies do not meet the definition of critical
accounting estimates, because they do not generally require us to make estimates
or judgments that are difficult or subjective.





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 $317,000 and $279,000 at December 31, 2009 and
2008, respectively.





13


INCOME
TAXES





The
Company accounts for income taxes using the liability method in accordance with
the Income Taxes Topic of the ASC. 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.





As of
December 31, 2009 and 2008, the Company did not increase or decrease the
liability for unrecognized tax benefit related to uncertain tax positions in
prior periods nor did the Company increase its liability for any uncertain tax
positions in the current year. Furthermore, there were no adjustments to the
liability or lapse of any statutes of limitation or settlements with taxing
authorities.





The
Company expects resolution of unrecognized tax benefits, if created, would occur
while the 100% valuation allowance of deferred tax assets is maintained;
therefore, the Company does not expect to have any unrecognized tax benefits
that, if recognized, would affect its effective income tax rate.





The
Company will recognize interest and penalty related to unrecognized tax benefits
and penalties as income tax expense. As of December 31, 2009, the Company has
not recognized any liabilities for penalty or interest as the Company does not
have any liability for unrecognized tax benefits.





The
Company is subject to taxation in the US and various states. The Company's 2005
through 2009 tax years are subject to examination by the taxing authorities.
With few exceptions, the Company is no longer subject to U.S. federal, state,
local or foreign examinations by taxing authorities for years before
2005.





COMPREHENSIVE
LOSS





Total
comprehensive 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, other comprehensive loss
represents the foreign currency translation adjustments, which are recorded as
components of stockholders' equity.





14


LOSS
PER COMMON 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 available to common stockholders by the weighted average
shares outstanding assuming all dilutive potential common shares were issued.
There were no dilutive potential common shares outstanding at December 31, 2009
or 2008.





ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





A SRC
is not required to provide any information in response to Item 305 of Regulation
S-K.





ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
information required by this item is submitted as a separate section of this
report immediately following the signature page.





ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES





None.





ITEM
9A(T) - CONTROLS AND PROCEDURES





Under the
supervision and with the participation of management, including Birge Bargmann,
our chief executive officer and chief financial officer, we have evaluated the
effectiveness of the Company’s disclosure controls and procedures as defined in
Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the
period covered by this Annual Report on Form 10-K. Based on that
evaluation, Ms. Bargmann has concluded that these controls and procedures
were effective as of December 31, 2009, including those to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the SEC, and is accumulated and
communicated to management, including the principal executive officer  and
the principal financial officer, as appropriate, to allow for timely decisions
regarding required disclosure.





REPORT
OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





The
Management of Proteo is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.





The
Company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, (iii) provide reasonable assurance that
receipts and expenditures of the company are being made only in accordance with
authorization of management and directors of the company, and (iv) provide
reasonable assurance regarding prevention or timely detection of the
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.





15


Management
has assessed the Company's internal control over financial reporting as of
December 31, 2009. The assessment was based on criteria for effective
internal control over financial reporting described in theInternal Control—Integrated
Framework  issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on the assessment, Management believes that
the Company maintained effective internal control over financial reporting as of
December 31, 2009.





This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management's report in this annual report.





CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
have been no significant changes in the Company's internal control over
financial reporting during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Inherent limitations exist
in any system of internal control including the possibility of human error and
the potential of overriding controls. Even effective internal controls can
provide only reasonable assurance with respect to financial statement
preparation. The effectiveness of an internal control system may also be
affected by changes in conditions.





ITEM
9B - OTHER INFORMATION





None.





PART
III





ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





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





NAME
            AGE
            POSITIONSBirge
      Bargmann
            48
            President,
      Chief Executive Officer,Chief
      Financial Officer and DirectorDr.
      Barbara Kahlke
            45
            SecretaryProfessor
      Oliver Wiedow, MD.
            52
            DirectorProf.
      Hartmut Weigelt, Ph.D.
            64
            Director





BIOGRAPHICAL
INFORMATION





Birge
Bargmann has served as our President, Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO") 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 2000 to 2005. Since 1989, Ms. Bargmann has worked as a
medical technique assistant engaged in the Elafin project at the University of
Kiel. She co-developed and carried out procedures to detect and to purify
Elafin.





16





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
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.





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.





Prof.
Hartmut Weigelt, Ph.D. has served as a Director of the Company since December
2000. Prof. Weigelt was a member of the Supervisory Board of Proteo Biotech AG
from 2000 to 2003. Since 1996, Prof. Weigelt has served as the managing director
of Eco Impact GmbH which he co-founded. Prof. Weigelt was a co-founder of the
first German private university, Witten/Herdecke and he is currently Chief
Scientific Officer ("CSO") of MedEcon Ruhr GmbH, and head of the Department of
Dental Biomedicine at the University of Applied Sciences in Hamm
(Northrhine-Westphalia, Germany). Prof. 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 and performs some of the same duties 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 has sufficient
knowledge and experience necessary to fulfill the duties and obligations that an
audit committee would have. The Company does not have a formal compensation
committee. The Board of Directors, acting as a compensation committee,
periodically meets to discuss and deliberate on issues surrounding the terms and
conditions of executive officer compensation.







17


FAMILY
RELATIONSHIPS





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





INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS





To the
best of the management'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
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 ETHICAL CONDUCT





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.us.





ITEM
11 - EXECUTIVE COMPENSATION





The
following table sets forth the total compensation earned over each of the past
two fiscal years ended December 31, 2009 by each person who served as the
principal executive officer of Proteo during fiscal years ended 2009 and 2008.
There were no other executive officers who had compensation of $100,000 or more
during fiscal years ended 2009 and 2008.





SUMMARY
COMPENSATION TABLE





Name
      and Principal Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
            Non-Equity
              Incentive
      Plan
              Compensation
              (#)
            Non-Qualified
              Deferred
              Compensation
              Earnings
              ($)
            All
      Other
              Compensation
              ($)
            Total
              Compensation
              ($)Birge
      Bargmann
            2008
            $  141,250
            -0-
            -0-
            -0-
            -0-
            -0-
            -0-
            141,250(Chief
      ExecutiveOfficer
      and Chief
            2009
            $  133,888
            -0-
            -0-
            -0-
            -0-
            -0-
            -0-
            133,888Financial
      Officer)





Ms.
Bargmann’s salary is paid by the Company’s wholly owned subsidiary Proteo
Biotech AG.


18


OPTION/STOCK
APPRECIATION RIGHTS GRANTS TABLE





The
Company does not have a stock option plan, and has not granted any stock
options or stock appreciation rights to date.





AGGREGATED
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE





Not
applicable.





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





The
Company does not have any equity compensation plans.





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.





EMPLOYMENT
AND CONSULTING AGREEMENTS





The
Company has no employment contracts with any of its officers or directors and
maintains no retirement, fringe benefit or similar plans for the benefit of its
officers or directors. However, Ms. Bargmann does have an employment contract
with the Company’s wholly owned subsidiary Proteo Biotech AG, which is described
below. The Company may, however, enter into employment contracts with its
officers and key employees, adopt various benefit plans and begin paying
compensation to its officers and directors as it deems appropriate to attract
and retain the services of such persons.  The Company does not pay fees to
directors who are not executive officers for their attendance at
meetings of the Board of Directors or its committees; however, the Company
may adopt a policy of making such payments in the future. The Company will
reimburse out-of-pocket expenses incurred by directors in attending Board and
committee meetings.





COMPENSATION
COMMITTEE AND INSIDER PARTICIPATION





The
current Board of Directors includes Birge Bargmann, who also serves as an
executive officer of the Company. As a result, this director discusses and
participates in deliberations of the Board of Directors on matters relating to
the terms of executive compensation. In this regard, a director whose executive
compensation is voted upon by the Board of Directors must abstain from such
vote.





REPORT
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION





The
following statement made by the Board of Directors, sitting as a Compensation
Committee, shall not be deemed incorporated by reference into any filing under
the Securities Act or the Exchange Act, and shall not otherwise be deemed filed
under either of such Acts.





The
Company does not have a formal compensation committee and the Company’s officers
receive no compensation from the Company at this time.  Ms. Bargmann,
our President, Chief Executive Officer and Chief Financial Officer, receives
compensation from our wholly-owned subsidiary, Proteo Biotech AG. The
Supervisory Board of Proteo Biotech AG entered into an employment contract with
Ms. Bargmann on August 1, 2007. The contract became effective on August 1, 2007
and expires on July 31, 2010. Pursuant to the agreement, Ms. Bargmann received a
salary of 8,000 Euro per month, which amounted to total annual compensation of
$141,000 for the year ended December 31, 2008 and $134,000 for the year ended
December 31, 2009.  The supervisory Board and Ms. Bargmann are obliged
to negotiate the compensation at any time on the request of either party taking
into consideration the economic performance of the Company. If no
understanding can be reached within one month, the requesting party is allowed
to terminate the agreement three months after at month’s end.





19


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth, as of December 31, 2009, 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.





Name
      of Beneficial Owner
            
            Number
      of Common Shares Beneficially Owned (1)
            
            Percent
      of ClassProf.
      Oliver Wiedow, M.D.
            
            10,680,000
            
            44.7%Birge
      Bargmann
            
            2,000,000
            
            8.4%Dr.
      Barbara Kahlke
            
            10,000
            
            *Prof.
      Hartmut Weigelt, Ph.D.
            
            72,500
            
            *Holger
      Pusch
            
            20,000
            
            *All
      directors and executive officers as a group
              (5
      persons)
            
            12,782,500
            
            53.5%


_________________


* less
than 1%


(1) Based
on 23,879,350 common shares outstanding as of December 21, 2009.





ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Pursuant
to a 30-year License Agreement we have 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, we agreed to pay licensing fees of 110,000
Euro per year, for a term of six years through the year ending December 31,
2006, for a total of 660,000 Euros. This equated to annual license fees of
approximately $130,000 for the year ending December 31, 2005 and $140,000 for
the year ending December 31, 2006. We also agreed to refund all expenses needed
to maintain such patents (e.g., patent fees, legal fees, etc).





As of
December 31, 2007, we have accrued $927,900 of licensing fees payable to Dr.
Wiedow. 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 in 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. In December 2007, the Company paid to Dr. Wiedow 30,000 Euros
(approx. $43,000). No other payments had been made to Dr. Wiedow as of December
31, 2007, which was a technical breach of the agreement. Dr. Wiedow waived such
breach and deferred the prior year payments to 2008.





On
December 23, 2008, we entered into an Amendment Agreement to the License
Agreement with Dr. Oliver Wiedow (the "Amendment"). Pursuant to the original
license agreement, which was entered into on December 30, 2000, we agreed to pay
Dr. Wiedow an annual license fee of 110,000 Euros for a period of six years. No
payments were made through fiscal year 2003. In 2004, the original license
agreement was amended to require us to make annual payments of 30,000 Euros, to
be paid on July 15 of each year, beginning in 2004. Such annual payment could be
increased to 110,000 Euros by June 1 of each year based on an assessment of our
financial ability to make such payments. Except as described in the preceding
paragraph, no other payments have been made under the original license agreement
and the amount payable to Dr. Wiedow as of December 31, 2008 was 630,000
Euros.





Pursuant
to the Amendment, Dr. Wiedow agreed that we shall pay the 630,000 Euros to him
as follows: for fiscal years 2008 to 2012, we shall pay Dr. Wiedow 30,000 Euros
per year, and for fiscal years 2013 to 2016, we shall pay Dr. Wiedow 120,000
Euros per year. The foregoing payments shall be made on or before December 31 of
each fiscal year. In December 2008 the Company paid Dr. Wiedow 30,000
Euros.  No other payments have been made to Dr. Wiedow as of December
31, 2009, which is a technical breach of the agreement. Dr. Wiedow waived such
breach and deferred the prior year payments to 2010.   While the
total amount owed does not currently bear interest, the Amendment provides that
any late payment shall be subject to interest at an annual rate equal to the
German Base Interest Rate (1.6% as of January 1, 2009) plus six percent. In the
event that our financial condition improves, the parties can agree to increase
and/or accelerate the payments.





20


The
Amendment also modified the royalty payment such that we will not only pay a
three percent royalty on gross revenues from our sale of products based on
the licensed technology, but also three percent of the license fees
(including upfront and milestone payments and running royalties) received by us
or our subsidiary from the sublicensing of the licensed technology.





On
September 28, 2006, Dr. Wiedow entered into an agreement to contribute 50,000
Euros (approximately $63,000) 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 years ended December 31, 2007
and 2006, losses of 50,000 Euros (approximately $63,000) were allocated against
the contributed capital account, which is presented as minority interest in the
profits and losses of Proteo Biotech on the accompanying statements of
operations and comprehensive loss.





The
disclosure requirements of Item 407(a) of Regulation S-K are not applicable to
this filing.





ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES





AUDIT
FEES:





We were
billed approximately $85,000 and $83,000 for the fiscal years ended December 31,
2009 and 2008, respectively, for professional services rendered by the principal
accountant for the audit of the our annual consolidated financial statements and
the review of our quarterly unaudited consolidated financial
statements.





AUDIT
RELATED FEES:





None





TAX
FEES:





We were
billed approximately $5,500 and $5,500 for the fiscal years ended December 31,
2009 and 2008, respectively, for professional services rendered by the principal
accountant for tax compliance.





ALL
OTHER FEES:





There
were no other professional services rendered by our principal accountant during
the two years ended December 31, 2009 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.





PART
IV





Item 15.    Exhibits
and Financial Statement Schedules





(a)(1)Financial
Statements.    Reference is made to the Index to
Consolidated Financial Statements on page F-1 for a list of financial statements
filed as a part of this Annual Report.





(2)Financial Statement
Schedules.    All financial statement schedules are
omitted because of the absence of the conditions under which they are required
to be provided or because the required information is included in the financial
statements listed above and/or related notes.





(3)List of
Exhibits.    The following is a list of exhibits
filed as a part of this Annual Report on Form 10-K.





Exhibit No.
            
            Description21
            
            List
      of Subsidiaries of Proteo, Inc.31.1
            
            Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act
      200231.2
            
            Certification
      of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act
      200232
            
            Certification
      of Chief Executive Officer and Chief Financial Officer under Section 906
      of the Sarbanes-Oxley Act 2002


21


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.





PROTEO,
      INC.
              (Registrant)Dated:
      March 26, 2010
            By:
            /s/ Birge
      BargmannBirge
      BargmannChief
      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
              Chief
      Financial Officer
            March
      26, 2010Birge
      Bargmann/s/
      Oliver Wiedow, M.D.
            Director
            March
      26, 2010Oliver
      Wiedow, M.D./s/
      Hartmut Weigelt, Ph.D.
            Director
            March
      26, 2010Hartmut
      Weigelt, Ph.D.








22


PROTEO,
INC. AND SUBSIDIARY


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS











Annual
      Consolidated Financial Statements:Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
            F-3Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2009 and 2008 and for the Period From November 22, 2000
      (Inception) Through December 31, 2009
            F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2009
      and 2008 and for the Period FromNovember
      22, 2000 (Inception) Through December 31, 2009
            F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and 2008
      and for the Period fromNovember
      22, 2000 (Inception) Through December 31, 2009
            F-8Notes
      to Consolidated Financial Statements
            F-9










F-1


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 sheets of Proteo, Inc. and
Subsidiary (collectively the "Company"), a Development Stage Company, as of
December 31, 2009 and 2008, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity and cash flows for the
years ended December 31, 2009 and 2008, and for the period from November 22,
2000 (Inception) to December 31, 2009. 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 audit 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, 2009 and 2008, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2009 and
2008, and for the period from November 22, 2000 (Inception) to December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As reported 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 of December 31, 2009, the Company's deficit accumulated during the
development stage approximated $6.8 million. 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.














March 26,
2010


Newport
Beach, California





F-2


PROTEO,
INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE COMPANY)


CONSOLIDATED
BALANCE SHEETS





December
      31,
            
            
            December
      31,ASSETS
            
            2009
            
            
            2008CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            689,126
            
            
            $
            1,237,450Research
      supplies inventory
            
            
            581,919
            
            
            
            114,650Prepaid
      expenses and other current assets
            
            
            67,469
            
            
            
            191,5991,338,514
            
            
            
            1,543,699PROPERTY
      AND EQUIPMENT, NET
            
            
            232,469
            
            
            
            265,245$
            1,570,983
            
            
            $
            1,808,944LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued liabilities
            
            $
            190,627
            
            
            $
            138,225Accrued
      licensing fees
            
            
            85,998
            
            
            
            42,291276,625
            
            
            
            180,516LONG
      TERM LIABILITIESDeferred
      fees
            
            
            117,230
            
            
            
            115,300Accrued
      licensing fees
            
            
            773,982
            
            
            
            803,529891,212
            
            
            
            918,829COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYNon-voting
      preferred stock, par value $0.001 per share; 10,000,000 shares authorized;
      630,000 and 600,000 shares issued and outstanding at December 31,
      2009 and 2008, respectively (Liquidation preference - Note
    3)
            
            
            630
            
            
            
            600Common
      stock, par value $0.001 per share; 300,000,000shares authorized;
      23,879,350 shares issued and outstanding
            
            
            23,880
            
            
            
            23,880Additional
      paid-in capital
            
            
            8,567,634
            
            
            
            8,567,634Note
      receivable for sale of preferred stock
            
            
            (1,731,306
            )
            
            
            (2,245,389
            )Accumulated
      other comprehensive income
            
            
            316,528
            
            
            
            279,280Deficit
      accumulated during development stage
            
            
            (6,774,220
            )
            
            
            (5,916,406
            )Total
      Proteo, Inc. Stockholders' Equity
            
            
            403,146
            
            
            
            709,599Noncontrolling
      Interest
            
            
            -
            
            
            
            -Total
      Stockholders' Equity
            
            
            403,146
            
            
            
            709,599Total
      Liabilities and Stockholders' Equity
            
            $
            1,570,983
            
            
            $
            1,808,944


SEE
ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
  F-3




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 AND FOR
THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31,
2009
 
 2009
              
              
              2008
              
              
              NOVEMBER
      22, 2000 (INCEPTION)THROUGH DECEMBER 31,
                2009CONSOLIDATED
      STATEMENTS OF OPERATIONSREVENUES
              
              $
              -
              
              
              $
              -
              
              
              $
              -EXPENSESGeneral
      and administrative
              
              
              388,371
              
              
              
              458,023
              
              
              
              4,374,697Research
      and development
              
              
              513,080
              
              
              
              536,365
              
              
              
              2,665,709901,451
              
              
              
              994,388
              
              
              
              7,040,406INTEREST
      AND OTHER INCOME (EXPENSE), NET
              
              
              43,667
              
              
              
              104,506
              
              
              
              203,212NET
      LOSS
              
              
              (857,784
              )
              
              
              (889,882
              )
              
              
              (6,837,194
              )LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
              
              
              -
              
              
              
              -
              
              
              
              63,004NET
      LOSS ATTRIBUTABLE TO PROTEO, INC.
              
              
              (857,784
              )
              
              
              (889,882
              )
              
              
              (6,774,190
              )PREFERRED
      STOCK DIVIDEND
              
              
              (30
              )
              
              
              -
              
              
              
              (30
              )NET
      LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
              
              $
              (857,814
              )
              
              $
              (889,882
              )
              
              $
              (6,774,220
              )BASIC
      AND DILUTED LOSS ATTRIBUTABLE TO PROTEO, INC.COMMON
      SHAREHOLDERS
              
              $
              (0.04
              )
              
              $
              (0.04
              )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
              
              
              23,879,350
              
              
              
              23,879,350CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE LOSSNET
      LOSS ATTRIBUTABLE TO PROTEO, INC.
              
              $
              (857,784
              )
              
              $
              (889,882
              )
              
              $
              (6,774,190
              )FOREIGN
      CURRENCY TRANSLATION ADJUSTMENTS
              
              
              37,248
              
              
              
              (91,098
              )
              
              
              316,528COMPREHENSIVE
      LOSS
              
              $
              (820,536
              )
              
              $
              (980,980
              )
              
              $
              (6,457,662
              )
 
 SEE
ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
 
 F-4





PROTEO, INC. AND
SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2009
  Preferred
      Stock Shares
                
                
                Amount
                
                
                Common
      Stock Shares
                
                
                Amount
                
                
                Additional
      Paid-in Capital
                
                
                Stock
      Subscriptions Receivable
                
                
                Accumulated
      Other Comprehensive Income (Loss)
                
                
                Deficit
      Accumulated During Development Stage
                
                
                TotalBALANCE
      - 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
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                150,000Reorganization
      with Proteo Biotech AG
                
                
                -
                
                
                
                -
                
                
                
                2,500,000
                
                
                
                2,500
                
                
                
                6,009
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,509Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (60,250
                )
                
                
                (60,250
                )BALANCE
      - December 31, 2000
                
                
                -
                
                
                
                -
                
                
                
                7,350,000
                
                
                
                7,350
                
                
                
                155,959
                
                
                
                (4,800
                )
                
                
                -
                
                
                
                (60,250
                )
                
                
                98,259Common
      stock issued for cash at $3.00 per share
                
                
                -
                
                
                
                -
                
                
                
                450,000
                
                
                
                450
                
                
                
                1,349,550
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,350,000Cash
      received for common stock subscribed at $0.001 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,800
                
                
                
                -
                
                
                
                -
                
                
                
                4,800Common
      stock issued for cash at $0.40 per share
                
                
                -
                
                
                
                -
                
                
                
                201,025
                
                
                
                201
                
                
                
                80,209
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                80,410Common
      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
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,200Other
      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
   F-5
  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
                
                
                
                -
                
                
                
                -
                
                
                
                406,440Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                116,057
                
                
                
                -
                
                
                
                116,057Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,105,395
                )
                
                
                (1,105,395
                )BALANCE
      - December 31, 2002
                
                
                -
                
                
                
                -
                
                
                
                21,600,434
                
                
                
                21,601
                
                
                
                3,613,513
                
                
                
                (1,627,755
                )
                
                
                95,564
                
                
                
                (1,539,756
                )
                
                
                563,167Common
      stock issued for cash at $0.60 per share
                
                
                -
                
                
                
                -
                
                
                
                66,667
                
                
                
                67
                
                
                
                39,933
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                40,000Cash
      received for common stock subscribed at $0.40 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                387,800
                
                
                
                -
                
                
                
                -
                
                
                
                387,800Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                164,399
                
                
                
                -
                
                
                
                164,399Net
      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
                )
                
                
                535,162Common
      stock issued for cash at $0.40 per share
                
                
                -
                
                
                
                -
                
                
                
                412,249
                
                
                
                412
                
                
                
                164,588
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                165,000Cash
      received for common stock subscribed at $0.40 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                680,000
                
                
                
                -
                
                
                
                -
                
                
                
                680,000Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                93,186
                
                
                
                -
                
                
                
                93,186Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (639,746
                )
                
                
                (639,746
                )BALANCE
      - December 31, 2004
                
                
                -
                
                
                
                -
                
                
                
                22,079,350
                
                
                
                22,080
                
                
                
                3,818,034
                
                
                
                (559,955
                )
                
                
                353,149
                
                
                
                (2,799,706
                )
                
                
                833,602Common
      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
                
                
                
                -
                
                
                
                -
                
                
                
                435,284Other
      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
  F-6
  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
                
                
                
                -
                
                
                
                -
                
                
                
                414,590Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                61,737
                
                
                
                -
                
                
                
                61,737Net
      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
                )Cash
      received for common stock subscribed  at $0.60 per
      share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                862,081
                
                
                
                -
                
                
                
                -
                
                
                
                862,081Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                89,987
                
                
                
                -
                
                
                
                89,987Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (445,169
                )
                
                
                (445,169
                )BALANCE
      - December 31, 2007
                
                
                -
                
                
                
                -
                
                
                
                23,879,350
                
                
                
                23,880
                
                
                
                4,968,234
                
                
                
                -
                
                
                
                370,378
                
                
                
                (5,026,524
                )
                
                
                335,968Preferred
      stock subscribed at $6.00 per share
                
                
                600,000
                
                
                
                600
                
                
                
                -
                
                
                
                -
                
                
                
                3,599,400
                
                
                
                (3,600,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -Cash
      received for preferred stock subscribed at $2.26 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,354,611
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (91,098
                )
                
                
                -
                
                
                
                (91,098
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (889,882
                )
                
                
                (889,882
                )BALANCE
      - December 31, 2008
                
                
                600,000
                
                
                
                600
                
                
                
                23,879,350
                
                
                
                23,880
                
                
                
                8,567,634
                
                
                
                (2,245,389
                )
                
                
                279,280
                
                
                
                (5,916,406
                )
                
                
                709,599Cash
      received for preferred stock subscribed at $2.26 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                514,083
                
                
                
                -
                
                
                
                -
                
                
                
                514,083Preferred
      stock dividend
                
                
                30,000
                
                
                
                30
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (30
                )
                
                
                -Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                37,248
                
                
                
                -
                
                
                
                37,248Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (857,784
                )
                
                
                (857,784
                )BALANCE
      - December 31, 2009
                
                
                630,000
                
                
                $
                630
                
                
                
                23,879,350
                
                
                $
                23,880
                
                
                $
                8,567,634
                
                
                $
                (1,731,306
                )
                
                $
                316,528
                
                
                $
                (6,774,220
                )
                
                $
                403,146
  SEE
ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
 
 F-7
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 AND FOR
THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31,
2009
 
 2009
                
                
                2008
                
                
                NOVEMBER
      22,
                  2000
                  (INCEPTION)
                  THROUGH
                  DECEMBER
      31,2009-CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (857,784
                )
                
                $
                (889,882
                )
                
                $
                (6,774,190
                )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
                
                
                56,523
                
                
                
                59,279
                
                
                
                391,201Bad
      debt expense
                
                
                60,408
                
                
                
                0
                
                
                
                60,408Loss
      on disposal of equipment
                
                
                -
                
                
                
                -
                
                
                
                4,518Unrealized
      foreign currency transaction (gains) losses
                
                
                14,160
                
                
                
                (41,685
                )
                
                
                197,562Changes
      in operating assets and liabilities:Research
      supplies inventory
                
                
                (452,808
                )
                
                
                7,760
                
                
                
                (583,500
                )Prepaid
      expenses and other current assets
                
                
                63,497
                
                
                
                (119,520
                )
                
                
                (126,722
                )Accounts
      payable and accrued liabilities
                
                
                60,429
                
                
                
                7,004
                
                
                
                152,424Deferred
      revenue
                
                
                -
                
                
                
                120,341
                
                
                
                120,341Accrued
      licensing fees
                
                
                -
                
                
                
                (42,100
                )
                
                
                660,713-NET
      CASH USED IN OPERATING ACTIVITIES
                
                
                (1,055,575
                )
                
                
                (898,803
                )
                
                
                (5,897,245
                )-CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                
                
                (20,308
                )
                
                
                (5,284
                )
                
                
                (633,614
                )Cash
      of reorganized entity
                
                
                -
                
                
                
                -
                
                
                
                27,638-NET
      CASH USED IN INVESTING ACTIVITIES
                
                
                (20,308
                )
                
                
                (5,284
                )
                
                
                (605,976
                )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                
                
                -
                
                
                
                -
                
                
                
                1,792,610Proceeds
      from subscribed common stock and issuanceof preferred stock to
      related party
                
                
                514,083
                
                
                
                1,354,591
                
                
                
                5,059,669NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                514,083
                
                
                
                1,354,591
                
                
                
                6,852,279EFFECT
      OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASHAND CASH
      EQUIVALENTS
                
                
                13,476
                
                
                
                (15,799
                )
                
                
                340,068-NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (548,324
                )
                
                
                434,705
                
                
                
                689,126CASH
      AND CASH EQUIVALENTS--BEGINNING OF PERIOD
                
                
                1,237,450
                
                
                
                802,745
                
                
                
                --CASH
      AND CASH EQUIVALENTS--END OF PERIOD
                
                $
                689,126
                
                
                $
                1,237,450
                
                
                $
                689,126SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONPreferred
      stock dividend
                
                $
                30
                
                
                $
                -
                
                
                $
                30Common
      stock issued for subscriptions receivable
                
                $
                -
                
                
                $
                -
                
                
                $
                1,627,755Net
      assets (excluding cash) of reorganized entityreceived in exchange
      for equity securities
                
                $
                -
                
                
                $
                -
                
                
                $
                8,509Unpaid
      balance of note receivable for issuance ofpreferred
      stock
                
                $
                -
                
                
                $
                2,245,389
                
                
                $
                2,245,389
  SEE
ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
  F-8
  PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 ORGANIZATION/NATURE
OF BUSINESS
 
 Proteo,
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 between PMI and Trivantage. Subsequently, Trivantage changed its
name to Proteo, Inc. Effective December 31, 2004, PMI merged into Proteo, Inc..
PBAG and Proteo, Inc. are hereinafter collectively referred to as 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 significant revenues from
product sales. The Company believes that none of its planned products will
produce sufficient revenues in the near future. 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-9
  PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 DEVELOPMENT
STAGE AND GOING CONCERN MATTERS
 
 The
Company has been in the development stage since it began operations on November
22, 2000 and has not generated any revenues from operations and has incurred net
losses since inception of approximately $6,787,000. There is no assurance of any
future revenues. At December 31, 2009, the Company has working capital of
approximately $1,062,000, stockholders' equity of approximately $403,000,
and an accumulated deficit of approximately $6.8 million.
 
 The
Company will require substantial additional funding for continuing research and
development, obtaining regulatory approval, and for the commercialization of its
products.
 
 Management
has taken action to address these matters. They include:
  ·
                    Retention
      of experienced management personnel with particular skills in the
      development of such products.·
                    Attainment
      of technology to develop biotech products.·
                    Raising
      additional funds through the sale of debt and/or equity
      securities.
 
 The
Company's products, to the extent they may be deemed drugs or biologics, are
governed by the United States 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 placement of debt and/or
sales of 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-10
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 CONCENTRATIONS
 
 The
Company maintains substantially all of its cash in bank accounts at a private
German commercial bank. The Company's bank accounts at this
financial institution are presently protected by the voluntary Deposit
Protection Fund of The German Private Commercial Banks. As such, the
Company's bank is a member of this deposit protection fund. The Company has
not experienced any losses in these bank 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.
 
 OTHER
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 recombinant proteins for use in humans.
The Company has no experience in obtaining regulatory approvals
for 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 fluctuations in foreign currency exchange
rates. The Company does not utilize derivative instruments to hedge against
such exposure.
 
 PRINCIPLES
OF CONSOLIDATION
 
 The
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) and
include the accounts of Proteo, Inc. and Proteo Biotech AG, its wholly owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation.
  Effective
January 1, 2009, the Company adopted new guidance to the Consolidation Topic of
the Financial Accounting Standard Board’s (“FASB”) new Accounting Standards
Codification (“ASC” or “Codification”).  This guidance improves the
relevance, comparability and transparency of the financial information that a
company provides in its consolidated financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This standard requires
the Company to classify noncontrolling interests (previously referred to as
"minority interest") as part of consolidated net earnings and to include the
accumulated amount of noncontrolling interests as part of stockholders'
equity.
 
  F-11
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 PRINCIPLES
OF CONSOLIDATION (continued)
 
 The net
loss amounts the Company has previously reported are now presented as "Net loss
attributable to Proteo, Inc" and, as required by the Codification, earnings per
share continues to reflect amounts attributable only to the Company. Similarly,
in the presentation of stockholders' equity, the Company distinguishes between
equity amounts attributable to the Company's stockholders and amounts
attributable to the noncontrolling interest - previously classified as minority
interest outside of stockholders' equity. In addition to these financial
reporting changes, this guidance provides for significant changes in accounting
related to noncontrolling interests; specifically, increases and decreases in
the Company's controlling financial interests in consolidated subsidiaries will
be reported in equity similar to treasury stock transactions. If a change in
ownership of a consolidated subsidiary results in loss of control and
deconsolidation, any retained ownership interests are remeasured with the gain
or loss reported in net earnings. Except for presentation, the implementation of
this guidance did not have a material effect on the Company's consolidated
financial statements because a substantive contractual arrangement specifies the
attribution of net earnings and loss not to exceed the noncontrolling
interest.
 
 STARTUP
ACTIVITIES
 
 The Other
Expenses Topic (Start-Up Costs Sub-topic) of the ASC 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.
 
 GRANTS
 
 In the
past, the Company received grants from the German government which were 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 were 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 were recorded as a reduction of such property's
historical cost.
 
 Funds
were available at the earliest from January 1 of each budget year with
a funds request submitted on or before December 5 of the preceding year.
Funds reserved for each budget year may not be assigned, and funds not
requested by December 5 of each budget year expired.
 
 The
Company has not applied for any additional grants since the May 2004 amended
grant described in Note 6.
 
 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 (if any) 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.
 
 
 F-12
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS AND CERTAIN OTHER ASSETS/LIABILITIES
 
 The Fair
Value Measurements and Disclosures Topic of the ASC 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 cash equivalents,
accounts payable and accrued liabilities, approximate their fair value at
December 31, 2009 and 2008 due to their short-term nature. The Company does not
have any assets or liabilities that are measured at fair value on a recurring or
non-recurring basis during the years ended December 31, 2009 and 2008 and for
the period from November 22, 2000 (Inception) through December 31,
2009.
 
 FOREIGN
CURRENCY FINANCIAL REPORTING
 
 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' equity. Such
accumulated amount approximated $317,000 and $279,000 at December 31, 2009
and 2008, respectively.
 
 The
Company records payables related to a certain licensing agreement (Note 6) in
accordance with the Foreign Currency Matters Topic of the Codification.
Quarterly commitments under such agreement are denominated in Euros. For each
reporting period, the Company translates the quarterly amount to U.S. dollars at
the exchange rate effective on that date. If the exchange rate changes between
when the liability is incurred and the time payment is made, a foreign exchange
gain or loss results. The Company paid approximately $0 and $42,000 under
this licensing agreement during the years ended December 31, 2009 and 2008,
respectively, and did not realize any significant foreign currency
exchanges gains or losses. Prior to 2008 the Company paid approximately
$43,000 under such agreement.
 
 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 an unrealized foreign currency transaction gain (loss) of
approximately $(14,000) and $42,000 for the years ended December 31, 2009 and
2008, respectively, which are included in interest and other income (expense),
net in the accompanying consolidated statements of operations and comprehensive
loss.
   F-13
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
   1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 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.
 
 RESEARCH
SUPPLIES INVENTORY
 
 Research
supplies inventory is stated at cost, and is entirely comprised of research
supplies and materials that are expensed as consumed.
 
 LONG-LIVED
ASSETS
 
 Property
and equipment are recorded at cost and depreciated using
the straight-line method over their expected useful lives, which range from
3 to 14 years. Leasehold improvements are amortized over the expected
useful life of the improvement or the remaining 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 or 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.
 
 The
Codification 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. Assets to be disposed
are reported at the lower of the carrying amount or fair value less
costs to sell. Management believes that no indicators of impairment existed as
of or during the years ended December 31, 2009 and 2008. There can be
no assurance, however, that market conditions or demand for the Company's
products or services will not change which could result in long-lived asset
impairment charges in the future.
 
 REVENUE
RECOGNITION
 
 It is the
Company's intent to recognize revenues from future product sales at the
time of product delivery. The Company believes that once significant
operating revenues are generated, the Company's revenue recognition
accounting policies will conform to the Revenue Recognition Topic of the
Codification.
 
  F-14
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 RESEARCH
AND DEVELOPMENT
 
 Research
and development costs are charged to operations as incurred. Grant funds
received are reported as a reduction of research and development costs (see
Note 6).
 
 PATENTS
AND LICENSES
 
 The
Company does not own any patents or patents pending related to the
Elafin technology and instead operates under a technology license agreement
with a related party (see Note 6). Under such license agreement, the
Company has agreed to pay 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 the Income Taxes Topic of the ASC. 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.
 
 As of
December 31, 2009 and 2008, the Company did not increase or decrease the
liability for unrecognized tax benefit related to uncertain tax positions
in prior periods nor did the Company increase its liability for any
uncertain tax positions in the current year. Furthermore, there were no
adjustments to the liability or lapse of any statutes of limitation or
settlements with taxing authorities.
 
 The
Company expects resolution of unrecognized tax benefits, if created,
would occur while the 100% valuation allowance of deferred tax assets is
maintained; therefore, the Company does not expect to have any unrecognized
tax benefits that, if recognized, would affect its effective
income tax rate.
 
 The
Company will recognize interest and penalty related to unrecognized
tax benefits and penalties as income tax expense. As of December 31, 2009,
the Company has not recognized any liabilities for penalty or interest as
the Company does not have any liability for unrecognized tax
benefits.
 
 The
Company is subject to taxation in the US and various states. The
Company's 2005 through 2009 tax years are subject to examination by the
taxing authorities. With few exceptions, the Company is no longer subject
to U.S. federal, state, local or foreign examinations by taxing authorities
for years before 2005.
 
 
  F-15
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 ACCOUNTING
FOR STOCK-BASED COMPENSATION
 
 From
inception to December 31, 2009, the Company has not granted any
stock options, stock warrants, or stock appreciation rights, and has not
adopted any stock option plan.
 
 LOSS
PER COMMON 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 available to common stockholders by the
weighted average shares outstanding assuming all dilutive potential common
shares were issued. There were no dilutive potential common shares
outstanding at December 31, 2009 or 2008..
 
 COMPREHENSIVE
LOSS
 
 Total
comprehensive 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, other comprehensive loss represents the foreign currency
translation adjustments, which are recorded as components of stockholders'
equity.
 
 SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION
 
 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.
 
 SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS
 
 Effective
September 30, 2009, the Company adopted the FASB’s new Accounting Standard
Codification as the single source of authoritative accounting guidance under the
Generally Accepted Accounting Principles Topic.  The ASC does not
create new accounting and reporting guidance, rather it reorganizes GAAP
pronouncements into approximately 90 topics within a consistent
structure.  All guidance in the ASC carries an equal level of
authority.  Relevant portions of authoritative content, issued by the
SEC, for SEC registrants, have been included in the ASC.  After the
effective date of the Codification, all nongrandfathered, non-SEC accounting
literature not included in the ASC is superseded and deemed
nonauthoritative.  Adoption of the Codification also changed how the
Company references GAAP in its consolidated financial statements.
 
 The FASB
has issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events
(Topic 855): Amendments to
Certain Recognition and Disclosure Requirements. The amendments in the
ASU remove the requirement for an SEC filer to disclose a date through which
subsequent events have been evaluated in both issued and revised financial
statements. Revised financial statements include financial statements revised as
a result of either correction of an error or retrospective application of U.S.
GAAP. The FASB believes these amendments remove potential conflicts with the
SEC’s literature. All of the amendments in the ASU were effective upon issuance
(February 24, 2010).
 
  F-16
  PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
 
 In
January 2010, the FASB issued ASU No. 2010-02, Consolidation (Topic 810) –
Accounting and Reporting for Decreases in Ownership of a Subsidiary - A Scope
Clarification. This ASU clarifies that the scope of the decrease in
ownership provisions of Subtopic 810-10 and related guidance applies
to:
  ·
                  A
      subsidiary or group of assets that is a business or nonprofit
      activity;·
                  A
      subsidiary that is a business or nonprofit activity that is transferred to
      an equity method investee or joint venture; and·
                  An
      exchange of a group of assets that constitutes a business or nonprofit
      activity for a noncontrolling interest in an entity (including an equity
      method investee or joint
venture).





ASU
2010-02 also clarifies that the decrease in ownership guidance in Subtopic
810-10 does not apply to: (a) sales of in substance real estate; and (b)
conveyances of oil and gas mineral rights, even if these transfers involve
businesses. The amendments in this ASU expand the disclosure requirements about
deconsolidation of a subsidiary or derecognition of a group of assets to
include:





·
              The
      valuation techniques used to measure the fair value of any retained
      investment;·
              The
      nature of any continuing involvement with the subsidiary or entity
      acquiring the group of assets; and·
              Whether
      the transaction that resulted in the deconsolidation or derecognition was
      with a related party or whether the former subsidiary or entity acquiring
      the assets will become a related party after the
    transaction.





ASU
2010-02 is effective beginning in the period that an entity adopts FASB
Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements
- an amendment of ARB 51 (now included in Subtopic 810-10). If an entity has
previously adopted Statement 160, the amendments are effective beginning in the
first interim or annual reporting period ending on or after December 15,
2009.  The adoption of this update did not have a material impact on
the Company’s consolidated financial statements.





The FASB
also issued in January 2010, ASU No. 2010-01, Equity (Topic 505): Accounting for
Distributions to Shareholders with Components of Stock and Cash. The
amendments to the Codification in this ASU clarify that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend. This
ASU codifies the consensus reached in EITF Issue No. 09-E, "Accounting for Stock Dividends,
Including Distributions to Shareholders with Components of Stock and
Cash." ASU 2010-01 is effective for interim and annual periods ending on
or after December 15, 2009, and should be applied on a retrospective
basis.  The adoption of this update did not have a material impact on
the Company’s consolidated financial statements.





In August
2009, the FASB issued ASU 2009-05, Fair Value Measurements and
Disclosures (Topic 820): Measuring Liabilities at Fair Value, which
includes amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures—Overall, for the fair value measurement of liabilities and
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the techniques provided
for in this update. The adoption of this update did not have a material impact
on the Company’s consolidated financial statements.







F-17





PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008


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





SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS (continued)





In April
2009, the FASB issued additional guidance under the Fair Value Measurements and
Disclosures Topic of the ASC.  This update relates to determining fair
values when there is no active market or where the price inputs being used
represent distressed sales.  This update provides additional guidance
for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased.  Also included is guidance on
identifying circumstances that indicate a transaction is not
orderly.  The adoption of this guidance had no impact on the Company’s
consolidated financial statements.





In April
2009, the FASB issued additional guidance under the Financial Instruments Topic
of the ASC.  This update requires disclosures about the fair value of
financial instruments for interim reporting periods as well as in annual
financial statements.  This update also requires interim financial
reporting disclosures in summarized financial information at interim reporting
periods. The adoption of this guidance had no impact on the Company’s
consolidated financial statements.





In
April 2009, the FASB issued additional guidance under the Investments – Debt and
Equity Securities Topic of the ASC.  For debt securities, this
guidance replaces the management assertion that it has the intent and ability to
hold an impaired debt security until recovery with the requirement that
management assert if it either has the intent to sell the debt security or if it
is more likely than not the entity will be required to sell the debt security
before recovery of its amortized cost basis.  If management intends to
sell the debt security or it is more likely than not the entity will be required
to sell the debt security before recovery of its amortized cost basis, an other
than temporary impairment (“OTTI”) shall be recognized in earnings equal to the
entire difference between the debt security's amortized cost basis and its fair
value at the reporting date.  After the recognition of an OTTI, the
debt security is accounted for as if it had been purchased on the measurement
date of the OTTI, with an amortized cost basis equal to the previous amortized
cost basis less the OTTI recognized in earnings.  The update also
changes the presentation in the financial statements of non credit related
impairment amounts for instruments within its scope.  When the entity
asserts it does not have the intent to sell the security and it is more likely
than not it will not have to sell the security before recovery of its cost
basis, only the credit related impairment losses are to be recognized in
earnings and non credit losses are to be recognized in other comprehensive
income (“OCI”).  Additionally, this update provides for enhanced
presentation and disclosure of OTTIs of debt and equity securities in the
financial statements.  The adoption of this guidance had no impact on
the Company’s consolidated financial statements.





Effective
January 1, 2009, the Company adopted additional guidance to the Intangibles –
Goodwill and Other Topic of the FASB ASC.  This update amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible
asset.  The intent of this update is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset under accounting
for business combinations, and other U.S. GAAP.  The adoption of this
guidance did not have any impact on the Company's consolidated financial
statements.







F-18





PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008
  1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS (continued)





Effective
January 1, 2009, the Company adopted new guidance to the Business Combinations
Topic of the FASB ASC.  This guidance establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  The adoption of this guidance
had no impact on the Company's consolidated financial statements.  The
Company will apply this guidance prospectively to any business combination on or
after January 1, 2009 as required.





Effective
January 1, 2009, the Company adopted additional guidance under the Fair Value
Measurement and Disclosures Topic of the FASB ASC, which delays the effective
date of the adoption of new guidance under the Fair Value Measurements and
Disclosures Topic to January 1, 2009 for certain nonfinancial assets and
nonfinancial liabilities.  Examples of applicable nonfinancial assets
and nonfinancial liabilities to which this update applies include, but are not
limited to:





·
            Nonfinancial
      assets and nonfinancial liabilities initially measured at fair value in a
      business combination that are not subsequently remeasured at fair
      value;


·
            Reporting
      units measured at fair value in the goodwill impairment test as described
      in the Intangibles – Goodwill and Other Topic of the FASB ASC and
      nonfinancial assets and nonfinancial liabilities measured at fair value in
      the goodwill impairment test, if applicable;
and


·
            Nonfinancial
      long-lived assets measured at fair value for impairment assessment under
      the Property, Plant and Equipment Topic of the FASB
  ASC.





The
adoption of this update had no impact on the Company's consolidated financial
statements.





FUTURE
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS





In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. This ASU requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting. ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
application is permitted. The Company is currently evaluating the impact of this
statement on the consolidated financial statements.







F-19





PROTEO,
INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 AND 2008







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





FUTURE
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS (continued)





In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) -
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). ASU 2009-17 represents a revision to former FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. ASU 2009-17 also requires a reporting
entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that
involvement. A reporting entity will be required to disclose how its involvement
with a variable interest entity affects the reporting entity’s financial
statements. ASU 2009-17 is effective at the start of a reporting entity’s first
fiscal year beginning after November 15, 2009, or January 1, 2010, for a
calendar year-end entity. Early application is not permitted.  The
adoption of this update is not expected to result in a material impact to the
Company’s future consolidated financial statements.





In June
2009, the FASB issued Statements on Financial Accounting Standards (“SFAS”) No.
166, Accounting for Transfers
of Financial Assets—An Amendment of FASB Statement 140, which eliminates
the concept of qualified special purpose entities (QSPEs) and provides
additional criteria transferors must use to evaluate transfers of financial
assets. This standard modifies certain guidance contained in FASB ASC 860 and is
adopted into the Codification through the issuance of ASU 2009-16, Transfers and Servicing (Topic 860):
Accounting for Transfers of Financial Assets. In order to determine
whether a transfer is accounted for as a sale, the transferor must assess
whether it and all of its consolidated entities have surrendered control of the
financial assets. The standard also requires financial assets and liabilities
retained from a transfer accounted for as a sale to be initially recognized at
fair value. This standard is effective for fiscal years and interim periods
beginning after November 15, 2009, with adoption applied prospectively for
transfers that occur on or after the effective date.   The
Company is currently evaluating the impact of this statement on the consolidated
financial statements.





Except as
described above, in the opinion of management, neither the FASB, its Emerging
Issues Task Force, the AICPA, nor the SEC have issued any additional accounting
pronouncements that are expected to have material impact on the Company's future
consolidated financial statements.











F-20





PROTEO,
INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 AND 2008







2.
PROPERTY AND EQUIPMENT





Property
and equipment, all of which is located in Kiel, Germany, consist of the
following:





December
      31,2009
            
            
            2008Technical
      and laboratory equipment
            
            $
            442,319
            
            
            $
            422,855Plant
            
            
            211,819
            
            
            
            208,331Leasehold
      improvements
            
            
            5,329
            
            
            
            5,241Office
      equipment
            
            
            29,925
            
            
            
            36,639689,392
            
            
            
            673,066Less
      accumulated depreciation and amortization
            
            
            (456,923
            )
            
            
            (407,821
            )Total
            
            $
            232,469
            
            
            $
            265,245





Depreciation
and amortization expense included in general and administrative expense in the
consolidated statements of operations was approximately $57,000 and $59,000 for
the years ended December 31, 2009 and 2008,
respectively.





During
the two years ended December 31, 2009, there were no long-lived assets that were
considered to be impaired.








3. STOCKHOLDERS'
EQUITY





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 restricted 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.







F-21





PROTEO,
INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 AND 2008







3. STOCKHOLDERS'
EQUITY (continued)





COMMON
STOCK (continued)





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 "Organization/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.





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 "Organization/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. 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 it expired on 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. FID-Esprit paid the remaining balance in 2007.







F-22





PROTEO,
INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE COMPANY)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 AND 2008







3.
STOCKHOLDERS' EQUITY (continued)





PREFERRED
STOCK





The
Company is authorized to issue 10,000,000 shares of preferred
stock, $0.001 par value per share. Except as described below, the Board of
Directors has not designated any liquidation value, dividend rates or other
rights or preferences with respect to any shares of preferred
stock.





The Board
of Directors has designated 750,000 preferred shares as non-voting Series A
Preferred Stock. As more fully described in the Company’s Form 8-K filed with
the SEC on June 11, 2008. Holders of Series A Preferred Stock are entitled to
receive preferential dividends, if and when declared, at the per share rate of
twice the per share amount of any cash or non-cash dividend distributed to
holders of the Company's common stock. If no dividend is distributed to common
stockholders, the holders of Series A Preferred Stock are entitled to an annual
stock dividend payable at the rate of one share of Series A Preferred Stock for
each twenty shares of Series A Preferred Stock owned by each holder of Series A
Preferred Stock. The annual stock dividend shall be paid on June 30 of each year
commencing in 2009 and no stock dividends will be paid after December 31,
2011.





On June
9, 2008, the Company entered into a Preferred Stock Purchase Agreement ("Stock
Purchase Agreement") with FIDEsprit (the “Investor”), a common stockholder and
related party. Pursuant to the Stock Purchase Agreement, the Company sold and
issued to the Investor 600,000 shares of Series A Preferred Stock at a price of
$6.00 per share, for an aggregate price of $3,600,000 ("Purchase Price"). In
payment of the Purchase Price, the Investor delivered to the Company a
promissory note in the amount of $3,600,000 (the “Note”), which matured on March
31, 2009. During the years ended December 31, 2009 and 2008, the Company
received payments approximating $514,000 (including payments received under the
Forbearance Agreement, as described below) and $1,355,000, respectively, in
connection with the Stock Purchase Agreement. The unpaid principal balance of
the Series A Preferred Stock note receivable as of December 31, 2009, which
represents a technical default under the Note, approximated $1,731,000. The
Series A Preferred Stock note receivable is reported as a reduction of
stockholders' equity at December 31, 2009.




On July
6, 2009, the Company and Investor entered into a Forbearance Agreement and
General Release (the “Forbearance Agreement”) to renegotiate the terms of the
Note.  Pursuant to the Forbearance Agreement, the Investor
acknowledged and agreed that, as of July 6, 2009, it was obligated to the
Company under the Note for the aggregate sum of $1,940,208 (the “Indebtedness”),
which represents the unpaid principal amount as of such date plus a late charge
equal to three percent (3%) of the unpaid principal amount (approximately
$65,000).  In exchange for the Company’s agreement to forbear from
exercising its rights under the Note and Guaranty, the Investor has agreed to
pay the Indebtedness by making monthly payments in the amount of $140,000
commencing on the first business day of September 2009 and continuing on the
first business day of each succeeding month thereafter until the Indebtedness is
paid in full.  As of December 31, 2009, the Company had only received
approximately $148,000 since the inception of the Forbearance Agreement
(approximately $5,000 of which was applied to the late charge), and therefore
the Investor was technically in default (see Note 8). The receivable for
late fees was fully reserved at December 31, 2009.





Effective
June 30, 2009, the Company declared a stock dividend of 30,000 shares of Series
A Preferred Stock payable to its Series A Preferred Stock holders pursuant to
the Stock Purchase Agreement.







F-23


PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008







4. NONCONTROLLING
INTEREST





On
September 28, 2006, a shareholder of the Company entered into an agreement
to contribute 50,000 Euros (approximately $63,000) 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. Prior to 2008, allocated losses reduced
the minority stockholder's capital account to $0, which has been reported
as net loss attributable to noncontrolling interest in the
accompanying consolidated statements of operations.





5. INCOME
TAXES





There is
no material income tax expense recorded for the years ended December 31,
2009 or 2008 due to the Company's net losses.





Income
tax expense for the years ended December 31, 2009 and 2008 differed
from the amounts computed by applying the U.S. federal income tax rate of
34 percent to the pretax loss for the following reasons:





2009
            
            
            2008Income
      tax benefit at U.S. federal statutory rates
            
            $
            (286,000
            )
            
            $
            (303,000
            )Change
      in valuation allowance
            
            
            286,000
            
            
            
            303,000State
      and local income taxes, net of federal income tax effect
            
            
            800
            
            
            
            800$
            800
            
            
            $
            800





The
Company has a deferred tax asset and an equal amount of valuation
allowance of approximately $1,879,000 and $1,593,000 at December 31,
2009 and 2008, respectively, relating primarily to tax net operating loss
carryforwards, as discussed below, and timing differences related to the
recognition of accrued licensing fees.





As of
December 31, 2009, the Company had tax net operating loss
carryforwards ("NOLs") of approximately $1,203,000 and $4,711,000 available
to offset future taxable Federal and foreign income, respectively. The
Federal NOL expires in varying years through 2025. 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 Federal tax NOLs could
be restricted.





6. COMMITMENTS
AND CONTINGENCIES





GRANTS





In May
2004, the German State of Schleswig-Holstein granted Proteo Biotech
AG approximately 760,000 Euros (the "Grant") for further research
and development of the Company's pharmaceutical product Elafin. The Grant,
as amended, covered the period from April 1, 2004 to December 31,
2007 if certain milestones were reached by September 30 of each
year. The Grant covered approximately 50% of eligible research and
development costs and was subject to the Company's ability to
otherwise finance the remaining costs.







F-24


PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008







6.
COMMITMENTS AND CONTINGENCIES (continued)





GRANTS
(continued)





The
Company received approximately 24,000 Euros ($34,000) of grant funds during the
year ended December 31, 2008. The Company had not applied for any other grants
from the German government since the Grant described
above.





DR.
WIEDOW LICENSE AGREEMENT





On
December 30, 2000, the Company entered into a thirty-year license
agreement, beginning January 1, 2001 (the "License Agreement"), with Dr.
Oliver Wiedow, MD, the owner and inventor of several patents, patent rights
and technologies related to Elafin. Pursuant to the License Agreement, the
Company agreed to pay Dr. Wiedow an annual license fee of 110,000 Euros for a
period of six years. No payments were made through fiscal year 2003. In 2004,
the License Agreement was amended to require the Company to make annual
payments of 30,000 Euros, to be paid on July 15 of each year, beginning in
2004. Such annual payment could be increased to 110,000 Euros by June 1 of each
year based on an assessment of the Company's financial ability to make such
payments. In December 2007 the Company paid Dr. Wiedow 30,000 Euros. The License
Agreement was again amended by an Amendment Agreement to the License
Agreement (the "Amendment") dated December 23, 2008. Pursuant to the Amendment,
the Company and Dr. Wiedow have agreed that the Company would pay the
outstanding balance of 630,000 Euros to Dr. Wiedow as follows: for fiscal years
2008 to 2012, the Company shall pay Dr. Wiedow 30,000 Euros per year, and for
fiscal years 2013 to 2016, the Company shall pay Dr. Wiedow 120,000 Euros per
year. The foregoing payments shall be made on or before December 31 of each
fiscal year. In December 2008 the Company paid Dr. Wiedow 30,000 Euros. No
payments were made under this agreement during 2009. While the total amount owed
does not currently bear interest, the Amendment provides that any late payment
shall be subject to interest at an annual rate equal to the German Base Interest
Rate (1.6% as of January 1, 2009) plus six percent. In the event that the
Company's financial condition improves, the parties can agree to increase and/or
accelerate the payments.





The
Amendment also modified the royalty payment such that the Company will not only
pay Dr. Wiedow a three percent royalty on gross revenues from the
Company's sale of products based on the licensed technology but also three
percent of the license fees (including upfront and milestone payments and
running royalties) received by the Company or its subsidiary from their
sublicensing of the licensed technology.





No
royalty expense has been recognized under the License Agreement or the
Amendment since the Company has yet to generate any related revenues. At
December 31, 2009 and 2008, the Company has accrued approximately $860,000 and
$846,000, respectively, of licensing fees payable to Dr. Wiedow, of which
approximately $86,000 and $42,000, respectively, is included in current
liabilities with the remainder included in long-term liabilities.





Dr.
Wiedow, who is a director of the Company, beneficially owned
approximately 45% of the Company's outstanding common stock as of December
31, 2009.








F-25


PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008







6.
COMMITMENTS AND CONTINGENCIES (continued)





DR.
WIEDOW LICENSE AGREEMENT (continued)





On
October 4, 1999, Dr. Wiedow and AstraZeneca PLC (formerly Zeneca
Limited) entered into an agreement to assign all patents and technology
related to Elafin 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 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 fifteen years with an annual license fee equal
to 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.





RHEIN
MINAPHARM AGREEMENT





In August
2007, the Company's subsidiary entered into an agreement with Rhein Minapharm
("Minapharm") for clinical development, production and marketing of
Elafin.  The Company has granted Minapharm the right to exclusively market
Elafin in Egypt and certain Middle Eastern and African countries.  Under
this agreement, the Company has deferred certain amounts received, and may
receive additional milestone-payments upon Minapharm's attainment of certain
clinical milestones as well as royalties on any future net product
sales.





LEASES





The
Company has entered into several leases for office and laboratory
facilities in Germany, expiring at dates through December
2011.








F-26


PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008







6.
COMMITMENTS AND CONTINGENCIES (continued)





LEASES
(continued)





Future
minimum rental payments under non-cancelable operating leases, in Euros and
equivalent U.S. dollars (based on the December 31, 2009 exchange
rate), approximate the following for the years ending December
31:





2010
            
            $
            50,0002011
            
            
            23,000$
            73,000





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, 2009 and 2008, and for the period November 22, 2000
(Inception) to December 31, 2009 approximated $35,000, $38,000 and
$315,000, respectively.





LEGAL





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, 2009 and 2008:





2009
            
            
            2008Numerator
      for basic and diluted loss per common share:Net
      loss attributable to Proteo, Inc.
            
            $
            (857,784
            )
            
            $
            (889,882
            )Preferred
      stock dividend
            
            
            (30
            )
            
            
            -Net
      loss charged to common stockholders
            
            
            (857,814
            )
            
            
            (889,882
            )Denominator
      for basic and diluted loss per common share:Weighted
      average number of common shares outstanding
            
            
            23,879,350
            
            
            
            23,879,350Basic
      and diluted loss per common share
            
            $
            (0.04)
            
            
            $
            (0.04)










F-27


PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2009 AND 2008







8.
SUBSEQUENT EVENTS





On
February 11, 2010, the Company entered into an Agreement on the Assumption of
Debt (“Agreement”) between the Company, btd biotech development GmBH
(“Assignee”), and Axel J. Kutscher (Guarantor of the Note, see Note 3). Pursuant
to the Agreement, the Company consented to Assignee’s assumption of the
obligations owed to the Company by Investor under the Note, Stock Purchase
Agreement, and Forbearance Agreement (see Note 3). The Guarantor consented to
the assumption of the obligations owed to the Company by Investor and
acknowledged, agreed, and consented to the continuing validity of his
guaranty.




















F-28