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, 2008.


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 RegisteredNone
            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 ̈Noþ




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. YesþNo ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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 companyþ




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ̈Noþ




The
aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant as of June 30, 2008 was approximately
$25,949,000 based on the last sale price on that date reported on the
Over-the-Counter Bulletin Board.




Documents
Incorporated by Reference


None.




Transitional
Small Business Disclosure Format (check one):Yes ̈Noþ








PROTEO,
INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008







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.
                  Submission
      of Matters to a Vote of Security Holders
                  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
      Disclosure
                  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 and Related
      Stockholder Matters
                  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, technologoical 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 concderning 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 four years to support us
financially. We currently expect to sell only small quantities of these products
in the next few business years. As a result, we intend to identify and develop
other potential products. To achieve profitable operations, the Company,
independently or in collaboration with others, must successfully identify,
develop, manufacture, and market proprietary products. The products and
technologies we intend to develop will require significant commitments of
personnel and financial resources.




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




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




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




Elafin
may also be useful in the treatment of the seriously injured. Similar to damage
of heart muscles as described above, much of the damage caused by serious
injuries 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.




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. The aim of the
trial is to investigate the effectiveness of Elafin at suppressing the
postoperative inflammatory processes. A further Phase II clinical trial has
already been approved by the Ethical Committee Minapharm Pharmaceuticals SAE,
Cairo, 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.




Elafin
may also be used in the course of heart transplantation. To transplant hearts
successfully, simultaneous treatment with anti-inflammatory drugs is necessary.
Inflammations of transplanted organs are mainly caused either by rejection of
the organ by the immune system or by blood supply deficiencies during the
transplantation. Although various drugs are used today to avoid the rejection of
the organ, such rejections still occur quite often. Therefore, additional
anti-inflammatory drugs are needed, which may potentially prevent 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.




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.






2




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.




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




In May
2004 we received another grant from the German State of Schleswig-Holstein in
the approximate amount of 760,000 Euros for further research and development of
our pharmaceutical product Elafin. The 2004 grant covered the period from April
1, 2004 to March 31, 2007 if certain milestones were reached by September 30 of
each year. The 2004 grant was extended through December 31, 2007. The 2004 grant
covered 50% of eligible research and development costs and was subject to our
ability to otherwise finance the remaining of the costs. An additional
condition of the grant was that the product had to be developed and subsequently
produced in the German State of Schleswig-Holstein.




As of
December 31, 2008, the Company had not applied for any other grants since the
2004 grant described above.




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




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.





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 has received an 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.




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.




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 Ethics Committee and in August 2008 by the
BUNDESINSTITUT FUR ARZNEIMITTEL UND MEDIZINPRODUKTE, the German Federal
Institute for pharmaceuticals and medical products. In November 2008 the Phase
II clinical trial on patients undergoing esophagectomy for esophagus carcinoma
was started in the Clinic for General and Thorax Surgery at the University
Hospital of Schleswig-Holstein, Campus Kiel.




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 and Chief Executive 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 four full-time employees and one
part-time employee as of December 31, 2008.




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




COLLABORATION
WITH OTHER COMPANIES




In an
effort to provide the Company with some revenue which will be utilized in the
implementation of our business plan, our Subsidiary 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 outlicensing partners, co-development partnerships
and other collaborations with third parties to generate revenues and/or to
expedite the Company's product development. However, there can be no assurance
that the Company's efforts to build such alliances will be successful at any
time or in any way.




4





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. Three other elastase inhibitors,
secretory leukoprotease inhibitor (SLPI), alpha-1-antitrypsin and recombinant
monocyte/neutrophil elastase inhibitor (rM/NEI), are similar to Elafin in that
they are of human descent and may be applied like Elafin principally. >From
the human protein inter-alpha-trypsin inhibitor a highly specific elastase
inhibitor, depelestat, has been engineered. Four other substances, ZD8321,
ZD0892, SSR69071 and ONO-5046, are synthetic elastase inhibitors which may have
effectiveness comparable to that of Elafin.




SECRETORY
LEUKOPROTEASE INHIBITOR (SLPI)




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




ALPHA-1-ANTITRYPSIN




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




RECOMBINANT
MONOCYTE/NEUTROPHIL ELASTASE INHIBITOR (RM/NEI)




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







5




ONO-5046
(SIVELESTAT)




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




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. In 2004, the original 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 on July 15, 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.




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.  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 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:




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, 2008, Proteo had four full-time employees and one part time
employee, 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




In
October 2001, the Company entered into several leases for office and laboratory
facilities in Germany beginning January 2002 and expiring at dates through
December 2011. One lease for office space at Kiel, Germany was cancelled as of
October 31, 2005. In June 2004 and in August 2005,  we entered into
leases for laboratory and office space and additional office space,
respectively. The aggregate monthly rental under the foregoing leases was
approximately $3,400.




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 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





Pursuant
to a written consent in lieu of the annual meeting of the Company’s stockholders
dated December 23, 2008 (the “Consent”), stockholders holding 12,680,000 shares
of the Company’s common stock, representing approximately 53% of the voting
power of the Company, elected the following four individuals to serve on the
Company’s board of directors until the next annual meeting of the Company’s
stockholders to be held in 2009: Birge Bargmann, Professor Oliver Wiedow, MD,
Holger Pusch and Professor Hartmut Weigelt, Ph.D.





In
addition, pursuant to the Consent, the stockholders ratified the appointment of
Squar, Milner, Peterson, Miranda & Williamson, LLP as independent auditors
of the Company for the fiscal year ending December 31, 2008.





No other
matters were consented upon and no other stockholders of the Company were asked
to sign the Consent.




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, 2008 and 2007 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
                          
                          LOW2008
                          First
      Quarter
                          $1.95
                          
                          $0.51Second
      Quarter
                          3.65
                          
                          0.65Third
      Quarter
                          2.49
                          
                          1.39Fourth
      Quarter
                          1.70
                          
                          0.602007
                          First
      Quarter
                          $0.71
                          
                          $0.36Second
      Quarter
                          0.67
                          
                          0.46Third
      Quarter
                          0.65
                          
                          0.28Fourth
      Quarter
                          1.01
                          
                          0.30
 
  On March
17, 2009, 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 2008 and 2007 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.






8




NUMBER
OF SHAREHOLDERS




As of
March 17, 2009, the number of shareholders of record of the Company's common
stock was 1,746.




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, 2008.




RECENT
SALES OF UNREGISTERED SECURITIES





In March
2008, the Company received $470,000 (“Deposit”) as a deposit on the
purchase of Preferred Stock from FIDEsprit AG (“FIDEsprit”), a Swiss
company. On June 9, 2008, the Company entered into a Preferred Stock Purchase
Agreement ("Stock Purchase Agreement") with FIDEsprit. Pursuant to the Stock
Purchase Agreement, the Company sold and issued to FIDEsprit 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, FIDESprit
delivered to the Company a promissory note in the amount of $3,600,000. The
promissory note matures on March 31, 2009.  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 paragraph was included in the Company's Form 8-K
filed with the SEC on June 11, 2008.




9




On
December 22, 2006, we entered into a Common Stock Purchase Agreement (the
"Agreement") with FIDEsprit (the "Investor"). Pursuant to the Agreement, we
agreed to issue and sell to the Investor 1,500,000 shares of our common stock at
a purchase price of $0.60 per share, for an aggregate purchase price of
$900,000. In payment of the purchase price, the Investor delivered to us a
promissory note in the principal amount of $900,000. The promissory note does
not bear any interest, and is payable in five installments of $180,000, with the
first payment due on the date the shares were issued, on December 22, 2006,
followed by four quarterly payments commencing on March 31, 2007, June 30, 2007,
September 30, 2007 and December 31, 2007. The aggregate purchase price of
$900,000 has been paid in full in installments through December 14, 2007. The
other information required by Item 701 of Regulation S-K relating to the
transaction described in this paragraph was included in the Company's Form 8-K
filed with the SEC on December 22, 2006.




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 four 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
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 adopted a positive
opinion recommending the granting of orphan medicinal product designation for
Elafin for treatment of pulmonary arterial hypertension and chronic
thromboembolic pulmonary hypertension. The orphan drug designation became
effective on March 20, 2007 upon adoption of the recommendation by the European
Commission.




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. Proteo will initially provide support for animal experiments with its
lead product on newborn rats to be carried out by Dr. Bernard Thebaud, associate
professor at the Department of Pediatrics and Neonatology and a recognized
authority in this area, with profound knowledge of animal models and substantial
clinical experience.




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.




RESULTS
OF OPERATIONS




OPERATING
EXPENSES




The
Company's operating expenses for the year ended December 31, 2008 were
approximately $994,000, an increase of approximately $513,000 over the year
ended December 31, 2007. This increase is due primarily to an increase in
research and development expenses during the year ended December 31, 2008 of
approximately $403,000 which was not offset by the receipt of any grant funds as
was the case in the prior year and an increase in general and administrative
expenses of approximately $110,000 for the year ended December 31, 2008. The
increase in general and administrative expenses is primarily due to an increase
in professional fees related to public financial reporting and the
implementation of certain internal controls over financial
reporting.







11




INTEREST
AND OTHER INCOME




Interest
and other income for the year ended December 31, 2008 were approximately
$105,000 an increase of approximately $72,000 over the year ended December 31
2007. The increase is due primarily to (1) interest income increasing from
$6,000 in 2007 to $48,000 in 2008; (2) royalty fees included in miscellaneous
income decreasing by $110,000 in 2008 compared to 2007 and (3) a foreign
currency transaction gain in 2008 of $42,000 compared to a loss of $101,000 in
2007.




FOREIGN
CURRENCY TRANSLATION ADJUSTMENTS




We
experienced a loss of approximately $91,000 in foreign currency translation
adjustments during the year ended December 31, 2008. For the year ended December
31, 2007, the Company recognized a gain of approximately $90,000. This
represents a net decrease of approximately $181,000. The decrease is primarily
due to a strengthening U.S. Dollar (our reporting currency) compared to the Euro
(our functional currency) during 2008.




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) $1,358,000 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,
2008, had a principal balance of $2,245,000. See Note 3 to the consolidated
financial statements included elsewhere herein for the payment terms under the
promissory note.




In May
2004, the German State of Schleswig-Holstein granted Proteo Biotech AG
approximately 760,000 Euros (the "2004 Grant") for further research and
development of the Company's pharmaceutical product Elafin. The 2004 Grant, as
amended, covers the period from April 1, 2004 to December 31, 2007 if certain
milestones have been reached by September 30 of each year, with a possible
extension as defined in the agreement. The 2004 Grant covers 50% of eligible
research and development costs and was subject to the Company's ability to
otherwise finance the remaining costs. An additional condition of the grant is
that the product is to be developed and subsequently produced in the German
state of Schleswig-Holstein. The Company qualified to receive approximately
196,109 Euros and 225,000 Euros under the 2004 Grant in 2007 and 2006,
respectively. In 2007, we received grant funds approximating 172,000 Euros and
qualified for an additional 23,623 Euros recorded as a receivable as of December
31, 2007. We did not qualify for approximately 21,000 Euros under the 2004 Grant
by December 31, 2007 which amount was not rolled forward and forfeited. As of
December 31, 2007, management believes that all milestones required by the 2004
Grant have been satisfied. The Company received approximately 24,000 Euros
($34,000) of grant funds during the year ended December 31, 2008. The Company
has not applied for any other grants as of December 31,
2008.





The
Company has cash and cash equivalents approximating $1,237,000 as of December
31, 2008. This is a significant increase over the December 31, 2007 balance of
approximately $803,000, mainly due to receipt of a payment from Minapharm
and the payments 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 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 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.




GRANTS
- GENERAL




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




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 $279,000 at December 31, 2008.




13






INCOME
TAXES




We
account for income taxes under the asset and liability method in accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for
Income Taxes” , which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.




We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider all available
positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent
financial operations. In the event we were to determine that we would be able to
realize our deferred income tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes.




In July
2006, the Financial Accounting Standard Board issued Financial
Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes,"
which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS No. 109.  FIN No. 48 provides
that a tax benefit from an uncertain tax position may be recognized when it is
more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based on
the technical merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interpretation also provides guidance
on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 was effective
for fiscal years beginning after December 15, 2006. The Company adopted the
provisions of FIN 48 on January 1, 2007. The Company did not recognize any
additional liability for unrecognized tax benefit as a result of the
implementation.




The
Company will recognize interest and penalties related to unrecognized tax
benefits within the income tax expense line in the accompanying consolidated
statement of operations. As of December 31, 2008 the Company has not recognized
liabilities for penalty and interest as the Company does not have liability for
unrecognized tax benefits.




IMPAIRMANT
OF LONG LIVED ASSETS





The
Company evaluates the recoverability of long-lived assets with finite lives in
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets . The Company assesses potential
impairments to its long-lived assets when there is evidence that events or
changes in circumstances indicate that the carrying amount of an asset may not
be recovered. An impairment loss is recognized when the carrying amount of the
long-lived asset is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset. Any required impairment loss is measured as the amount by which
the carrying amount of a long-lived asset exceeds its fair value and is recorded
as a reduction in the carrying value of the related asset and a charge to
operating results. Based upon the most recent assessment as of December 31,
2008, the Company has determined there was no impairment in the value of
long-lived assets.







COMPREHENSIVE
INCOME (LOSS)




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






14




LOSS
PER COMMON SHARE





SFAS No.
128, “Earnings per Share”, requires presentation of
basic earnings per common share (“Basic EPS”) and diluted earnings per
common share (“Diluted EPS”).  Basic earnings (loss) per
common share is computed by dividing earnings (loss) available to
common  stockholders by the weighted average number of common shares
outstanding during the period.  Diluted earnings per common
share reflects the potential  dilution, using the
treasury  stock method,  that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in our
net earnings or loss.  In computing diluted earnings (loss) per
common share, the treasury stock method assumes that outstanding options and
warrants are exercised and the proceeds are used to purchase common stock at the
average market price during the period.  Options and warrants will
have a dilutive effect under the treasury stock method only when the average
market price of the common stock during the period exceeds the exercise price of
the options and warrants.




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
DISCLOSURE




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, 2008, 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, 2008. The assessment was based on criteria for effective
internal control over financial reporting described in the Internal Control—Integrated
Frameworkissued 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, 2008.




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
                    47
                    President,
      Chief Executive Officer,Chief
      Financial Officer and DirectorDr.
      Barbara Kahlke
                    44
                    SecretaryProfessor
      Oliver Wiedow, MD.
                    51
                    DirectorHolger
      Pusch
                    52
                    DirectorProf.
      Hartmut Weigelt, Ph.D.
                    63
                    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.




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





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.




The
Company does not have a formal nominating committee. The Board of Directors,
acting as a nominating committee, recommends candidates who will be nominated as
management’s slate of directors at each annual meeting of stockholders. The
Board of Directors will also consider candidates for directors nominated by
stockholders. A stockholder who wished to submit a candidate for consideration
at the annual meeting of stockholders to be held in 2009, must have notified the
Secretary of the Company, in writing, no later than March 13,
2009.  The written notice must have included information about each
proposed nominee, including name, age, business address, principal occupation,
shares beneficially owned and other information required to be included in proxy
solicitations. The nomination notice must also have included the nominating
stockholder’s name and address, the number of shares beneficially owned and a
statement that such stockholder intends to nominate his candidate. A statement
from the candidate must also have been furnished, indicating the candidate’s
desire and ability to serve as a director. Adherence to these procedures is a
prerequisite to a stockholder’s right to nominate a candidate for director at
the annual meeting.




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.de.




ITEM
11 - EXECUTIVE COMPENSATION




The
following table sets forth the total compensation earned over each of the past
two fiscal years ending December 31, 2008 by each person who served as the
principal executive officer of Proteo during fiscal year 2008. There were no
other executive officers who had compensation of $100,000 or more during fiscal
year 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
                      2007
                      $   64,000
                      -0-
                      -0-
                      -0-
                      -0-
                      -0-
                      -0-
                      64,000Financial
      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
$64,000 for the year ended December 31, 2007 and $141,000 for the year ended
December 31, 2008.  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 AND RELATED
STOCKHOLDER MATTERS




The
following table sets forth, as of December 31, 2008, 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
                                      
                                      *Holger
      Pusch
                                      
                                      20,000
                                      
                                      *Prof.
      Hartmut Weigelt, Ph.D.
                                      
                                      80,000
                                      
                                      *All
      directors and executive officers as a group (5
    persons)
                                      
                                      12,790,000
                                      
                                      53.6%


_________________


* less
than 1%




(1) Based
on 23,879,350 common shares outstanding as of March 7, 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 we paid Dr. Wiedow 30,000 Euros. 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 $83,000 and $84,000 for the fiscal years ended December 31,
2008 and 2007, 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 $6,000 for the fiscal years ended December 31,
2008 and 2007, respectively, for professional services rendered by the principal
accountant for tax compliance and tax advice.




ALL
OTHER FEES:




There
were no other professional services rendered by our principal accountant during
the two years ended December 31, 2008 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 30, 2009
                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
      30, 2009Birge
      Bargmann/s/
      Oliver Wiedow, M.D.
              Director
              March
      30, 2009Oliver
      Wiedow, M.D./s/
      Holger Pusch
              Director
              March
      30, 2009Holger
      Pusch/s/
      Hartmut Weigelt, Ph.D.
              Director
              March
      30, 2009Hartmut
      Weigelt, Ph.D.
 
 22




PROTEO,
INC. AND SUBSUDIARY
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS








Annual
      Consolidated Financial Statements:Report
      of Independent Registered Public Accounting Firm
                        F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                        F-3Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2008 and 2007 and for the PeriodFrom
      November 22, 2000 (Inception) Through December 31, 2008
                        F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2008
      and 2007 and for the Period From November 22, 2000 (Inception)
      Through December 31, 2008
                        F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and 2007
      and for the Period from November 22, 2000 (Inception) Through December
      31, 2008
                        F-10Notes
      to Consolidated Financial Statements
                        F-12








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, 2008 and 2007, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity and cash flows for the
years ended December 31, 2008 and 2007, and for the period from November 22,
2000 (Inception) to December 31, 2008. 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, 2008 and 2007, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2008 and
2007, and for the period from November 22, 2000 (Inception) to December 31,
2008, 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, 2008, the Company's deficit accumulated during the
development stage approximated $5.9 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.
 
 /s/
Squar, Milner, Peterson, Miranda & Williamson, LLP
 
 
 March 30,
2009
 Newport
Beach, California
  F-2




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
BALANCE SHEETS
 
 ASSETS
                                          
                                          December
      31, 2008
                                          
                                          
                                          December
      31, 2007CURRENT
      ASSETSCash
      and cash equivalents
                                          
                                          $
                                          1,237,450
                                          
                                          
                                          $
                                          802,745Research
      supplies inventory
                                          
                                          
                                          114,650
                                          
                                          
                                          
                                          127,557Prepaid
      expenses and other current assets
                                          
                                          
                                          191,599
                                          
                                          
                                          
                                          80,542TOTAL
      CURRENT ASSETS
                                          
                                          
                                          1,543,699
                                          
                                          
                                          
                                          1,010,844PROPERTY
      AND EQUIPMENT, NET
                                          
                                          
                                          265,245
                                          
                                          
                                          
                                          376,542Total
      Assets
                                          
                                          $
                                          1,808,944
                                          
                                          
                                          $
                                          1,387,386LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued liabilities
                                          
                                          $
                                          138,225
                                          
                                          
                                          $
                                          123,518Accrued
      licensing fees
                                          
                                          
                                          42,291
                                          
                                          
                                          
                                          927,900TOTAL
      CURRENT LIABILITIES
                                          
                                          
                                          180,516
                                          
                                          
                                          
                                          1,051,418LONG
      TERM LIABILITIESDeferred
      revenue
                                          
                                          
                                          115,300
                                          
                                          
                                          
                                          --Accrued
      licensing fees
                                          
                                          
                                          803,529
                                          
                                          
                                          
                                          --TOTAL
      LONG TERM LIABILITIES
                                          
                                          
                                          918,829
                                          
                                          
                                          
                                          --COMMITMENTS
      AND CONTINGENCIES (Note 6)STOCKHOLDERS'
      EQUITYNon-voting
      preferred stock, par value $0.001 per share; 10,000,000 shares authorized;
      600,000 shares issued and outstanding (Liquidation preference - Note
      3)
                                          
                                          
                                          600
                                          
                                          
                                          
                                          --Common
      stock, par value $0.001 per share; 300,000,000 shares authorized;
      23,879,350 shares issued and outstanding
                                          
                                          
                                          23,880
                                          
                                          
                                          
                                          23,880Additional
      paid-in capital
                                          
                                          
                                          8,567,634
                                          
                                          
                                          
                                          4,968,234Note
      receivable for sale of preferred stock
                                          
                                          
                                          (2,245,389
                                          )
                                          
                                          
                                          --Accumulated
      other comprehensive income
                                          
                                          
                                          279,280
                                          
                                          
                                          
                                          370,378Deficit
      accumulated during development stage
                                          
                                          
                                          (5,916,406
                                          )
                                          
                                          
                                          (5,026,524
                                          )Total
      Stockholders' Equity
                                          
                                          
                                          709,599
                                          
                                          
                                          
                                          335,968Total
      Liabilities and Stockholders' Equity
                                          
                                          $
                                          1,808,944
                                          
                                          
                                          $
                                          1,387,386
 
 
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF 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, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
 
 2008
                                        
                                        
                                        2007
                                        
                                        
                                        November
      22, 2000
                                          (Inception)
                                          Through
                                          December
      31,
                                          2008REVENUES
                                        
                                        $
                                        --
                                        
                                        
                                        $
                                        --
                                        
                                        
                                        $
                                        --EXPENSESGeneral
      and administrative
                                        
                                        
                                        458,023
                                        
                                        
                                        
                                        347,825
                                        
                                        
                                        
                                        3,986,326Research
      and development, net of grants
                                        
                                        
                                        536,365
                                        
                                        
                                        
                                        133,286
                                        
                                        
                                        
                                        2,152,629994,388
                                        
                                        
                                        
                                        481,111
                                        
                                        
                                        
                                        6,138,955OTHER
      INCOME (EXPENSE)Interest
      income
                                        
                                        
                                        48,376
                                        
                                        
                                        
                                        6,334
                                        
                                        
                                        
                                        89,135Miscellaneous
      income, net
                                        
                                        
                                        14,445
                                        
                                        
                                        
                                        126,717
                                        
                                        
                                        
                                        253,812Foreign
      currency transaction gain (loss)
                                        
                                        
                                        41,685
                                        
                                        
                                        
                                        (101,087
                                        )
                                        
                                        
                                        (183,402
                                        )104,506
                                        
                                        
                                        
                                        31,964
                                        
                                        
                                        
                                        159,545NET
      LOSS BEFORE MINORITY INTEREST
                                        
                                        
                                        (889,882
                                        )
                                        
                                        
                                        (449,147
                                        )
                                        
                                        
                                        (5,979,410
                                        )MINORITY
      INTEREST IN NET LOSS OF CONSOLIDATEDSUBSIDIARY,
      NET OF TAXES
                                        
                                        
                                        --
                                        
                                        
                                        
                                        3,978
                                        
                                        
                                        
                                        63,004NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERS
                                        
                                        
                                        (889,882
                                        )
                                        
                                        
                                        (445,169
                                        )
                                        
                                        
                                        (5,916,406
                                        )FOREIGN
      CURRENCY TRANSLATION ADJUSTMENTS
                                        
                                        
                                        (91,098
                                        )
                                        
                                        
                                        89,987
                                        
                                        
                                        
                                        279,280COMPREHENSIVE
      LOSS
                                        
                                        $
                                        (980,980
                                        )
                                        
                                        $
                                        (355,182
                                        )
                                        
                                        $
                                        (5,637,126
                                        )BASIC
      AND DILUTED LOSS PER COMMON SHARE
                                        
                                        $
                                        (0.04
                                        )
                                        
                                        $
                                        (0.02
                                        )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
                                        
                                        
                                        23,879,000
                                        
                                        
                                        
                                        23,879,000
  
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF 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, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
  
 Common
      Stock
                                      
                                      
                                      Additional
                                        Paid-in
                                      
                                      
                                      Stock
                                        Subscriptions
                                      
                                      
                                      Accumulated
                                        Other
                                        Comprehensive
                                      
                                      
                                      Deficit
                                        Accumulated
                                        During
                                        DevelopmentShares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      Receivable
                                      
                                      
                                      Income
      (Loss)
                                      
                                      
                                      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
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      4,800
  
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
  F-5




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
 
 (continued)
 
 Common
      Stock
                                      
                                      
                                      Additional
                                        Paid-in
                                      
                                      
                                      Stock
                                        Subscriptions
                                      
                                      
                                      Accumulated
                                        Other
                                        Comprehensive
                                      
                                      
                                      Deficit
                                        Accumulated
                                        During
                                        DevelopmentShares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      Receivable
                                      
                                      
                                      Income
      (Loss)
                                      
                                      
                                      Stage
                                      
                                      
                                      TotalCommon
      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
                                      )
                                      
                                      
                                      1,146,065Common
      stock issued in connection with reverse merger
                                      
                                      
                                      1,313,922
                                      
                                      
                                      
                                      1,314
                                      
                                      
                                      
                                      (1,314
                                      )
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --Cash
      received for common stock subscribed at $0.40 per share
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      406,440
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      406,440
 
 
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
  F-6




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
 
 (continued)
 
 
 Common
      Stock
                                          
                                          
                                          Additional
                                            Paid-in
                                          
                                          
                                          Stock
                                            Subscriptions
                                          
                                          
                                          Accumulated
                                            Other
                                            Comprehensive
                                          
                                          
                                          Deficit
                                            Accumulated
                                            During
                                            DevelopmentShares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Receivable
                                          
                                          
                                          Income
      (Loss)
                                          
                                          
                                          Stage
                                          
                                          
                                          TotalOther
      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
                                          
                                          
                                          
                                          --
                                          
                                          
                                          
                                          --
                                          
                                          
                                          
                                          --
                                          
                                          
                                          
                                          165,000
 
 
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
  F-7
  PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
 
 (continued)
 
 Common
      Stock
                                            
                                            
                                            Additional
                                              Paid-in
                                            
                                            
                                            Stock
                                              Subscriptions
                                            
                                            
                                            Accumulated
                                              Other
                                              Comprehensive
                                            
                                            
                                            Deficit
                                              Accumulated
                                              During
                                              DevelopmentShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Capital
                                            
                                            
                                            Receivable
                                            
                                            
                                            Income
      (Loss)
                                            
                                            
                                            Stage
                                            
                                            
                                            TotalCash
      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
 
 
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
     F-8
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
  (continued)
 Preferred
      Stock
                                                            
                                                            
                                                            Common
      Stock
                                                            
                                                            
                                                            Additional
                                                              Paid-in
                                                            
                                                            
                                                            Stock
      Subscriptions
                                                            
                                                            
                                                            Accumulated
      Other Comprehensive
                                                            
                                                            
                                                            Deficit
      Accumulated During DevelopmentShares
                                                            
                                                            
                                                            Amount
                                                            
                                                            
                                                            Shares
                                                            
                                                            
                                                            Amount
                                                            
                                                            
                                                            Capital
                                                            
                                                            
                                                            Receivable
                                                            
                                                            
                                                            Income
      (Loss)
                                                            
                                                            
                                                            Stage
                                                            
                                                            
                                                            TotalCommon
      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
      comprehensiveincome
                                                            
                                                            --
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            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 subsribed  at $0.60 per
    share
                                                            
                                                            --
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            862,081
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            862,081Other
      comprehensiveincome
                                                            
                                                            --
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            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
      comprehensiveincome
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            $
                                                            (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
                                                            )
                                                            
                                                            $
                                                            709,599




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


F-9




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
 
 
 2008
                                
                                
                                2007
                                
                                
                                November
      22, 2000
                                  (Inception)
                                  Through
                                  December
      31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                
                                $
                                (889,882
                                )
                                
                                $
                                (445,169
                                )
                                
                                $
                                (5,916,406
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                
                                
                                59,279
                                
                                
                                
                                54,578
                                
                                
                                
                                334,678Loss
      on disposal of equipment
                                
                                
                                --
                                
                                
                                
                                4,518
                                
                                
                                
                                4,518Foreign
      currency transaction (gain) loss
                                
                                
                                (41,685
                                )
                                
                                
                                101,087
                                
                                
                                
                                183,402Changes
      in operating assets and liabilities:Research
      supplies inventory
                                
                                
                                7,760
                                
                                
                                
                                (24,547
                                )
                                
                                
                                (130,692
                                )Prepaid
      expenses and other current assets
                                
                                
                                (119,520
                                )
                                
                                
                                (24,518
                                )
                                
                                
                                (190,219
                                )Accounts
      payable and accrued liabilities
                                
                                
                                7,004
                                
                                
                                
                                17,851
                                
                                
                                
                                91,995Deferred
      revenue
                                
                                
                                120,341
                                
                                
                                
                                --
                                
                                
                                
                                120,341Accrued
      licensing fees
                                
                                
                                (42,100
                                )
                                
                                
                                (44,187
                                )
                                
                                
                                660,713Net
      cash used in operating activities
                                
                                
                                (898,803
                                )
                                
                                
                                (360,387
                                )
                                
                                
                                (4,841,670
                                )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                                
                                
                                (5,284
                                )
                                
                                
                                (6,294
                                )
                                
                                
                                (613,306
                                )Cash
      of reorganized entity
                                
                                
                                --
                                
                                
                                
                                --
                                
                                
                                
                                27,638Net
      cash used in investing activities
                                
                                
                                (5,284
                                )
                                
                                
                                (6,294
                                )
                                
                                
                                (585,668
                                )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                                
                                
                                --
                                
                                
                                
                                --
                                
                                
                                
                                1,792,610Proceeds
      from subscribed common stock, and issuance of preferred
    stock
                                
                                
                                1,354,591
                                
                                
                                
                                862,081
                                
                                
                                
                                4,545,586Net
      cash provided by financing activities
                                
                                
                                1,354,591
                                
                                
                                
                                862,081
                                
                                
                                
                                6,338,196EFFECT
      OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH
      EQUIVALENTS
                                
                                
                                (15,799
                                )
                                
                                
                                37,863
                                
                                
                                
                                326,592NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                
                                
                                434,705
                                
                                
                                
                                533,263
                                
                                
                                
                                1,237,450CASH
      AND CASH EQUIVALENTS - beginning of period
                                
                                
                                802,745
                                
                                
                                
                                269,482
                                
                                
                                
                                --CASH
      AND CASH EQUIVALENTS - end of period
                                
                                $
                                1,237,450
                                
                                
                                $
                                802,745
                                
                                
                                $
                                1,237,450
 
 (continued)
 
 
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
  F-10




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
 FROM
NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2008
 
 
 
 
 2008
                          
                          
                          2007
                          
                          
                          November
      22, 2000
                            (Inception)
                            Through
                            December
      31, 2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCommon
      stock issued for subscriptions receivable
                          
                          $
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          1,627,755Net
      assets (excluding cash) of reorganized entity received in exchange for
      equity securities
                          
                          $
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          8,509Unpaid
      balance of note receivable for issuance of preferred stock
                          
                          $
                          2,245,389
                          
                          
                          $
                          --
                          
                          
                          $
                          2,245,389
 
 
 
 See the
accompanying notes to consolidated financial statements for additional
information on non-cash investing and financing activities during the years
ended December 31, 2008 and 2007, and for the period from November 22, 2000
(Inception) through December 31, 2008.
 
 
 
 THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
  F-11




PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 
 
 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 ORGANIZATION/NATURE
OF BUSINESS
 
 Proteo,
Inc. (formerly TriVantage Group, Inc.) and Proteo Marketing, Inc. ("PMI"), a
Nevada corporation, which began operations in November 2000, entered into a
reorganization and stock exchange agreement in December 2000 with Proteo Biotech
AG ("PBAG"), a German corporation, incorporated in Kiel, Germany. Pursuant to
the terms of the agreement, all of the shareholders of PBAG exchanged their
common stock for 2,500,000 shares of PMI common stock. As a result, PBAG became
a wholly owned subsidiary of PMI. Proteo Inc.'s common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "PTEO.OB".
 
 During
2001, PMI entered into a Shell Acquisition Agreement (the "Acquisition
Agreement") with Trivantage Group, Inc. ("Trivantage"), a public "shell"
company, in a transaction accounted for as a reverse merger. In accordance with
the Acquisition Agreement, PMI first acquired 176,660,280 shares (1,313,922
post-reverse split shares, as described below) of Trivantage's common stock
representing 90% of the issued and outstanding common stock of Trivantage, in
exchange for a cash payment of $500,000 to the sole shareholder of Trivantage.
Secondly, Trivantage completed a one for one-hundred-fifty reverse stock split.
Finally, effective April 25, 2002, the shareholders of PMI exchanged their
shares of PMI for an aggregate of 20,286,512 shares of Trivantage to effect a
reverse merger 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 revenues from product sales. The
Company believes that none of its planned products will produce sufficient
revenues in the near future. As a result, the Company plans to identify and
develop other potential products. There are no assurances, however, that the
Company will be able to produce such products, or if produced, that they will be
accepted in the marketplace.
  F-12
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 
 
 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 $5,916,000. There is no assurance of any
future revenues. At December 31, 2008, the Company has working capital of
approximately $1,363,000, stockholders' equity of approximately $710,000,
and an accumulated deficit of approximately $5.9 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-13
  PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 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
accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") and include the accounts of Proteo, Inc. and its
wholly owned subsidiary. The operations of PBAG, acquired on December 30,
2000, are included in the accompanying consolidated statements of
operations and comprehensive loss from such date. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
  
 F-14
 
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
  1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 STARTUP
ACTIVITIES
 
 Statement
of Position No. 98-5, "REPORTING THE COSTS OF STARTUP ACTIVITIES" requires
that all non-governmental entities expense the costs of startup activities
as incurred, including organizational costs. This standard has
not materially impacted the Company's financial position or results of
operations.
 
 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.
  As of
December 31, 2008, the Company had 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.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS AND CERTAIN OTHER ASSETS/LIABILITIES
 
 Statement
of Financial Accounting Standards ("SFAS") No. 107 "DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS" requires disclosure of fair
value information about financial instruments when it is practicable to
estimate that value. Management believes that the carrying amounts of the
Company's financial instruments, consisting primarily of
cash, accounts payable and accrued expenses, approximate their fair
value at December 31, 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 basis and, during the years ended December 31, 2008 and 2007, did
not have any assets or liabilities that were measured at fair value on a
non-recurring basis. The measurements referenced in the preceding sentence refer
to those described in SFAS No. 157 ("Fair Value Measurements"), as
amended.
  
 F-15
 
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
  1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 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 $279,000 at December 31, 2008.
 
 The
Company records payables related to a licensing agreement (see Note 6)
in accordance with SFAS No. 52, "FOREIGN CURRENCY TRANSLATION."
Quarterly commitments under such agreement are denominated in Euros. For
each reporting period, the Company translates the quarterly amount to US
dollars at the exchange rate effective on that date. If the exchange rate
changes between when the liability is incurred and the time payment is
made, a foreign currency exchange gain or loss results. The Company paid
approximately $42,000 and $43,000 under this licensing agreement during the
year ended December 31, 2008 and 2007, respectively, and did not realize
any significant foreign currency exchanges gains or losses. Prior to 2007
the Company made no payments under such agreement.
 
 Additionally,
the Company computes a foreign currency transaction 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 of approximately $42,000
and an unrealized foreign currency transaction loss of approximately
$101,000 for the years ended December 31, 2008 and 2007,
respectively.
   F-16
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 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
Financial Accounting Standards Board ("FASB") has issued SFAS No.
144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS."
SFAS No. 144 addresses financial accounting and reporting for
the impairment or disposal of certain long-lived assets, and requires
that certain long- lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying
amounts may not be recoverable. If the cost basis of a long-lived asset is
greater than the projected future undiscounted net cash flows from such
asset, an impairment loss is recognized. Impairment losses are calculated
as the difference between the cost basis of an asset and its estimated fair
value. SFAS No. 144 also requires companies to separately
report discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to shareholders) or is classified as held for sale. Assets to
be disposed are reported at the lower of the carrying amount or fair
value less costs to sell.
  
 F-17
 
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 LONG-LIVED
ASSETS (continued)
 
 Management
believes that no indicators of impairment existed as of or during
the year ended December 31, 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. In December 2003, the SEC released Staff Accounting
Bulletin ("SAB") No. 104, "REVENUE RECOGNITION," which provides guidance on
the recognition, presentation and disclosure of revenue in the financial
statements. The Company believes that once significant operating revenues
are generated, the Company's revenue recognition accounting policies will
conform to SAB No. 104.
 
 RESEARCH
AND DEVELOPMENT
 
 Research
and development costs are charged to operations as incurred. Grant funds
received are 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 SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." Deferred tax
assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
A valuation allowance is provided for significant deferred tax assets when
it is more likely than not that such assets will not be
recovered.
 
 Management
evaluates the Company's tax positions for measurement and recognition using
the guidance set forth in FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109", which is more fully described below.
 
 
 F-18
 
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
  1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 INCOME
TAXES (continued)
 
 The
Company adopted the provisions of FASB Interpretation No.
48 on January 1, 2007. The Company did not recognize any additional
liability for unrecognized tax benefit as a result of the implementation.
As of December 31, 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, 2008,
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, 2006, and 2007 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-19
 
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 ACCOUNTING
FOR STOCK-BASED COMPENSATION
 
 From
inception to December 31, 2008, 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
 
 The
Company computes loss per common share using SFAS No. 128, "EARNINGS PER SHARE."
Basic loss per common share is computed based on the weighted average
number of shares outstanding for the period. Diluted loss per common share
is computed by dividing net loss by the weighted average shares outstanding
assuming all dilutive potential common shares were issued. There were no
dilutive potential common shares outstanding at December 31, 2008 or 2007.
Additionally, there were no adjustments to net loss to determine net loss
available to common shareholders. As such, basic and diluted loss per
common share equals net loss, as reported, divided by the weighted average
common shares outstanding for the respective periods.
 
 COMPREHENSIVE
INCOME (LOSS)
 
 SFAS No.
130, "REPORTING COMPREHENSIVE INCOME", established standards for reporting
and display of comprehensive income (loss) and its components in a full set
of general-purpose financial statements. Total comprehensive income (loss)
represents the net change in stockholders' equity (deficit) during a period
from sources other than transactions with stockholders and as
such, includes net earnings or loss. For the
Company, other comprehensive income (loss) represents the foreign
currency translation adjustments, which are recorded as components of
stockholders' equity.
 
 SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION
 
 SFAS No.
131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION",
established standards for how public companies report information about
segments of their business in their annual financial statements
and requires them to report selected segment information in their quarterly
reports issued to shareholders. It also requires entity-wide disclosures
about the products and services an entity provides, the countries in which
it holds material assets and reports material revenues, and its major
customers. The Company considers itself to operate in one segment and has
had no operating revenues from inception. See Note 2 for information on
long-lived assets located in Germany.
  
 F-20
 
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the FASB issued SFAS No.157, "FAIR VALUE
MEASUREMENTS," which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 simplifies and codifies related guidance within
GAAP, but does not require any new fair value measurements. The guidance in
SFAS No. 157 applies to derivatives and other financial instruments
measured at estimated fair value under SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" and
related pronouncements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The adoption of SFAS No. 157 did
not have a significant effect on the Company's financial position or
results of operations.
 
 On
February 15, 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN
AMENDMENT OF FASB STATEMENT NO. 115." This standard permits an entity
to measure many financial instruments and certain other items at estimated
fair value. Most of the provisions of SFAS No. 159 are elective; however,
the amendment of SFAS No. 115 ("Accounting for Certain Investments in Debt
and Equity Securities") applies to all entities that own trading
and available-for-sale securities. The fair value option created by
SFAS No. 159 permits an entity to measure eligible items at fair value
as of specified election dates. Among others, eligible items exclude (1)
financial instruments classified (partially or in total) as permanent
or temporary stockholders' equity (such as a convertible debt security
with a non-contingent beneficial conversion feature) and (2)
investments in subsidiaries and interests in variable interest
entities that must be consolidated. A for-profit business entity will
be required to report unrealized gains and losses on items for which the
fair value option has been elected in its statements of operations at
each subsequent reporting date.
  The fair
value option (a) may generally be applied instrument by instrument, (b) is
irrevocable unless a new election date occurs, and (c) must be applied to
the entire instrument and not to only a portion of the instrument. For the
Company, SFAS No. 159 was effective as of January 1, 2008. As of December
31, 2008, the Company had not adopted SFAS No. 159.  SFAS No. 115 did not
apply to the Company during the year ended December 31, 2008.
  In May
2008, the FASB issued FASB Staff Position ("FSP") No. APB 14-1 entitled
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." This FSP amends the following
pronouncements (among several others) issued by the FASB's Emerging Issues Task
Force ("EITF"): Issue No. 98-5 ("Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"),
and Issue No. 00-27 ("Application of Issue No. 98-5 to Certain Convertible
Instruments").
 
 FSP APB
14-1 applies to convertible debt instruments that, by their stated terms, may be
settled in cash or other assets upon conversion (including partial cash
settlement), unless the embedded conversion option must be separately accounted
for as a derivative under SFAS No. 133. Convertible preferred shares that are
mandatorily redeemable financial instruments and classified as liabilities under
SFAS No. 150 ("Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity") are within the scope of FSP APB 14-1; however,
convertible preferred stock reported as equity (or temporary equity) is not
within the scope of this pronouncement. In addition, FSP APB 14-1 does not apply
to convertible debt instruments that require or permit settlement in cash (or
other assets) upon conversion when the holders of the underlying stock would
receive the same form of consideration in exchange for their
shares.
  F-21
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
 
 FSP APB
14-1 requires that both the equity component (the conversion feature) and
liability component of convertible debt within its scope be separately accounted
for at estimated fair value in order to reflect the entity's nonconvertible
borrowing rate when interest cost is recognized in subsequent periods. The
excess of the principal amount of the liability component over its carrying
value must be amortized to interest cost using the interest method described in
APB Opinion No. 21 ("Interest on Receivables and Payables"). The equity
component is not re-measured as long as it continues to meet the conditions for
equity classification in EITF Issue No. 00-19 ("Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock"). FSP APB 14-1 also provides guidance on de-recognition as it relates to
modifications, exchanges and induced conversions of debt instruments within its
scope. This FSP is effective for financial instruments issued during fiscal
years beginning after December 15, 2008, and interim periods within those years;
early adoption is not permitted. However, FSP APB 14-1 must be applied
retrospectively to all periods presented, and thus may impact instruments within
its scope that were outstanding at any time during such prior periods.
Management has not determined the effect (if any) of this FSP on the Company's
future interim and annual financial statements.
 
 In June
2008, the FASB ratified EITF Issue No. 07-5 entitled "Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock." This
pronouncement applies to any freestanding financial instrument or embedded
feature that has all the characteristics of a derivative set forth in paragraphs
6-9 of SFAS No. 133 for purposes of determining whether such instrument or
embedded feature qualifies for the first part of the scope exception set forth
in paragraph 11(a) of SFAS No. 133. EITF Issue No. 07-5 also applies to any
freestanding financial instrument that is potentially settled in an entity's own
stock, regardless of whether the instrument has all the characteristics of a
derivative set forth in SFAS No. 133, for purposes of determining whether the
instrument is within the scope of EITF Issue No. 00-19. EITF Issue No. 07-5 does
not apply to share-based payment awards within the scope of SFAS No. 123(R) for
purposes of determining whether such instruments are classified as liability or
equity. EITF Issue No. 01-6 ("The Meaning of 'Indexed to a Company's Own Stock') has been
superseded.
 
 As more
fully explained below, the objective of EITF Issue No. 07-5 is to determine
whether a financial instrument or an embedded feature qualifies for the first
part of the scope exception ("indexed to its own stock") described in paragraph
11(a) of SFAS No. 133. If so, and if the financial instrument or embedded
feature has all the characteristics described in paragraphs 6-9 of SFAS No. 133,
it must be analyzed under other GAAP [including EITF Issue No. 05-2 ("The
Meaning of 'Conventional Convertible Debt Instrument' in Issue No. 00-19")] to
determine whether it is classified in stockholders' equity - or would be if it
were a freestanding instrument. If a financial instrument is otherwise a
derivative as defined by SFAS No. 133 and does not qualify under the exception
described above, it must be reported as a derivative and accounted for at
estimated fair value; whether such an embedded feature must be separated from
the host contract (and accounted for as a derivative) is based on other criteria
described in SFAS No. 133. If the conversion feature embedded in a convertible
debt instrument meets both elements of the scope exception in paragraph 11(a) of
SFAS No. 133, it would not be separated from the host contract or accounted for
as a derivative by the issuer.
 
 Under
EITF Issue No. 07-5, an entity must determine whether an equity-linked financial
instrument or embedded feature is indexed to its own stock by using the
following two-step approach: (1) evaluate the instrument's contingent exercise
provisions (if any), and (2) evaluate its settlement provisions. An exercise
contingency (as defined) will not preclude an instrument or an embedded feature
from being considered indexed to an entity's own stock provided that it is based
on either (a) an observable market other than the market for the issuer's
capital stock or (b) an observable index other than one calculated or measured
solely by reference to the issuer's own operations (for example, revenues or
EBITDA). If the instrument qualifies under Step 1, it is then analyzed under
Step 2. An instrument (or embedded feature) is considered indexed to an entity's
own stock if its settlement amount will equal the difference between the
estimated fair value of a fixed number of the entity's equity shares and either
a fixed monetary amount or a fixed amount of a debt instrument issued by the
entity. With very few exceptions - unless the only variables that could affect
the settlement amount would be inputs to the estimated fair value of a
"fixed-for-fixed" forward or option on equity shares, an instrument's strike
price or the number of shares used to calculate the settlement are not
considered fixed if its terms provide for any potential adjustment, regardless
of the probability of the adjustment or whether any such adjustments are within
the entity's control. As a result, standard anti-dilution clauses will
apparently preclude an instrument from being considered "indexed to its own
stock."
 F-22
 PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
 
 
 EITF
Issue No. 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. The
guidance in such pronouncement must be applied to outstanding instruments as of
the beginning of the fiscal year in which it is adopted, with a
cumulative-effect adjustment of opening retained earnings (or other appropriate
components of equity or net assets). Management has not determined the effect
(if any) of EITF Issue No. 07-5 on the Company's future interim and annual
financial statements.


In
December 2007, the FASB issued SFAS No. 141(R), "BUSINESS COMBINATIONS."
This pronouncement will significantly change the accounting for
business combinations, expand the concept of a business combination (such
that a transfer of consideration is not necessarily required to trigger
acquisition-method accounting), and amend the GAAP definition of a
"business" to include development stage enterprises. SFAS No. 141(R) will
also impact accounting for the initial consolidation of a variable interest
entity that is a business, and accounting for bargain purchases (as
defined) and step acquisitions. When a business combination constitutes a
change in control of the acquiree, the purchasing entity will generally be
required to recognize all (and only) the assets acquired, liabilities
assumed, and noncontrolling interests (formerly known as "minority
interests") at their full fair value as of the acquisition date, even when
the controlling interest acquired is less than a 100% interest.
 
 SFAS No.
141(R) includes substantial new disclosure requirements, and
applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning after December 14, 2008. Earlier adoption is prohibited. Such
pronouncement must be adopted concurrently with SFAS No. 160 (see
discussion in the following two paragraphs). Management is currently
evaluating what effect (if any) SFAS No. 141(R) will have on the Company's
future financial statements.
 
 In
December 2007, the FASB also issued SFAS No. 160, "NONCONTROLLING INTERESTS
IN CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB No. 51." SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this pronouncement requires that a noncontrolling
interest (minority interest) be reported in the stockholders' equity
section of the balance sheet, with separate identification to distinguish
such interest from the parent company's equity. The components of net
income or loss attributable to the noncontrolling interest will be included
in the results of operations in their "natural" classifications, and must
be disclosed on the face of the income statement; however,
earnings-per-share data will continue to be based exclusively on amounts
attributable to the parent company. SFAS No. 160 clarifies that changes in
a parent company's ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the event does not result in a
loss of control. In
addition, SFAS No. 160 requires that a parent company recognize gain or
loss when a subsidiary is deconsolidated; such gain or loss will be
measured using the estimated fair value of the noncontrolling equity
investment on the deconsolidation date. A deconsolidation transaction also
establishes a new fair value basis in any retained noncontrolling ownership
interest, requiring gain/loss recognition for the difference between such
new basis and the historical carrying amount of the remaining ownership
interest. This pronouncement includes expanded disclosure requirements
regarding the interests of the parent company and noncontrolling interests
in its subsidiaries. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 14,
2008; earlier adoption is prohibited. Management is currently evaluating
what effect (if any) this pronouncement will have on the Company's
future financial statements.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants,
and the SEC did not or are not believed by management to have a material
impact on the Company's present or future consolidated financial
statements.
  F-23
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND 2007
 
 
 2. PROPERTY AND
EQUIPMENT
 
 Property
and equipment, all of which is located in Kiel, Germany, consist of the
following:
  December
      31,2008
                              
                              
                              2007Technical
      and laboratory equipment
                              
                              $
                              422,855
                              
                              
                              $
                              441,813Plant
                              
                              
                              208,331
                              
                              
                              
                              217,671Leasehold
      improvements
                              
                              
                              5,241
                              
                              
                              
                              5,476Office
      equipment
                              
                              
                              36,639
                              
                              
                              
                              32,378673,066
                              
                              
                              
                              697,338Less
      accumulated depreciation and amortization
                              
                              
                              (407,821
                              )
                              
                              
                              (320,796
                              )Total
                              
                              $
                              265,245
                              
                              
                              $
                              376,542
  Depreciation
and amortization expense included in general and administrative expense in the
consolidated statements of operations was approximately $59,000 and $55,000 for
the years ended December 31, 2008 and 2007,
respectively.
  During
the two years ended December 31, 2008, there were no long-lived assets that were
considered to be impaired under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
 
 
 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-24
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND 2007
 
 
 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-25
 
 PROTEO,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 
 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.
 
 In March
2008, the Company received 300,000 Euros ($471,000) ("Deposit")
from FIDEsprit AG ("FIDEsprit"), a Swiss corporation, as a deposit for a
capital stock subscription. On June 5, 2008, the Company's Board of
Directors authorized the issuance of up to 750,000 shares of non-voting
Series A Preferred Stock ("Series A Stock") with a par value of $0.001 per
share. On June 9, 2008, the Company entered into a Preferred Stock Purchase
Agreement ("Stock Purchase Agreement") with FIDEsprit. Pursuant to the
Stock Purchase Agreement, the Company sold and issued to FIDEsprit 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,
FIDESprit delivered to the Company a promissory note in the amount of
$3,600,000. The promissory note matures on March 31, 2009. Scheduled
principal payments have been paid or are due as follows: (i) the excess of
the first installment ($900,000) over the Deposit was paid upon execution
of the Stock Purchase Agreement, (ii) the second installment, in the amount
of $450,000, was due on or before August 30, 2008, (iii) the
third installment, in the amount of $900,000, was due on or before November
30, 2008, and (iv) the final installment, in the amount of $1,350,000, is
due on or before March 31, 2009. The promissory note bears interest at 10%
per annum only on any unpaid principal balance after March 31, 2009 or upon
any default event.
  During the
quarter ended June 30, 2008, the Company applied the Deposit against
the Purchase Price and received approximately $662,000 in principal
payments on the promissory note. During the quarters ended September 30,
2008 and December 31, 2008 the Company received approximately $139,000 and
$83,000 in principal payments on the promissory note, respectively.
The unpaid principal balance of the Series A Stock note receivable as of
December 31, 2008 approximated $2,245,000 which includes approximately
$895,000 that was due on or before November 30, 2008. Of this
amount approximately $65,000 was received in February 2009. The Series A
Stock note receivable is reported as a reduction of stockholders' equity at
December 31, 2008. FIDEsprit is currently in default under the promissory note
due to non-payment of the installment due on November 30, 2008. The Company has
sent a written notice of default to FIDEsprit and has reserved its rights under
the promissory note. The Company has not accelerated the due date of the
remaining outstanding principal nor taken any other action under the note at
this time.
 
 Holders
of Series A 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 Stock are entitled to an annual stock dividend payable
at the rate of one share of Series A Stock for each twenty shares of Series
A Stock owned by each holder of Series A 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.
In the event the Company shall enter into any transaction in which
the shares of common stock are exchanged into other stock or securities,
each share of Series A Stock shall automatically be exchanged or converted into
the same security at a rate per share equal to 1.5 times the rate per share
that the common stock is exchanged for. Upon liquidation, holders of Series
A Stock are entitled to receive a per share cash distribution equal to
twice the rate of the per share cash distribution, if any, to the holders
of common stock.
  During
the March-June 2008 period, FIDEsprit and the Company had one common director,
who was then also a stockholderof the Company.
   F-26
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND 2007
 
  4. MINORITY
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. During the years
ended December 31, 2008, 2007 and 2006, losses of $0, $3,978 and
$59,026, respectively, were allocated to the minority stockholder's capital
account, which has been reported as minority interest in net loss of Proteo
Biotech in the accompanying consolidated statements of
operations.
 
 5.INCOME TAXES
 
 There is
no material income tax expense recorded for the years ended December 31,
2008 or 2007 due to the Company's net losses.
 
 Income
tax expense for the years ended December 31, 2008 and 2007 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:
  2008
                                          
                                          
                                          2007Income
      tax benefit at U.S. federal statutory rates
                                          
                                          $
                                          (303,000
                                          )
                                          
                                          $
                                          (151,000
                                          )Change
      in valuation allowance
                                          
                                          
                                          303,000
                                          
                                          
                                          
                                          151,000State
      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 $1,561,000
and $1,374,000 at December 31, 2008 and 2007, 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, 2008, the Company had tax net operating loss
carryforwards ("NOLs") of approximately $632,000
and $3,997,000 (2,835,000 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.
  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, covers the period from April 1, 2004 to December
31, 2007 (the "New Grant")  if certain milestones have been reached
by September 30 of each year, with a possible extension as defined in
the agreement. The New Grant covers approximately 50% ofeligible research
and development costs and is subject to the Company's ability to
otherwise finance the remaining costs. An additional condition of
the New Grant is that the product is to be developed and
subsequently produced in the German state of
Schleswig-Holstein.
  F-27
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND 2007
 
 
 6. COMMITMENTS AND CONTINGENCIES
(continued)
 
 GRANTS
(continued)
 
 The
Company qualified to receive approximately 217,000 Euros and 225,000
Euros (approximately $320,000 and $298,000, respectively) of the New Grant
in 2007 and 2006, respectively. New Grant funds approximating 196,000 Euros
and 225,000 Euros ($289,000 and $298,000, respectively) have been received
(or were due at year end) and reported as a reduction of research and
development expenses for the years ended December 31, 2007 and 2006,
respectively. The remaining 21,000 Euros (approximately $27,000) expired as
of December 31, 2007 and were forfeited. As of December 31, 2007,
management believes that all milestones required by the New Grant have been
satisfied. The Company received approximately 24,000 Euros ($34,000) of grant
funds during the year ended December 31, 2008.
  As of
December 31, 2008, the Company had not applied for any other grants from the
German government since the New 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. 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.
 
 Expense
related to such license totaling zero, $139,000, and $747,000 is included in
general and administrative expense in the accompanying consolidated statements
of operations and comprehensive loss for the years ended December 31, 2008 and
2007, and for the period November 22, 2000 (inception) to December 2008,
respectively. 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, 2007, the Company has accrued
$927,900 of licensing fees payable to Dr. Wiedow. At December 31, 2008, the
Company has accrued approximately $846,000 of licensing fees payable to Dr.
Wiedow of which approximately $42,000 is included in current liabilities and
$804,000 is 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, 2008.
  F-28
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
 
 
 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 (approximately $15,000 and $14,000 at
December 31, 2007 and December 31, 2008, respectively) 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 recognized  $110,000 of miscellaneous income
in 2007 and has deferred additional 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-29
  PROTEO, INC. AND
SUBSIDIARY
 (A DEVELOPMENT STAGE
COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND 2007
 
  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, 2008 exchange
rate), approximate the following for the years ending December
31:


euro
                          
                          
                          
                          dollars2009
                          
                          
                          18,000
                          
                          
                          
                          25,0002010
                          
                          
                          18,000
                          
                          
                          
                          25,0002011
                          
                          
                          8,000
                          
                          
                          
                          11,0002012
                          
                          
                          0
                          
                          
                          
                          02013
                          
                          
                          0
                          
                          
                          
                          044,000
                          
                          
                          $
                          61,000
 
 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, 2008 and 2007, and for the period November 22, 2000
(Inception) to December 31, 2008 approximated $38,000, $40,000 and
$290,000, 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, 2008 and 2007:
 
 2008
                        
                        
                        2007Numerator
      for basic and diluted loss per common share:Net
      loss charged to common stockholders
                        
                        $
                        (889,882
                        )
                        
                        $
                        (445,169
                        )Denominator
      for basic and diluted loss per common share:Weighted
      average number of common shares outstanding
                        
                        
                        23,879,000
                        
                        
                        
                        23,879,000Basic
      and diluted loss per common share
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.02
                        )






F-30