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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period _______to________

Commission File Number 0-19175

PROTEON, INC.
(Exact name of registrant as specified in its charter)

Massachusetts 04-2531856
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

Nine Technology Drive, Westborough, MA 01581
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (508) 898-2800
Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of each class) (Number of shares)

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.
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Yes X No
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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 10K. [ ]

Aggregate market value of Registrant's voting stock held by non-affiliates of
the Registrant as of March 27, 1997; $25,778,750 (without admitting that any
person whose shares are not included in determining such value is an
affiliate).

Indicate the number of shares outstanding of each of the Registrant's classes of
comon stock as of the latest practicable date. Shares of Common Stock oustanding
as of March 27, 1997: 15,276,296

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the Company's
fiscal year ended December 31, 1996 (the "1996 Annual Report") are incorporated
by reference into Parts II and IV of this Report and portions of the
Registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders to be
held on May 21st, 1997 (the "1997 Proxy Statement") are incorporated by
reference into Part III of this Report. With the exception of those portions of
the 1996 Annual Report and 1997 Proxy Statement expressly incorporated in this
Report by reference, such documents shall not be deemed filed as a part of this
Report.

Page 1 of 150 pages
Exhibit index at page

PART I

ITEM 1. GENERAL BUSINESS

COMPANY OVERVIEW
- ----------------

Proteon, Inc., together with its subsidiaries, including, OpenROUTE
Networks, Inc., ("Proteon," or "the Company") is known as an innovative product
provider in the multi-billion dollar data communications industry. Proteon and
its subsidiary, OpenROUTE Networks, have distinguished themselves as leaders in
helping customers with network connectivity. For more than 16 years, Proteon has
shipped network connectivity products that have helped customers grow and
prosper through deploying network computing. Historically, Proteon networking
products have provided connectivity solutions in more than 70 percent of the
Fortune 100 companies. Leveraging this expertise in mission-critical network
solutions, Proteon is delivering this same quality for Internet, Intranet, and
small to medium-sized enterprise users. The Company is committed to providing
access solutions that make networks more accessible, secure, easier to use,
manage, and operate. The Company's comprehensive line of access solutions
includes products for Internet/Intranet access, branch office access, Token Ring
and Ethernet switching, hubs and adapters.

The Company was incorporated in Massachusetts in January 1974 as
Proteon Associates, Inc. The Company changed its name to Proteon, Inc. in July
1983. Its executive offices are located at 9 Technology Drive, Westborough,
Massachusetts 01581, and its telephone number at that location is (508)
898-2800. The Company's manufacturing facilities are located at the same
address. In January 1997, the company announced the formation of a new
wholly owned subsidiary, OpenROUTE Networks, Inc. This new subsidiary was
incorporated in the state of Delaware, USA.

OpenROUTE Networks' markets encompass the fast growing components of the
networking industry. For Internet and Intranet connections, OpenROUTE
Networks' products combine cost effectiveness with ease of operation,
interoperability, network security, reliability and performance. The Company's
customers include both the Global 1000 multinationals, as well as those small
to medium-sized enterprises requiring connections to the Internet and to
suppliers, customers, and business products. Proteon, Inc.'s customers encompass
local area networking sites that implement Token Ring and Ethernet network
topologies. Specific products marketed by Proteon include network adapter
cards, network hubs, LAN switches, and a switch-router.

At the core of the Company's design philosophy is a commitment to
deliver reliable, high-performance networking products based on industry
standards. Proteon's and OpenROUTE Networks' products incorporate the highest
possible technical specifications to provide open, interoperable solutions for
today's shared bandwidth internetworks.

NETWORKING INDUSTRY

The data communications industry continues to undergo a fundamental shift
away from hierarchical single-vendor systems to open, peer-to-peer
communications networks and information management tools that provide users with
greater computing power and access to information. This evolution has fostered
the growth of two dynamic markets: workstations and networking. Workstations
deliver increasingly powerful, personal productivity tools, and data
communications networks provide the "highways" that distribute and share this
processing power throughout an organization, enabling users to more fully
leverage and manage information resources.

As the deployment of networks matures, three recent trends continue to
develop: networking of remote sites to the headquarters office via remote access
routers; reduction of network congestion with the implementation of LAN
segmentation using various switching technologies; and the massive drive for
businesses of all sizes and individuals to connect their systems and networks to
the Internet and Intranet.

The peer-to-peer evolution has created an increased demand for
client/server based applications. The first impact of client/server based
networks is the increasing demand for inexpensive, easy to use, remote access
routers. Remote offices can now access corporate databases while running local
application programs. The client/server shift has also created the demand for
greater performance in the LAN, and hence is driving the market for switching
solutions. Also, users are now gaining access to previously unreachable
resources including the Internet, corporate headquarters and other remote sites.
Any LAN-attached workstation with Internet Protocol (IP) client software can
send and receive electronic mail, access public databases worldwide, share files
and programs through File Transfer Protocol (FTP), participate in thousands of
business and consumer-related newsgroups, and easily browse the massive
quantities of information available on the World Wide Web.

Proteon and OpenROUTE Networks believe that one of the keys to their
success will be making networks more accessible to a new, broader base of
customers. The Company is committed to open, standards-based products,
innovative solutions to customer requirements for reliable and high
performance networks, a favorable price/performance ratio, ease of
installation, use, network security and network compatibility.

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FORMATION OF NEW SUBSIDIARY
- ---------------------------

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The formation of the new OpenROUTE Networks subsidiary was decided in
keeping with the Company's strengthened focus on the rapidly growing market for
Internet and Intranet connectivity. The Company defines the Internet as a
"public" network representing it to all audiences, and the Intranet as a
"private," secure network with Internet-like characteristics that is most often
used only by the employees of a specific company or organization. This new
OpenROUTE Networks subsidiary will focus on the development, marketing and
distribution of the Company's award-winning GlobeTrotter router products.

The new subsidiary was formed to bring together the Company's resources on
the GlobeTrotter family of high-performance, low-cost remote access routers and
the ongoing licensing of its OpenROUTE internetworking software suite. The name
"OpenROUTE Networks" reflects the Company's specific emphasis in the remote
access marketplace. In conjunction with the establishment of this new
subsidiary, the Company also unveiled a new corporate logo. The new logo will
also be used in a corporate branding campaign to better position GlobeTrotter
products. The new name also reflects the "open" nature of the public Internet.
OpenROUTE Networks has a multi-faceted sales strategy to meet the growing need
to connect hundreds of thousands of organizations to the Internet in a cost-
effective and secure manner. A major OpenROUTE Networks sales thrust will be to
focus on key and emerging product features for Internet Service Providers (ISPs)
and the distributors who service this segment of the market. Major ISPs and
distributors to ISPs have already become important OpenROUTE Networks customers.

OpenROUTE Networks also markets products through OEM relationships. Digital
Equipment Corporation and Nippon Telegraph and Telephone's (NTT) Advanced
Technology Division currently resell GlobeTrotter remote access routers under
their own brand names. OpenROUTE Networks expects to announce other OEM
relationships during 1997. OpenROUTE Networks also sells remote access
products through some of the world's largest distributors such as Tech Data
Corp. and Ingram Micro. In addition, a large base of Value Added Resellers
(VARs), including Racal DataGroup, actively market GlobeTrotter products in all
domestic and international markets. OpenROUTE Networks is targeting major sales
in markets such as government, health care, education, publishing,
manufacturing, insurance, professional services, libraries and entertainment.

LAN PRODUCTS AGREEMENT
- ----------------------

Proteon, Inc. and Microvitec PLC jointly announced the signing of a
reseller agreement and a letter of intent, subject to contract closure, for an
additional series of agreements that provide Microvitec to resell Proteon's
products and obtain intellectual property rights for LAN products, manufacturing
licenses, and access to other Proteon resources to develop products and services
for the LAN marketplace.

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SIGNIFICANT EXECUTIVE APPOINTMENTS AND CHANGES
- ----------------------------------------------

In March 1996, the Company promoted William Greer to Vice President
of American Sales Operations. Greer had been serving as Regional Sales Director
for the Eastern Region of the United States since he joined Proteon in 1995.
Early in 1997, Mr. Greer was given additional responsibilities as Vice President
of Worldwide Sales. In this role, Greer is responsible for all sales programs in
North, Central and South America, Asia Pacific and Europe. He supervises
Proteon's sales force, as well as manages relationships with Proteon sales
partners including large scale systems integrators, Value Added Resellers,
master distributors, and Internet Service Providers.

In the fall of 1996, Robert J. Connaughton, the company's Chief Legal
Counsel, was given additional corporate responsibilities as Vice President of
Finance and Chief Financial Officer. Mr. Connaughton, who joined Proteon in
1995, has nearly two decades of experience in senior management, law, operations
and finance.

During the year, three senior executives resigned their positions. David
Allen resigned his position as Vice President of European Sales Operations.
Jeffrey B. Low resigned his position as Vice President of Worldwide Marketing,
and Joseph A. DiGiantomasso resigned his position as Chief Financial Officer.
Information regarding employee contracts is available in the Company's Proxy
filing with the Securities and Exchange Commission.

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REMOTE ACCESS (ROUTERS)
- -----------------------

OpenROUTE Networks' product focus is anticipated to be in the market
segment of Remote Access Routing. This rapidly growing market is fueled by
large corporations deploying client/server applications in remote offices and
connections to the Internet. Proteon shipped the industry's first "plug and
play" low end router, the DNX 300, in early 1993. In November 1994, Proteon
began shipping the RBX 200. This router is the product of a joint development
agreement with IBM and at that time differentiated itself, the Company
believes, through low price, custom designed, remote access routing features,
and a high degree of interoperability with IBM's internetworking products.
The RBX 200 runs the full range of the Company's OpenROUTE(TM) routing
software. To date, Proteon has shipped more than 150,000 access ports with its
routers.

In April 1996, the Company expanded its line of connectivity products with
the introduction of the Globe Trotter (GT) Access Manager Point-of-Presence
(POP) platform. The GT Access Manager POP has been specifically designed as a
total Point-of-Presence solution for the thousands of Internet Service Providers
(ISPs) around the world that are currently expanding their connectivity
infrastructure. With an attractive entry-level price point of $8,995 (U.S.) --
the lowest price in the industry in its class -- and a scaleable architecture,
the Company believes the GT Access Manager gives ISPs maximum flexibility to
accommodate the dynamic requirements of their customers. The GT Access Manager
includes resilient features such as dual power supplies, high density wide area
network (WAN) connections and a highly optimized RISC-based routing engine. The
Company continues to market this product along with its high-end routers, the
CNX 500 and CNX 600.

In April of 1996, the Company made one of its most significant product
announcements of the year when it announced a major expansion of its line of
GlobeTrotter Remote Access routers. This expansion included six new models that
address all the major options for Internet/Intranet connectivity. The new models
included:

o The GlobeTrotter 70-U, which provides full Internet Protocol (IP)
connectivity for Integrated Services Digital Network (ISDN) links and
includes an integrated NT-1. It is also the industry's only product of its
type for under $1,000;

o The GlobeTrotter 70-S/T, which provides the same features as the
GlobeTrotter 70-U, plus support for other ISDN peripherals through the S/T
interface, also at under $1,000;

o The GlobeTrotter 72-U, which provides IP, IPX, AppleTalk and bridging
connectivity for ISDN links with an integrated NT-1, priced at only $1,195;

o The GlobeTrotter 72-S/T, which provides IP, IPX, AppleTalk, and Bridging
connectivity, plus support for other ISDN peripherals through the S/T
interface, also priced at only $1,195;

o The GlobeTrotter 60 which now features asynchronous dial-up and synchronous
Frame Relay or leased-line IP connectivity, priced at only $795; and

o The GlobeTrotter 62, with the same asynchronous and synchronous
functionality, with additional protocol support for IPX, AppleTalk and
Bridging, priced at only $995.

The Company believes that the expansion of the GlobeTrotter line is
critical to growth in 1997. The Company believes that having a more complete
line of Remote Access routers will give it a better entry point into business
partnerships with ISPs and OEM prospects. This line of products is expected to
strengthen the Company's position in the market for ISDN routers.

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During the summer of 1996, the Company's ISDN product line was even further
strengthened when it participated in an industry-wide testing consortium. In
recent laboratory testing conducted by Proteon, the GlobeTrotter 70-U -- running
Version 5 of Stac(R) LZS(R) compression algorithm and compression control
protocols -- achieved data throughput rates over an ISDN link that were between
30 and 70 percent faster than competing products.

At the fall Networld+Interop industry trade show in Atlanta, the Company
released the results of another industry test that demonstrated the performance
of its ISDN products. The testing, which measured Integrated Services Digital
Network (ISDN) router and bridge performance, was sponsored by Strategic
Networks Consulting, Inc., Rockland, Mass., a leading market research firm and
networking consultant.

The GlobeTrotter 70 -- at a list price of only $995 per unit for unlimited
users -- beat out all competing products in two critical areas: data
compression and ISDN call setup.

MAJOR EMPHASIS ON NETWORK SECURITY
- ----------------------------------

In an effort to significantly expand its GlobeTrotter product line, the
Company launched a major product marketing effort for network security products.
The program has been designed to address the networking marketplace's need for
affordable and secure ways of remotely accessing the Internet and corporate
Intranets. The Secure Internet/Intranet Program is offered to Internet Service
Providers (ISPs) and end users, and is based on a security hierarchy that
recognizes the need for increasingly stronger security mechanisms depending upon
the type of user and the type of application. As 1997 unfolds, OpenROUTE
Networks intends to address each of those levels of users with strategic
partnerships and products. Recent industry research indicates that in a drive to
achieve greater business success in the face of increasing global competition,
Internet and Intranet-based services hold the key for today's virtual
organization. Acting as a global backbone, these networks can link branch
offices, telecommuters, partners, suppliers or customers directly into the
business process.

The first product implementation of this program is being marketed as the
GTSecure-60 Firewall Router, a high-performance, cost-effective solution that
uniquely integrates both full firewall and routing capabilities into a single
product. The Company believes that it was one of the first in the industry to
offer this type of integrated security product. Most other solutions call for
users to manage security in a separate server environment running expensive
security software. The Company believes this low-cost approach provides adequate
network security for most small office users.

In the Fall of 1996, the Company added the GTSecure-70 Firewall Router
to its product line for ISDN connections. In addition, the Company added IP
filtering technology and began active participation in testing with the National
Computer Security Association. The GTSecure Firewall Routers were subsequently
certified by the NCSA. GTSecure Firewall Routers start at pricing levels of only
$1,395 per unit (U.S. list). As 1997 unfolds, the Company intends to offer other
products that integrate routing and security in the same system platform.

All of OpenROUTE Networks' routers feature the Company's award-winning
OpenROUTE(TM) internetworking software. By using OpenROUTE(TM) software, users
have assurance that the products will interoperate with a wide range of
existing installed equipment. OpenROUTE(TM) has been accepted by industry
leaders as the most open, standards-based internetworking software available.

The Company has continued to devote significant engineering resources to
its OpenROUTE internetworking software. Recently, the Company announced two new
versions that encompass major new technologies and features. OpenROUTE Release
2.2 includes new features such as:

o Support for NetWare Link Service Protocol (NLSP), a technology that
provides link state routing for Internetwork Packet Exchange (IPX) based
networks that are among the largest in the industry;

o Implementation of IPXWAN Version 2, a link management and negotiation
protocol for use over serial lines and other wide area services; and

o A series of IPX enhancements that aid in routing traffic, load sharing,
bandwidth management and diagnostics.

One of the most attractive features of OpenROUTE 2.2 is the support for
NLSP. NLSP is a protocol for information exchanged among routers geared to the
needs of large IPX internetworks. IPX is the Network-Layer protocol used by the
NetWare operating system, and by the compatible network products of other system
providers. NLSP addresses the limitations of the IPX Routing Information
Protocol and Service Advertisement Protocol (RIP/SAP). Users are much better
able to scale their networks with NLSP. NLSP was designed and specified by
Novell. Support of NLSP makes the company's products attractive in the large
base of Novell users.

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OpenROUTE Release 2.3, which was recently announced, further expands the
capabilities of the software suite. This release introduces several new WAN
capabilities that significantly enhance the software for ISDN links. Key new
features include:

o Internet Protocol (IP) Address Assignment, a capability that allows IP
addresses to be automatically assigned to a router's WAN ports;

o Support for Callback, a new feature that allows an OpenROUTE GlobeTrotter
router to make or accept call requests to and from the remote routers or
access servers;

o Improved IP filters that block unwanted traffic and allow users to create a
collection of access control lists to route traffic based on an
organization's network policy; and

o Support for Internetwork Packet Exchange Wide Area Net (IPXWAN), a new
Novell protocol that standardizes the transfer of IPX packets over various
WAN media.

During 1997, the Company plans to introduce other new versions of OpenROUTE
that will expand the current product line and open new markets in the Remote
Access segment.

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JOINT DEVELOPMENT
- -----------------

In the fall of 1996, the Company announced an important strategic
partnership with NTT Advanced Technology Corporation (NTT-AT) of Japan in
which OpenROUTE Networks and NTT-AT will work together to provide the Japanese
marketplace with high-performance connectivity products for ISDN. The companies
have jointly developed an ISDN router which is now being marketed in Japan.
These new products are being sold in Japan with an integrated NTT-AT Data
Service Unit (DSU). The Company believes that the market for network access
solutions in Japan is currently showing dramatic growth as small offices and
Internet/Intranet users take advantage of ISDN's high bandwidth capabilities.
NTT-AT has a high degree of proficiency in the data communications sector
utilizing LAN technologies, and now is focusing on the Remote Access market as
one of its key areas. The Company believes that this method of joint
development is important to its future growth. The Company intends to
aggressively seek out other, similar joint partnerships with
telecommunications carriers in both domestic and international markets.

OpenROUTE Networks also currently builds product under an OEM relationship
for Digital Equipment Corporation of Maynard, Mass. Digital currently markets a
small Remote Access router that carries the Digital name but is built by
OpenROUTE Networks.

BUSINESS PARTNERING WITH INTERNET SERVICE PROVIDERS
- ---------------------------------------------------

A major initiative is the Company's decision to seek business
partnerships with Internet Service Providers. The Company believes that
Internet Service Providers offer a new path of wide-scale distribution for
GlobeTrotter routers. As ISPs have evolved around the world, their equipment
needs have paralleled this process. In many cases where ISPs are connecting
small businesses to the Internet or Intranet, the installation of a Remote
Access Router is necessary. By solidifying its presence with ISPs on a global
basis, the Company expands its distribution and increases the potential to grow
its business. The Company does not currently have any agreements with ISPs that
provide for the exclusive installation of OpenROUTE Networks products. However,
a major effort is being made to work on development with ISPs, thus ensuring
that OpenROUTE Networks' products are the preferred choice.

The Company's first significant relationship in this area was established
with PSINet, Inc. of Herndon, Virginia, in the Spring when OpenROUTE Networks
GlobeTrotter routers were certified to connect to PSINet's massive
Internet-optimized network. At the time, PSINet's network had more than 300
Points-of-Presence around the world. The certification is important to the
Company because it means that for business and corporate users PSINet may
specify OpenROUTE Networks products. The GlobeTrotter products were certified
after a series of rigid lab tests and comparisons with many competitive
products.

During the course of the year, OpenROUTE Networks expanded its relationship
with PSINet on many fronts. The companies jointly announced that they would
develop a range of technologies that strengthen the security of PSINet's
Internet Services and enable advanced network capabilities for future service
offerings. This technology from OpenROUTE Networks enables PSINet to enhance
security services that are integrated into the network itself. Subsequently,
this technology from OpenROUTE Networks was offered by

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PSINet under the name "RouteWaller." This joint development with PSINet also
enabled the Company to develop its own GTSecure Firewall Routers.

Going forward, the Company's strategy is to increase the number of ISPs
that carry OpenROUTE Networks routers. Other companies added in 1996 include
SundayNET, Northern Net, Best Internet, Supernet, EasyNET, Vossnet, SingNET,
Athena Internet, ContribNET, Tokyo Internet, ILK Internet, Global Internet, and
Asia On Line. During the year, the Company hopes to announce other agreements
with ISPs from around the world.

Designed in accordance with general ISP requirements, GlobeTrotter remote
access routers give users shared Internet access, thus avoiding multiple phone
line costs and expensive modem banks. GlobeTrotters feature plug-and-play
operation, user-friendly graphical interfaces, Internet Protocol (IP)
standards-based internetworking and security, and local and remote
manageability.

COMPANY AWARD
- -------------

OpenROUTE Networks won an important industry award when its comprehensive
portfolio of GlobeTrotter Remote Access routers won a 1996 Users' Choice Award
from Communications News. The honor singled out OpenROUTE Networks in the
category for internetworking equipment. The Communications News awards are based
on actual inquiries from subscribers. Inquiries about the OpenROUTE Networks
products came from communications and networking professionals at end user
sites.

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LOCAL AREA NETWORKING PRODUCTS
- ------------------------------

The Company is continuing to market a number of LAN products. However, the
Company is putting less emphasis on LAN products than in previous years. The
decision to partner with third parties in license arrangements is intended to
enhance development.

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MARKETING, SALES AND CUSTOMERS
- ------------------------------

End-users of the Company's products have typically been organizations with
critical applications requiring connectivity integrating their headquarters and
wide area computing environments. The Company's marketing and distribution
strategy is to reach these end-users primarily through an indirect sales channel
comprised of selected large systems integrators, Internet Service Providers,
original equipment manufacturers (OEMs), value added resellers (VARs),
telecommunications carriers, and distributors with experience in network
integration and a reputation for excellent service. As the Company moves
forward, it will be targeting a customer base that may not be familiar with
standard networking terms.

MARKETING PROGRAMS
- ------------------

The Company understands the critical nature of creating end-user awareness
for its products and capabilities. The Company's marketing programs in 1996 and
planned marketing programs for 1997 continue to focus on channel, ISP, and end-
user awareness through: direct mail campaigns; targeted advertising; significant
educational and product announcement activities; public relations; seminar
programs; electronic advertising mediums such as the Internet, and regional and
large, national industry trade shows. These programs are intended to enhance
brand name recognition for the Company and its products with end-users, generate
sales leads for the Company's field sales force and the Company's resellers, and
support the sales efforts of its resellers. In the future, the Company plans to
devote more time and money to branding of the OpenROUTE Networks nameplate. In
conjunction with the creation of OpenROUTE Networks, the Company launched a new,
colorful logo that will play a key role in the corporate campaign.

WORLD WIDE WEB SITE DEVELOPMENT
- -------------------------------

To better communicate its messages, the Company is making a major
commitment to the World Wide Web. Since deploying its World Wide Web site in
1995, the Company has continued to enhance and improve the site. The current
site includes a wide range of Company information such as corporate
information, product information, investor information, business partners, etc.
To further improve its Web site, the Company intends to launch a new "business
oriented" site that is more closely tied to the Company's Remote Access
business. The new site, currently under construction, is found at URL
http://www.openroute.com. The Company is committed to using its Internet site
as an important factor for its business. In the near future, the Company also
plans to use the Internet for electronic commerce. To implement the new site,
the Company is using the outside resources of a web development vendor.

INVESTOR RELATIONS PROGRAMS
- ---------------------------

The Company's marketing efforts also include an Investor Relations program
that encompasses a wide range of activities. On a daily basis, the Company has
communications personnel available to speak with current investors, investor
prospects, buy-side and sell-side analysts, portfolio managers, and others
interested in the Company's finances and products. The Company also conducts an
outreach program to present its business story to security analysts. These
analyst forums are typically conducted by the Company's Chief Executive
Officer. Venues have included New York City, San Francisco, and Boston. During
1997, the Company expects to continue to leverage its marketing efforts through
these analyst forums. The Company also conducts regular quarterly conference
calls with Wall Street securities analysts and makes its senior executives
available for on-site visits. Other investor relations activities include the
Company's annual meeting, annual report, financial reports, etc. The Company
recently launched a new service called "Shareholder direct." This
telecommunications-based service features a toll-free number for inbound
callers. Interested parties can hear recorded messages and retrieve documents
at no charge. The Company has instituted this service in lieu of quarterly
mailings. The Company believes this new system gives interested parties better
and faster access to financial statements and recent press announcements. The
Company also makes investor relations information available through its World
Wide Web site. The Company's Web site can be reached at http://www.proteon.com
or http://www.openroute.com.

VARs/ISPs
- ---------

The Company continues to reinforce its long-standing commitment to indirect
sales channels with the Premier Access and Internet Access Partner Program.
This is an ongoing cooperative effort designed to increase sales opportunities
for the hundreds of value added resellers (VARs) and ISPs that currently carry
the Company's product line, and expand the Company's reach into new
geographical regions.

Under the program, partners have a direct relationship with the Company,
but may continue to procure products through distribution. Access Partners are
authorized to sell all the Company's solutions, which currently includes
products for Internet access, Small Office/Home Office Access, Branch Office
Access, Shared Remote Access Routing and Local Access Token Ring and Ethernet
switching, hubs and adapters.

Access Partners have to meet certain criteria in order to qualify
for the program. Once qualified, this group of partners is eligible for co-op
funding on all products purchased. The Company also provides training,
evaluation, and beta testing programs exclusively to these partners. The new
plan creates one partner program for all classifications of resellers including
network integrators, VARs, Internet service providers, national integrators, and
systems integrators. The Company works with its sales partners to guarantee
geographical and product exclusivity for partner products and provides free
sales and technical training. The Company also participates in joint sales

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calls and provides its partners with qualified sales leads by territory. Access
Partners also receive early access to new products and technical information,
and are eligible for a demonstration/evaluation equipment program.

FIELD SALES FORCE
- -----------------

The Company's field sales force is primarily responsible for providing
sales support and training to the Company's systems integrators, OEMs, ISPs,
VARs, telecommunications carriers, and distributors. In 1996, the Company
focused a portion of its sales force on direct presence at end-user sites with
the goal of providing awareness to the end-user of Proteon and OpenROUTE
Networks' products and the development of leads to support its reseller
partners. The field sales force has a number of offices in the United States,
and international offices in London, Singapore, North Sydney, Tokyo, Toronto,
Paris, Kelkheim, and Hong Kong.

SYSTEMS INTEGRATORS AND OEMS
- ----------------------------

Proteon and OpenROUTE Networks sell networking products primarily through a
large number of systems integrators and OEMs. These organizations typically have
technical expertise and an installed customer base in either telecommunications
or computer communications, and are experienced in the sale and support of
complex networking solutions.

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DISTRIBUTORS
- ------------

Proteon sells a substantial portion of its Token Ring and Ethernet adapter
and intelligent hub and wirecenter products in North America to a number of
distributors, which usually resell to resellers and dealers, including several
national chains. Typically, distributors market Proteon's Token Ring and
intelligent hub products to dealers, whereas VARs sell the complete product
line, including routers, to end-users. The Company's distributors include Ingram
Micro and Tech Data. The Company also decided to initiate programs to sell its
router and switch products through distributors. As a result of this initiative,
certain distributors will carry OpenROUTE Networks' internetworking products and
service the needs of VARs and other types of system integrators. The Company
believes this new sales distribution channel for internetworking products will
broaden the accessibility of its products.

INTERNATIONAL SALES
- -------------------

The Company's products are currently marketed, sold and serviced
internationally by over 60 distributors, VARs, and OEMs. These resellers have
generally non-exclusive agreements applying to a country-wide territory. In
1996, international sales accounted for 38.3% of net sales. In 1995, the number
was 35.7%. In 1994, the number was 35.3%.

19
16

CUSTOMER SUPPORT AND SERVICE
- ----------------------------

The Company's customer service organization provides a comprehensive suite
of service and support programs for resellers and end-users. The underlying
philosophy of the Company is to provide end-users with alternatives for
acquiring services for their networking requirements. The Company's users have
the option of contracting directly with the Company, or with a number of Company
supported service providers, enabling them to choose the service model that best
complements their business model.

Proteon and OpenROUTE Networks' product warranties range from 90 days for
software products to a Lifetime Hardware Warranty for network adapter cards. The
service offerings consist of technical support (remote and on-site), maintenance
contracts, hardware and software upgrades, product exchange, spares, depot
repair, and professional services.

The Company significantly enhanced its service capabilities when it
announced a joint support agreement with IBM. The agreement further
strengthened the Company's ability to provide on-site

20
17

support across the United States and Canada. The three-year agreement pairs
IBM's service and support resources with OpenROUTE Networks' comprehensive line
of multiprotocol internetworking systems to provide users with more options in
servicing their growing, mission-critical networks.

Under the terms of the agreement, OpenROUTE Networks' customers will be
able to choose from multiple on-site support options. OpenROUTE Networks'
expects its own customer service unit to handle most U.S. requirements. When
on-site support is required, OpenROUTE Networks will contact IBM's national
dispatch center and make all necessary arrangements. OpenROUTE Networks will
continue to be responsible for problem resolution. IBM provides direct support
for Canadian maintenance requirements, including telephone support, equipment
exchange, and on-site service. While OpenROUTE Networks provides second and
third level technical support, IBM Canada maintains ownership through problem
resolution.

RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------

Management believes the Company's future success depends in large part upon
timely enhancement of existing products and the development of new products that
not only maintain technological excellence, but also improve the capabilities,
efficiency, and cost-effectiveness of the end-users' data communications
networks. The Company is developing new products to improve price/performance
ratios, enhance its network management capabilities, simplify ease of use,
network security and ensure interoperability with other vendors' standards-based
products. The Company is also helping to define and support emerging industry
standards that underly the use of new technological capabilities. The Company
is currently participating in a variety of Internet Engineering Task Force
(IETF) working groups, and the IEEE 802.5 and 802.12 subcommittees.

The Company believes it is essential to work cooperatively with other
organizations that have complementary technologies. Significant relationships
have been developed with IBM, Motorola ISG, Digital Equipment Corp., Yokogawa
Digital Computer Corp. (Japan), Plaintree Systems, AT&T, and TELDAT,
S.A. of Spain. The Company believes that interoperability with other vendors'
networking products will be of increasing importance in the future. The
Company expends considerable efforts on interoperability to increase market
acceptance of its products.

The Company's laboratories conduct ongoing interoperability tests with IBM
and other vendors' products. In several cases, development partners provide
reciprocal testing. To pursue broader interoperability, Proteon, in 1992, helped
found the University of New Hampshire Token Ring Interoperability Laboratory,
and joined other vendors in the Token Ring Interoperability Laboratory (TRIL).

In 1996, 1995, and 1994, the Company's research and product development
expenditures were $9,353,000, $8,802,000, and $11,162,000, respectively. All of
the Company's expenditures for hardware and software research and development
costs have been expensed as incurred.

MANUFACTURING
- -------------

21
18

The Company's manufacturing operations primarily consist of assembly,
testing and quality control of materials, components, subassemblies, and
systems. The Company has developed a strategic relationship with SCI Systems
(SCI), a major subcontract manufacturer with access to cost-effective, high
volume manufacturing, distribution, and repair capability worldwide. SCI
manufactures a majority of the Company's board assemblies for its router, hub,
and adapter card product lines. The Company believes that in the event of an
interruption in manufacturing at SCI, alternative subcontractors could be
brought on line quickly. However, such a transition could result in production
delays which might adversely affect the Company's business. The Company also
subcontracts board assemblies with other local vendors for lower volume
products. Proteon and OpenROUTE Networks does some final assembly and testing of
its intelligent hubs and routers at its Westborough, Massachusetts manufacturing
facility. A repair depot and logistic operation is also located at Westborough,
coordinating global service requirements for all products.

In the fall of 1996, the Company's manufacturing facilities were
consolidated into Company headquarters at 9 Technology Drive. The Company has
since undertaken efforts to sub-lease its now unused manufacturing space, and
expects to do so in the near future.

22
19

INTELLECTUAL PROPERTY RIGHTS
- ----------------------------

The Company was granted a patent on February 18, 1992, for its Token Ring
synchronization technology, commonly referred to as JitterBuster. On July 21,
1992 the Company was granted a patent for Token Ring Equalizer. Each of these
patents has a life of 17 years from the date of grant.

Currently, Proteon relies principally upon a combination of contractual
rights, trade secrets, and copyright laws to establish and protect its
proprietary rights in its products. The Company believes that, because of the
rapid pace of technological change in the data communications and computer
industries, the legal protection for its products is a less significant factor
in the Company's success than the knowledge, ability, and experience of the
Company's employees, the frequency of product enhancements and the timeliness
and quality of support services provided by the Company.

Certain technology used in the Company's products is licensed by the
Company from third parties, generally on a non-exclusive basis. These license
agreements generally require the Company to pay royalties (certain of these
license agreements include minimum royalty requirements) and to fulfill
confidentiality obligations in order to maintain the licenses. One of the
Company's license agreements is an exclusive license for a portion of the
software incorporated in the Company's bridging routers. In order to maintain
the exclusivity of this license, the Company must make minimum annual royalty or
other payments in addition to those required to maintain the license. The sum of
these payments for each year is relatively insignificant to the Company. The
maximum royalties

23
20

payable under this license are limited in accordance with a formula. Generally,
if the Company does not pay minimum royalties or make other minimum payments
each year under this license, the license may be terminated. Absent a breach of
this license agreement by the Company, the license may be continued indefinitely
at the Company's option. The termination of this license would have a material
adverse effect on the Company's operations because the technology licensed under
this agreement is included in the software incorporated in the Company's
bridging router products, which provide a significant portion of the Company's
revenues.

RISK FACTORS
- ------------
In this 10K, under the provisions of the "safe harbor" section of the
Private Securities Litigation Reform Act of 1995, Proteon, Inc. makes
forward-looking statements that involve a number of risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the level of acceptance of Proteon's and OpenROUTE Networks' products in
the marketplace; the company's ability to generate revenue across all existing
product lines; future reventues generated by the licensing of OpenROUTE
software; general competitive pressures in the marketplace; the company's
ability to sign agreements with reseller partners including both Premier Access
Partner VARs and Internet Service Providers (ISPs); the ability to sign OEM
agreements; and continued overall growth in the networking industry. Risk
factors are listed in the company's annual report, Form 10-K, Form 10-Q, and
other filings with the Securities and Exchange Commission.

TECHNOLOGICAL CHANGE, NEW PRODUCTS AND INDUSTRY STANDARDS
- ---------------------------------------------------------

As the deployment of networks mature, four recent trends continue to
develop: networking of remote sites to the headquarters office via remote access
routers; reduction of network congestion with the implementation of local area
networks (LAN's); segmentation using various switching technologies; and the
push by businesses of all sizes and individuals to connect their systems and
networks to the Internet.

The Company is still in the process of repositioning itself from a company
emphasizing deployment of Token Ring solutions to one that is focused on
network access - or shared access. The Company's overall business strategy is
to provide leading edge product solutions in this market segment.

The market for the Company's products is characterized by rapidly changing
technology, new product introductions and a multiplicity of current and evolving
industry standards. Accordingly, the Company believes that its future success
will depend on (1) its continuing ability to enhance and expand its existing
products; (2) to develop or private label other manufacturer's technology; and
(3) introduce in a timely fashion new products which incorporate new
technologies, conform to standards, and achieve market acceptance.

There can be no assurance that the Company's strategy is the correct one
under the circumstances; that the Company has correctly assessed trends in the
marketplace; that the Company will be able to develop, market or support, or
secure external supplies of, such products successfully; or that the Company
will be able to respond effectively to technological changes, new product
announcements by others or new industry standards.

24
21
INTELLECTUAL PROPERTY
- ---------------------

Currently, the Company relies principally upon a combination of contractual
rights, trade secrets, and copyright laws to establish and protect proprietary
aspects of its products. The Company believes that, because of the rapid pace of
technological change in the data communications and computer industries, legal
protection for its products is a less significant factor in the Company's
success than the knowledge, ability, and experience of the Company's employees,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company. However, should a successful challenge be
mounted against the rights of the Company in and to its intellectual property,
by allegations of infringement on the rights of others or for any other reason,
the Company's business, operations and finances could be adversely affected.
Certain technology used in the Company's products is licensed by the Company
from third parties. The termination of certain of these licenses would have a
material adverse effect on the Company's operations.

25
22

INTERNETWORKING SOFTWARE LICENSING
- ----------------------------------

OpenROUTE(TM), the Company's world class internetworking software suite,
is the foundation of the Company's high performance local and remote access
internetworking products. All of the Company's internetworking products ship
with some variant of this software technology installed. The Company licenses
this software to other providers of internetworking products.

The market for routers and bridges is dominated by Cisco Systems. The
Company's intent, as a smaller participant, is to: develop innovative new
products for emerging niche markets with superior performance characteristics
and cost effectiveness; license its proprietary router software source code to
major manufacturers for use in their routing

27
23

and bridging products; identify markets for its routing, bridging and shared
access products; and develop and market products which have the features desired
by the market and interoperate with the products manufactured by the major
industry participants.

While the Company has had some success in implementing this strategy, there
can be no assurance that this strategy will prove to be the correct one for the
future. Similarly, there can be no assurance that the Company has chosen the
right products for development, that it will be able to develop and produce the
chosen products, or that those products will gain acceptance in the marketplace.
In addition, while each router source code license sale can produce significant
revenue, there is a limited market of customers for the Company's router source
code and each license draws heavily on the Company's engineering resources.

Failure by the Company to identify new licensing prospects, to continue to
make such licensing arrangements, or to be able to support the sales made to
date would have an adverse effect on the Company's operations. Additionally, as
routing technology progresses, the Company may be required to modify its routing
and bridging software to maintain compatibility with various standards and
interoperability with other manufacturers router products. Failure by the
Company to maintain such compatibility, interoperability, and technical
competencies could adversely affect the Company's business, operations and
finances.

It is the Company's intention to rely less on software licensing as an
overall source or revenue. The Company also expects that in future months
certain revenue streams from IBM and Digital Equipment Corp. will diminish and
end. The loss of these revenue streams could adversely affect future results
unless the Company generates revenues from other products.

COMPETITION
- -----------

The data communications, networking, and computer industries are highly
competitive and characterized by rapidly changing technology and evolving
industry standards. These advances result in frequent new product introductions,
increased capabilities and improvements in the relative price/performance of
networking products. As a competitor in the networking industry, Proteon
believes that one of the keys to success will be making networks more accessible
to a broader base of customers. The Company is committed to open,
standards-based products, innovative solutions to customer requirements for
reliable and high performance networks, a favorable price/performance ratio,
ease of installation, security, interoperability and ease of use. There is no
guarantee that the Company will be able to fully succeed against the
competition.

The Company competes with several companies having greater research and
development, marketing and financial resources, manufacturing capability,
customer support organizations, and name recognition than those of the Company.
There can be no assurance that the Company will be able to compete successfully
in the future or that competitive pressures will not adversely affect the
Company's business.

RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------

28
24

management capabilities, simplify ease of use, and ensure interoperability with
other vendors' standards-based products. Proteon is also helping to define and
support emerging industry standards underlying the use of new technological
capabilities.

VARIABILITY OF QUARTERLY OPERATING RESULTS
- ------------------------------------------

The Company's quarterly operating results may vary significantly depending
upon factors such as the timing of new product announcements and releases by the
Company and its competitors, the timing of significant orders, the mix of
products sold, and the mix of distribution channels through which the products
are sold. In addition, substantially all of the Company's sales in each quarter
result from orders booked in that quarter. Consequently, if sales do not close
in any quarter as anticipated, the Company's results of operations for that
quarter would be adversely affected. Further, the Company's expense levels are
based, in part, on its expectations as to future sales. If sales levels are
below expectations, operating results may be adversely affected.

METHOD OF DISTRIBUTION
- ----------------------

The Company sells its products to end users worldwide primarily through an
indirect sales channel comprised of large systems integrators, OEMs, VARs, and
distributors. These resellers also represent other lines of products which are,
in some cases, identical or complementary to, or which compete with, those of
the Company. While the Company attempts to encourage these resellers to focus on
its products through marketing and support programs, there is a risk that these
resellers may give higher priority to products of other suppliers, thereby
reducing their efforts devoted to selling the Company's products. One reseller,
Ingram Micro, accounted for approximately 14%, 12%, and 11%, of the Company's
sales in 1996, 1995, and 1994, respectively, and a second reseller, Tech Data,
accounted for approximately 14% and 10% of the Company's sales in 1996 and 1995,
respectively.

There can be no assurance that the Company has selected appropriate
channels of distribution for its products or that existing resellers will
dedicate adequate resources to sales of the Company's products. Failure to do so
could result in an adverse impact on the Company's business, operations and
finances.

MARKETING, SALES AND CUSTOMERS
- ------------------------------

End-users of the Company's products have typically been organizations with
critical applications requiring connectivity integrating their branch offices or
headquarters and wide area computing environments. OpenROUTE Networks' marketing
and distribution strategy is to reach these end-users primarily through an
indirect sales channel comprised of selected large systems integrators, Internet
Service Providers, original equipment manufacturers (OEMs), value added
resellers (VARs), and distributors with experience in network integration and
reputation for excellent service. In addition, the Company's strategy includes
increased presence of its sales force in end-user sites. In some cases, the
Company will sell directly to an end user. However, this accounts for a very
small percentage of overall sales.

There can be no assurance that the Company has correctly formulated its
end-user profile or selected appropriate methods of marketing and selling its
products. Failure to do so could result in an adverse impact on the Company's
business, operations and finances.

LIQUIDITY
- ---------

29
25

The Company's management believes that its cash, cash equivalents, and
marketable securities will satisfy its expected working capital and capital
expenditure requirements through the next twelve months. Significant reductions
in revenue could cause adverse effects on cost and the ability to finance
operations.

INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
- ---------------------------------------------------------------

International sales accounted for 38.3%, 35.7%, and 35.3% in 1996, 1995,
and 1994, respectively, of the Company's net sales. The Company expects that
international sales will continue to be a significant portion of the its
business. Foreign regulatory bodies often establish standards different from
those in the United States, and the Company's products are designed generally
to meet those international standards. The inability of the Company to design
products in compliance with such foreign standards could have an adverse
effect on the Company's operating results. The Company's international business
may be affected by changes in demand resulting from fluctuation in currency
exchange rates as well as by risks such as tariff regulations and difficulties
in obtaining export licenses.

SHARES ELIGIBLE FOR FUTURE SALE
- -------------------------------

Approximately 15,428,000 outstanding shares of Common Stock are now freely
tradable on the open market. A total of 522,604 shares are exercisable under
vested options as of December 31, 1996, and the shares issuable upon exercise
of any such option will be tradable or eligible for sale in the public market
pursuant to a registration statement, or Rule 144 or Rule 701 under the
Securities Act. Additional shares will become eligible for resale in the
public market at subsequent dates. Sales of substantial numbers of such shares
in the public market could adversely affect the market price of the Common
Stock.

POSSIBLE VOLATILITY OF STOCK PRICE
- ----------------------------------

Based on the recent trading of the Company's stock, the Company believes
factors such as announcements of new products by the Company or its competitors,
quarterly variations in financial results, or other events could cause the
market price of the Common Stock to fluctuate substantially. In addition, the
stock market has experienced volatility which has particularly affected the
market prices for many high technology companies' stock and which often has
been unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Company's Common Stock.

CERTAIN CHARTER AND BY-LAW PROVISIONS
- -------------------------------------

The Company's Amended and Restated Articles of Organization and By-Laws
contain certain provisions that could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. Certain of such provisions allow the Company to
issue preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions.

EMPLOYEES
- ---------

As of December 31, 1996, the Company employed a total of 193 persons,
including 63 in sales, marketing and customer support, 53 in engineering and
product development,

30
26

55 in manufacturing, and 22 in finance and administration. None of the Company's
employees are represented by a labor union. The Company has experienced no work
stoppages and believes its employee relations are in good standing.

REGISTERED TRADEMARKS
- ---------------------

Proteon, OpenROUTE, TokenVIEW and ProNET are registered trademarks and
JitterBuster CNX 600, CNX 500, CNX 400, DNX 350, DNX 300, RapiDriver, OneVIEW,
and OverVIEW are trademarks of Proteon. Ethernet is a registered trademark and
XNS is a trademark of Xerox Corporation. IBM and NetView are registered
trademarks and SNA is a trademark of IBM. Motorola is a trademark of Motorola,
Inc. AMD is a trademark of Advanced Micro Devices, Inc. AT&T is a trademark of
AT&T.

31
27

ITEM 2. PROPERTIES

The Company's principal administrative, marketing, manufacturing and
product development facilities are located in one building in Westborough,
Massachusetts and occupy a total of approximately 42,000 square feet as of
December 31, 1996. The Company occupies these facilities under an agreement
which expires in April 2002. In addition, the Company leases 11 sales and
support offices elsewhere in the United States and abroad. The Company believes
that its existing facilities are adequate for its current needs.

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor any of its subsidiaries is a party to any material
legal proceedings nor is any property of the Company or its subsidiaries the
subject of material legal proceedings.

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

No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended December 31, 1996.

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28

PART II

ITEM 5. MARKET FOR PROTEON COMMON STOCK
AND RELATED STOCKHOLDER MATTERS

The section entitled "Stock Price History" on page __ of the 1996 Annual
Report is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The table entitled "Selected Consolidated Financial Data" contained on page
__ of the 1996 Annual Report is incorporated herein by reference. The table
should be read in conjunction with the consolidated financial statements and
related notes and other financial information appearing elsewhere in the 1996
Annual Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages __ through __ of the Annual Report.

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

The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained on pages __ through __ of the
1996 Annual Report is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The sections entitled "Consolidated Balance Sheets," "Consolidated
Statements of Operations," "Consolidated Statements of Stockholders' Equity,"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements," and "Report of Independent Accountants" contained on pages __
through __ of the 1996 Annual Report are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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29

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF PROTEON

The sections entitled "Information About The Executive Officers," "Proposal
1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Company's 1997 Proxy Statement which the
Company intends to file with the Securities and Exchange Commission on or about
April 11, 1997 are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The section entitled "Compensation of Directors and Executive Officers"
contained in the 1997 Proxy Statement (except for those portions entitled
"Certain Relationships and Related Transactions", "Information About the
Executive Officers", "Compensation Committee Report on Executive Compensation",
"Compensation Committee Report on Option Repricing", and "Comparison of
Cumulative Total Return Since Initial Public Offering among Proteon, Inc.,
NASDAQ Stock Market and H & Q Communication Section Index") is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The section entitled "Principal Shareholders" contained in the 1997 Proxy
Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

The section entitled "Certain Relationships and Related Transactions"
contained in the 1997 Proxy Statement is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS,
SCHEDULE, AND REPORTS ON FORM 8-K

(a) Financial Statements, Schedule, and Exhibits

The financial statements, schedule, and exhibits listed below are filed as
part of this Report:

Sequentially
Numbered Page
-------------

1. Financial statements (Data incorporated by reference from
the attached 1996 Annual Report to the shareholders of
Proteon, Inc.):

Consolidated Balance Sheets as of December 31, 1996 and 1995 ___

Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ___

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 ___

Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ___

Notes to Consolidated Financial Statements ___

Report of Independent Accountants ___

2. Schedule:

II Valuation and Qualifying Accounts __

Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the required information is included in
the consolidated financial statements or notes submitted.

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31

3. Exhibits:

Exhibit
Number Description
------ -----------

(3.1) Restated Articles of Organization as Amended
(3.3) By-Laws, as amended and restated
(4.1) Article 4 of the Restated Articles of Organization, (See Exhibit 3.1)
(4.2) Form of Common Stock Certificate
(10.1) Agreement to Manufacture, dated December 1, 1988 between the
Registrant and SCI Manufacturing, Inc.
(10.3) Purchase Agreement, dated December 1, 1990 between the
Registrant and Texas Instruments, Inc.
(10.4) Software License Agreement, dated January 1, 1990 between the
Registrant and Noel Chiappa
(10.5)* 1991 Restated Stock Option Plan
(10.6)* 1988 Nonqualified Stock Option Plan
(10.7)* Restated Employee Stock Award Plan
(10.8)* Consulting Agreement, dated August 31, 1989 between the
Registrant and David Clark
(10.9) Form of Indemnification Agreement. An Indemnification Agreement was
entered into by and between the Registrant and each of:
David Allen, Steven J. Bielagus, Daniel J. Capone, Jr., David Clark,
Robert J. Connaughton Jr., Joe Grillo, Jeffrey B. Low, Julius Marcus,
Howard C. Salwen, L.J. Sevin, and certain other former
Directors and Executives. Although the agreements were executed
on various dates, each is the same as the Form of Indemnification
Agreements in all material respects and details, and therefore the
individual agreements are not filed herewith.
(10.10) Amendment dated April 18, 1991 to Agreement to Manufacture, dated
December 1, 1988 between the Registrant and SCI Manufacturing, Inc.
(10.11)* Executive Compensation Arrangements Not Set Forth in Formal
Documents
(10.12)* Consulting Agreement, dated August 25, 1993, between the
Registrant and Howard Salwen
(10.13)* Employment Agreement, dated February 25, 1994, between
Registrant and Joseph A. DiGiantommaso
(10.14)* Employment Agreement, dated March 18, 1994, between the
Registrant and Steven J. Bielagus
(10.15)* Employment Agreement, dated June 27, 1994 between the
Registrant and Daniel J. Capone, Jr.
(10.16) Lease Agreement dated December 19, 1994 between the Registrant
and WCB Twenty Limited Partnership
(10.17) Lease Agreement dated December 1, 1994 between the Registrant
and John Hancock Mutual Life Insurance Company
(10.18)* Letter Agreement dated March 2, 1995, between the Registrant and
Jeffrey B. Low
(10.19)* Letter Agreement dated April 11, 1995, between the Registrant and
Bruce W. Lichorowic
(10.20)* Severance Compensation Agreement dated October 11, 1995
between the Registrant and Daniel J. Capone, Jr.

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32

Exhibit
Number Description
------ -----------

(10.21)* Severance Compensation Agreement dated October 11, 1995
between the Registrant and Joseph A. DiGiantommaso
(10.22)* Severance Compensation Agreement dated October 18, 1995
between the Registrant and Steven J. Bielagus
(10.23)* Severance Compensation Agreement dated October 30, 1995
between the Registrant and Jeffrey B. Low
(10.24)* Severance Compensation Agreement dated November 15, 1995
between the Registrant and Bruce W. Lichorowic
(10.25)* Employment Separation Agreement dated February 9, 1996 between
the Registrant and Bruce W. Lichorowic
(10.26)* Employment Agreement, dated January 4, 1996 between the
Registrant and Robert J. Connaughton, Jr.
(10.27)* Employment Agreement, dated March 11, 1996 between the
Registrant and William T. Greer
(10.28)* Severance Compensation Agreement dated March 11, 1996
between the Registrant and William T. Greer
(10.29)* Employment Agreement, dated October 16, 1996 between the
Registrant and Robert J. Connaughton, Jr.
(10.30)* Severance Compensation Agreement dated October 21, 1996
between the Registrant and Robert J. Connaughton, Jr.
(11) Statement RE: Computation of Per Share Earnings
(13) The Annual Report to Stockholders of the Company for the fiscal
year ended December 31, 1996 (except for the pages and information
thereof expressly incorporated by reference in this Form 10-K,
the Annual Report to Shareholders is provided solely for the
information of the Securities and Exchange Commission and is not
deemed "filed" as part of this Form 10-K)
(21) Subsidiaries of the Registrant
(23) Consent of Coopers & Lybrand L.L.P.
(27) Financial Data Schedule

* Exhibit is a management contract or compensatory plan, contract or
arrangement required to be filed as an Exhibit to this Form 10-K.

(b) Reports on Form 8-K

The Company filed no reports on Form 8-K with the Securities and Exchange
Commission during the last quarter of the fiscal year ended December 31, 1996.

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33

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Proteon, Inc. has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized on March 27,
1997.

PROTEON, INC.
(Registrant)

March 27, 1997 By: /s/ Daniel J. Capone, Jr.
-----------------------------
Daniel J. Capone, Jr.
President & Chief Executive Officer
(principal executive officer)
Authorized Signatory

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

March 27, 1997 By: /s/ Robert J. Connaughton, Jr.
-----------------------------
Robert J. Connaughton, Jr.
Vice President, Finance and Administration
Chief Financial Officer
Treasurer and Clerk
(principal financial officer)

March 27, 1997 By: /s/ David Clark
-----------------------------
David Clark, Director

March 27, 1997 By: /s/ Julius Marcus
-----------------------------
Julius Marcus, Director

March 27, 1997 By: /s/ Howard C. Salwen
-----------------------------
Howard C. Salwen, Director

March 27, 1997 By: /s/ L.J. Salwen
-----------------------------
L.J. Salwen, Director

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Proteon, Inc.:

Our report on the consolidated financial statements of Proteon, Inc. has been
incorporated by reference in the Form 10-K from page 30 of the 1996 Annual
Report to Shareholders of Proteon, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 35 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

/s/ COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
February 11, 1997

38
35
SCHEDULE II

PROTEON, INC.
VALUATION AND QUALIFYING ACCOUNTS

Balance at Uncollectible Balance at
Allowance for Beginning Provision Accounts End of
Doubtful Accounts of Period for Bad Debt Written Off Period
- -------------------------------------------------------------------------------------------------

Year ended December 31, 1996 $889,276 $ - $(217,521) $671,755

Year ended December 31, 1995 887,524 - 1,752 889,276

Year ended December 31, 1994 419,393 348,000 120,131 887,524

EXHIBIT INDEX

Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------

(3.1) Restated Articles of Organization as Amended*(c) (filed as Exhibit 3.1)
(3.3) By-Laws, as amended and restated, of the Registrant * (a)
(filed as Exhibit 3.3)
(4.1) Article 4 of the Restated Articles of Organization, (See Exhibit 3.1)
(4.2) Form of Common Stock Certificate * (b) (filed as Exhibit 4.2)
(10.1) Agreement to Manufacture, dated December 1, 1988 between the
Registrant and SCI Manufacturing, Inc. * (a) (filed as Exhibit 10.2)(+)
(10.3) Purchase Agreement, dated December 1, 1990 between the Registrant
and Texas Instruments, Inc. * (a) (filed as Exhibit 10.4) (+)
(10.4) Software License Agreement, dated January 1, 1990 between the
Registrant and Noel Chiappa * (a) (filed as Exhibit 10.5) (+)
(10.5) 1991 Restated Stock Option Plan * (d) (filed as Exhibit 19.1)
(10.6) 1988 Nonqualified Stock Option Plan * (a) (filed as Exhibit 10.7)
(10.7) Restated Employee Stock Award Plan * (a) (filed as Exhibit 10.8)
(10.8) Consulting Agreement, dated August 31, 1989 between the Registrant
and David Clark * (a) (filed as Exhibit 10.11)
(10.9) Form of Indemnification Agreement. An Indemnification Agreement
was entered into by and between the Registrant and each of:
David Allen, Steven J. Bielagus, Daniel J. Capone, Jr., David Clark,
Robert J. Connaughton Jr., Jeffrey B. Low, Julius Marcus,
Howard C. Salwen, L.J. Sevin, and certain other former Directors
and Executives. Although the agreements were executed on various
dates, each is the same as the Form of Indemnification Agreements
in all material respects and details, and therefore the individual
agreements are not filed herewith. * (a) (filed as Exhibit 10.17)
(10.10) Amendment dated April 18, 1991 to Agreement to Manufacture, dated
December 1, 1988 between the Registrant and SCI Manufacturing, Inc.
* (a) (filed as Exhibit 10.24)
(10.11) Executive Compensation Arrangement Not Set Forth in Formal Document*
(e) (filed as Exhibit 10.26)
(10.12) Consulting Agreement, dated August 25, 1993, between the Registrant and
Howard Salwen * (f) (filed as Exhibit 10.1)
(10.13) Employment Agreement, dated February 25, 1994, between Registrant and
Joseph A. DiGiantommaso *(h) (filed as Exhibit 10.2)
(10.14) Employment Agreement, dated March 18, 1994, between the Registrant and
Steven J. Bielagus * (h) (filed as Exhibit 10.3)
(10.15) Employment Agreement, dated June 27, 1994 between the Registrant and
Daniel J. Capone, Jr. * (i) (filed as Exhibit 10.4)
(10.16) Lease Agreement dated December 19, 1994 between the Registrant and WCB
Twenty Limited Partnership * (j) (filed as Exhibit 10.31) (10.17) Lease
Agreement dated December 1, 1994 between the Registrant and John
Hancock Mutual Life Insurance Company * (j) (filed as Exhibit 10.32)

EXHIBIT INDEX

Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------

(10.18) Letter Agreement dated March 2, 1995, between the Registrant and Jeffrey B.
Low * (j) (Filed as Exhibit 10.33)
(10.19) Letter Agreement dated April 11, 1995, between the Registrant and Bruce W.
Lichorowic * (k) (Filed as Exhibit 10.1)
(10.20) Severance Compensation Agreement dated October 11, 1995 between the
Registrant and Daniel J. Capone, Jr.* (l) (Filed as Exhibit 10.20) 40
(10.21) Severance Compensation Agreement dated October 11, 1995 between the
Registrant and Joseph A. DiGiantommaso* (l) (Filed as Exhibit 10.21) 51
(10.22) Severance Compensation Agreement dated October 18, 1995 between the
Registrant and Steven J. Bielagus* (l) (Filed as Exhibit 10.22) 65
(10.23) Severance Compensation Agreement dated October 30, 1995 between the
Registrant and Jeffrey B. Low* (l) (Filed as Exhibit 10.23) 79
(10.24) Severance Compensation Agreement dated November 15, 1995 between the
Registrant and Bruce W. Lichorowic* (l) (Filed as Exhibit 10.24) 92
(10.25) Employment Separation Agreement dated February 9, 1996 between the
Registrant and Bruce W. Lichorowic* (l) (Filed as Exhibit 10.25) 106
(10.26) Employment Agreement, dated January 4, 1996 between the Registrant and
Robert J. Connaughton, Jr.
(10.27) Employment Agreement, dated March 11, 1996 between the Registrant and
William T. Greer
(10.28) Severance Compensation Agreement dated March 11, 1996 between the Registrant
and William T. Greer
(10.29) Employment Agreement, dated October 16, 1996 between the Registrant and
Robert J. Connaughton, Jr.
(10.30) Severance Compensation Agreement dated October 21, 1996 between the
Registrant and Robert J. Connaughton, Jr.
(11) Statement RE: Computation of Per Share Earnings 112
(13) The Annual Report to Stockholders of the Company for the fiscal year ended
December 31, 1996 (except for the pages and information thereof expressly
incorporated by reference in this Form 10-K, the Annual Report to Shareholders
is provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form 10-K) 113
(21) Subsidiaries of the Registrant 149
(23) Consent of Coopers & Lybrand L.L.P. 150
(27) Financial Data Schedule

All exhibit descriptions followed by an asterisk and a letter in
parentheses were previously filed with the Securities and Exchange
Commission as Exhibits to, and are hereby incorporated by reference
from, the following documents:
(a) Registrant's Registration Statement on Form S-1 Registration No.
33-40073.
(b) Amendment No. 1 on Form 8 to the Registrant's Registration
Statement on Form 8-A, File No. 0-19175.
(c) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
(d) Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 27, 1992.
(e) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.

42
38

(f) Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 2, 1993.
(g) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
(h) Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1994.
(i) Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 2, 1994.
(j) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(k) Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 1, 1995.
(l) Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.

All exhibit descriptions followed by a (+) indicate documents with
respect to which confidential treatment has been granted.