U.S. SECURITIES and EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A
                                (Amendment No. 1)

  {X} Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
                                   Act of 1934

                   For the fiscal year ended December 31, 2004

     { } Transition report pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

       For the transition period from                to
                                      ---------------   ---------------

                          Commission File No. 33-86242

                             PROTOSOURCE CORPORATION
                  --------------------------------------------
                 (Name of Small Business Issuer in its Charter)



                    California                              77-0190772
          ------------------------------               --------------------
         (State or other jurisdiction of              (I .R. S. Employer
          incorporation or organization)              Identification Number)

         One Bethlehem Plaza, 4th Floor
            Bethlehem, Pennsylvania                            18018
     --------------------------------------                   --------
    (Address of principal executive offices)                 (Zip Code)

                    Issuer's telephone number: (610) 332-2893

        Securities registered pursuant to Section 12(b) of the Act: None

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

                            No Par Value Common Stock
                    Redeemable Common Stock Purchase Warrants
                               Class A and Class B

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

As of December 31, 2004, 8,114,829 shares of the Registrant's no par value
Common Stock were outstanding. As of December 31, 2004, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$306,135 based upon a closing bid price of $0.04 per share of Common Stock on
the OTC Bulletin Board.

Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB/A or any amendment to
this Form 10-KSB/A. { }

The Registrant's revenues for its most recent fiscal year were $1,639,594.

The following documents are incorporated by reference into Part III, Items 9
through 12 hereof: None.

<PAGE>

                                2004 FORM 10-KSB
                                ----------------

                                Explanatory Note


We are filing this Amendment No. 1 on Form 10-KSB to ProtoSource Corporation's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, which
was originally filed with the Securities and Exchange Commission ("the SEC") on
March 31, 2005 (the Original Form 10-KSB), to reflect the restatement of our
consolidated financial statements as of December 31, 2004 and for each of the
years ended December 31, 2004 and 2003. (See Note 2 to the Consolidated
Financial Statements.)

Certain items in Management's Discussion and Analysis have been changed to
reflect the restated amounts.

This Form 10-KSB/A does not reflect events occurring after the filing of the
original Form 10-KSB, and represents the Company's Report on Form 10-KSB in its
entirety including changes to only those items identified in Note 2 to the
Consolidated Financial Statements.)

















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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

The following is a summary of certain information contained in this Report and
is qualified in its entirety by the detailed information and financial
statements that appear elsewhere herein. Except for the historical information
contained herein, the matters set forth in this Report include forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to differ
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in the periodic reports filed by
ProtoSource Corporation, a California corporation (the "Company"), with the
Commission. The forward-looking statements included in the Report speak only as
of the date hereof.


Introduction

Through April 2002, the Company operated psnw.com, a full-service Internet
service provider with primary offices in Fresno, California. psnw.com provides
three types of services to business customers:

1. reselling high-speed Internet access via ADSL/SDSL; 2. Web design,
development and hosting services; and 3. outsourced technical support for other
ISPs.

On May 1, 2002, the Company entered into a conditional agreement to sell the
assets of the psnw.com business to Brand X Networks, Inc. ("Brand X"). Brand X
is a privately-held California-based company whose principal shareholders were
former employees of the Company. The Company agreed to lay off the remaining
employees based in Fresno on April 30th, 2002. Most terminated employees were
hired by Brand X. Additionally, Brand X assumed financial and operational
responsibility for the ISP business. On April 14, 2003, the Company completed a
fifth amendment to the purchase agreement with Brand X pursuant to which the
Company has agreed to accept an aggregate payment of $632,000 for the ISP
Division, less credits to Brand X of $112,686. Of such amount, $200,000 shall be
paid through the provision of services to the Company from Brand X.

On January 1, 2004, the sale of the ISP business to Brand X closed. Under the
terms of that agreement a promissory note of $284,455 was executed by Brand X to
be paid in 55 equal, monthly installments. This note is secured by a pledge of
shares in Brand X. In addition ProtoSource is entitled to appoint one person to
the board of Brand X for the duration of the agreement.


New Business Strategy

A key part of this strategy is the acquisition of P2i Newspaper, Inc. On
February 13, 2003, the Company announced an agreement and plan of merger to
acquire all of the outstanding capital stock of P2i Newspaper, Inc., a Delaware
corporation headquartered in Bethlehem, Pennsylvania ("P2i Newspaper") and a
wholly owned subsidiary of P2i, Inc., a Pennsylvania corporation ("P2i"), in
exchange for the issuance of up to 19,383,531 shares of ProtoSource common stock
(the "Agreement").

On January 1, 2004, the acquisition of P2i's newspaper business closed with the
issuance of 193,836 preferred shares of ProtoSource. Each share of preferred
stock is convertible into the right to receive 100 shares of ProtoSource common
stock at any time after the authorized number of shares of common stock is
increased to 100,000,000 shares.

The 193,836 shares of preferred stock will be reduced by the number of shares
equal to the total fees incurred to audit the financial statements of P2i, or
P2i Newspaper, divided by $50 (the "Adjusted Shares"). The Adjusted Shares shall
be subject to a three-year lock-up, which may be released upon the stock price
and volume reaching established thresholds. Upon closing of the transaction,
ProtoSource appointed Thomas Butera, President of P2i, as a director of
ProtoSource. Mr. Butera, together with Peter Wardle, President of ProtoSource,
shall have the right to appoint three members to the board of directors of
ProtoSource.

P2i Newspaper became a wholly owned subsidiary of the Company on January 1,
2004. P2i Newspaper is a leader in the conversion of print content into Web
content, and its clients include newspapers from the Tribune, McClatchy Copley

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and Gannett newspaper groups in the US, Northcliffe and Tindle newspaper groups
in the UK, as well as many others. In addition to its headquarters in
Pennsylvania, P2i Newspaper has a West Coast Sales office and its data
conversion center is located in the Multimedia Super Corridor in Kuala Lumpur,
Malaysia.


Business of ProtoSource

The merger with P2i Newspaper at the start of 2004 is indicative of
ProtoSource's long-term business strategy: to focus on the delivery of
technologically sophisticated, database-driven, business-to-business services
and solutions.

Executing this strategy starts with the state-of-the-art facility operated by
ProtoSource subsidiary P2i Online Sdn Bhd, located south of Kuala Lumpur,
Malaysia. This business unit employs almost 70 staff utilizing proprietary
applications and processes. Major clients include Newspapers from the Tribune,
McClatchy and Gannett publishing organizations, as well as retailers and
government offices in North America and the UK.

The primary business is the mining, management and databasing of print content
for the publishing industry, and its distribution via the Internet. Every day of
the week, 52 weeks a year, we receive electronic files from clients. These are
processed overnight for delivery the following morning. Data is delivered not
only to the Company's web servers for seamless integration into our clients'
existing, hosted web sites, but also distributed back to clients and their
business partners in a wide range of formats to fit their ever evolving needs.
The combination of low labor costs, a well-educated labor pool fluent in
English, and sophisticated technologies make the Company highly competitive.
ProtoSource intends leveraging these competitive advantages in other markets.

Of the 1,600 daily newspapers in the US, almost all are putting content online
to some degree as are many of the approximately 4,500 weekly papers that are
available online. Utilizing proprietary technologies the Company converts
print-ads and editorial content into interactive, online content that is
seamlessly incorporated into existing newspaper web sites. All newspaper print
ads are first created electronically at the newspaper, merged with
electronically created editorial, paginated using sophisticated software, edited
on a local or wide area network and transmitted electronically to the printing
presses. At the end of every business day Newspaper customers send to the
Company's processing facility in Malaysia, via FTP, the same electronic versions
of ads and pages that they send to their printing presses. These files are
processed, quality-checked and delivered to the hosting servers by the start of
the following business morning.

The production process uses highly sophisticated, proprietary tools to segment
and database text and graphics that comprise the elements of P2i's dynamic web
page solution. As users click their way through the finished web content, pages
are built dynamically from the databased content. This facilitates a range of
features including search, sort and browse functionality, and can be viewed
using the links located at the end of this presentation. The business model is
quite straightforward. Clients pay per ad/page processed, and are billed
monthly.

Through 2005, the Company will continue to focus on increasing market share in
the newspaper vertical and targeting government, retail and manufacturing
verticals. The Company believes it can grow its business over the next five
years from these vertical markets.


Industry and Competition
------------------------

E-commerce overview

For most businesses, the Internet has created a new communication and sales
channel that enables companies to interact with large numbers of geographically
dispersed consumers and businesses. Traditional businesses are implementing
sophisticated web sites to drive customers to brick-and-mortar stores, effect
electronic commerce initiatives that offer competitive advantages and mine
customer data. These businesses are deploying an expanding variety of
Internet-enabled applications, ranging from web site marketing and recruiting
programs to on-line customer interaction systems and integrated purchase order
and just-in-time inventory solutions for key customers and suppliers. These
capabilities require increasingly complex web sites and support operations. In

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addition, advances in on-line security and payment mechanisms are alleviating
concerns associated with conducting transactions in an open-platform
environment, thus prompting more consumers and businesses to use the Internet in
conjunction with purchases and more businesses to offer a greater breadth of
electronic commerce services.

More importantly, companies today recognize that the Internet is not going to
replace other media, nor is it going to replace traditional shopping and
purchasing habits. Rather, today, companies are implementing integrated
marketing strategies that tie print, TV, Radio and Internet together to generate
revenues either via mail order, traditional shopping or e-commerce.


Newspapers

Newspapers have been putting virtually all of their classified liner advertising
online for several years, using primarily, software solutions that generate the
online content from the newspaper's own print content.

The online publishing of display advertising, run-of-print advertising ("ROP"),
special sections and free-standing-inserts ("FSIs") has evolved into an
application-service-provider ("ASP") business model whereby newspapers want a
technology driven solution with a high level of service and support from their
vendor. Much of this content is printed in color, has a high profile within the
print publication and is very costly to the advertiser.

The key driver of demand for these services is the statistical data that now
confirms the online readership of newspaper content over and above print
circulation. In addition, traditional newspaper revenues from advertising are
under assault from the new online giants such as Monster.com, ebay and others.
Implementing effective online solutions is perceived as critical by most
newspapers.

Customers demand a high level of interactivity and enhanced features from online
versions of this print advertising. Developing and enabling these solutions
requires a substantial financial investment in both R&D and servers,
connectivity and processes that is best justified when amortized across many
newspapers. Indications are that these costs are deemed prohibitive to
individual newspapers, and even newspaper groups, but that they are keen to use
an outside resource to deliver these solutions. P2i Newspaper has proprietary
processes that position us well to acquire a significant share of this market.

These solutions have become increasingly more sophisticated, evolving into
online shopping centers or channels where newspaper site visitors can search and
browse across many ads from multiple sources: display classified, ROP, FSIs and
special sections. Additionally, newspapers are developing their own platforms,
licensing solutions and looking at partners who provide more than one solution.

Recognizing this, P2i Newspaper has positioned itself to deliver processed
content in a variety of formats so that it can be incorporated into many
solutions, web sites and platforms at the same time.


Competition

Infosis, a company P2i acquired in September 2000, was the first company to
establish a presence in this business space. As the revenue models have proved
to be viable, competitors have emerged. Some, such as Harvest and Print2Web,
adopted very similar strategies to that of P2i pre 2004: sell directly to the
newspapers and deliver ever increasingly sophisticated solutions. Others, such
as WSN and Travidia, are approaching the retailers directly to convert their FSI
content and then act as the distributor of this content to newspapers.

Companies such as Daily Shopper and Saleshound (now combined as one entity,
CrossMedia Services) are also moving into this space having been acquired by
Tribune, Gannett and Knight-Ridder in 2004. Their original strategy was to
aggregate sales content from newspaper inserts and stores, publish it online
within a destination site and attract visitors. These original business models
are now gaining traction and newspapers today are looking at ways to commingle
online newspaper ads and inserts.

Secondary competition comes from the software companies that have developed ad
management systems for newspapers, such as Mactive and Olive. Newspapers use
their solutions to manage their ad content and they could include modules that
would publish the content online. There are certainly many applications that can
publish classified liner ads online automatically from the ad management
function, but none that can provide the level of sophistication that ASP
solutions feature.

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There are many obstacles to newspapers adopting pure software solutions to
compete with P2i Newspaper services. Firstly, ads are created in many different
ways, even within a single newspaper. Some are submitted electronically from
advertising agencies and design firms. Others are created by the newspaper's own
creative departments. Some are in color, some in black and white. FSI's are
usually created by agencies or print companies specializing in that field, and
the newspaper only receives the printed versions, rarely the electronic
versions. The "normalization" of incoming data is a key component of the
proprietary processes P2i Newspaper has developed. Once the content has been
processed, the functionality requires the various applications that power those
features to be running on the host server. Finally there is a human element to
the publishing of this content: every individual ad and page needs to be viewed
by an operator to ensure that the multiple images and text boxes that are
incorporated in a single newspaper page are matched.

As difficult as it would be for a newspaper to take the services and solutions
that P2i Newspaper has available in-house using a software solution only, in the
years ahead, as the volume of online advertising content increases, more and
more newspapers and newspaper groups will look for such a solution. P2i
Newspaper recognizes that it may need to modify its services to meet the
newspaper's evolving needs.

As of December 31, 2004, P2i Newspaper had a combination of 64 full-time and
part time employees. Of such employees, 4 were engaged in marketing and sales, 8
were devoted to research, development and technical support, 46 to production
services and 6 were responsible for management, finance and administration. None
of the Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.



ITEM 2. DESCRIPTION OF PROPERTY


The Company occupies 1,500 square feet of office space at One Bethlehem Plaza,
Bethlehem, PA 18018, 3,000 square feet of office space in an office park south
of Kuala Lumpur, Malaysia and is negotiating to add a further 3,000 square feet
in Malaysia.


ITEM 3. LEGAL PROCEEDINGS


Not applicable.


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


Not applicable.





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                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock and Class A Warrants traded on The Nasdaq SmallCap Market from
May 15, 1998 until March 2002 under the symbols PSCO and PSCOW. Our class B
common stock purchase warrants traded on The Nasdaq Small Cap Market from
February 14, 2001 until March 2002. Since March 2002, all of our securities have
traded on the OTC Bulletin Board. The following table sets forth for the periods
indicated the high and low sales price per share of our common stock and our
common stock purchase warrants.


For the quarter ended:  Common Stock       Class A Warrants     Class B Warrants
----------------------  ------------       ----------------     ----------------
                        High      Low        High      Low         High    Low
                        ----      ---        ----      ---         ----    ---

March 31, 2000          $7.18    $5.75       $1.68    $1.12        N/A     N/A
June 30, 2000           $6.12    $4.25       $2.25    $0.87        N/A     N/A
September 30, 2000      $6.31    $5.37       $2.12    $1.37        N/A     N/A
December 31, 2000       $5.50    $1.56       $1.75    $0.38        N/A     N/A

March 31, 2001          $3.75    $0.94       $0.81    $0.13        $0.63   $0.22
June 30, 2001           $2.29    $1.20       $0.35    $0.02        $0.26   $0.04
September 30, 2001      $1.74    $1.20       $0.23    $0.06        $0.18   $0.03
December 31, 2001       $1.15    $0.40       $0.11    $0.02        $0.09   $0.02

March 31, 2002          $1.05    $0.80
June 30, 2002           $0.95    $0.65
September 30, 2002      $0.75    $0.35
December 31, 2002       $0.43    $0.35

March 31, 2003          $0.35    $0.30
June 30, 2003           $0.32    $0.20
September 30, 2003      $0.21    $0.11
December 31, 2003       $0.15    $0.06

March 31, 2004          $0.08    $0.08
June 30, 2004           $0.08    $0.08
September 30, 2004      $0.04    $0.04
December 31, 2004       $0.04    $0.04


As of March 15, 2005, there were approximately 1,500 record and beneficial
owners.


DIVIDEND POLICY

We have not paid any cash dividends on our common stock and we currently intend
to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any credit facilities or other
contractual arrangements and such other factors deemed relevant by our Board of
Directors.

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

The statements contained in this Form 10-KSB are not purely historical
statements, but rather include what we believe are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which are indicated by words or phrases such as anticipate, expect,
intend, plan, will, we believe, the Company believes, management believes and
similar words or phrases. The forward-looking statements are based on our
current expectations and are subject to certain risks, uncertainties and
assumptions, including factors set forth in the following discussion and in the
discussions under Risk Factors and Business. Our actual results could differ
materially from results anticipated in these forward-looking statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements.


RESULTS OF OPERATIONS

Year Ended December 31, 2004 vs. Year Ended December 31, 2003


Net Revenues

For the year ended December 31, 2004, net revenues were $1,639,594 versus $0 for
the year ended December 31, 2003. Net revenues for 2004 were attributable
entirely to the operations of P2i Newspaper acquired by Company on January 1,
2004. There were no revenues during 2003 as the Company's ISP division was
discontinued under the terms of a conditional agreement entered on May 1, 2002.
The Company's ISP and web development assets have been operated by Brand X
Networks since that date. The sale of assets to Brand X Networks closed January
1, 2004.


Operating Costs And Expenses

For the year ended December 31, 2004, operating costs and expenses totaled
$1,845,479 versus $442,243 in 2003. The Company's cost-of-revenues, selling,
general and administrative expenses increased by $1,403,236, principally due to
the operations of P2i Newspaper. Administrative fees principally consist of the
Company's management office and personnel, professional fees associated with
restructuring and maintenance of the Company, and officers' and directors'
liability insurance costs. In addition, the Company had impairment charges of
$24,000 and $81,000 in 2004 and 2003, respectively, in connection with the
Company's investment in P2i, Inc.


Interest Expense

Interest expense totaled $904,046 for the year ended December 31, 2004 versus
interest expense of $1,653,031 in 2003. The decrease in interest expense is a
result of a significant reduction in convertible notes obtained during 2004 as
compared to 2003 to fund the operations of the Company and January 1, 2004 P2i
merger. As a result, amortization of debt issuance costs became a far smaller
component of interest expense in 2004 than in 2003.


Other (Charges)

Other charges included $406,844 of investment banking fees recorded in 2004 and
$1,705,062 write-off of notes and interest receivable in 2003, both amounts
relating to the P2i Merger. In 2003, $65,942 of losses arising from the sale of
marketable securities (Dauphin Technology, Inc. common stock) had been recorded.


Discontinued Operations

Effective May 1, 2002, the Company entered into an agreement to sell
substantially all of the assets of the ISP division to Brand X Networks, Inc., a
California Corporation, for $632,000. The assets have been held and operated by
Brand X Networks, Inc. for its purposes since May 1, 2002, at which time the
Company discontinued its ISP operations. On April 14, 2003, the Company

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completed a fifth amendment to the purchase agreement with Brand X pursuant to
which the Company has agreed to accept an aggregate payment of $632,000 for the
ISP Division, less credits to Brand X of $112,686. Of such amount, $200,000
shall be paid through the provision of services to the Company from Brand X.

On January 1, 2004, the sale of the ISP business to Brand X closed. Under the
terms of that agreement a promissory note of $284,455 was executed by Brand X to
be paid in 55 equal monthly installments. This note is collateralized by a
pledge of shares in Brand X. In addition, ProtoSource is entitled to appoint one
person to the board of directors of Brand X for the duration of the agreement.
The assets sold and liabilities assumed with respect to this sale were removed
from Company's books and a $475,454 gain on disposal of the ISP was recorded
during the quarter ended March 31, 2004.


Liquidity and Capital Resources


The Company assesses liquidity by its ability to generate cash to fund its
operations. Significant factors that affect the management of liquidity include:
current balances of cash, expected cash flows provided by operations, current
levels of accounts receivable and accounts payable balances, access to financing
sources and expected investment in equipment.

The Company used cash in excess of its working capital requirements for the year
ended December 31, 2004. Net cash of approximately $191,000 was used in
operations despite adjustments for non-cash charges of approximately $1,163,000
included in the Company's net loss of $1,027,783. These non-cash charges
included depreciation and amortization of $111,322, a provision for bad debts of
$7,782, a $24,000 impairment of the Company's investment in Infosis, $612,618 of
amortized debt issuance costs and conversion benefits of convertible notes
payable, and the recognition of $406,844 of investment banking fees originally
recorded in fiscal 2002 as a deferred charge (with a credit to stock
subscriptions payable related to the then pending acquisition of P2i Newspaper).
In addition to these positive adjustments to cash flows from operations was a
net favorable increase in the Company's net working capital components of
$149,492, most of which pertained to accrued but unpaid interest on the
Company's convertible debt. However, despite these favorable adjustments to net
cash from operations, there was an unfavorable adjustment of $475,454 due to the
non-cash credit attributable to the gain realized on the sale of the ISP
division to Brand X Networks on January 1, 2004.

During the period, the Company realized a net negative cash flow from its
investing activities of approximately $70,000. The largest negative component
was approximately $166,000 of advances to the Company's directors and officers.
However this was offset by approximately $102,000 of collections on the Brand X
note receivable and cash obtained from the P2i Newspaper acquisition.

During the period the Company obtained $348,000 of net funds through its
issuance of convertible debt, but used approximately $95,000 of cash to advance
funds to a related company and for payments on its capital lease obligations.

As of December 31, 2004, the Company had $39,726 in cash and $475,050 in
accounts receivable and other current assets. Taken together with $3,449,278 of
total current liabilities, this resulted in a negative working capital position
of $2,934,502 at December 31, 2004.

On April 30, 1999, we entered into a strategic alliance with Infosis Corp., a
privately held corporation and purchased 12.7%, on a non-diluted basis, of its
outstanding common stock. We paid an aggregate of $1.8 million for 600,000
shares of Infosis Corp. common stock. At the time of the purchase, the $1.8
million payment represented 51.1% of our available cash. 30,000 of the purchased
shares were paid to Andrew, Alexander, Wise & Co., Inc. ("AAWC"), as a finder's
fee. After payment of the 30,000 shares of Infosis common stock to AAWC, we
owned 570,000 shares of Infosis Corp. common stock. There was no affiliate or
related party relationships with Infosis prior to this investment. The strategic
alliance pertained to joint marketing and development activities whereby
ProtoSource would become the web design and development arm of Infosis Corp. As
part of the investment, William Conis, then a Director of ProtoSource, was
appointed to the Board of Directors of Infosis Corp. in June 1999. In June 1999,
the Board of Directors of Infosis Corp. replaced its CEO and CFO. The new
management team changed the direction of Infosis Corp. and did not follow
through on the alliance with ProtoSource.

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In January, 2000, Infosis Corp. issued ProtoSource 120,000 shares of its common
stock as an adjustment to reflect a lower offering price per share in a
concluded private placement of its common stock, which brought ProtoSource's
holdings of Infosis Corp. to 690,000 shares. The additional shares issued were
the result of the anti-dilution provision, which was part of the original
investment in Infosis Corp. The receipt of the additional shares from the
anti-dilution provision did not result in a change in the cost basis of
ProtoSource's original investment in Infosis Corp.

In July, 2000, we purchased an $84,177 convertible promissory note from Infosis
Corp. in connection with a bridge financing.

In September, 2000, ProtoSource acquired an aggregate of $329,686 principal
amount of Infosis Corp. convertible promissory notes at $0.05 on the dollar for
a total acquisition price of $16,484. These convertible promissory notes were
then converted into 329,686 shares of preferred stock of Infosis Corp.
Concurrent with the acquisition of the Infosis Corp. promissory notes by
ProtoSource, Infosis Corp. merged into P21, Inc., a privately held corporation.
ProtoSource's investment in Infosis Corp. was increased by the amount that it
paid for the promissory notes, which were then converted into preferred stock of
Infosis Corp. As a result of this merger, ProtoSource owned 506,225 shares of
common stock or approximately 4% of P2i, Inc. As a result of a lack of interest
in the strategic alliance by Infosis and the merger between Infosis and P2i,
Inc., our original investment into Infosis, which merged into P2i, Inc., has
turned into a passive investment. P2i, Inc. is a privately-held company and
there can be no assurances that we will realize the full value of this
investment if we need to dispose of these assets. In addition, after further
review of this investment, although no formal appraisal or valuation report was
prepared, as of December 31, 2000, we recorded an impairment expense of
$1,271,484 to write down this investment to its estimated market value. The
impairment expense was recorded as the difference between $630,000 and the total
amount of our investment in Infosis.

On July 17, 2001, P2i acquired all the assets of Twenty Twenty Design &
Marketing, Inc. of New York City. As a result of this acquisition, our holdings
in P2i were diluted to approximately 2.6% of the resulting entity. Additionally,
the post-merger valuation of P2i was set at approximately $8.7 million. Based on
this new information, we recorded an additional impairment charge of $404,000 as
of June 30, 2001, to write down this investment to fair value. The impairment
charge was recorded as the difference between the previous value of this
investment ($630,000) and the newly established value ($226,000). Further
impairment charges of $121,000 were recorded in 2002, $81,000 in 2003 and
finally $24,000 in 2004 resulting in the full impairment of this investment.

On December 5, 2001, the Company received notification from Nasdaq that the
Company no longer satisfied the minimum requirements for continued listing on
the Nasdaq Small Cap Market. The Company applied for an exception to the Nasdaq
listing requirements, which was granted on March 12, 2002. A temporary exemption
was given until April 22, 2002. It was conditioned on the Company filing a proxy
statement with the Securities and Exchange Commission by March 15, 2002, which
provides our shareholders the opportunity to approve the acquisition of P2i, as
well as certain other conditions. Due to a delay in the receipt of audited
financials for P2i, the Company was unable to meet the deadline. Subsequently,
the Company's securities were delisted from Nasdaq. The Company's securities now
trade on the OTC Bulletin Board.

On December 14, 2001, after exploring numerous alternatives, the Company entered
into a term sheet to acquire P2i for 22,768,412 shares of our common stock.

In March 2002, the Company entered into an agreement with AAWC to act as
placement agent for the sale of convertible notes aggregating at least $300,000.
The notes are secured by certain assets of the Company and accrue interest at
10% per annum. P2i has agreed to pay all the costs and obligations incurred with
this financing. The funding was completed during March 2002 and AAWC was paid a
10% commission and a 3% non-accountable expense allowance.

On May 1, 2002, the Company entered into a conditional agreement to sell the
assets of the Fresno-based ISP business to Brand X Networks. Brand X Networks is
a privately held California-based company whose principal shareholders were
former employees of the Company. The Company agreed to lay off the remaining

                                       10
<PAGE>

employees based in Fresno on April 30th. Most terminated employees were hired by
Brand X. Additionally, Brand X has assumed financial and operational
responsibility for the ISP business. On April 14, 2003, the Company completed a
fifth amendment to the purchase agreement with Brand X pursuant to which the
Company has agreed to accept an aggregate payment of $632,000 for the ISP
Division, less credits to Brand X of $112,686, and the transaction closed on
January 1, 2004. Of such amount, $200,000 shall be paid through the provision of
services to the Company from Brand X. The balance shall be paid at the rate of
approximately $5,171 per month, until completely paid.

In July 2002, the Company executed its merger agreement with P2i. Concurrently,
the Company's CEO, Mr. William Conis, resigned his position as both CEO and
Director. Mr. Peter Wardle, CEO of P2i and a ProtoSource Director, became CEO of
the Company.

On September 17, 2002, the Board of Directors approved a revised term sheet
restructuring the P2i acquisition, and on January 1, 2004, this transaction
closed. Under the new terms, ProtoSource will acquire the Newspaper portion of
P2i, Inc.'s business through the acquisition of specific assets which include
the entire newspaper related customer base, technology, intellectual property
and P2i's production company located just south of Kuala Lumpur, Malaysia. In
addition, key P2i employees will transition with the business. These assets and
the key employees have been transferred to P2i Newspaper, Inc. a wholly-owned
subsidiary of P2i formed specifically for this purpose. The acquisition of P2i
Newspaper, Inc. by ProtoSource has been accounted for by the purchase method of
accounting as a reverse acquisition. For accounting purposes, P2i Newspaper,
Inc. is considered to be the acquirer and ProtoSource is the acquiree.

The number of shares of restricted common stock to be issued to P2i ("P2i,
Inc.") has subsequently been revised to 19,383,531 shares (after conversion of
the preferred stock issued as merger consideration) which will result in an
ownership of approximately 37% by the stockholders of P2i, on a fully diluted
basis assuming conversion of certain bridge loans into common stock, the balance
being held by the current stockholders of ProtoSource. After the acquisition of
P2i Newspaper, the Board of Directors of ProtoSource consists of seven members.
One member has been appointed by the investment banker, AAWC. (This appointment
must be approved by P2i but can't be unreasonably withheld.) Messrs. Wardle and
Butera will be on the Board and they shall appoint the two independent members
plus one other as long as they hold 25% or more of P2i (see below) collectively,
and P2i owns 25% or more of ProtoSource. In the event that P2i's ownership drops
below 25% but is not less than 10%, P2i shall appoint one board member. In the
event that P2i's ownership drops below 10%, P2i shall not have the right to
appoint any board member. ProtoSource and P2i both used the same investment
banker to represent them in the transaction and each will pay the investment
banker a fee based on the value of the transaction using a pre-set formula. The
investment banking fees to be paid are $406,844 by ProtoSource and $413,422 by
P2i. The amounts paid to the investment banker will be paid through the issuance
of common stock, which is restricted for a three-year period, based on an
agreed-upon value of $.50 per share at the time of signing the term sheet, or
813,688 shares for ProtoSource and 826,844 shares for P2i. The shares to be
issued for P2i's investment banking fees will be subtracted from the shares to
be issued to the P2i stockholders for the acquisition. P2i's remaining catalog
and new media business will stay with P2i. However, ProtoSource will increase
its ownership in P2i from the current 2.18% (506,225 shares) to 19.8%. The
consideration to be paid is the forgiveness of P2i debt to ProtoSource.


During 2002, the Company entered into an agreement with AAWC to act as a
placement agent for the sale of convertible notes aggregating $1,300,000. The
notes are secured by stock in P2i Newspaper, Inc. and accrue interest at 10% per
annum. The Company pays the cost and obligations of the first $200,000 incurred
with this financing and P2i Newspaper, Inc. has agreed to pay all remaining
costs and obligations. Through December 31, 2003, $1,225,000 in funding had been
completed. AAWC was paid a 10% commission and a 3% non-accountable expense.
Substantially all of the proceeds from these notes have been loaned to P2i
Newspaper, Inc. The loans were in the form of demand notes accruing interest at
8% per annum. These loans, with their related interest receivable, were written
off in 2003.

During May 2003, the Company entered into an agreement with Carl R. Butera for
the sale of a convertible note aggregating $200,000. The note is secured by
stock in P2i Newspaper, Inc. and accrues interest at 10% per annum.

                                       11
<PAGE>

Substantially all of the proceeds from this note have been loaned to P2i
Newspaper, Inc. The loans were in the form of a demand notes accruing interest
at 8% per annum. These loans, with their related interest receivable, were
written off in 2003.

During the twelve-month period ended December 31, 2003, the Company entered into
certain agreements with AAWC to act as a placement agent for the sale of
convertible notes aggregating $700,000. The notes are secured by stock in P2i
and accrue interest at 10% per annum. P2i has agreed to pay the related costs
and obligations. Through December 31, 2003, $600,000 in funding had been
completed; an additional $100,000 was completed during January 2004. AAWC was
paid a 10% commission and a 3% non-accountable expense. Substantially all of the
proceeds from these notes have been loaned to P2i Newspaper, Inc. The loans were
in the form of demand notes accruing interest at 8% per annum. These loans, with
their related interest receivable, were written off in 2003.

During 2004, the Company entered into certain agreements with AAWC to act as a
placement agent for the sale of convertible notes aggregating $500,000, of which
$300,000 was raised during the first and second quarters of 2004. These notes
accrue interest at 10% per annum. AAWC was paid a 10% commission and a 3%
non-accountable expense. These notes and all other notes are secured by the
assets of ProtoSource and P2i Newspaper.

The Company did not source any external funding during the second and third
quarters of 2004, nor had it sourced any external funding between January 1,
2005 and March 30, 2005.


Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation ("FIN" No. 46(R), "Consolidation of Variable Interest
Entities". FIN No. 46(R) addresses the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. FIN
No. 46(R) was effective for the Company in 2004 and had no impact on its
financial condition or results of operations.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The new
Statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This Statement requires
that those items be recognized as current period charges and requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The Company does not expect
adoption of this Statement to have a material impact on is financial condition
or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". This
Statement replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123 (R) will
require the fair value of all stock option awards issued to employees to be
recorded as and expense over the related vesting period. The Statement also
requires the recognition of compensation expense for the fair value of any
unvested stock option awards outstanding at the date of adoption. As permitted
by SFAS No. 123, the Company currently accounts for share-based payments to
employees using the APB No. 25 intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)'s fair value method will have and impact on the
Company's results of operations. Had the Company adopted SFAS No. 123(R) in
prior periods, the impact of that standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro forma net income and earnings
per share above.


Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted

                                       12
<PAGE>

in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and related disclosure of contingent
assets and liabilities. The significant accounting policies which we believe are
the most critical to aid in fully understanding and evaluating our reported
financial results include the following:

In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (and superceded in 2001 by
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"),
the Company recorded impairment charges of $24,000 and $81,000 in 2004 and 2003,
respectively, to reduce the carrying value of its investment in P2i, Inc. to
zero.

In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
maintains a valuation allowance of $5,900,000 as of December 31, 2002 on
deferred tax assets relating to its net operating losses which the Company has
not determined to be more likely than not realizable.

Through December 31, 2003, the Company has advanced $1,642,303 to P2i, a company
whose Chief Executive Officer serves in the same capacity at ProtoSource
Corporation. This was used to help fund P2i Newspaper, Inc.'s operations from
the date the first term sheet was executed on December 17, 2001 to the closing
of the transaction on January 1, 2004. Effective December 31, 2003, amounts due
from P2i, Inc. have been written off.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is not amortized, rather, management tests goodwill annually for
impairment in the fourth quarter.

The Company considers certain trade accounts receivable to be of doubtful
collection; accordingly, a $7,782 allowance for doubtful accounts was recorded
in 2004. The Company considers its notes receivable to be fully collectible;
accordingly, no allowance for doubtful collection of these notes had been
established. If amounts become uncollectible, they will be charged to operations
when that determination is made.


In consideration of SEC Proposed Rule Release 33-8098, the Company does not
maintain estimates for sales returns or credits, cancellations and warranties.
Due to the peculiar nature of the type of services provided and the underlying
processes employed by the Company to create and deliver completed product
(without defect) to its customers, there is no material exposure to what would
be classified as sales returns or credits. Likewise, cancellations and or
warranties are not significantly measurable in respect to the type of electronic
product (internet website content) deliverable to the Company's customers; and
historically, there has been no basis or need for such.


                                       13
<PAGE>

ITEM 7. FINANCIAL STATEMENTS


ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company does not have any material market risk sensitive financial
instruments.


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

None.


ITEM 8a. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures.

An evaluation was performed under the supervision and with the participation of
our management, including the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of our disclosure
procedures. Based on management's evaluation as of the end of the period covered
by this Annual Report, our principal executive officer and chief financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") were sufficiently effective to ensure that the
information required to be disclosed by us in the reports that we file under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness,
accuracy and completeness.


Changes in internal controls.

There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective actions
were required or undertaken except as disclosed.







                                       14
<PAGE>

                                    PART III

ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT

Executive Officers, Directors, Director Nominees And Key Employees

Our executive officers, directors and key employees and their ages and positions
with us are as follows:

NAME                                POSITION
----                                --------
Peter Wardle, 50                    Chief Executive Officer, President,
                                    Chief Financial Officer and Director
Thomas Butera, 38                   Chief Operating Officer and Director
Joseph DiMarino, 62                 Director
Mark Blanchard, 52                  Director
Stewart Kalter, 34                  Director

Peter Wardle became a director in December 2001 and was appointed as Chief
Executive Officer, Chief Financial Officer and President in May 2002. Mr. Wardle
was Chief Executive Officer of P2i, Inc. from May 2000 through December 2003.
Mr. Wardle served as Chief Executive Officer of 2020 Marketing and Design from
1993 when he co-founded the company until December 2003. Prior to that, Mr.
Wardle served as a database marketing consultant form 1990 to 1993. From 1987 to
1990, he was Chief Executive Officer of Autoroos, Inc. Mr. Wardle received a
degree in accounting from Stockport College in the UK in 1978.

Thomas C. Butera was appointed as Chief Operating Officer and a director of the
Company in January 2004. From 1993 until December 2003, Mr. Butera was creative
director of 2020 Marketing and Design. From December 2001 through December 2003,
Mr. Butera served as an executive of P2i, Inc. Since May 2003, Mr. Butera has
served as Chief Operating Officer of P2i Newspaper, Inc. Mr. Butera is a
graduate of Parsons School of Design in New York City.

Joseph DiMarino was appointed as a director of the Company in August 2003. Mr.
DiMarino began his newspaper career in 1970 with the Philadelphia Inquirer,
which is a Knight Ridder newspaper. Mr. DiMarino held various executive
positions with Knight Ridder, Inc. from 1970 until June 2002. From August 2002
until May 2003, Mr. DiMarino was Chief Operating Officer of P2i Newspaper, Inc.
Since May 2003, Mr. DiMarino has provided consulting services to the newspaper
industry. Mr. DiMarino is a graduate of Villanova University.

Mark Blanchard has been a member of the Company's Board since May 2002. Mr.
Blanchard was a co-founder and has been President of Resort TV Services since
July 2003. Prior to that he was Vice President and General Manager of
ProtoSource's former Suncoast division, a business he helped founding 1998. From
1995 to 1998 he was founder and President of Internet Stock Market Inc., which
facilitated the promotion of public companies. From 1992 to 1995, Mr. Blanchard
was founder and President of Pension Specialists Management Group, a company
that advised pension funds on investments. From 1979 to 1992, Mr. Blanchard held
several positions with Raymond James and Associates, and Smith Barney, full
service brokerage firms. His final position with Smith Barney was Senior Vice
President of Municipals. He graduated from Rutgers University with a degree in
business in 1976.

Stewart Kalter became a director in October 2001. Since May 2003, Mr. Kalter has
served as President of Vision Securities. From May 2001 through May 2003, Mr.
Kalter served as Director of Corporate Finance and Research of Andrew,
Alexander, Wise & Company, Inc. Prior to that, he was Director of Research at
Global Capital Securities from February 2000 to March 2001. Mr. Kalter was a
Research Analyst with Spencer Clarke from November 1997 to January 2000. From
1995 until 1997, he served as a Research Associate with Bishop Allen. Mr. Kalter
has a BS in Accounting from Widener College and an MBA in Finance and Banking
from Hofstra University.

                                       15

<PAGE>

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company's executive officers and
directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of their ownership thereof and
changes in that ownership with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. Executive officers, directors
and greater than 10% stockholders are required by SEC regulations to furnish the
Company with copies of all such reports they file.

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company pursuant to Rule 16a-3(e) under the Exchange Act during fiscal 2004
and Forms 5 and amendments thereto furnished to the Company with respect to
fiscal 2003, no persons during the last fiscal year failed to file on a timely
basis.


Code of Ethics

The Company has adopted its Code of Ethics and Business Conduct for Officers,
Directors and Employees, that applies to all of the officers, directors and
employees of the Company. The Code of Ethics is filed as an exhibit to this
Report on Form 10-KSB.


ITEM 10. EXECUTIVE COMPENSATION

The following table discloses certain compensation paid to the Company's Chief
Executive Officer for the last three fiscal years.
<TABLE>
<CAPTION>

                                                                                       Long Term
Name and                                                                             Compensation
Principal                                    Other        Annual    All Other      Awards/Securities
Position              Year    Salary ($)  Compensation    Bonus    Compensation   Underlying Options(#)
--------              ----    ----------  ------------    -----    ------------   ---------------------
<S>                   <C>      <C>         <C>            <C>       <C>           <C>
Peter Wardle, CEO     2004     $125,000         -           -            -                 -
Thomas Butera, COO    2004     $112,500         -           -            -                 -
William Conis,        2002     $ 89,519         -           -            -                 -
 Former Chief         2001     $182,291         -           -            -              $50,000
 Executive Officer    2000     $163,333    $12,000(1)       -            -                 -

----------

     (1) As per Mr. Conis's 1999 Consulting Agreement.
</TABLE>

Option Grants in Last Year and Stock Option Grant

No options were granted during the year ended December 31, 2004.


Aggregate Option Exercise of Last Fiscal year and Fiscal Year-End Option Values

The following table provides information on the value of the named executive
officers' unexercised options at December 31, 2004. No shares of Common Stock
were acquired upon exercise of options during the fiscal year ended December 31,
2004.

                                                         Value of
                  Number of Unexercised          Unexercised In-The-Money
                  Options at Year End              Options at Year End
               ---------------------------     ---------------------------
Name           Exercisable   Unexercisable     Exercisable   Unexercisable
----           -----------   -------------     -----------   -------------

None.



                                       16
<PAGE>

2000 Employee Stock Option Plan

On May 1, 2001, the Company received shareholder approval to adopt an employee
stock option plan (the Plan). This Plan provides for the grant of options
intended to qualify as incentive stock options and nonqualified stock options
within the meaning of Section 422 of the United States Internal Revenue Code of
1986 (the Code). Incentive stock options are issuable only to eligible officers,
directors, key employees and consultants of the Company.

The Plan is administered by the Board of Directors and terminates in May 2006.
At December 31, 2002, the Company had reserved 350,000 shares of Common Stock
for issuance under the Plan. Under the Plan, the Board of Directors determines
which individuals shall receive options, the time period during which the
options may be partially or fully exercised, the number of shares of Common
Stock that may be purchased under each option and the option price.

The per share exercise price of the Common Stock may not be less than the fair
market value of the Common Stock on the date the option is granted. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option, more than 10% of the total combined voting power of all classes of
stock of the Company is eligible to receive incentive stock options under the
Plan unless the option price is at least 110% of the fair market value of the
Common Stock subject to the option on the date of grant.

No options may be transferred by an optionee, other than by will or the laws of
descent and distribution, and during the lifetime of an optionee, the option may
only be exercisable by the optionee. Options may be exercised only if the option
holder remains continuously associated with the Company from the date of grant
to the date of exercise. Options under the Plan must be granted within five
years from the effective date of the Plan and the exercise date of an option
cannot be later than ten years from the date of grant. Any options that expire
unexercised or that terminate upon an optionee's ceasing to be employed by the
Company become available once again for issuance. Shares issued upon exercise of
an option will rank equally with other shares then outstanding.

As of December 31, 2004, no options are outstanding under this Plan.


1999 Executive Officer Stock Option Plan

In May 1999, the Board of Directors approved the 1999 Executive Officer Stock
Option Plan (the 1999 Plan) for the benefit of the executive officers. The 1999
Plan is intended to provide an incentive to individuals to act as executive
officers and to maintain a continued interest in the Company's operations. All
options under the 1999 Plan will be issued under Section 422A of the Internal
Revenue Code, and include qualified and non-qualified stock options.

The terms of the 1999 Plan provide that the Company is authorized to grant
options to purchase shares of common stock to executive officers upon the
majority consent of the Board of Directors. The option price to be paid by
optionees for shares under qualified stock options must not be less than the
fair market value of the shares as reported by the Nasdaq SmallCap Market on the
date of the grant. The option price for nonqualified stock options must not be
less than 85% of such fair market value. Options must be exercised within six
years following the date of grant and the optionee must exercise options during
service to the Company or within three months of termination of such service (12
months in the event of death or disability). The Board of Directors may extend
the termination date of an option granted under the Plan.

A total of 150,000 shares of authorized but unissued common stock have been
reserved for issuance pursuant to the 1999 Plan. As of December 31, 2004, no
options are outstanding under this Plan.

Options under the 1999 Plan may not be transferred, except by will or by the
laws of intestate succession. The number of shares and price per share of the
options under the Plan will be proportionately adjusted to reflect forward and
reverse stock splits. The holder of an option under the 1999 Plan has none of
the rights of a shareholder until shares are issued.

                                       17
<PAGE>

The 1999 Plan is administered by the Board of Directors, which has the power to
interpret the 1999 Plan, determine which persons are to be granted options and
the amount of such options. The provisions of the Federal Employee Retirement
Income Security Act of 1974 do not apply to the 1999 Plan. Shares issuable upon
exercise of options will not be purchased in open market transactions but will
be issued by us from authorized shares. Payment for shares must be made by
optionees in cash from their own funds. No payroll deductions or other
installment plans have been established.

Shares issuable under the 1999 Plan may be sold in the open market, without
restrictions, as free trading securities. No options may be assigned,
transferred, hypothecated or pledged by the option holder. No person may create
a lien on any securities under the 1999 Plan, except by operation of law.
However, there are no restrictions on the resale of the shares underlying the
options. The 1999 Plan will remain in effect until May 2009 but may be
terminated or extended by the Board of Directors.


2000 Executive Officer Stock Option Plan

On May 1, 2001, the Company received shareholder approval for an additional
Executive Officer Stock Option Plan (the 2000 Plan) for the benefit of the
executive officers. The 2000 Plan is intended to provide an incentive to
individuals to act as executive officers and to maintain a continued interest in
the Company's operations. All options under the 2000 Plan will be issued under
Section 422A of the Internal Revenue Code, and include qualified and
non-qualified stock options.

The terms of the 2000 Plan provide that the Company is authorized to grant
options to purchase shares of common stock to executive officers upon the
majority consent of the Board of Directors. The option price to be paid by
optionees for shares under qualified stock options must not be less than the
fair market value of the shares as reported by the OTC Bulletin Board on the
date of the grant. The option price for nonqualified stock options must not be
less than 85% of such fair market value. Options must be exercised within six
years following the date of grant and the optionee must exercise options during
service to the Company or within three months of termination of such service (12
months in the event of death or disability). The Board of Directors may extend
the termination date of an option granted under the Plan.

A total of 350,000 shares of authorized but unissued common stock have been
reserved for issuance pursuant to the 2000 Plan. As of December 31, 2004, no
options are outstanding under this Plan.

Options under the 2000 Plan may not be transferred, except by will or by the
laws of interstate succession. The number of shares and price per share of the
options under the Plan will be proportionately adjusted to reflect forward and
reverse stock splits. The holder of an option under the 2000 Plan has none of
the rights of a shareholder until shares are issued.

The 2000 Plan is administered by the Board of Directors, which has the power to
interpret the 2000 Plan, determine which persons are to be granted options and
the amount of such options. The provisions of the Federal Employee Retirement
Income Security Act of 1974 do not apply to the 2000 Plan. Shares issuable upon
exercise of options will not be purchased in open market transactions but will
be issued by us from authorized shares. Payment for shares must be made by
optionees in cash from their own funds. No payroll deductions or other
installment plans have been established.

Shares issuable under the 2000 Plan may be sold in the open market, without
restrictions, as free trading securities. No options may be assigned,
transferred, hypothecated or pledged by the option holder. No person may create
a lien on any securities under the 2000 Plan, except by operation of law.
However, there are no restrictions on the resale of the shares underlying the
options. The 2000 Plan will remain in effect until May 2010 but may be
terminated or extended by the Board of Directors.

                                       18
<PAGE>

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

The following table sets forth information concerning the holdings of Common
Stock by each person who, as of March 31, 2005, holds of record or is known by
the Company to hold beneficially or of record, more than 5% of the Company's
Common Stock, by each director, and by all directors and executive officers as a
group. All shares are owned beneficially and of record and all share amounts
include stock options and Common Stock purchase warrants exercisable within 60
days from the date hereof. Such amounts also include shares of common stock
issuable upon conversion of the 193,836 shares of preferred stock which are each
convertible into 100 shares of common stock at any time after the authorized
number of shares of common stock is increased to 100,000,000.

                                         Amount and Nature
                                           of Beneficial        Percent of Class
Name of Beneficial Owner (1)               Ownership (2)               (%)
----------------------------               -------------               ---

Peter Wardle                               19,383,600(3)             70.5%
Thomas Butera                              19,383,600(3)             70.5%
Joseph DiMarino                                     -                   -
Mark Blanchard (4)                            461,454                 6.2%
Stewart Kalter                                      -                   -

Kent Spears                                   367,173                 4.9%
Peter J. Pappas (5)                         1,319,748                16.2%

All officers and directors as a group
(5 persons)                                   461,454                 6.2%

--------------------
* Less than 1%

(1) Except as otherwise indicated, the address of each beneficial owner is c/o
ProtoSource Corporation, One Bethlehem Plaza, 4th Floor, Bethlehem, PA 18018.

(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to the
shares shown. Except where indicated by footnote and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of voting securities shown as
beneficially owned by them.

(3) Each of Messrs. Wardle and Butera may be deemed control persons of P2i,
Inc., the registered owner of 193,836 shares of preferred stock convertible into
19,383,600 shares of common stock.

(4) Includes 43,310 shares owned by his wife, Virginia M. Blanchard.

(5) Includes 612,986 shares issuable upon exercise of warrants or conversion of
convertible promissory notes.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 2003, the Company signed an agreement and Plan of Merger with P2i to
acquire P2i's Print-to-Internet business in exchange for a controlling interest
in the Company and satisfaction of the existing P2i debt to the Company. The
Company loaned P2i $50,000 in 2001, $995,280 in 2002 and $597,023 in 2003. The
loans to P2i were in the form of demand notes, which in the event that the
merger did not get completed, would have been due on demand.

In May 2002 Peter Wardle, CEO and a principal stockholder of P2i, Inc. and a
director of the Company, assumed the duties and responsibilities of CEO of the
Company. As of January 2004, Mr. Wardle draws a salary from the Company and his
expenses are being reimbursed. Additionally, during 2004, Mr. Wardle received
$106,379 in advances to be reimbursed, in accordance with a note-holders'
security agreement, to the Company by sale of ProtoSource common stock that is
to be issued to P2i, Inc. in accordance with the merger agreement of Company
with P2i Newspaper, Inc.

                                       19
<PAGE>

In January 2004 Thomas Butera, COO and a principal stockholder of P2i, Inc. and
a director of the Company, assumed the duties and responsibilities of COO of the
Company. As of January 2004, Mr. Butera draws a salary from the Company and his
expenses are being reimbursed. Additionally, during 2004, Mr. Butera received
$59,501 in advances to be reimbursed, in accordance with a note-holders'
security agreement, to the Company by sale of ProtoSource common stock that is
to be issued to P2i, Inc. in accordance with the merger agreement of Company
with P2i Newspaper, Inc.

As of December 31, 2004, an amount of $10,906 is due from P2i, Inc. As CEO and
principal stockholder of P2i, Inc. and a director of the Company, Peter Wardle
has pledged that any such funds provided to P2i, Inc. by the Company will be
reimbursed by sale of ProtoSource common stock that is to be issued to P2i, Inc.
in accordance with the agreement of merger of Company with P2i Newspaper, Inc.

P2i, through its infrastructure, provides office space to the Company. P2i and
the Company entered into a services agreement for periods commencing after
January 1, 2003 thru December 31, 2003. During 2003, $50,400 of fees were
recorded by the Company with respect to this agreement. For periods commencing
after January 1, 2004, the Company has been making direct payments to P2i's
office space leaseholder. During 2004, payments of approximately $37,400 were
paid to P2i's leaseholder.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBIT
NUMBER                           DESCRIPTION
------                           -----------

3.01           Restated Articles of Incorporation of the Registrant (1)

3.02           By-laws of the Registrant (1)

3.03           Class A warrant agreement

3.04           Class B warrant agreement (6)

10.01          1995 Incentive Stock Option Plan (2)

10.02          2001 Employee Stock Option Plan

10.03          1999 Executive Officer Option Plan (5)

10.04          2001 Executive Officer Option Plan

10.05          Agreement and Plan of Merger, dated as of February 13, 2003, by
               and among ProtoSource Corporation, ProtoSource Acquisition LLC,
               P2i, Inc. and P2i Newspaper, Inc. (6)

31.1           Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
               Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1           Certification Of Principal Executive Officer and Principal
               Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
               Act of 2002.

99.1           Code of Ethics and Business Conduct of Officers, Directors and
               Employees (7)

----------

(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2/A, as filed with the Securities and Exchange Commission on May 5, 1998.

(2) Incorporated by reference to the Company's Registration Statement on Form
SB-2, declared effective by the Securities and Exchange Commission on February
9, 1995, file number 333-56242.

                                       20
<PAGE>

(3) Incorporated by reference to the Company's Form 8-K, as filed with the
Securities and Exchange Commission on November 9, 1999.

(4) Incorporated by reference to the Company's Form 8-K, as filed with the
Securities and Exchange Commission on August 31, 2000.

(5) Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on May 14, 1999, file
number 333-78497.

(6) Incorporated by reference from the Company Form 8-K, as filed with the
Securities and Exchange Commission on February 19, 2003

(7) Incorporated by reference from the Company's Form 10-KSB for the year ended
December 31, 2002.


(b) Reports on Form 8-K.

During the three-month period ended December 31, 2004, the Company filed no
reports on Form 8-K.


Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees. The aggregate fees billed by our auditors to date, for professional
services rendered for the audit of the Company's annual financial statements for
the years ended December 31, 2004 and December 31, 2003, and for review of the
financial statements included in the Company's quarterly reports on Form 10-QSB
during such fiscal years, were $30,000 and $42,520 ($25,000 from Margolis &
Company and $17,520 from the Company's predecessor auditors), respectively.

Audit-Related Fees. The aggregate fees billed for assurance and related services
by our auditors that are reasonably related to the performance of the audit or
review of our financial statements were $0 and $0 for the years ended December
31, 2004 and 2003, respectively.

Tax Fees. The aggregate fees billed for tax preparation and related services by
our auditors were $2,500 and $6,000 for the years ended December 31, 2004 and
2003, respectively.

All Other Fees. For the fiscal year ended December 31, 2003, the Company
incurred fees to auditors of $20,000 for services rendered to the Company, other
than the services covered in "Audit Fees", "Audit-Related Fees" or "Tax Fees".
The nature of such services rendered was the audit of P2i Newspaper, Inc.'s
annual financial statements for fiscal 2001 & 2002 as a preparatory step to
merger with Company. This included a review of P2i Newspaper's accounts through
September 30, 2003.


                                       21
<PAGE>


                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in Bethlehem, Pennsylvania, on November 10, 2006.

                                            PROTOSOURCE CORPORATION





                                            By: /s/ Peter Wardle
                                              --------------------------------
                                                    Peter Wardle
                                                    Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on the dates
indicated.


Signature                       Title                           Date
---------                       -----                           ----


/s/  Peter Wardle               Chief  Executive Officer       November 10, 2006
--------------------------      Chief Financial Officer
     Peter Wardle              (Principal Accounting
                                Officer), and Director

/s/  Thomas Butera              Chief  Operating Officer       November 10, 2006
--------------------------      Director
     Thomas Butera

/s/  Joseph DiMarino            Director                       November 10, 2006
--------------------------
     Thomas Butera

/s/  Mark Blanchard             Director                       November 10, 2006
--------------------------
     Mark Blanchard

/s/  Stewart Kalter             Director                       November 10, 2006
--------------------------
     Stewart Kalter





                                       22
<PAGE>

ITEM 7. FINANCIAL STATEMENTS
----------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                     Page
                                                                     ----

Financial Statements                                                 F-1

Report of Independent Registered Public Accounting Firm              F-2

Consolidated Balance Sheet as of December 31, 2004                   F-3

Consolidated Statement of Operations
  for the years ended December 31, 2004 and 2003                     F-4

Consolidated Statement of Stockholders' Equity (Deficiency)          F-5
  for the years ended December 31, 2004 and 2003

Consolidated Statement of Cash Flows
  for the years ended December 31, 2004 and 2003                     F-6 & 7

Notes to Consolidated Financial Statements                           F-8 to F-24






                                       F-1
<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
ProtoSource Corporation

We have audited the accompanying consolidated balance sheet of ProtoSource
Corporation and Subsidiary as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
the years ended December 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of ProtoSource Corporation and
Subsidiary as of December 31, 2004, and the results of their operations and
their cash flows for the years ended December 31, 2004 and 2003 in conformity
with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying financial
statements, the Company incurred net losses of $1,027,783 and $3,845,612 during
the years ended December 31, 2004 and 2003, respectively. As discussed in Note 1
to the financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




                                                 /s/ Margolis & Company P.C.
                                                 ---------------------------
                                                 Certified Public Accountants

Bala Cynwyd, Pennsylvania
March 9, 2005, except for the restatement discussed in Note 2 to the
Consolidated Financial Statements as to which the date is November 1, 2006


                                       F-2
<PAGE>
<TABLE>
<CAPTION>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004
                             (RESTATED - SEE NOTE 2)
----------------------------------------------------------------------------------

                                     ASSETS

<S>                                                                   <C>
Current assets:
   Cash                                                               $     39,726
   Accounts receivable - trade, net of allowance of $7,782                 180,709
   Advances to officers, net of obligations to officers                     47,130
   Amounts due from related party - P2i, Inc.                               10,906
   Note receivable, current portion                                         64,814
   Prepaid expenses and other                                              171,491
                                                                      ------------

       Total current assets                                                514,776
                                                                      ------------

Property and equipment, at cost, net of
   accumulated depreciation and amortization of $414,671                   110,008
                                                                      ------------

Other assets:
   Note receivable, non-current portion - Brand X Networks, Inc.           153,162
   Goodwill - Acquisition of P2i Newspaper                                 375,067
   Debt issuance costs, net of accumulated amortization of $199,933         47,067
   Deposits                                                                  8,263
                                                                      ------------

       Total other assets                                                  583,559
                                                                      ------------

       Total assets                                                   $  1,208,343
                                                                      ============



                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
   Notes payable                                                      $  2,425,000
   Current portion of obligations under capital leases                      34,852
   Accounts payable                                                        158,297
   Accrued expenses                                                        831,129
                                                                      ------------

       Total current liabilities                                         3,449,278
                                                                      ------------

Obligations under capital leases, non-current portion                        7,154
Stock subscriptions payable                                                969,345
                                                                      ------------

       Total non-current liabilities                                       976,499
                                                                      ------------

Commitments and contingencies

Stockholders' deficiency:
   Preferred stock, Series B, no par value; 5,000,000 shares
     authorized, 193,836 issued and outstanding                            416,179
   Common stock, no par value; 10,000,000 shares
     authorized, 8,114,829 shares issued and outstanding                25,835,960
   Additional paid-in capital                                            2,291,607
   Accumulated deficit                                                 (31,761,180)
                                                                      ------------

       Net  stockholders' deficiency                                    (3,217,434)
                                                                      ------------

       Total liabilities and stockholders' deficiency                 $  1,208,343
                                                                      ============


The notes to consolidated financial statements are an integral part of the above
statement.

                                       F-3
<PAGE>

                        PROTOSOURCE CORPORATION AND SUBSIDIARY
                        --------------------------------------

                         CONSOLIDATED STATEMENT OF OPERATIONS
                                (RESTATED - SEE NOTE 2)
---------------------------------------------------------------------------------------

                                                                    YEAR ENDED
                                                                    DECEMBER 31,
                                                               2004            2003
                                                           ------------    ------------

Net revenues                                               $  1,639,594    $       --
                                                           ------------    ------------

Operating costs and expenses:
   Cost of revenues                                             916,728            --
   Selling, general and administrative                          793,429         352,517
   Depreciation and amortization                                111,322           8,726
   Impairment of investment                                      24,000          81,000
                                                           ------------    ------------

         Total operating costs and expenses                   1,845,479         442,243
                                                           ------------    ------------

         Operating loss                                        (205,885)       (442,243)
                                                           ------------    ------------

Other income (charges):
   Interest expense                                            (904,046)     (1,653,031)
   Investment banking fees                                     (406,844)           --
   Other expense                                                (10,737)           --
   Write-off of notes and interest receivable, P2i, Inc.           --        (1,705,062)
   Loss on sale of marketable securities                           --           (65,942)
   Interest income                                                6,316            --
   Other income                                                  17,959          20,666
                                                           ------------    ------------

          Net other (charges)                                (1,297,352)     (3,403,369)
                                                           ------------    ------------


Loss from continuing operations                              (1,503,237)     (3,845,612)

Discontinued operations:
   Gain on disposal - ISP                                       475,454            --
                                                           ------------    ------------

Net loss                                                   ($ 1,027,783)   ($ 3,845,612)
                                                           ============    ============


Net loss per basic and diluted share of common stock:
   Continuing operations                                   ($       .05)   ($       .47)
   Discontinued operations                                          .01            --
                                                           ------------    ------------

Net loss                                                   ($       .04)   ($       .47)
                                                           ============    ============

Weighted average number of basic and
  diluted common shares outstanding                          31,798,461       8,202,405
                                                           ============    ============



The notes to consolidated financial statements are an integral part of the above statement.

                                          F-4
<PAGE>

                                             PROTOSOURCE CORPORATION AND SUBSIDIARY
                                             --------------------------------------

                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                           FOR THE YEARS DECEMBER 31, 2004 AND 2003
                                                   (RESTATED - SEE NOTE 2)

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

                                                                                                                      Accumulated
                                                Preferred Stock                Common Stock            Additional        Other
                                          ---------------------------   ---------------------------      Paid-In     Comprehensive
                                             Shares         Amount         Shares         Amount         Capital        (Loss)
                                          ------------   ------------   ------------   ------------   ------------   ------------
Balance, December 31, 2002
  as previously stated                            --             --        7,489,829   $ 25,635,960   $  1,487,891   ($    62,069)

Prior period adjustment
  see Note 2                                      --             --             --             --           76,216           --
                                          ------------   ------------   ------------   ------------   ------------   ------------

Balance, December 31, 2002                        --             --        7,489,829     25,635,960      1,564,107        (62,069)

Issuance of common stock in
  connection with financing                       --             --          625,000        200,000           --             --
Beneficial conversion feature of
  convertible notes                               --             --             --             --          617,500           --
Other comprehensive (loss), net of tax:
  Unrealized (loss) on marketable
    securities                                    --             --             --             --             --           (3,873)
  Reclassification adjustment for
    losses included in net loss                   --             --             --             --             --           65,942

Net loss                                          --             --             --             --             --             --
                                          ------------   ------------   ------------   ------------   ------------   ------------

Total Comprehensive (loss)                        --             --             --             --             --             --


Balance, December 31, 2003                        --             --        8,114,829     25,835,960      2,181,607           --


Issuance of preferred stock in
  connection with acquisition                  193,836   $    416,179           --             --             --             --
Beneficial conversion feature of
  convertible notes                               --             --             --             --          110,000           --

Net loss                                          --             --             --             --             --             --
                                          ------------   ------------   ------------   ------------   ------------   ------------

Total Comprehensive (loss)                        --             --             --             --             --             --


Balance, December 31, 2004                     193,836   $    416,179      8,114,829   $ 25,835,960   $  2,291,607   $       --
                                          ============   ============   ============   ============   ============   ============


Table continues below.

                                                                         Current Year's
                                          Accumulated                    Comprehensive
                                             Deficit         Total           (Loss)
                                          ------------    ------------    ------------
Balance, December 31, 2002
  as previously stated                    ($26,811,569)   $    250,213            --

Prior period adjustment
  see Note 2                                   (76,216)           --              --
                                          ------------    ------------    ------------

Balance, December 31, 2002                 (26,887,785)        250,213            --

Issuance of common stock in
  connection with financing                       --           200,000            --
Beneficial conversion feature of
  convertible notes                               --           617,500            --
Other comprehensive (loss), net of tax:
  Unrealized (loss) on marketable
    securities                                    --            (3,873)   ($     3,873)
  Reclassification adjustment for
    losses included in net loss                   --            65,942          65,942

Net loss                                    (3,845,612)     (3,845,612)     (3,845,612)
                                          ------------    ------------    ------------

Total Comprehensive (loss)                        --              --      ($ 3,783,543)


Balance, December 31, 2003                 (30,733,397)     (2,715,830)           --


Issuance of preferred stock in
  connection with acquisition                     --           416,179            --
Beneficial conversion feature of
  convertible notes                               --           110,000            --

Net loss                                    (1,027,783)     (1,027,783)   ($ 1,027,783)
                                          ------------    ------------    ------------

Total Comprehensive (loss)                        --              --      ($ 1,027,783)


Balance, December 31, 2004                ($31,761,180)   ($ 3,217,434)           --
                                          ============    ============    ============


The notes to consolidated financial statements are an integral part of the above statement.

                                       F-5
<PAGE>

                         PROTOSOURCE CORPORATION AND SUBSIDIARY
                         --------------------------------------

                          CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (RESTATED - SEE NOTE 2)
---------------------------------------------------------------------------------------

                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                                 2004           2003
                                                              ----------     ----------

                               INCREASE (DECREASE) IN CASH

Cash flows from operating activities:
  Net loss                                                   ($1,027,783)   ($3,845,612)
  Adjustments to reconcile net loss to net cash
       (used in) operating activities:
     Depreciation and amortization                               111,322          8,726
     Provision for bad debts                                       7,782           --
     Gain on disposal -- ISP                                    (475,454)          --
     Impairment of investment                                     24,000         81,000
     Loss on sale of marketable securities                          --           65,942
     Loss on disposal of property and equipment                       29           --
     Amortization of debt issuance costs                         502,618        862,242
     Amortization of beneficial conversion
       of notes payable                                          110,000        617,500
     Investment banking fees to be paid by
       issuance of common stock                                  406,844
     Write-off of notes and interest receivable, P2i, Inc.          --        1,705,062
     Changes in operating assets and liabilities:
       Accounts receivable                                       (25,333)          --
       Interest receivable                                          --             --
       Prepaid expenses and other assets                          22,187          2,025
       Assets and liabilities held for sale                         --             --
       Accounts payable                                         (115,221)        28,870
       Accrued expenses                                          267,859        196,920
       Deferred revenue                                             --           39,062
                                                             -----------    -----------

              Net cash (used in) operating activities           (191,150)      (238,263)
                                                             -----------    -----------

Cash flows from investing activities:
  Cash obtained from acquisition of P2i Newspaper                 56,775           --
  Purchase of property and equipment                              (6,013)          --
  Increase in notes receivable, P2i, Inc.                           --         (610,226)
  Decrease in notes receivable - other                            45,403           --
  Increase in directors and employees advances                  (165,755)          --
  Proceeds from sale of marketable securities                       --            7,051
                                                             -----------    -----------

              Net cash (used in) investing activities            (69,590)      (603,175)
                                                             -----------    -----------


                             CONTINUED ON NEXT PAGE


The notes to consolidated financial statements are an integral part of the above statement.

                                       F-6
<PAGE>

                            PROTOSOURCE CORPORATION AND SUBSIDIARY
                            --------------------------------------

                       CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
------------------------------------------------------------------------------------------------


                                                                                YEAR ENDED
                                                                               DECEMBER 31,
                                                                             2004         2003
                                                                          ---------    ---------

Cash flows from financing activities:
  Proceeds from borrowings                                                $ 400,000    $ 900,000
  Payments on obligations under capital leases                              (41,104)     (13,775)
  Net change in amount due related company                                  (53,888)        --
  Debt issuance costs incurred                                              (52,000)        --
                                                                          ---------    ---------

           Net cash provided by financing activities                        253,008      886,225
                                                                          ---------    ---------

Net increase (decrease) in cash                                              (7,732)      44,787

Cash at beginning of year                                                    47,458        2,671
                                                                          ---------    ---------

Cash at end of year                                                       $  39,726    $  47,458
                                                                          =========    =========




                      SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:
  Interest                                                                $  23,199    $ 173,289
                                                                          ---------    ---------
  Income taxes                                                            $    --      $    --
                                                                          ---------    ---------




           SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Issuance of common stock in connection with financing                     $    --      $ 200,000
Subscriptions of common stock due in connection with financing              195,000      367,501
Issuance of preferred stock in connection with acquisition                  416,179         --
Sale of ISP Division in exchange for note receivable
  and credit for future services                                            475,454         --
Unrealized loss on marketable securities                                       --        (62,069)

Write-off of interest receivable from P2i, Inc. recorded
  during the nine-month period ended September 30, 2003
  deemed uncollectible and written-off during the
  quarter ended December 31, 2003                                              --        (75,658)



The notes to consolidated financial statements are an integral part of the above statement.

                                             F-7
</TABLE>
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Nature of Operations and Summary of Significant Accounting Policies
     -------------------------------------------------------------------

     Nature of operations - ProtoSource Corporation, formerly SHR Corporation
     doing business as Software Solutions Company (the "Company'), was
     incorporated on July 1, 1988, under the laws of the state of California.
     Until May 1, 2002, the Company was an Internet service provider (ISP). The
     Company provided dial-up Internet access, web hosting services and web
     development services. The Company entered into an agreement on May 1, 2002
     to sell substantially all of the assets pertaining to the ISP to Brand X
     Networks, Inc. (see Note 2). Effective January 1, 2004, the Company
     acquired P2i Newspaper, Inc. (see Note 8). P2i Newspaper, Inc. is
     principally engaged in the conversion of text and graphics from print to
     interactive Web content. Its clients include newspaper groups located in
     the United States and the United Kingdom. P2i Newspaper is headquartered in
     Bethlehem, Pennsylvania and has a data conversion center located in Kuala
     Lumpur, Malaysia.

     Basis of presentation - The accompanying consolidated financial statements
     have been prepared on a going concern basis, which contemplates the
     realization of assets and the satisfaction of liabilities in the normal
     course of business. The financial statements do not include any adjustments
     relating to the recoverability and classification of recorded asset amounts
     or the amount and classification of liabilities that might be necessary
     should the Company be unable to continue as a going concern. The Company's
     continuation as a going concern is dependent upon its ability to generate
     sufficient cash flows to meet its obligations on a timely basis, to obtain
     additional financing as may be required, and to generate revenues to a
     level where the Company becomes profitable. Additionally, the Company has
     experienced extreme cash liquidity shortfalls from operations.

     The Company's continued existence is dependent upon its ability to achieve
     its operating plan. Management's plans include the following:

     o    Obtaining additional working capital through the sale of common stock
          or debt securities.

     o    The ability of P2i Newspaper to successfully implement its strategic
          plan as follows:

          P2i Newspaper's long-term business strategy is to focus on the
          processing of print content into Web content using technologically
          sophisticated, database-driven, services and solutions across multiple
          business-to-business verticals. The combination of on-target sales
          strategies, low labor costs, a well-educated labor pool fluent in
          English, and sophisticated technologies make P2i Newspaper highly
          competitive. The Company intends leveraging these competitive
          advantages in other markets over the next five years.

          Through 2005 and 2006, P2i Newspaper will focus on the following:
          increase market share in the newspaper vertical and target government,
          retail and manufacturing verticals.

                                       F-8
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Nature of Operations and Summary of Significant Accounting Policies -
     Continued
     ---------------------------------------------------------------------

     Newspaper

     o    In November 2003, P2i Newspaper made the strategic decision to
          withdraw from marketing directly to new newspaper accounts in the
          United States, but instead to focus on building partnerships to build
          sales. The Company recognized that the conversion of print content
          into Internet was viewed by newspapers as an essential commodity, and
          as such they were motivated by price as much as product functionality
          and features.

     o    Through its partners and residual direct accounts, P2i Newspaper is
          supplying or has access to over 1,600 U.S. newspapers: over 24% of the
          U.S. market.

     Government

     o    The UK government has mandated that all government publications must
          also be available online within the near future. P2i Newspaper is
          working closely to maximize this opportunity.

     o    P2i Newspaper's solution has just been evaluated by the city of
          Stockport in the UK and has passed the established Bobby AA standards.

     Retail

     o    P2i Newspaper currently processes inserts for several retailers.

     o    In addition, the Company is in talks with retailer groups to provide
          the ad and special section processing that will be incorporated into a
          platform featuring newspaper content and retail inserts.

     o    The pricing for converting catalog and retail insert pages has fallen
          dramatically over the past 18 months. P2i Newspaper believes it will
          continue to fall and that the Company is perfectly positioned to
          re-enter this market using a similar strategy to that used in the
          newspaper space: partnerships.

     Manufacturing

     o    P2i Newspaper solutions are applicable for any business with large
          volumes of frequently updated print content that is appropriate for
          Internet distribution.

     o    Manufacturing companies are generally putting all technical manuals
          online in crude PDF format.

     o    The potential revenue opportunity is being quantified, but is believed
          to be substantial.

     If management cannot achieve the above objectives, the Company may find it
     necessary to dispose of assets, or undertake other actions as may be
     appropriate.

                                       F-9
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Nature of Operations and Summary of Significant Accounting Policies -
     Continued
     ---------------------------------------------------------------------

     Principles of consolidation - The consolidated financial statements include
     the accounts of the Company and P2i Newspaper, Inc., its wholly-owned
     subsidiary. All significant intercompany accounts and transactions have
     been eliminated.

     Revenue recognition - In accordance with the SEC's Staff Accounting
     Bulletin No. 104, the Company recognizes service revenue when persuasive
     evidence of an arrangement exists, services are performed and delivered
     without defect, the price of the transaction is fixed and determinable, and
     collectibility is reasonably assured.

     In general, no matter the nature of a customer's business, the Company,
     through its software technology at its production facilities, converts any
     manner of print text and print graphics to interactive web content
     accessible via the Internet. This most often is in the form of online
     advertising. (i.e., A visitor to a customer's website can, if he so
     chooses, interact with the ad because the Company's technology has made
     that possible. The interactivity often involves various links to additional
     information and possible other pertinent or interested parties or sources
     behind the genesis and purpose of the ad.) This electronically processed
     service is objective and readily verifiable by both parties immediately
     upon delivery to a customer's website.

     Only after the Company completes its conversion processing of specific
     digital data (printable text and/or graphic image files) provided by the
     customer and delivers the results as interactive, online web content
     directly to the customer's Internet website(s) does the Company identify a
     measurable event for purposes of revenue recognition. The measurable,
     delivered event or unit is typically identified as a "page" (or "pages") of
     service provided to the customer, immediately usable by the customer and
     its clients at their website(s). This process service takes place daily, 52
     weeks a year, whereupon, digital files are received and processed overnight
     for morning delivery. Through contractual agreement, a price is determined
     and the customer is billed for each unit of service provided at the agreed
     upon price. Although the Company accumulates billable revenue-recognizable
     events daily, it typically waits until month end to bill for all units
     delivered during the course of that month as a convenience to its
     customers.

     If there are any identifiable problems or defects with any "page" content,
     it is typically fixed by the Company within a matter of hours. With respect
     to sales returns or credits, cancellations and warranties, because of the
     inherent nature of the type of services provided and the underlying
     processes employed by the Company to create and deliver completed product
     to its customers, there is no material exposure to what would be classified
     as sales returns or credits. Likewise, cancellations and or warranties are
     not significantly measurable in respect to the type of electronic product
     (Internet website content) deliverable to the Company's customers.
     Historically, there has been little to no applicable sales returns or
     credits. For these reasons, the Company has no material need or basis to
     make estimates for returns and allowances.

                                      F-10
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Nature of Operations and Summary of Significant Accounting Policies -
     Continued
     ---------------------------------------------------------------------

     Cash and cash equivalents - For purposes of the statements of cash flows,
     the Company considers all highly liquid investments with a maturity of
     three months or less at the date of purchase to be cash equivalents.

     Accounts receivable - Trade accounts receivable are stated at the amount
     management expects to collect from outstanding balances. It is the policy
     of management to review the outstanding accounts receivable at the end of
     each reporting period, as well as the bad debt write-offs experienced in
     the past, and establish an allowance for doubtful accounts for
     uncollectable amounts.

     Property and equipment - Assets held under capital lease obligations are
     amortized using the straight-line method over the shorter of the useful
     lives of the assets or the term of the lease.

     Depreciation and amortization of property and equipment charged to
     operations was $111,322 and $8,726 for the years ended December 31, 2004
     and 2003, respectively.

     Amortization - Debt issuance costs are being amortized using the
     straight-line method over the one-year term of the notes (see Note 4).

     Impairment - With respect to the Company's investment in P2i, Inc., an
     impairment charge of $24,000 and $81,000 was recognized for the years ended
     December 31, 2004 and 2003, respectively, as there was a decline in the
     fair value of the investment below its cost, which was considered other
     than temporary. The fair value was based on financial projections,
     consultation with the Company's investment banker and an outside
     consultant, and management's estimates. Effective January 1, 2004, the
     Company acquired P2i's Print-to-Internet business (see Note 9).

     Goodwill - In accordance with Statement of Financial Accounting Standards
     ("SFAS") No. 142, Goodwill and Other Intangible Assets, goodwill is not
     amortized; however, it must be tested annually for impairment.

                                      F-11
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Summary of Significant Accounting Policies - Continued
     ------------------------------------------------------

     Stock-based compensation - The Company adopted SFAS No. 123, "Accounting
     for Stock-Based Compensation," for its stock-based compensation plans.
     Through 2004, the Company continued to measure compensation expense for its
     stock-based employee compensation plans using the intrinsic value method
     prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
     Employees," and related interpretations. The Company will adopt SFAS No.
     123(R) in 2005, which will require the fair value of all stock option
     awards issued to employees to be recorded as an expense over the related
     vesting period.

     If the Company had elected to recognize compensation expense based upon the
     fair value at the grant date for awards under these plans consistent with
     the methodology prescribed by SFAS No. 123, the Company's net loss and loss
     per share would be increased to the following pro forma amounts for the
     years ended December 31, 2004 and 2003:

                                                        2004           2003
                                                    -----------    -----------
     Net loss:
       As reported                                  ($1,230,227)   ($4,291,884)
       Deduct:
         Total stock-based compensation
           determined under Black-Scholes
           option valuation model for all awards,
           net of income taxes                          (35,000)       (35,000)
                                                    -----------    -----------

     Pro forma                                      ($1,265,227)   ($4,326,884)
                                                    ===========    ===========

     Net loss per share of common stock:
       As reported                                  ($      .04)   ($      .52)
       Pro forma                                    ($      .04)   ($      .53)


     These pro forma amounts may not be representative of future disclosures
     since the estimated fair value of stock options is amortized to expense
     over the vesting period and additional options may be granted in future
     years. The fair value for these options was estimated at the date of grant
     using the Black-Scholes option-pricing model with the following
     assumptions:

     Risk free interest rate                          4.95%
     Expected life                                    5 years
     Expected volatility                              76.5%
     Expected dividend yield                          None


     Income taxes - Deferred income taxes are provided for temporary differences
     between the financial reporting and tax basis of assets and liabilities
     using enacted tax laws and rates for the years when the differences are
     expected to reverse.

                                      F-12

<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Summary of Significant Accounting Policies - Continued
     ------------------------------------------------------

     Net (loss) per basic and diluted share of common stock - Basic loss per
     share is calculated using the weighted average number of common shares
     outstanding. Diluted loss per share is computed on the basis of the
     weighted average number of common shares outstanding during the period
     increased by the dilutive effect of outstanding stock options using the
     "treasury stock" method.

     The basic and diluted loss per share are the same since the Company had a
     net loss for 2004 and 2003 and the inclusion of stock options and other
     incremental shares would be anti-dilutive. Options and warrants to purchase
     2,225,000 and 1,697,500 shares of common stock at December, 2004 and 2003,
     respectively, were not included in the computation of diluted earnings per
     share.

     Estimates - The preparation of the Company's financial statements in
     conformity with generally accepted accounting principles requires the
     Company's management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amount of revenues and expenses during the reporting period.
     Actual results could differ from those estimates.

     Reclassifications - Certain reclassifications have been made to the 2003
     financial statement presentation for comparability with the 2004 financial
     statements.



     Recently Issued Accounting Standards
     ------------------------------------

     In December 2003, the Financial Accounting Standards Board ("FASB") issued
     Financial Interpretation ("FIN") No. 46(R), "Consolidation of Variable
     Interest Entities". FIN No. 46(R) addresses the application of Accounting
     Research Bulletin No. 51, "Consolidated Financial Statements", to certain
     entities in which equity investors do not have the characteristics of a
     controlling financial interest or do not have sufficient equity at risk for
     the entity to finance its activities without additional subordinated
     financial support. FIN No. 46(R) was effective for the Company in 2004 and
     had no impact on its financial condition or results of operations.

     In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The new
     Statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
     Pricing," to clarify the accounting for abnormal amounts of idle facility
     expense, freight, handling costs, and wasted material. This Statement
     requires that those items be recognized as current period charges and
     requires that allocation of fixed production overheads to the cost of
     conversion be based on the normal capacity of the production facilities.
     This statement is effective for fiscal years beginning after June 15, 2005.
     The Company does not expect adoption of this Statement to have a material
     impact on is financial condition or results of operations.

                                      F-13

<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.   Summary of Significant Accounting Policies - Continued
     ------------------------------------------------------

     In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
     This Statement replaces SFAS No. 123 and supersedes APB No. 25. SFAS No.
     123 (R) will require the fair value of all stock option awards issued to
     employees to be recorded as an expense over the related vesting period. The
     Statement also requires the recognition of compensation expense for the
     fair value of any unvested stock option awards outstanding at the date of
     adoption. As permitted by SFAS No. 123, the Company currently accounts for
     share-based payments to employees using the APB No. 25 intrinsic value
     method and, as such, generally recognizes no compensation cost for employee
     stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value
     method will have an impact on the Company's results of operations. Had the
     Company adopted SFAS No. 123(R) in prior periods, the impact of that
     standard would have approximated the impact of SFAS No. 123 as described in
     the disclosure of pro forma net income and earnings per share above.


2.   Restatement of Financial Statements
     -----------------------------------

     Balance Sheet:
                                                      December 31, 2004
                                                 As Originally        As
                                                   Reported        Restated
                                                 ------------    ------------

     Stock subscription payable (a)              $       --      $    969,345

     Stockholders' deficiency:
          Common stock, to be issued,
            no par value, 5,376,188 shares (a)        969,345            --

           Additional paid-in capital (b)           2,864,107       2,291,607

           Accumulated deficit (b)                (32,333,680)    (31,761,180)

     Net stockholders' deficiency (a)              (2,248,089)     (3,217,434)


     (a)  The Company has reclassified the amount of $969,345 from stockholders'
          deficiency (common stock to be issued) to non-current liabilities
          representing the current value of 5,376,188 shares of common stock to
          be issued to certain debt holders in accordance to loan agreements and
          the Company's investment banker in connection with services provided,
          such stock to be issued when it becomes available.

     (b)  The reduction in additional paid-in capital and accumulated deficit
          reflects a prior period adjustment of $76,216 for the correction of
          the computation of the beneficial conversion feature of convertible
          notes which should have been allocated to the year ended December 31,
          2002, as well as computational corrections reducing the amounts of the
          beneficial conversion feature by $358,716 and $290,000 in 2003 and
          2004, respectively.

                                      F-14
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.   Restatement of Financial Statements - Continued
     -----------------------------------------------

Statement of Operations:

                                        Year Ended December 31,
                                  2004                          2003
                                  ----                          ----
                       As Originally      As        As Originally       As
                         Reported      Restated       Reported       Restated
                        -----------   -----------    -----------    -----------

Interest expense (a)    $ 1,106,490   $   904,046    $ 2,099,303    $ 1,653,031

Loss from continuing
  operations (a)         (1,705,681)   (1,503,237)    (4,291,884)    (3,845,612)

Net loss (a)             (1,230,227)   (1,027,783)    (4,291,884)    (3,845,612)

Net loss per basic and
  diluted share of
  common stock (a)             (.04)         (.04)          (.52)          (.47)


     (a)  The Company reduced the amount of interest expense in 2004 and 2003 by
          $202,444 and $446,272, respectively, as a result of the correction of
          the computation of the beneficial conversion feature of convertible
          notes in both years, and amortization of debt issuance costs in 2003.


Statement of Cash Flows:

                                       Year Ended December 31,
                                   2004                      2003
                                   ----                      ----
                       As Originally      As     As Originally      As
                          Reported     Restated     Reported     Restated
                          ---------    ---------    ---------    ---------

Net cash (used in):
   Operating activities   ($191,150)   ($191,150)   ($238,263)   ($238,263)

   Investing activities     (69,590)     (69,590)    (603,175)    (603,175)

Net cash provided by
  Financing activities      253,008      253,008      886,225      886,225


                                      F-15
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.   Restatement of Financial Statements - Continued
     -----------------------------------------------

Statement of Stockholders' Equity (Deficiency):

                                           December 31,
                                2004                           2003
                                ----                           ----
                    As Originally       As         As Originally        As
                      Reported       Restated        Reported        Restated
                    ------------   ------------    ------------    ------------

Common stock to be
   issued (a)       $    969,345   $       --      $    700,000    $       --

Additional paid-in
   capital (b) (c)     2,864,107      2,291,607       2,464,107       2,181,607

Accumulated
 deficit (b) (c)     (32,333,680)   (31,761,180)    (31,103,453)    (30,733,397)

Comprehensive
    loss (d)          (1,230,227)    (1,027,783)     (4,229,815)     (3,783,543)


     (a)  The Company has reclassified the amount of $969,345 and $700,000 at
          December 31, 2004 and 2003, respectively, from stockholders'
          deficiency (common stock to be issued) to non-current liabilities
          representing the current value of the cumulative amount of 5,376,188
          and 2,562,500 shares of common stock at December 31, 2004 and 2003,
          respectively, to be issued to certain debt holders in accordance to
          loan agreements and the Company's investment banker in connection with
          services provided, such stock to be issued when it becomes available.

     (b)  The reduction in additional paid-in capital and accumulated deficit
          for 2004 reflects a prior period adjustment of $76,216 for the
          correction of the computation of the beneficial conversion feature of
          convertible notes which should have been allocated to the year ended
          December 31, 2002, as well as computational corrections reducing the
          amounts of the beneficial conversion feature by $358,716 and $290,000
          in 2003 and 2004, respectively.

     (c)  The reduction in additional paid-in capital for 2003 reflects
          computational corrections reducing the amounts of the beneficial
          conversion feature by $282,500.

     (d)  The Company reduced the amount of interest expense in 2004 and 2003 by
          $202,444 and $446,272, respectively, as a result of the correction of
          the computation of the beneficial conversion feature of convertible
          notes in both years, and amortization of debt issuance costs in 2003.

                                      F-16
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

3.   Discontinued Operations
     -----------------------

     Sale of ISP Division
     --------------------

     Effective May 1, 2002, the Company entered into an agreement to sell
     substantially all of the assets of the ISP division to Brand X Networks,
     Inc., a California Corporation, for $632,000. The assets have been held and
     operated by Brand X Networks, Inc. for its purposes since May 1, 2002, at
     which time the Company discontinued its ISP operations. On April 14, 2003,
     the Company completed a fifth amendment to the purchase agreement with
     Brand X pursuant to which the Company has agreed to accept an aggregate
     payment of $632,000 for the ISP Division, less credits to Brand X of
     $112,686. Of such amount, $200,000 shall be paid through the provision of
     services to the Company from Brand X. The balance shall be paid at the rate
     of approximately $5,171 per month, until completely paid.

     On January 1, 2004, the sale of the ISP business to Brand X closed. Under
     the terms of that agreement a promissory note of $284,455 was executed by
     Brand X to be paid in 55 equal monthly installments. This note is
     collateralized by a pledge of shares in Brand X. In addition, ProtoSource
     is entitled to appoint one person to the board of directors of Brand X for
     the duration of the agreement.

     There were no operations of the discontinued ISP business during the years
     ended December 31, 2004 and 2003.











                                      F-17
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

4.   Notes Payable
     -------------

     Notes payable of $2,425,000 is composed of 32 individual notes executed
     during the period beginning March 2002 and continuing through April 2004.
     These notes, which are secured by the assets of ProtoSource and P2i
     Newspaper, range between $25,000 and $200,000 on their face. All notes are
     one-year renewable 10% interest (per annum) convertible promissory notes.
     Each note can be prepaid, in whole or in part, without premium or penalty,
     at any time. Upon prepayment of the entire principal amount of a note, all
     accrued, but unpaid interest shall be paid to the holder on the date of
     prepayment. At any time prior to or at the time of repayment, the holder
     may elect to convert some or all of the principal and interest owing into
     shares of the Company's common stock. The conversion rate shall equal the
     amount to be converted, divided by each note's predetermined conversion
     price established at note issuance or renewal. {Conversion prices, after a
     series of renewals, range between $0.0667 and $0.10.} As a result of the
     beneficial conversion feature of these notes, through December 31, 2004,
     the Company has recognized $1,852,500 as interest expense and additional
     paid-in capital. Also in connection with the issuance of these notes, as an
     added inducement to loan to the Company, the Company entered into
     accompanying subscription agreements to provide each note-holder shares of
     its no par value common stock. As a result, the Company issued or will
     issue a total of 7,006,226 shares of common stock valued at approximately
     $1,844,168.

     In respect to the notes (as discussed in the preceding paragraph) during
     the years ended December 31, 2004 and 2003, the Company issued $400,000 and
     $900,000, respectively, of promissory notes in exchange for amounts
     borrowed from individuals. As the result of the beneficial conversion
     feature of these notes, in 2004 and 2003, $110,000 and $617,500,
     respectively, has been recognized as interest expense and additional
     paid-in capital. Additionally, in connection with the issuance of these
     particular notes, the Company issued or will issue 2,000,000 and 3,187,500
     shares of common stock for 2004 and 2003, respectively. These shares are
     valued at approximately $195,000 for 2004 and $567,501 for 2003 and have
     been amortized to interest expense on a monthly basis over the one-year
     term of the notes.

     Additionally, as a further requirement pertaining to the issuance of these
     notes, the Company will issue 550,000 and 407,500 warrants pertaining to
     2004 and 2003, respectively, to the underwriter. The value of the warrants
     is considered to have a deminimus value for both 2004 and 2003.




                                      F-18
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

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

5.   Income Taxes
     ------------

     Significant components of deferred income taxes as of December 31, 2004 are
     as follows:

                 Net operating loss carryforward   $ 5,900,000
                 Less valuation allowance           (5,900,000)
                                                   -----------
                 Net deferred tax asset            $      --
                                                   ===========


     The Company has assessed its past earnings history and trends and
     expiration dates of carryforwards and has determined that it is more likely
     than not that no deferred tax assets will be realized. The valuation
     allowance of $5,900,000 is maintained on deferred tax assets, which the
     Company has not determined to be more likely than not realizable at this
     time. The net change in the valuation allowance for deferred tax assets was
     a decrease of $370,000. The Company will continue to review this valuation
     on a quarterly basis and make adjustments as appropriate.

     At December 31, 2004, the Company had federal and state net operating loss
     carryforwards of approximately $16,000,000 and $4,700,000, respectively.
     Such carryforwards expire in the years 2008 through 2024 and 2005 through
     2009 for federal and state purposes, respectively.


6.   Preferred Stock
     ---------------

     The authorized preferred stock of the Company consists of 5,000,000 shares,
     no par value Series B Convertible Preferred Stock. {193,836 shares are
     issued and outstanding.} The preferred stock may be issued in series from
     time to time with such designation, rights, preferences and limitations as
     the Board of Directors of the Company may determine by resolution. The
     rights, preferences and limitations of separate series of preferred stock
     may differ with respect to such matters as may be determined by the Board
     of Directors, including without limitation, the rate of dividends, method
     and nature of payment of dividends, terms of redemption, amounts payable on
     liquidation, sinking fund provisions (if any), conversion rights (if any),
     and voting rights. Unless the nature of a particular transaction and
     applicable statutes require approval, the Board of Directors has the
     authority to issue these shares without shareholder approval

     Upon authorization of sufficient shares of common stock, holders of the
     Series B Convertible Preferred Stock ("Series B Stock") are entitled to
     convert each share of Series B Stock into 100 shares of common stock.
     Series B stockholders are not entitled to receive dividends. In a
     liquidation, the holders would be treated as if they were owners of the
     number of shares of common stock into which the Series B Stock is
     convertible.



                                      F-19
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

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

7.   Stock Options and Warrants
     --------------------------

     1999 Executive Officers Stock Option Plan
     -----------------------------------------

     In May 1999, the Company's Board of Directors authorized a stock option
     plan that provides for the grant of incentive and nonqualified options to
     eligible officers and directors of the Company to purchase up to 150,000
     shares of the Company's common stock. The purchase price of such shares
     shall be at least equal to the fair market value at the date of grant. Such
     options vest at the discretion of the Board of Directors. The stock option
     plan expires in 2009. There are currently no outstanding options under this
     plan.


     2000 Stock Option Plans
     -----------------------

     In May 2001, the Company's shareholders approved the Company's 2000
     Employee Stock Option Plan and the 2000 Executive Stock Option Plan. Each
     Plan has 350,000 shares reserved for issuance and no stock options have
     been granted under either plan as of December 31, 2004.


     Board of Directors Options
     --------------------------

     The Company issued 115,000 stock options to its Non-Employee Directors from
     October 1998 to December 31, 2001. The options vest immediately, or over a
     three-year period, and are exercisable at $1.36 to $6.00 per share and the
     options are for a five-year term. As of December 31, 2004, 92,500 options
     are outstanding.









                                      F-20
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

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

8.   Commitments and Contingencies
     -----------------------------

     Leases
     ------

     The Company leases certain computer equipment under noncancellable capital
     leases.

     The following is a schedule of future minimum lease payments at December
     31, 2004 under the Company's capital leases (together with the present
     value of minimum lease payments).

                       2005                               $ 38,852
                       2006                                  7,442
                       2007                                   --
                                                          --------
            Total minimum lease payments                    46,294
            Less amount representing interest               (4,288)
                                                          --------
            Present value of net minimum lease payments     42,006
            Less current portion                           (34,852)
                                                          --------
                                                          $  7,154
                                                          ========


     The Company occupies office space leased by P2i, Inc. and is making direct
     payments to P2i, Inc.'s leaseholder. Under this arrangement, during 2004,
     the Company has recorded approximately $37,400 of rent expense. In 2003,
     the Company paid administrative fees to P2i, Inc. of approximately $50,000
     for office space and other administrative charges. As of December 31, 2004,
     the Company had no future operating lease commitments.


9.   Acquisition
     -----------

     On February 13, 2003, the Company announced an agreement and Plan of Merger
     to acquire all of the outstanding capital stock of P2i Newspaper, Inc., a
     Delaware corporation ("P2i Newspaper") and a wholly-owned subsidiary of
     P2i, Inc., a Pennsylvania corporation ("P2i"), in exchange for the issuance
     of up to 19,383,531 shares of ProtoSource common stock and satisfaction of
     the existing P2i debt to the Company (the "Agreement"). {As consideration
     for the satisfaction of P2i debt, the Company will increase its total
     ownership in P2i to 19.8%.}

     The 19,383,531 shares will be reduced by the number of shares equal to the
     total fees incurred to audit the financial statements of P2i, or P2i
     Newspaper, divided by $0.50 (the "Adjusted Shares"). The Adjusted Shares
     shall be subject to a three-year lock-up, which may be released upon the
     stock price and volume reaching established thresholds.

     On January 1, 2004, the Company, P2i Newspaper and P2i amended the terms of
     the Agreement (the "Amendment"). Pursuant to the terms of the Amendment, in
     exchange for all of the issued and outstanding shares of P2i Newspaper, the
     Company will issue 193,836 shares of series B preferred stock (the
     "Preferred Stock"), which shares shall be reduced by the total fees
     incurred to audit the financial statements of P2i or P2i Newspaper, divided
     by $50.

                                      F-21
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

9.   Acquisition - Continued
     -----------------------

     The acquisition of P2i Newspaper became effective on January 1, 2004, at
     which time P2i Newspaper became a wholly-owned subsidiary of the Company.
     P2i Newspaper is a leader in the conversion of previously created print
     advertising into interactive Web products for newspaper, magazine and mail
     order/retail catalog advertising. Clients include newspapers from the
     Gannett, Tribune and McClatchy Newspaper groups. The Company is
     headquartered in Bethlehem, PA, and has a data conversion facility in Kuala
     Lumpur, Malaysia.

     The cost was as follows:

          Market value of preferred stock to be issued        $416,179
          Fair market value of net assets of P2i Newspaper      41,112
                                                              --------

          Goodwill                                            $375,067
                                                              ========


     The Company loaned P2i $50,000 in 2001, $995,280 in 2002, and $597,023 in
     2003. The loans to P2i were in the form of demand notes. The notes accrued
     interest at the rate of 8% per annum. The notes receivable, together with
     the related accrued interest, were written-off during 2003 as collection on
     these notes was deemed to be doubtful and were in consideration of the
     following:

     The acquisition of P2i Newspaper was the central component of the
     transaction between the Company and P2i; however, in further accordance to
     the agreement, as a consideration for the satisfaction of P2i's existing
     debt to the Company (i.e., $1,705,062 in notes receivable plus accrued
     interest), the Company acquired an additional interest in P2i's new media
     business, bringing the Company's total ownership in P2i to 19.8%. However,
     despite the increased ownership of P2i, the ownership in P2i is considered
     to be of deminimus value and therefore has no classification within the
     Company's financial statements.


10.  Concentrations of Credit Risk
     -----------------------------

     Financial instruments, which potentially subject the Company to
     concentrations of credit risk, consist principally of cash and notes
     receivable. The Company places its cash and short-term investments with
     high credit quality financial institutions, and limits its credit exposure
     with any one financial institution.






                                      F-22
<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     --------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

11.  Employee Benefit Plan
     ---------------------

     The Company has a 401(k) savings plan for employees who are not covered by
     any collective bargaining agreement, have attained age 21 and have
     completed one year of service. Employee and Company matching contributions
     are discretionary. The Company made no contributions for the years ended
     December 31, 2004 and 2003. Company contributions vest as follows:

                Years of Service                Percent Vested
                ----------------                --------------

                       1                              33%
                       2                              66%
                       3                             100%


12.  Fair Value of Financial Instruments
     -----------------------------------

     Disclosures about the fair value of financial instruments, for the
     Company's financial instruments, are presented in the table below. These
     calculations are subjective in nature and involve uncertainties and
     significant matters of judgment and do not include income tax
     considerations. Therefore, the results cannot be determined with precision
     and cannot be substantiated by comparison to independent market values and
     may not be realized in actual sale or settlement of the instruments. There
     may be inherent weaknesses in any calculation technique, and changes in the
     underlying assumptions used could significantly affect the results. The
     following table presents a summary of the Company's financial instruments
     as of December 31, 2004:

                                                  Carrying       Estimated
                                                   Amount        Fair Value
                                                 ----------      ----------

     Financial liabilities:
       Notes payable                             $2,425,000      $2,425,000
       Capital lease obligations                     47,006          47,006


     The carrying amounts for cash, accounts payable and accrued expenses
     approximate fair value because of the short maturities of these
     instruments. The fair value of notes payable and the capital lease
     obligations, including the current portion, approximates fair value because
     of the market rate of interest on the notes payable and the interest rate
     implicit in the obligations under capital leases.

13.  Pro forma Financial Information
     -------------------------------

     In connection with the acquisition of P2i Newspaper, a pro forma statement
     of operations of ProtoSource Corporation for the year ended December 31,
     2003 as if the acquisition occurred on January 1, 2003 follows.


                                      F-23
<PAGE>
<TABLE>
<CAPTION>

                                         PROTOSOURCE CORPORATION AND SUBSIDIARY
                                         --------------------------------------

                                     PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                                          FOR THE YEAR ENDED DECEMBER 31, 2003

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

                                                               Historical                              Pro forma
                                              -------------------------------------------- -------------------------------
                                                                                                 Adjustments
                                              ProtoSource    P2i Newspaper,                       Increase/
                                              Corporation         Inc.,          Total     Notes (Decreases)  Consolidated
                                              ------------    ------------    ------------ -----------------  ------------
<S>                                           <C>             <C>             <C>             <C>             <C>
Net revenues                                  $       --      $  1,454,492    $  1,454,492                    $  1,454,492
                                              ------------    ------------    ------------                    ------------

Operating costs and expenses:
    Cost of revenues                                  --           983,282         983,282                         983,282
    Selling, general and administrative            352,517         626,344         978,861                         978,861
    Depreciation and amortization                    8,726         146,990         155,716                         155,716
    Impairment of investment                        81,000            --            81,000                          81,000
                                              ------------    ------------    ------------                    ------------

         Total operating costs and expenses        442,243       1,756,616       2,198,859                       2,198,859
                                              ------------    ------------    ------------                    ------------

         Operating loss                           (442,243)       (302,124)       (744,367)                       (744,367)
                                              ------------    ------------    ------------                    ------------

Other income (charges):
    Interest expense                            (1,653,031)        (14,845)     (1,667,876)                     (1,667,876)
    Other expense                                     --           (39,239)        (39,239)                        (39,239)
    Write-off of notes and interest
       receivable, P2i, Inc.                    (1,705,062)      1,705,062            --                              --
    Loss on sale of marketable securities          (65,942)           --           (65,942)                        (65,942)
    Loss on disposal of fixed assets                  --            (1,687)         (1,687)                         (1,687)
    Other income                                    20,666            --            20,666                          20,666
                                              ------------    ------------    ------------    ------------    ------------

         Net other (charges)                    (3,403,369)      1,649,291      (1,754,078)           --        (1,754,078)
                                              ------------    ------------    ------------    ------------    ------------

Net income (loss)                             $ (3,845,612)   $  1,347,167    $ (2,498,445)   $       --      $ (2,498,445)
                                              ============    ============    ============    ============    ============

Net loss per basic and diluted share
 of common stock                              $      (0.47)                                                   $      (0.09)
                                              ============                                                    ============
Weighted average number of basic and
 diluted common shares outstanding               8,202,405                                 (A)  19,383,531      27,585,936
                                              ============                                    ============    ============

Notes:
(A) Represents estimated number of shares of ProtoSource common shares to be issued and exchanged for P2i Newspaper, Inc.


                                                          F-24
</TABLE>