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

                                   FORM 10-KSB


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

                   For the fiscal year ended December 31, 2007

     { } 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. 000-25594

                             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) 814-0550

        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 issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]

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 [   ]

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. [ X ]

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

The Registrant's revenues for its most recent fiscal year were $3,125,076.

As of December 31, 2007, the market value of the Registrant's no par value
Common Stock, excluding shares held by affiliates, was $567,953 based upon a
closing bid price of $0.06 per share of Common Stock on the OTC Bulletin Board.


<PAGE>

    APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
                              PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [   ]  No  [   ]


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

As of December 31, 2007, 9,927,329 shares of the Registrant's no par value
Common Stock were outstanding.

DOCUMENTS ARE INCORPORATED BY REFERENCE:
None.

Transitional Small Business Disclosure Format (check one):  Yes [   ]  No [ X ]

















                                        2
<PAGE>

                             PROTOSOURCE CORPORATION

                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------


                                      INDEX
                                      -----

                                                                            Page
                                                                            ----
PART  I
-------

Item  1.  Description of Business.                                             4

      2.  Description of Property.                                             9

      3.  Legal Proceedings.                                                   9

      4.  Submission of Matters to a Vote of Security Holders.                10

PART  II
--------

Item  5.  Market for Common Equity and Related Stockholder Matters
          and Small Business Issuer Purchases of Equity Securities.           11

      6.  Management's Discussion and Analysis or Plan of Operation.          12

      7.  Financial Statements. (See F-1 to F26)                              17

      8.  Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure.                                18

      8A. Controls and Procedures.                                            18

      8B. Other Information.                                                  18

PART  III
---------

Item  9.  Directors, Executive Officers, Promoters and Control
          Persons; Compliance with Section 16(a) of the Exchange Act.         19

     10.  Executive Compensation.                                             20

     11.  Security Ownership of Certain Beneficial Owners and
          Management and Related Stockholder Matters.                         24

     12.  Certain Relationships and Related Transactions, and
          Director Independence.                                              25

     13.  Exhibits.                                                           27

     14.  Principal Accountant Fees and Services.                             28


Signatures, Certifications, and Code of Ethics and Business Conduct:

         Signatures.                                                          29

         Certifications.                                                      30

         Exhibit 99.1 - Code of Ethics and Business Conduct for Officers,     32
         Directors and Employees of ProtoSource Corporation.


                                        3
<PAGE>

                                     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
Securities and Exchange Commission (the "Commission"). The forward-looking
statements included in the Report speak only as of the date hereof.

The Company's reports as filed with the Commission under the Securities Exchange
Act of 1934 are currently under review by the Commission. The Company has made
certain responses to the Commission, but there can be no assurances that
additional changes will not be required to be included in the Company's
previously filed reports or in this Form 10-KSB. Any such changes will be
reflected in amended filings made after the date hereof.


Introduction
------------

The Company's long-term business strategy is to focus on delivery of
technologically sophisticated, database-driven, business to business services
and solutions via a coordinated sales and marketing strategy in the United
States and Europe. The product/service offerings fall into two categories:


-    Products and services tailored specifically to create online versions of
     print content, primarily for the print and publishing industries.

The Company's proprietary system allows for the normalization of diverse forms
of data, including text and graphics, which can be integrated by a seamless,
dynamic, and highly customizable front-end interface. This allows customers to
have their data re-purposed for new revenue generation. It also serves to
enhance the customer's own productivity by enabling more effective information
management and exchange between themselves and their end customers, who both
gain greater satisfaction through the enhanced interactivity.

-    Technical support and hosting.

Currently, Internet and telephone (IT) companies comprise the bulk of the
customer base for technical support. The hosting services are deployed across IT
and publishing customers.


Executing this strategy starts with the P2i-branded services delivered from a
facility owned and operated by the Company's subsidiary, P2i Newspaper, LLC.
This facility is located south of Kuala Lumpur, Malaysia and employs
approximately 100 staff utilizing proprietary applications and processes. Each
day, 52 weeks a year, electronic files can be received from the Company's
clients. Once received, these are to be processed for delivery the following
morning, or up to 72 hours later. Data is deliverable not only to the Company's
web servers for seamless integration into clients' existing, hosted web sites,
but can also be distributed back to clients and to their business partners in a
wide range of formats to fit their ever evolving needs.

Newspapers, retailers, commercial printers and other publishers (traditional and
online) in the United States and Europe turn to P2i Newspaper for a variety of
solutions. The online presentation and Web enablement of the Company's clients'
content is the key to efficient, effective Web presence, and the ensuing
revenues and profits such a presence will yield. The Company takes the same
electronic files that generate print output, and uses them to deliver a vastly
enhanced user friendly online presence, adding a myriad of user-friendly
features that are unique to Web-based presentations. This cost-effective
solution perfectly transfers the client's known brand identity to the Internet,
and integrates into the delivery all the inherent E-commerce, interactive and
database features needed to maximize its impact and benefits.

                                       4
<PAGE>

The Company's second facility in Fresno, CA, operated by, and branded as,
BX-Solutions, is wholly-owned subsidiary, ProtoSource Acquisition II, Inc.,
which employs approximately 30 staff providing 24/7 English and Spanish
technical support via incoming telephone calls to the customers of technology
companies. These comprise small and mid-size Internet service providers and
telecommunication companies in the United States. This facility also houses and
manages servers for its own customers.


History
-------

Through April 2002, the Company operated psnw.com, a full-service Internet
service provider with primary offices in Fresno, California. psnw.com provided
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.

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 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 was to
be paid through the provision of services to the Company from Brand X. And the
balance was to be paid at the rate of approximately $5,172 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 was collateralized by a
pledge of shares in Brand X. In addition, ProtoSource was entitled to appoint
one person to the board of directors of Brand X for the duration of the
agreement.

In February 2006, still within terms of the purchase agreement, Brand X notified
ProtoSource that it would be unable to make its next payment on its note payable
obligation and could not then specify when the next payment(s) would be
forthcoming. Subsequently, ProtoSource discovered that Brand X had become
insolvent and was unable to meet its obligations to ProtoSource and, as a
consequence, was unable to cure its default status on its note payable
obligation and, therefore, of the purchase agreement itself. At December 31,
2005, ProtoSource assessed the collectibility of the remaining note receivable
balance of $162,582 and its unused services credit balance of $151,308 and
determined that collection or realization of any portion of these amounts was
highly doubtful and their values should be written down to $0. As a consequence,
the Company recorded a provision for Brand X's uncollectible note and services
credit in the amount of $313,890 in 2005.

In an agreement dated March 2006, ProtoSource sold, assigned and transferred the
promissory note it held in respect of the January 2004 sale of its ISP business
to Brand X Networks, Inc. to P2i, Inc., a related party. As set forth in this
transaction, a new promissory note, secured by all the assets of Brand X
Networks, Inc., was issued to P2i, Inc. in the net amount of $162,582: The
principal with interest to be paid in 33 equal monthly installments of $5,172,
until completely paid. This arrangement was approved by the Company's board of
directors because the Company would not risk bringing Brand X Networks into
ProtoSource with too many unknown liabilities attachable to Brand X Networks.
Because regular payments had not been made, this successor note was in default
status and had been fully reserved. During the whole of 2006, ProtoSource
recovered $13,800 from the P2i, Inc. / Brand X Networks, Inc. promissory note
arrangement. As the value of this note was written down to $0 at December 31,
2005, these payments were classified as "other income" in 2006.

On August 16, 2007 the Company exercised its security interests and entered into
a foreclosure acquisition agreement with Brand X Networks, Inc., taking
possession of its business assets as collateral due to its inability to pay its
debt to the Company. These assets were transferred to ProtoSource Acquisition
II, Inc., a Nevada corporation (incorporated August 15, 2007) and a wholly owned
subsidiary of the Company, on September 1, 2007. Effective September 1, 2007,
the Company provides bilingual technical support services, web-hosting, and
Internet connectivity.

                                       5
<PAGE>

In respect to the foreclosure acquisition agreement, ProtoSource Acquisition II,
Inc. acquired computer equipment and software, office equipment, furniture and
fixtures and prepaid expenditures together valued at approximately $57,000.
Furthermore, it assumed specified service provider and miscellaneous third party
liabilities, and agreed to honor accrued vacation pay and unpaid expenses of
former Brand X Networks, Inc. employees, most of whom were hired on September 1,
2007 by ProtoSource Acquisition II. These liabilities approximated $56,000. As a
consequence of this action, a net recovery of approximately $1,000, classified
as "other income", was recorded during 2007.

As a further component to the reacquisition of the collateralized assets of
Brand X Networks, Inc., the Company gave consideration to P2i, Inc. (a related
party) who became a controlling owner of Brand X Networks, Inc. through its
March 2006 purchase of the original note held by the Company in respect to the
sale of the Company's ISP assets to Brand X. In consideration for P2i, Inc.'s
management and controlling interest in Brand X Networks, Inc., and such that
P2i, Inc. would not act to oppose the matter of foreclosure on the assets of
Brand X Networks, the Company forgave P2i, Inc.'s existing liabilities to the
Company through August 28, 2007 and will continue to support P2i, Inc. in the
discharge of liabilities (arising prior to the January 1, 2004 P2i Newspaper
merger with the Company) out of the Company's cash flow until such obligations
are fully discharged. The value of this consideration is estimated to be
$566,186, which has all been characterized as goodwill. This includes the net
amount of $294,186 outstanding to the Company as of August 28, 2007, plus an
additional $272,000 in future obligations. As a consequence of this action,
during the current period the Company recorded a $294,186 write-off of amounts
due to the Company and recorded an obligation in accrued expenses of $272,000.
Because of the related party nature of this goodwill, management has deemed it
to be impaired and has recorded the charge of $566,186 in other charges in the
consolidated statement of operations.

A key part of the Company's strategy was the acquisition of P2i Newspaper. 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 500,000,000 shares.

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
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 data conversion center located in the
Multimedia Super Corridor in Kuala Lumpur, Malaysia.


Business of ProtoSource's Media & Data Conversion Business Segment
------------------------------------------------------------------

Executing the Company's business strategy starts with the P2i-branded services
delivered from a facility owned and operated by the Company's subsidiary, P2i
Newspaper, LLC. This facility is located south of Kuala Lumpur, Malaysia and
employs approximately 100 staff utilizing proprietary applications and
processes.

Each day, 52 weeks a year, electronic files can be received from the Company's
clients. Once received, these are to be processed for delivery the following
morning, or up to 72 hours later. Data is deliverable not only to the Company's
web servers for seamless integration into clients' existing, hosted web sites,
but can also be distributed back to clients and to their business partners in a
wide range of formats to fit their ever evolving needs. 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
combination of low labor costs, a well-educated labor pool fluent in English,
and sophisticated technologies make the Company highly competitive.

                                        6
<PAGE>

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 Newspaper'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.
The business model is quite straightforward. Clients pay per ad/page processed,
and are billed monthly.

Through 2008, 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
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.

                                       7
<PAGE>

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, Inc. 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, selling
directly to the newspapers, delivering 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,
ShopLocal) 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.

There are many obstacles to newspapers adopting pure software solutions to
compete with P2i Newspaper's service capabilities. 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, 2007, P2i Newspaper had a combination of 131 full-time and
part time employees. Of such employees, 3 were engaged in marketing and sales, 4
were devoted to research, development and technical support, 118 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.

                                       8
<PAGE>

Business of ProtoSource's Technical Support & Hosting Services Business Segment
-------------------------------------------------------------------------------

The Company's business strategy includes its facility located in Fresno, CA
which is operated by, and branded as, "BX-Solutions", and is wholly-owned
subsidiary, ProtoSource Acquisition II, Inc. ProtoSource Acquisition II, Inc.
employs approximately 30 staff who provide 24/7 English and Spanish technical
support utilizing proprietary applications and processes built upon an open
source software platform. This facility also houses and manages servers for its
own customers. Major customers include small and mid-size telephone and Internet
service companies in the United States and Canada.

There are two elements to the business -- technical support via incoming
telephone calls, and hosting services.

24 hours a day, 7 days a week, 52 weeks a year, subscribers to BX-Solutions
customers call dedicated phone numbers for technical assistance pertaining to
Internet services provided by BX-Solutions' customers. BX-Solutions target
customer is a technology provider large enough to have a viable customer base,
but not so large that having its own call center is justifiable. BX-Solutions is
staffed to provide customized, branded incoming call center services for these
customers. Additionally, BX-Solutions hosts and manages the servers that provide
a lot of the services, especially email, for its customers, as well as some of
the hosting for P2i Newspaper, LLC, a wholly-owned subsidiary of the Company.


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

There has been a trend in recent years for companies to outsource technical
support requirements to offshore vendors. This has resulted in a perception, by
the consumer, of deteriorating support standards, and there is now a trend to
move some of this support back to the United States. BX-Solutions is working to
take advantage of that trend by marketing to smaller US ISPs and
telecommunication companies. Competition for BX-Solutions still comprises
offshore call centers (to a lesser degree) and near-shore (Canada and Mexico) US
call centers. However, the market for these services is so vast the primary
obstacle in business development continues to be the traditional ones facing
most companies operating in large markets: price and service levels.

The Company has determined that there is significant synergy potential between
P2i Newspaper, LLC and ProtoSource Acquisition II, Inc. (i.e., BX-Solutions):
Products and services to be released later this year by P2i Newspaper will
require technical support that will be sourced by BX-Solutions. And, P2i
Newspaper is fielding inquiries for Spanish language services that can be
supported by BX-Solutions bilingual workforce.


ITEM 2. DESCRIPTION OF PROPERTY.

The Company occupies 1,500 square feet of office space at One Bethlehem Plaza,
Bethlehem, PA 18018, 6,400 square feet of office space in an office park south
of Kuala Lumpur, Malaysia, and 5,440 square feet of office space at 2511 W. Shaw
Avenue, Fresno, CA 93711.


ITEM 3. LEGAL PROCEEDINGS.

Not applicable.





                                       9
<PAGE>

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

Through December 10, 2007, the Company had authority for 10,000,000 shares of no
par value common stock with 9,927,329 shares issued and outstanding. On December
11, 2007, the Company's shareholders approved an amendment to our certificate of
incorporation pursuant to which the authorized number of shares of common would
be increased to 500,000,000. The final vote consisted of 6,153,548 ballots cast
as follows: 5,713,630 "For", 431,355 "Against", and 8,563 "Abstain". At December
31, 2007, 9,927,329 of common shares were issued and outstanding.





















                                       10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.

Since March 2002, all of the Company's 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, 2006           $0.06    $0.06       N/A      N/A       N/A     N/A
June 30, 2006            $0.06    $0.06       N/A      N/A       N/A     N/A
September 30, 2006       $0.06    $0.06       N/A      N/A       N/A     N/A
December 31, 2006        $0.04    $0.04       N/A      N/A       N/A     N/A

March 31, 2007           $0.04    $0.04       N/A      N/A       N/A     N/A
June 30, 2007            $0.04    $0.04       N/A      N/A       N/A     N/A
September 30, 2007       $0.05    $0.05       N/A      N/A       N/A     N/A
December 31, 2007        $0.06    $0.06       N/A      N/A       N/A     N/A


As of March 15, 2008, there were approximately 466 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.


EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information about the shares of the Company's
common Stock that may be issued upon the exercise of options granted to
employees under option plans which were approved by the Board of Directors, as
well as shares that may be issued upon the exercise of options under the plans
that were issued to consultants, which were not approved by the Board of
Directors.

-------------------------------------------------------------------------------------------------------------------
                                          Number of securities       Weighted average        Number of securities
Plan category                               to be issued upon        exercise price of      remaining available for
                                               exercise of          outstanding options,      future issuance under
                                          outstanding options,      warrants and rights       equity compensation
                                           warrants and rights                                 plans (excluding
                                                                                            securities reflected in
                                                                                                  column (a)
-------------------------------------------------------------------------------------------------------------------
                                                   (a)                      (b)                       (c)
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by              -0-                      -0-                     350,000
security holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved             -0-                      -0-                     150,000
by security holders
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Total                                              -0-                      -0-                     500,000
-------------------------------------------------------------------------------------------------------------------

                                       11
</TABLE>
<PAGE>

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

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, 2007 vs. Year Ended December 31, 2006

Net Revenues - For the year ended December 31, 2007, net revenues were
$3,125,076 versus $2,641,492 for the year ended December 31, 2006, a rise over
the previous year of $483,584. In 2006, all revenues of the Company were
attributed to the operations of P2i Newspaper acquired by the Company on January
1, 2004. But, $424,994 of total 2007 net revenues are attributable to
ProtoSource Acquisition II, Inc. established by the Company on August 15, 2007
with its ISP service operations commencing on September 1, 2007. The
approximately $59,000 increase in P2i Newspaper revenues over the previous year
is mostly attributable to media companies within the newspaper vertical that
have a demand for the conversion of large volumes.

Operating Costs and Expenses - For the year ended December 31, 2007, operating
costs and expenses totaled $3,033,826 versus $2,605,374 in 2006, a $428,452 rise
over the previous year. $449,720 of this amount is directly attributable to the
operations of ProtoSource Acquisition II, Inc. ("BX-Solutions") which commenced
operations September 1, 2007. However, $21,268 represents a net reduction of P2i
Newspaper operating costs and expenses over the previous year. Such costs were
$2,584,106 and $2,605,374 for 2007 and 2006, respectively.

A breakdown of the components of operating cost indicates the following:

In respect to the Company's cost of revenues, $1,564,060 is attributable to P2i
Newspaper and $379,594 to BX-Solutions for 2007. As P2i Newspaper's cost of
revenues were $1,637,235 in 2006, this represents a net reduction of $73,175
over the previous year. While achieving approximately $59,000 more in sales, P2i
Newspaper enacted aggressive reductions and controls of Malaysian production
staff costs while improving overall operating efficiencies to combat rising
costs as exacted by a strengthening Ringgit against the U.S. dollar. Despite the
increasing exchange rate pressures, P2i Newspaper's recorded cost of revenues,
as a percentage of revenues, were 57.9% in 2007 versus 62.0% in 2006.

In respect to the Company's selling, general and administrative expenses
("SGA"), $966,095 is attributable to P2i Newspaper and $46,807 to BX-Solutions
for 2007. BX-Solutions total SGA is virtually all attributed to clerical staff
and general office expenses. As P2i Newspaper's SGA were $891,130 in 2006, this
represents a $74,965 net rise in P2i Newspaper's SGA expenses over the previous
year.

The following were significant P2i Newspaper SGA components that accounted for
the increase over the previous year: Approximately $59,000 more in selling
expenses were incurred in 2007 over 2006, mostly as a result of employing the
services of a consultant who had been hired in 2007 to serve as the Company's
sales director. And approximately $16,000 more in general and administrative
costs was incurred in 2007 over 2006. This was largely due to increases in
healthcare, telecommunication and professional services costs. In 2006,
operating costs and expenses included a $23,604 loss on disposal of computer
equipment. {Administrative costs principally consist of the Company's management
office and personnel, professional fees associated with maintenance of the
Company, and officers' and directors' liability insurance costs.}

                                       12
<PAGE>

Interest Expense - Interest expense totaled $394,356 for the year ended December
31, 2007 versus interest expense of $356,854 in 2006. Interest expense is
principally the result of the convertible notes obtained during 2004, 2003, and
2002 to fund operations of the Company and that of P2i Newspaper before and
after the January 2004 merger. As there had been no new debt issues since April
2004, neither the current year nor the preceding year reflects any amortization
of debt issue costs.


Other Income (Charges) - As a result of a foreclosure acquisition agreement
dated August 16, 2007 with Brand X Networks, Inc., other income included
approximately $1,000 from recovery of net assets from Brand X. As consideration
was given to P2i, Inc., a related party, in connection to this matter, other
charges included an impairment charge of $566,186. In 2006, other income
included a $13,800 recovery of the Brand X note receivable written off in 2005.
(See "Discontinued Operations" and "Foreclosure acquisition agreement" for
further explanation of this.)


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 completed a fifth amendment to the purchase agreement with Brand X
pursuant to which the Company 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 was to be paid through the provision of services to the Company from
Brand X, and the balance was to be paid at the rate of $5,172 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 was collateralized by a
pledge of shares in Brand X. In addition, ProtoSource was 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.

In February 2006, still within terms of the purchase agreement, Brand X notified
ProtoSource that it would be unable to make its next payment on its note payable
obligation and could not then specify when the next payment(s) would be
forthcoming. Subsequently, ProtoSource discovered that Brand X had become
insolvent and was unable to meet its obligations to ProtoSource and, as a
consequence, was unable to cure its default status on its note payable
obligation and, therefore, of the purchase agreement itself. At December 31,
2005, ProtoSource assessed the collectibility of the remaining note receivable
balance of $162,582 and its unused services credit balance of $151,308 and
determined that collection or realization of any portion of these amounts was
highly doubtful and that their values should be written down to $0. As a
consequence, the Company recorded a provision for Brand X's uncollectible note
and services credit in the amount of $313,890 in 2005.

In an agreement dated March 2006, ProtoSource sold, assigned and transferred the
promissory note it held in respect of the January 2004 sale of its ISP business
to Brand X Networks, Inc. to P2i, Inc., a related party. As set forth in this
transaction, a new promissory note, secured by all the assets of Brand X
Networks, Inc., was issued to P2i, Inc. in the net amount of $162,582. The
principal with interest was to be paid in 33 equal monthly installments of
$5,172, until completely paid. Because regular payments have not been made, this
successor note is in default status and has been fully reserved. During 2006,
ProtoSource recovered $13,800 from the P2i, Inc. / Brand X Networks, Inc.
promissory note arrangement. As the value of this note was written down to $0 at
December 31, 2005, these collected payments were classified as "other income" in
2006.


Foreclosure acquisition agreement - On August 16, 2007 the Company exercised its
security interests and entered into a foreclosure acquisition agreement with
Brand X Networks, Inc., taking possession of its business assets as collateral
due to its inability to pay its debt to the Company. These assets were
transferred to ProtoSource Acquisition II, Inc., a Nevada corporation
(incorporated August 15, 2007) and a wholly owned subsidiary of the Company, on
September 1, 2007. Effective September 1, 2007, the Company provides bilingual
technical support services, Web-hosting, and Internet connectivity.

                                       13
<PAGE>

In respect to the foreclosure acquisition agreement, ProtoSource Acquisition II,
Inc. acquired computer equipment and software, office equipment, furniture and
fixtures and prepaid expenditures together valued at approximately $57,000.
Furthermore, it assumed specified service provider and miscellaneous third party
liabilities, and agreed to honor accrued vacation pay and unpaid expenses of
former Brand X Networks, Inc. employees, most whom were hired on September 1,
2007 by ProtoSource Acquisition II. These liabilities approximated $56,000. As a
consequence of this action, a net recovery of approximately $1,000, classified
as "other income", was recorded during 2007.

As a further component to the reacquisition of the collateralized assets of
Brand X Networks, Inc., the Company gave consideration to P2i, Inc. (a related
party) which became a controlling owner of Brand X Networks, Inc. through its
March 2006 purchase of the original note held by the Company in respect to the
sale of the Company's ISP assets to Brand X. In consideration for P2i, Inc.'s
management and controlling interest in Brand X Networks, Inc., and such that
P2i, Inc. would not act to oppose the matter of foreclosure on the assets of
Brand X Networks, the Company forgave P2i, Inc.'s existing liabilities to the
Company through August 28, 2007 and will continue to support P2i, Inc. in the
discharge of liabilities (arising prior to the January 1, 2004 P2i Newspaper
merger with the Company) out of the Company's cash flow until such obligations
are fully discharged. The value of this consideration is estimated to be
$566,186, which has all been characterized as goodwill. This includes the net
amount of $294,186 outstanding to the Company as of August 28, 2007, plus an
additional $272,000 in future obligations. As a consequence of this action,
during the current period the Company recorded a $294,186 write-off of amounts
due to the Company and recorded an obligation in accrued expenses of $272,000.
Because of the related party nature of this goodwill, management has deemed it
to be impaired and has recorded the charge of $566,186 in other charges in the
consolidated statement of operations.


Liquidity and Capital Resources
-------------------------------

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

For the year ended December 31, 2007, the Company generated, or obtained from
the Company's working capital resources, approximately $68,000 more cash than
was used during the year.

Though the Company's net loss for the year ended December 31, 2007 was
approximately $874,000, cash flows provided by operations approximated $136,000.
In part, this was due to approximately $77,000 of depreciation and amortization
and approximately $242,000 of other (net) non-cash charges related to a
foreclosure acquisition agreement with the Company that was included in the net
loss: This included approximately $294,000 of amounts due from P2i, Inc. that
were written off. Offsetting these non-cash charges (but also related to the
foreclosure matter) were non-cash credits which included an approximately
$52,000 reduction in accounts receivable.

Apart from the non-cash charges to income, cash flows from operations were
further aided by approximately $691,000 of year-over-year net changes in the
Company's working capital components. Significant components affecting working
capital and availability of cash (because they were accrued during the period
but unpaid) were as follows: Approximately $239,000 in unpaid obligations to
P2i, Inc. which are connected to a foreclosure acquisition agreement,
approximately $373,000 of accrued interest arising from the Company's
convertible debt obligations, approximately $73,000 increase in accrued supplier
and service provider obligations, along with an approximately $18,000 reduction
in prepaid rents and accounts receivable. These positive contributing factors to
working capital and available cash were offset by an approximately $11,000
decrease in accrued payroll liabilities. Accounts receivable as reported at
year-end are current, with no amounts deemed uncollectible.

During the year ended December 31, 2007, the Company had negative cash flows
from investing activities of approximately $85,000. This consisted of
approximately $7,000 for acquisitions of new equipment, approximately $1,000 to
security deposits, approximately $10,000 of advances issued to directors and
officers, and approximately $67,000 of cash provided to a related company.

And during the year ended December 31, 2007, the Company used, through its
financing activities, approximately $33,000 of funds for payments on capital
lease obligations.

                                       14
<PAGE>

As of December 31, 2007, the Company had $72,381 in cash and $415,604 in
accounts receivable and other current assets. Taken together with $4,777,344 of
total current liabilities, this resulted in a negative working capital position
of $4,289,359 at December 31, 2007. $3,931,658 of this amount pertains to the
Company's obligations to its convertible debt holders and $238,800 of this
amount pertains to the Company's obligations to P2i, Inc., a related party.



On October 15, 2005, the Company entered into a 24-month term capital lease
agreement with Bankers Capital for the purchase of computer and computer related
items valued at $27,767 with monthly lease payments of $1,596 each. The lease
term expired September 14, 2007 and the residual maturity date was October 15,
2007 with a $1 purchase option. $3,487 was paid to Bankers Capital at the start
of the lease to cover the first payment, one payment held for a security
deposit, and for UCC filing and documentation fees.

On July 15, 2006, the Company entered into a 24-month term capital lease
agreement with Bankers Capital for the purchase of computer and computer related
items valued at $26,827 with monthly lease payments of $1,521. The lease term
expires June 14, 2008 and the residual maturity date is July 15, 2008 with a $1
purchase option. $3,438 was paid to Bankers Capital at the start of the lease to
cover the first payment, one payment held for a security deposit, and for UCC
filing and documentation fees. Company officers, Peter A. Wardle and Thomas C.
Butera, are personal guarantors of this agreement.

In July 2007, the Company entered into an investment banking agreement with
Colebrooke Capital, Inc. The agreement is for $2.5 million in potential capital
funding. The fees under this arrangement are $7,500 down and $3,500 for the
first 90 days of the agreement. Under this arrangement the Company will be
required to a pay a 7% financing fee on any funds raised by Colebrooke Capital.
Furthermore, in respect to capital transactions introduced by Colebrooke
Capital, there will be a 5% transaction fee requirement, but no fees on any
Company generated deals.

On August 15, 2007, the Company entered into a 24-month term capital lease
agreement with Bankers Capital for the purchase of computer and computer related
items valued at $20,123 with monthly lease payments of $1,163. The lease term
expires July 14, 2009 and the residual maturity date is July 15, 2009 with a $1
purchase option. $2,720 was paid to Bankers Capital at the start of the lease to
cover the first payment, one payment held for a security deposit, and for UCC
filing and documentation fees. Company officers, Peter A. Wardle and Thomas C.
Butera, are personal guarantors of this agreement.

On October 15, 2007, the Company entered into a 24-month term capital lease
agreement with Bankers Capital for the purchase of computer and computer related
items valued at $24,380 with monthly lease payments of $1,408. The lease term
expires September 14, 2009 and the residual maturity date is September 15, 2009
with a $1 purchase option. $3,212 was paid to Bankers Capital at the start of
the lease to cover the first payment, one payment held for a security deposit,
and for UCC filing and documentation fees. Company officers, Peter A. Wardle and
Thomas C. Butera, are personal guarantors of this agreement.

At a meeting held on December 11, 2007, the Company's shareholders approved an
increase in authorized shares of common stock to 500,000,000. At December 31,
2007 9,927,329 of common shares were issued and outstanding and the Company had
obligations to issue an additional 22,947,219 shares of common with a further
33,945,000 shares committed for issuance.










                                       15
<PAGE>

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

In July 2006, the Financial Accounting Standards Board ("FASB") issued FIN No.
48, "Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS No.
109". FIN No. 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 also prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. In
addition, FIN No. 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN No. 48 are to be applied to all tax positions
upon initial adoption of this standard. Only tax positions that meet the
more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized as an adjustment to the opening balance
of accumulated deficit (or other appropriate components of equity) for that
fiscal year. The provisions of FIN No. 48 are effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
material impact on our financial position, results of operations, or cash flows
for the year ended December 31, 2007.


In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 108, to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that the Company quantify
misstatements based on their impact on each of its financial statements and
related disclosures. SAB 108 is effective for fiscal years ending after November
15, 2006. The Company has adopted SAB 108 effective as of December 31, 2006. The
adoption of this bulletin did not have a material impact on our financial
position, results of operations, or cash flows.


In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS
No. 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors' requests for expanded information
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS No. 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value, and does not
expand the use of fair value in any new circumstances. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and is required to be adopted by the Company in the first quarter of 2008.
The Company is currently evaluating the effect that the adoption of SFAS No. 157
will have on our financial position, results of operations, or cash flows.

In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities", providing companies with an option to report
selected financial assets and liabilities at fair value. The Standard's
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. Generally accepted accounting principles have required
different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. SFAS No. 159 helps to mitigate this
type of accounting-induced volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The Standard requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the Company's
choice to use fair value on its earnings. It also requires entities to display
the fair value of those assets and liabilities for which the Company has chosen
to use fair value on the face of the balance sheet. SFAS No. 159 is effective
for the Company on January 1, 2008. The adoption of the provision of SFAS No.
159 is not expected to have a material effect on the Company's financial
position, results of operations, or cash flows.




                                       16
<PAGE>

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
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. 109, "Accounting for Income Taxes", the Company
maintains a valuation allowance of $5,600,000 as of December 31, 2007 on
deferred tax assets relating to its net operating losses which the Company has
not determined to be more likely than not realizable.

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. In August 2007 in connection with a
foreclosure acquisition agreement with Brand X Networks, Inc., the Company
recognized $566,186 of goodwill related to the transaction but deemed it fully
impaired, as this matter involved P2i, Inc., a related party.

The Company did not consider any of its trade accounts receivable to be of
doubtful collection; accordingly, the Company has no allowance for doubtful
accounts.

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.


ITEM 7. FINANCIAL STATEMENTS.

The consolidated financial statements of ProtoSource Corporation for the years
ended December 31, 2007 and 2006 are included in this Report following the
signature page of this Report:

    Cover Page                                                       F-1
    Report of Independent Registered Public Accounting Firm          F-2
    Consolidated Balance Sheet as of December 31, 2007               F-3
    Consolidated Statement of Operations
     for the years ended December 31, 2007 and 2006                  F-4
    Consolidated Statement of Stockholders' (Deficiency)
     for the years ended December 31, 2007 and 2006                  F-5
    Consolidated Statement of Cash Flows
     for the years ended December 31, 2007 and 2006.                 F-6 to F-7
    Notes to Consolidated Financial Statements                       F-8 to F-26







                                       17
<PAGE>

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 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.

Management's Report of Internal Control Over Financial Reporting.

The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting in accordance with Exchange
Act Rule 13a-15. With the participation of the Company's chief executive officer
and principal financial officer, the Company conducted an evaluation of the
effectiveness of its internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSCO) in Internal Control-Integrated Framework.

The Company's internal control over financial reporting includes those policies
and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.

Based on this evaluation, the Company's management concluded that its internal
control over financial reporting was effective as of December 31, 2007.

A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.

This annual report does not include an attestation report of the Company's
registered accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission.


ITEM 8B. OTHER INFORMATION.

None.

                                       18
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.


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      53             Chief Executive Officer, President,
                                 Chief Financial Officer and Director
Thomas Butera     41             Chief Operating Officer and Director
Joseph DiMarino   65             Director
Mark Blanchard    55             Director
Stewart Kalter    37             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.



                                       19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>

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, 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 Officers and certain other officers for the last three fiscal years.

-----------------------------------------------------------------------------------------------------------------------------
Name & Principal Position   Year    Salary     Bonus   Stock   Option   Non-Equity    Change in       All Other     Total ($)
                                      ($)       ($)    Awards  Awards   Incentive     Pension Value   Compensation
                                                        ($)      ($)    Plan          and             ($)
                                                                        Compensation  Non-Qualified
                                                                        ($)           Deferred
                                                                                      Compensation
                                                                                      Earnings ($)
-----------------------------------------------------------------------------------------------------------------------------
Peter Wardle, CEO           2007    125,000      -       -        -          -              -          145,568(1)    270,568
                            2006    125,000      -       -        -          -              -           76,629(1)    201,629
                            2005    125,000      -       -        -          -              -              -         125,000
-----------------------------------------------------------------------------------------------------------------------------
Thomas Butera, COO          2007    112,500      -       -        -          -              -           20,261(2)    132,761
                            2006    112,500      -       -        -          -              -           43,384(2)    155,884
                            2005    112,500      -       -        -          -              -              -         112,500
-----------------------------------------------------------------------------------------------------------------------------
Kenneth DiStefano,          2007    125,000      -       -        -          -              -              -         125,000
Controller                  2006    104,808   10,000     -        -          -              -              -         114,808
                            2005     90,000      -       -        -          -              -              -          90,000
-----------------------------------------------------------------------------------------------------------------------------

(1)  In respect to fiscal 2007, this represents amounts advanced to Mr. Wardle
     through December 31, 2007. Of this amount, $73,679 relates to amounts
     advanced during 2006 but reclassified (recorded) as compensation to Mr.
     Wardle during 2007. At December 31, 2007, $71,889 is classified as a
     reimbursable advance with potential to be recognized as future compensation
     for Mr. Wardle. In respect to fiscal 2006, this represents amounts advanced
     prior to January 1, 2006, but reclassified (recorded) as compensation to
     Mr. Wardle during 2006.

(2)  In respect to fiscal 2007, this represents amounts advanced to Mr. Butera
     through December 31, 2007, the full amount then having been reclassified
     (recorded) as compensation to Mr. Butera during 2007. There are no
     outstanding advances attributable to Mr. Butera at December 31, 2007. In
     respect to fiscal 2006, $5,673 relates to amounts advanced prior to January
     1, 2006, $37,711 pertains to amounts advanced during 2006. As $43,384, the
     full amount, had been reclassified (recorded) as compensation to Mr. Butera
     during 2006, there were no outstanding advances attributable to Mr. Butera
     at December 31, 2006.









                                       20
<PAGE>

Option Grants in Last Year and Stock Option Grant.

No options were granted during the year ended December 31, 2007.



Outstanding Equity Awards at Fiscal Year-End.

None.

---------------------------------------------------------------------------------------------------------------------------------
                                  Option Awards                                                    Stock Awards
---------------------------------------------------------------------------------- ----------------------------------------------
Name                  Number       Number        Equity       Option    Option      Number     Market      Equity      Equity
                      of           of            Incentive    Exercise  Expiration  of         Value of    Incentive   Incentive
                      Securities   Securities    Plan         Price     Date        Shares     Shares or   Plan        Plan
                      Underlying   Underlying    Awards:      ($)                   or Units   Units of    Awards:     Awards:
                      Unexercised  Unexercised   Number                             of Stock   Stock       Number      Market or
                      Options      Options       of                                 That       That Have   of          Payout
                      (#)          (#)           Securities                         Have       Not         Unearned    Value
                      Exercisable  Unexercisable Underlying                         Not        Vested      Shares,     of
                                                 Unexercised                        Vested     ($)         Units or    Unearned
                                                 Unearned                           (#)                    Other       Shares,
                                                 Options                                                   Rights      Units or
                                                 (#)                                                       That Have   Other
                                                                                                           Not         Rights
                                                                                                           Vested      That Have
                                                                                                           (#)         Not
                                                                                                                       Vested
                                                                                                                       ($)

--------------------- ------------ ------------- ------------ --------- ---------- ---------- ----------- ----------- -----------
Peter Wardle               -            -             -         $ -         -          -         $  -         -          $  -
Thomas Butera              -            -             -           -         -          -            -         -             -
Joseph DiMarino            -            -             -           -         -          -            -         -             -
Mark Balanchard            -            -             -           -         -          -            -         -             -
Stewart Kalter             -            -             -           -         -          -            -         -             -
TOTAL:                     -            -             -         $ -         -          -         $  -         -          $  -
---------------------------------------------------------------------------------------------------------------------------------


Director Compensation

None.

---------------------------------------------------------------------------------------------------------------------------------
       Name (a)         Fees Earned    Stock      Option      Non-Equity        Change in Pension        All Other       Total
                         or Paid in    Awards     Awards    Incentive Plan   Value and Nonqualified    Compensation       ($)
                            Cash         ($)        ($)      Compensation     Deferred Compensation         ($)           (h)
                            ($)          (c)        (d)           ($)               Earnings                (g)
                            (b)                                   (e)                  (f)
----------------------- ------------- ---------- ---------- ---------------- ------------------------ ---------------- ----------
Peter Wardle                $ -          $ -        $ -           $ -                  $ -                  $ -           $ -
Thomas Butera                 -            -          -             -                    -                    -              -
Joseph DiMarino               -            -          -             -                    -                    -              -
Mark Blanchard                -            -          -             -                    -                    -              -
Stewart Kalter                -            -          -             -                    -                    -              -
TOTAL:                      $ -          $ -        $ -           $ -                  $ -                  $ -           $ -
---------------------------------------------------------------------------------------------------------------------------------

Directors may receive compensation for their services and reimbursement for
their expenses as shall be determined from time to time by resolution of the
Board. As of December 31, 2007, none of the Company's directors currently
receive any compensation for their service on the Board of Directors.

                                       21
</TABLE>
<PAGE>

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, 2007, 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.

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.

                                       22
<PAGE>

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, 2007, 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.
















                                       23
<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 30, 2008, 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 500,000,000.

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

Peter Wardle                               19,383,600(3)             66.1%
Thomas Butera                              19,383,600(3)             66.1%
Joseph DiMarino                                     -                   -
Mark Blanchard (4)                            461,454                 4.6%
Stewart Kalter                                      -                   -
Peter J. Pappas (5)                         1,319,748                12.5%
All officers and directors as a group
(5 persons)                                19,845,054                67.7%
--------------------

* 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.










                                       24
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE.


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, through 2007, Mr. Wardle received
$222,197 in advances in accordance with a note-holders' security agreement. Such
advances are reimbursable 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. $150,308 ($73,679 in 2007 and $76,629 in 2006)
of the $222,197 relates to amounts advanced to Mr. Wardle but reclassified
(recorded) as compensation to Mr. Wardle through 2007. At December 31, 2007,
$71,889 is classified as a reimbursable advance with potential to be recognized
as future compensation for Mr. Wardle.

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. During 2005 and 2006, for purposes of providing
working capital to the Company, Mr. Butera advanced $24,000 to the Company for
an indefinite period of time. Through December 31, 2007, $12,000 had been repaid
to Mr. Butera leaving a balance of $12,000. Additionally, through 2007, Mr.
Butera received $63,645 in advances in accordance with a note-holders' security
agreement. Such advances are reimbursable 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. $20,261 in 2007 and $20,261 in
2006, the full amount, had been reclassified (recorded) as compensation to Mr.
Butera. There are no outstanding advances attributable to Mr. Butera at December
31, 2007.

In an agreement dated March 2006, ProtoSource sold, assigned and transferred the
promissory note it held in respect of the January 2004 sale of its ISP business
to Brand X Networks, Inc. to P2i, Inc., a related party. As set forth in this
transaction, a new promissory note, secured by all the assets of Brand X
Networks, Inc., was issued to P2i, Inc. in the net amount of $162,582. The
principal with interest shall be paid in 33 equal monthly installments of
$5,172, until completely paid. Because regular payments have not been made, this
successor note is in default status and has been fully reserved. During the
whole of 2006, ProtoSource recovered $13,800 from the P2i, Inc. / Brand X
Networks, Inc. promissory note arrangement. As the value of this note was
written down to $0 at December 31, 2005, these collected payments were
classified as "other income" in 2006.

In August 2007, as a further component to the reacquisition of the
collateralized assets of Brand X Networks, Inc., the Company gave consideration
to P2i, Inc. (a related party) which became a controlling owner of Brand X
Networks, Inc. through its March 2006 purchase of the original note held by the
Company in respect to the sale of the Company's ISP assets to Brand X. In
consideration for P2i, Inc.'s management and controlling interest in Brand X
Networks, Inc., and such that P2i, Inc. would not act to oppose the matter of
foreclosure on the assets of Brand X Networks, the Company forgave P2i, Inc.'s
existing liabilities to the Company through August 28, 2007 and will continue to
support P2i, Inc. in the discharge of liabilities (arising prior to the January
1, 2004 P2i Newspaper merger with the Company) out of the Company's cash flow
until such obligations are fully discharged. The value of this consideration is
estimated to be $566,186, which has all been characterized as goodwill. This
includes the net amount of $294,186 outstanding to the Company as of August 28,
2007, plus an additional $272,000 in future obligations. As a consequence of
this action, during the current period the Company recorded a $294,186 write-off
of amounts due to the Company and recorded an obligation in accrued expenses of
$272,000. Because of the related party nature of this goodwill, management has
deemed it to be impaired and has recorded the charge of $566,186 in other
charges in the consolidated statement of operations.

                                       25
<PAGE>

As of December 31, 2006, an amount of $400 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. For
periods commencing after January 1, 2004, the Company has been making direct
payments to P2i's office space leaseholder. During 2007 and 2006, payments of
approximately $35,800 and $35,300, respectively, were paid to P2i's leaseholder.































                                       26
<PAGE>

ITEM 13. EXHIBITS.

a. EXIBITS


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.

(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.


                                       27
<PAGE>

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, 2007 and December 31, 2006, and for review of the
financial statements included in the Company's quarterly reports on Form 10-QSB
during such fiscal years, were $35,500 and $34,450, 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 $4,000 for the years ended
December 31, 2007 and 2006, respectively.

Tax Fees. The aggregate fees billed for tax preparation and related services by
our auditors were $3,500 and $3,000 for the years ended December 31, 2007 and
2006, respectively.

All Other Fees. For the fiscal years ended December 31, 2007 and 2006, the
Company incurred no fees to auditors for services rendered to the Company, other
than the services covered in "Audit Fees", "Audit-Related Fees" or "Tax Fees".










                                       28
<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 March 31, 2008.

                                            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       March 31, 2008
----------------------------      Chief Financial Officer
     Peter Wardle                (Principal Accounting
                                  Officer), and Director

/s/  Thomas Butera                Chief  Operating Officer       March 31, 2008
----------------------------      Director
     Thomas Butera

/s/  Joseph DiMarino              Director                       March 31, 2008
----------------------------
     Thomas Butera

/s/  Mark Blanchard               Director                       March 31, 2008
----------------------------
     Mark Blanchard

/s/  Stewart Kalter               Director                       March 31, 2008
----------------------------
     Stewart Kalter





                                       29
<PAGE>

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                     Page
                                                                     ----

Financial Statements Index                                           F-1

Report of Independent Registered Public Accounting Firm              F-2

Consolidated Balance Sheet as of December 31, 2007                   F-3

Consolidated Statement of Operations
  for the years ended December 31, 2007 and 2006                     F-4

Consolidated Statement of Stockholders' (Deficiency)                 F-5
  for the years ended December 31, 2007 and 2006

Consolidated Statement of Cash Flows
  for the years ended December 31, 2007 and 2006                     F-6 & 7

Notes to Consolidated Financial Statements                           F-8 to F-26














                                      F-1
<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
ProtoSource Corporation

We have audited the accompanying consolidated balance sheet of ProtoSource
Corporation and Subsidiaries as of December 31, 2007, and the related
consolidated statements of operations, stockholders' (deficiency), and cash
flows for the years ended December 31, 2007 and 2006. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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
Subsidiaries as of December 31, 2007, and the results of their operations and
their cash flows for the years ended December 31, 2007 and 2006, in conformity
with accounting principles generally accepted in the United States of America.

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 $874,100 and $303,697 during the
years ended December 31, 2007 and 2006, 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 24, 2008



                                       F-2
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2007
--------------------------------------------------------------------------------

                                     ASSETS


Current assets:
   Cash                                                            $     72,381
   Accounts receivable                                                  356,263
   Advances to officers, net of obligations to officers                  59,341
                                                                   ------------

       Total current assets                                             487,985
                                                                   ------------

Property and equipment, at cost, net of
   accumulated depreciation and amortization of $575,657                 93,901
                                                                   ------------

Other assets:
   Amounts due from related party - P2i, Inc.                               400
   Goodwill - acquisition of P2i Newspaper                              375,067
   Deposits                                                               8,749
                                                                   ------------

       Total other assets                                               384,216
                                                                   ------------

       Total assets                                                $    966,102
                                                                   ============



                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
   Notes payable                                                   $  2,425,000
   Current portion of obligations under capital leases                   28,359
   Accounts payable                                                     126,289
   Accrued interest                                                   1,506,658
   Amounts due to related party - P2i, Inc.                             238,800
   Accrued expenses - other                                             452,238
                                                                   ------------

       Total current liabilities                                      4,777,344
                                                                   ------------

Obligations under capital leases, non-current portion                    17,561
Stock subscriptions payable                                             661,844
                                                                   ------------

       Total non-current liabilities                                    679,405
                                                                   ------------

Commitments and contingencies

Stockholders' deficiency:
   Preferred stock, Series B, no par value; 5,000,000 shares
     authorized, 193,836 shares issued and outstanding                  416,179
   Common stock, no par value; 500,000,000 shares
     authorized, 9,927,329 shares issued and outstanding             26,143,461
   Additional paid-in capital                                         2,291,607
   Accumulated other comprehensive income                                92,953
   Accumulated deficit                                              (33,434,847)
                                                                   ------------

       Net  stockholders' deficiency                                 (4,490,647)
                                                                   ------------

       Total liabilities and stockholders' deficiency              $    966,102
                                                                   ============


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

                                       F-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>

                      PROTOSOURCE CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------------------------------------------------------



                                                                YEAR ENDED
                                                                DECEMBER 31,
                                                            2007            2006
                                                        ------------    ------------


Net revenues                                            $  3,125,076    $  2,641,492
                                                        ------------    ------------

Operating costs and expenses:
   Cost of revenues                                        1,943,654       1,637,235
   Selling, general and administrative                     1,012,902         891,130
   Depreciation and amortization                              77,230          53,405
   Loss on disposal of property and equipment                     40          23,604
                                                        ------------    ------------

         Total operating costs and expenses                3,033,826       2,605,374
                                                        ------------    ------------

         Operating income                                     91,250          36,118
                                                        ------------    ------------

Other income (charges):
   Recovery of amounts previously written off                  1,096          13,800
   Other income                                                 --             7,442
   Impairment charges                                       (566,186)           --
   Interest expense                                         (394,356)       (356,854)
   Other expense                                              (5,904)         (4,203)
                                                        ------------    ------------

          Net other (charges)                               (965,350)       (339,815)
                                                        ------------    ------------


Net loss                                                ($   874,100)   ($   303,697)
                                                        ============    ============



Net loss per basic and diluted share of common stock:   ($       .03)   ($       .01)
                                                        ============    ============

Weighted average number of basic and
  diluted common shares outstanding                       32,874,548      32,874,548
                                                        ============    ============



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

                                        F-4
<PAGE>

                                           PROTOSOURCE CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY)
                                           FOR THE YEARS DECEMBER 31, 2007 AND 2006

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

                                                                                                                      Accumulated
                                                Preferred Stock                Common Stock            Additional        Other
                                          ---------------------------   ---------------------------      Paid-In     Comprehensive
                                             Shares         Amount         Shares         Amount         Capital        Income
                                          ------------   ------------   ------------   ------------   ------------   ------------

Balance, December 31, 2005                     193,836   $    416,179      8,114,829   $ 25,835,960   $  2,291,607           --

Issuance of common stock in
connection with financing                         --             --        1,812,500        307,501           --             --

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

Other comprehensive income, net of tax:
  Foreign currency translation
    adjustments                                   --             --             --             --             --     $     43,532
                                          ------------   ------------   ------------   ------------   ------------   ------------

Total comprehensive (loss)



Balance, December 31, 2006                     193,836        416,179      9,927,329     26,143,461      2,291,607         43,532


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

Other comprehensive income, net of tax:
  Foreign currency translation
    adjustments                                   --             --             --             --                          49,421
                                          ------------   ------------   ------------   ------------   ------------   ------------

Total comprehensive (loss)


Balance, December 31, 2007                     193,836   $    416,179      9,927,329   $ 26,143,461   $  2,291,607   $     92,953
                                          ============   ============   ============   ============   ============   ============


Table continues below.

                                          Accumulated                    Comprehensive
                                             Deficit         Total           (Loss)
                                          ------------    ------------    ------------

Balance, December 31, 2005                ($32,257,050)   ($ 3,713,304)           --

Issuance of common stock in
connection with financing                         --           307,501            --

Net loss                                      (303,697)       (303,697)   ($   303,697)

Other comprehensive income, net of tax:
  Foreign currency translation
    adjustments                                   --            43,532          43,532
                                          ------------    ------------    ------------

Total comprehensive (loss)                                                ($   260,165)
                                                                          ============


Balance, December 31, 2006                 (32,560,747)     (3,665,968)           --


Net loss                                      (874,100)       (874,100)   ($   874,100)

Other comprehensive income, net of tax:
  Foreign currency translation
    adjustments                                   --            49,421          49,421
                                          ------------    ------------    ------------

Total comprehensive (loss)                                                ($   824,679)
                                                                          ============

Balance, December 31, 2007                ($33,434,847)   ($ 4,490,647)
                                          ============    ============

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

                                       F-5
<PAGE>

                      PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                                  2007         2006
                                                               ---------    ---------


                             INCREASE (DECREASE) IN CASH

Cash flows from operating activities:
  Net loss                                                     ($874,100)   ($303,697)
  Adjustments to reconcile net loss to net cash
       provided by operating activities:
     Depreciation and amortization                                77,230       53,405
     Provision for bad debts                                        --         15,892
     Loss on disposal of property and equipment                       40       23,604
     Non-cash adjustments to accounts receivable                 (52,330)        --
     Write-off of amounts due from related party - P2i, Inc.     294,186         --
     Changes in operating assets and liabilities:
       Accounts receivable                                         6,968     (106,645)
       Prepaid expenses and other assets                          10,883         (883)
       Accounts payable                                           72,784        7,401
       Accrued liability to related party - P2i, Inc.            238,800         --
       Accrued expenses                                          361,883      396,410
                                                               ---------    ---------

              Net cash provided by operating activities          136,344       85,487
                                                               ---------    ---------

Cash flows from investing activities:
  Acquisitions of property and equipment                          (6,666)     (60,081)
  (Increase) decrease in advances to officers                    (10,250)      14,211
  (Increase) in amount due from related party                    (67,000)     (88,851)
  (Increase) decrease in deposits                                   (975)      (5,415)
                                                               ---------    ---------

              Net cash (used in) investing activities            (84,891)    (140,136)
                                                               ---------    ---------



                               CONTINUED ON NEXT PAGE


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

                                         F-6
<PAGE>

                      PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                                  2007         2006
                                                               ---------    ---------

Cash flows from financing activities:
  Payments on obligations under capital leases                   (33,335)     (24,853)
                                                               ---------    ---------

           Net cash (used in) financing activities               (33,335)     (24,853)
                                                               ---------    ---------


Effect of exchange rate changes on cash                           49,421       43,532
                                                               ---------    ---------

Net increase (decrease) in cash                                   67,539      (35,970)

Cash at beginning of year                                          4,842       40,812
                                                               ---------    ---------

Cash at end of year                                            $  72,381    $   4,842
                                                               =========    =========




                 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:
  Interest                                                     $  21,684    $  19,506
                                                               ---------    ---------
  Income taxes                                                 $    --      $    --
                                                               ---------    ---------




SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Issuance of common stock in connection with financing          $    --      $ 307,501
Acquisition of equipment under capital lease obligation           46,480       26,827
Acquisition of equipment arising from note foreclosure            46,638         --
Acquisition of prepaid expense arising from note foreclosure      10,000         --
Acquisition of accrued expenses                                   55,542         --


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

                                       F-7
</TABLE>
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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. On May 1, 2002, the Company entered into an agreement
     to sell substantially all of the assets pertaining to the ISP to Brand X
     Networks, Inc. (see Note 2). On August 16, 2007, the Company exercised its
     security interests and entered into a foreclosure acquisition agreement
     with Brand X Networks, Inc., taking possession of its business assets as
     collateral due to its inability to pay its debt to the Company. These
     assets were transferred to ProtoSource Acquisition II, Inc., a Nevada
     corporation (incorporated August 15, 2007) and a wholly owned subsidiary of
     the Company on September 1, 2007. Effective September 1, 2007, the Company
     provides bilingual technical support services, web-hosting, and Internet
     connectivity (see Note 2).

     Effective January 1, 2004, the Company acquired P2i Newspaper, LLC (see
     Note 14). P2i Newspaper 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. These measures are imperative,
     as 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 to successfully implement its strategic plan as follows:


                                       F-8
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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

     The Company's long-term business strategy is to focus on delivery of
     technologically sophisticated, database-driven, business to business
     services and solutions via a coordinated sales and marketing strategy in
     the United States and Europe. The product/service offerings fall into two
     categories:

     -    Products and services tailored specifically to create online versions
          of print content, primarily for the print and publishing industries.

     The Company's proprietary system allows for the normalization of diverse
     forms of data, including text and graphics, which can be integrated by a
     seamless, dynamic, and highly customizable front-end interface. This allows
     customers to have their data re-purposed for new revenue generation. It
     also serves to enhance the customer's own productivity by enabling more
     effective information management and exchange between themselves and their
     end customers, who both gain greater satisfaction through the enhanced
     interactivity.

     -    Technical support and hosting.

     Currently, Internet and telephone (IT) companies comprise the bulk of the
     customer base for technical support. The hosting services are deployed
     across IT and publishing customers.

     Executing this strategy starts with the P2i-branded services delivered from
     a facility owned and operated by the Company's subsidiary, P2i Newspaper,
     LLC. This facility is located south of Kuala Lumpur, Malaysia and employs
     approximately 100 staff utilizing proprietary applications and processes.
     Each day, 52 weeks a year, electronic files can be received from the
     Company's clients. Once received, these are to be processed for delivery
     the following morning, or up to 72 hours later. Data is deliverable not
     only to the Company's web servers for seamless integration into clients'
     existing, hosted web sites, but can also be distributed back to clients and
     to their business partners in a wide range of formats to fit their ever
     evolving needs.


     Services of P2i Newspaper comprise the following:

     Hosted Solutions -- Publishers large and small may use the Company's array
     of customizable, turnkey, hosted products for entire publications, sections
     and vertical-specific solutions. Utilizing proprietary technology, the
     Company converts print content comprising editorial and media ads into
     interactive, online content that is seamlessly incorporated into existing
     newspaper/publisher web sites. At the end of every business day, publishing
     clients transmit to the Company the same electronic versions of ads and
     pages that go to press. These files are received by the Company's
     production group, processed, quality checked, and delivered to the hosting
     servers by the start of the following business day.

                                       F-9
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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

     Data Extraction -- Customers utilizing in-house or third party solutions
     may rely upon the Company's ability to database incoming content down to
     the minutest subset. The Company has solutions that will convert multiple
     forms of disparate electronic content and process them into one constant
     data flow as one of its specialties. Extracting relevant data points,
     merging consistencies and fielding content to produce a data feed, per the
     client's or third party's specifications, is at the core of the Company's
     technology. The ensuing data enables tight search functions and powers
     retail advertising web sites.

     Content Review - Because online content needs to reflect the values,
     relevance and accuracy that print institutions have embodied for centuries,
     the Company's Content Review team functions to examine thousands of items a
     day for retailers and newspapers, editing, proofing and determining
     relevancy. The staff reviews pricing, language, brand names, and scores of
     other specifics, delivering a critical component in the online publishing
     of user-generated content.

     Technical Support -- The Company has also launched a poly-lingual Technical
     Support team. Unlike a traditional call center that scripts its responses,
     this functional group separates itself from the competition by providing a
     highly trained, technically skilled support person that is trained to
     understand the idiosyncrasies of customers' products and services to ensure
     each caller gets the best possible service.


     Services of ProtoSource Acquisition II, Inc. comprise the following:

     Technical Support & Internet Hosting Services - Bilingual technical support
     services, web-hosting and internet connectivity.

     The Company's second facility in Fresno, CA, operated by, and branded as,
     BX-Solutions, is wholly-owned subsidiary, ProtoSource Acquisition II, Inc.,
     which employs approximately 30 staff providing 24/7 English and Spanish
     technical support via incoming telephone calls to the customers of
     technology companies. These comprise small and mid-size Internet service
     providers and telecos in the United States. This facility also houses and
     manages servers for its own customers.

     The combination of on-target sales strategies, low labor costs, a
     well-educated labor pool fluent in English, and sophisticated technologies
     are key to the Company's competitive strategy.

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

                                      F-10
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


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 two wholly-owned subsidiaries, P2i
     Newspaper, LLC and Protosource Acquisition II, Inc. 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 defect 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, 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-11
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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. As of December 31, 2007, management believes that an
     allowance for bad debts was not considered necessary.

     Property and equipment - Depreciation of property and equipment is provided
     by the straight-line method over the estimated useful lives of the assets.
     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.

     Amortization - Debt issuance costs are amortized using the straight-line
     method over the one-year term of the notes (see Note 3).

     Impairment - As of December 31, 2004, the investment in P2i, Inc. had been
     effectively written down to $0. 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 14). In
     August 2007, in connection with a foreclosure acquisition agreement with
     Brand X Networks, Inc., the Company recognized $566,186 of goodwill related
     to the transaction but deemed it fully impaired, as this matter involved
     P2i, Inc., a related party (see Note 2).

     Goodwill - In connection with the Company's acquisition of P2i Newspaper,
     the Company recognized approximately $375,000 of goodwill (see Note 14). In
     accordance with Statement of Financial Accounting Standards ("SFAS") No.
     142, Goodwill and Other Intangible Assets, goodwill is not amortized;
     however, it is tested annually for impairment.

     Foreign currency translation - Assets and liabilities of the Company's
     foreign operations are translated into U.S dollars at the exchange rate in
     effect at the balance sheet date. Revenue is eliminated in consolidation.
     Expenses are translated at average rates in effect during the period. The
     resulting translation adjustment is reflected as accumulated other
     comprehensive income on the consolidated balance sheet.



                                      F-12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


1.   Nature of Operations and 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 adopted SFAS No.
     123(R) in 2005, which requires the fair value of all stock option awards
     issued to employees to be recorded as an expense over the related vesting
     period.

     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.

     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 weighted average number of basic and diluted
     common shares outstanding includes:

       Actual shares issued and outstanding at December 31, 2007                 9,927,329
       Stock subscriptions payable - note holders (see Note 3)                   2,750,000
       Stock subscriptions payable - investment banker (see Note 7)                813,688
       Series B convertible preferred stock issued to P2i, Inc. (see Note 14)   19,383,531
                                                                                ----------
                                                                                32,874,548
                                                                                ==========

     The basic and diluted loss per share are the same since the Company had a
     net loss for 2007 and 2006 and the inclusion of stock options and other
     incremental shares would be anti-dilutive. Options and warrants to purchase
     1,070,000 shares of common stock at December 31, 2007 and 2006 were not
     included in the computation of diluted loss 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 2006
     financial statement presentation for comparability with the 2007 financial
     statements.

                                      F-13
</TABLE>
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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

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

     In July 2006, the Financial Accounting Standards Board ("FASB") issued FIN
     No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of
     SFAS No. 109". FIN No. 48 clarifies the accounting for uncertainty in
     income taxes recognized in an enterprise's financial statements in
     accordance with SFAS No. 109, "Accounting for Income Taxes." FIN No. 48
     also prescribes a recognition threshold and measurement attribute for
     financial statement recognition and measurement of a tax position taken or
     expected to be taken in a tax return. In addition, FIN No. 48 provides
     guidance on derecognition, classification, interest and penalties,
     accounting in interim periods, disclosure and transition. The provisions of
     FIN No. 48 are to be applied to all tax positions upon initial adoption of
     this standard. Only tax positions that meet the more-likely-than-not
     recognition threshold at the effective date may be recognized or continue
     to be recognized as an adjustment to the opening balance of accumulated
     deficit (or other appropriate components of equity) for that fiscal year.
     The provisions of FIN No. 48 are effective for fiscal years beginning after
     December 15, 2006. The adoption of FIN 48 did not have a material impact on
     our financial position, results of operations, or cash flows for the year
     ended December 31, 2007.


     In September 2006, the Securities and Exchange Commission ("SEC") issued
     Staff Accounting Bulletin ("SAB") 108, to address diversity in practice in
     quantifying financial statement misstatements. SAB 108 requires that the
     Company quantify misstatements based on their impact on each of its
     financial statements and related disclosures. SAB 108 is effective for
     fiscal years ending after November 15, 2006. The Company has adopted SAB
     108 effective as of December 31, 2006. The adoption of this bulletin did
     not have a material impact on our financial position, results of
     operations, or cash flows.


     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
     SFAS No. 157 provides guidance for using fair value to measure assets and
     liabilities. It also responds to investors' requests for expanded
     information about the extent to which companies measure assets and
     liabilities at fair value, the information used to measure fair value, and
     the effect of fair value measurements on earnings. SFAS No. 157 applies
     whenever other standards require (or permit) assets or liabilities to be
     measured at fair value, and does not expand the use of fair value in any
     new circumstances. SFAS No. 157 is effective for financial statements
     issued for fiscal years beginning after November 15, 2007 and is required
     to be adopted by the Company in the first quarter of 2008. The Company is
     currently evaluating the effect that the adoption of SFAS No. 157 will have
     on our financial position, results of operations, or cash flows.





                                      F-14
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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

     In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
     Financial Assets and Financial Liabilities", providing companies with an
     option to report selected financial assets and liabilities at fair value.
     The Standard's objective is to reduce both complexity in accounting for
     financial instruments and the volatility in earnings caused by measuring
     related assets and liabilities differently. Generally accepted accounting
     principles have required different measurement attributes for different
     assets and liabilities that can create artificial volatility in earnings.
     SFAS No. 159 helps to mitigate this type of accounting-induced volatility
     by enabling companies to report related assets and liabilities at fair
     value, which would likely reduce the need for companies to comply with
     detailed rules for hedge accounting. SFAS No. 159 also establishes
     presentation and disclosure requirements designed to facilitate comparisons
     between companies that choose different measurement attributes for similar
     types of assets and liabilities. The Standard requires companies to provide
     additional information that will help investors and other users of
     financial statements to more easily understand the effect of the Company's
     choice to use fair value on its earnings. It also requires entities to
     display the fair value of those assets and liabilities for which the
     Company has chosen to use fair value on the face of the balance sheet. SFAS
     No. 159 is effective for the Company on January 1, 2008. The adoption of
     the provision of SFAS No. 159 is not expected to have a material effect on
     the Company's financial position, results of operations, or cash flows.



















                                      F-15
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


2.   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 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 was to be paid through the provision of services to
     the Company from Brand X, and the balance was to be paid at the rate of
     approximately $5,172 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 was
     collateralized by a pledge of shares in Brand X. In addition, ProtoSource
     was entitled to appoint one person to the board of directors of Brand X for
     the duration of the agreement.

     In February 2006, still within terms of the purchase agreement, Brand X
     notified ProtoSource that it would be unable to make its next payment on
     its note payable obligation and could not then specify when the next
     payment(s) would be forthcoming. Subsequently, ProtoSource discovered that
     Brand X had become insolvent and was unable to meet its obligations to
     ProtoSource and, as a consequence, was unable to cure its default status on
     its note payable obligation and, therefore, of the purchase agreement
     itself. At December 31, 2005, ProtoSource assessed the collectibility of
     the remaining note receivable balance of $162,582 and its unused services
     credit balance of $151,308 and determined that collection or realization of
     any portion of these amounts was highly doubtful and their values should be
     written down to $0. As a consequence, the Company recorded a provision for
     Brand X's uncollectible note and services credit in the amount of $313,890
     in 2005.

     In an agreement dated March 2006, ProtoSource sold, assigned and
     transferred the promissory note it held in respect of the January 2004 sale
     of its ISP business to Brand X Networks, Inc. to P2i, Inc., a related
     party. As set forth in this transaction, a new promissory note, secured by
     all the assets of Brand X Networks, Inc., was issued to P2i, Inc. in the
     net amount of $162,582: The principal with interest was to be paid in 33
     equal monthly installments of $5,172, until completely paid. Because
     regular payments had not been made, this successor note was in default
     status and had been fully reserved. During 2006, ProtoSource recovered
     $13,800 from the P2i, Inc. / Brand X Networks, Inc. promissory note
     arrangement. As the value of this note was written down to $0 at December
     31, 2005, these payments were classified as "other income" in 2006.



                                      F-16
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


2.   Sale of ISP Division - Continued
     --------------------------------

     Foreclosure acquisition:

     On August 16, 2007, the Company exercised its security interests and
     entered into a foreclosure acquisition agreement with Brand X Networks,
     Inc., taking possession of its business assets as collateral due to its
     inability to pay its debt to the Company. These assets were transferred to
     ProtoSource Acquisition II, Inc., a Nevada corporation (incorporated August
     15, 2007) and a wholly-owned subsidiary of the Company, on September 1,
     2007. Effective September 1, 2007, the Company provides bilingual technical
     support services, Web-hosting, and Internet connectivity.

     In respect to the foreclosure acquisition agreement, ProtoSource
     Acquisition II, Inc. acquired computer equipment and software, office
     equipment, furniture and fixtures and prepaid expenditures together valued
     at approximately $57,000. Furthermore, it assumed specified service
     provider and miscellaneous third party liabilities, and agreed to honor
     accrued vacation pay and unpaid expenses of former Brand X Networks, Inc.
     employees, most of whom were hired on September 1, 2007 by ProtoSource
     Acquisition II. These liabilities approximated $56,000. As a consequence of
     this action, a net recovery of approximately $1,000, classified as "other
     income", was recorded during 2007.

     The following is a summary of the assets recovered and liabilities assumed
     upon foreclosure:

        Assets recovered:

          Prepaid expenses                  $10,000
          Computer equipment and software    35,309
          Office furniture and equipment     11,329
                                            -------
          Total assets recovered             56,638
                                            -------

        Liabilities assumed:

          Accrued service providers         $34,597
          Accrued vacation payable            7,814
          Employee expense claims             8,796
          Miscellaneous other claims          4,335
                                            -------
          Total liabilities assumed          55,542
                                            -------

          Net assets recovered              $ 1,096
                                            =======


                                      F-17
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


2.   Sale of ISP Division - Continued
     --------------------------------

     Consideration given in respect to foreclosure acquisition:

     As a further component to the reacquisition of the collateralized assets of
     Brand X Networks, Inc., the Company gave consideration to P2i, Inc. (a
     related party) which became a controlling owner of Brand X Networks, Inc.
     through its March 2006 purchase of the original note held by the Company in
     respect to the sale of the Company's ISP assets to Brand X. In
     consideration for P2i, Inc.'s management and controlling interest in Brand
     X Networks, Inc., and such that P2i, Inc. would not act to oppose the
     matter of foreclosure on the assets of Brand X Networks, the Company
     forgave P2i, Inc.'s existing liabilities to the Company through August 28,
     2007 and will continue to support P2i, Inc. in the discharge of liabilities
     (arising prior to the January 1, 2004 P2i Newspaper merger with the
     Company) out of the Company's cash flow until such obligations are fully
     discharged. The value of this consideration is estimated to be $566,186,
     which has all been characterized as goodwill. This includes the net amount
     of $294,186 outstanding to the Company as of August 28, 2007, plus an
     additional $272,000 in future obligations. As a consequence of this action,
     during the current period the Company recorded a $294,186 write-off of
     amounts due to the Company and recorded an obligation in accrued expenses
     of $272,000. Because of the related party nature of this goodwill,
     management has deemed it to be impaired and has recorded the charge of
     $566,186 in other charges in the consolidated statement of operations.


     A summary of the components of goodwill related to this transaction are as
     follows:

     Forgiveness of amounts due from related party P2i, Inc.    $ 294,186
     Obligation to related party P2i, Inc. assumed                272,000
                                                                ---------
     Goodwill arising from foreclosure acquisition                566,186
     Less: Impairment of goodwill re: related party P2i, Inc.    (566,186)
                                                                ---------
     Net goodwill resulting from this transaction               $       0
                                                                =========



                                      F-18
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


3.   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 principle 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, 2007,
     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 noteholder 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.

     As of December 31, 2007, there were $255,000 of stock subscriptions payable
     (2,750,000 common shares) related to this obligation.

     There were no notes issued during the years ended December 31, 2007 and
     2006.








                                      F-19
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


4.   Income Taxes
     ------------

     Significant components of deferred income taxes as of December 31, 2007 are
     as follows:

          Net operating loss carryforward                 $ 5,600,000
          Less valuation allowance                         (5,600,000)
                                                          -----------
          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 $5,600,000 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 $200,000. The Company will continue to review this valuation
     on a quarterly basis and make adjustments as appropriate.

     At December 31, 2007, the Company had federal and state net operating loss
     carryforwards of approximately $15,900,000 and $2,400,000, respectively.
     Such carryforwards expire in the years 2014 through 2027 and 2012 through
     2027 for federal and state purposes, respectively.


5.   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-20
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


6.   Common Stock
     ------------

     Through December 10, 2007, the Company had authority for 10,000,000 shares
     of no par value common stock with 9,927,329 shares issued and outstanding.
     On December 11, 2007, the Company's shareholders approved an amendment to
     our certificate of incorporation pursuant to which the authorized number of
     shares of common would be increased to 500,000,000. The final vote
     consisted of 6,153,548 ballots cast as follows: 5,713,630 "For", 431,355
     "Against", and 8,563 "Abstain". At December 31, 2007, 9,927,329 of common
     shares were issued and outstanding.


7.   Stock Subscriptions Payable
     ---------------------------

     In addition to the obligations to noteholders described in Note 3, stock
     subscriptions payable includes 813,688 shares of common stock, valued at
     $406,844, to be exchanged with an investment banker in connection with the
     acquisition of P2i Newspaper, LLC which occurred in January 2004. Taken
     together, this represents a total of 3,563,688 shares of common stock
     valued at $661,844 to be issued.


8.   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 which
     remains in effect until May 2010 but may be terminated or extended by the
     Board of Directors. The Executive Stock Option Plan has 350,000 shares
     reserved for issuance with no stock options having been granted as of
     December 31, 2007.



                                      F-21
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


9.   Commitments and Contingencies
     -----------------------------

     Leases

     The Company leases certain computer equipment under three noncancellable
     capital leases.

     The following is a schedule of future minimum lease payments at December
     31, 2007 under the Company's capital leases (together with the present
     value of minimum lease payments).

            2008                                       $ 37,716
            2009                                         19,635
                                                       --------
     Total minimum lease payments                        57,351
     Less amount representing interest                  (11,431)
                                                       --------
     Present value of net minimum lease payments         45,920
     Less current portion                               (28,359)
                                                       --------
                                                       $ 17,561
                                                       ========


     The Company occupies office space leased by P2i, Inc. and is making direct
     payments to P2i, Inc.'s leaseholder. Under this arrangement, the Company
     has recorded approximately $36,000 and $35,000 of rent expense for each of
     the years ended December 31, 2007 and 2006, respectively.

     As the P2i, Inc. lease commitment expires October 2008, the Company's
     expected commitment in respect to this arrangement is as follows for the
     years ended December 31:

            2008                                       $ 30,304


     Through June 2006, the Company leased 3,200 square feet of office space at
     its facility in Cyberjaya, Selangor Malaysia. Beginning July 1, 2006 the
     Company entered into a new lease agreement with the same leaseholder adding
     3,200 square feet of additional space, bringing the total leased space to
     6,400 square feet. The term of the tenancy agreement is for two years. The
     agreement states that either party can terminate the agreement by giving
     written notice of 90 days to the other party. Under this arrangement, the
     Company has recorded approximately $93,700 and $65,800 of rent expense for
     each of the years ended December 31, 2007 and 2006, respectively.

     The Company's commitment under this lease is as follows for the years ended
     December 31:

            2008                                       $ 46,900




                                      F-22
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


9.   Commitments and Contingencies - Continued
     -----------------------------------------

     Leases - continued
     ------------------

     On August 16, 2007, the Company entered into an agreement with Brand X
     Networks, Inc. to accept the assignment of an existing lease for 5,440
     square feet of office space located in Fresno, CA which the Company now
     occupies. The lease had commenced on April 25, 2003, was extended and
     modified on June 1, 2004 and July 1, 2007 and ends on June 30, 2012.

     The Company's commitment under this lease is as follows for the years ended
     December 31:

            2008                                       $ 60,000
            2009                                       $ 60,000
            2010                                       $ 60,000
            2011                                       $ 60,000
            2012                                       $ 30,000


     Contingencies
     -------------

     At various times, the Company is subject to various claims from former
     employees for potential damages relating to wrongful dismissal or other
     causes. The Company currently has three such cases, none of which
     management believes will further materially adversely affect the Company's
     financial condition.


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.


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, 2007 and 2006. Company contributions, if any, vest as follows:

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

                       1                              33%
                       2                              66%
                       3                             100%



                                      F-23
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


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, 2007:

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

     Financial liabilities:
       Notes payable                             $2,425,000       $2,425,000
       Capital lease obligations                     45,920           45,920


     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.  Concentrations
     --------------

     Revenues for the years ended December 31, 2007 and 2006 include revenues
     from one major customer that accounted for 31% and 35%, respectively, of
     total Company revenues. Accounts receivable from this customer amounted to
     24% and 30% of the Company's total accounts receivable at December 31, 2007
     and 2006, respectively.


14.  P2i Newspaper
     -------------

     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").

     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 issued 193,836 shares of series B preferred stock (the "Preferred
     Stock").


                                      F-24
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


14.  P2i Newspaper - Continued
     -------------------------

     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.

     The acquisition of P2i Newspaper became effective on January 1, 2004, at
     which time P2i Newspaper became a wholly-owned subsidiary of the Company.
     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 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.













                                      F-25
<PAGE>

                    PROTOSOURCE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------


15.  Business Segment Data
     ---------------------

     The Company has two reportable business segments. The following is a
     description of each operating segment:

     Media & Data Conversion Technologies - These operations are principally
     engaged in the mining and database management of print, graphic and data
     content for the publishing industry, and its distribution via the Internet.
     Data is deliverable to the Company's web servers for seamless integration
     into the clients' hosted web sites, but also is distributed back to the
     client, and their business partners, in a wide range of formats to fit
     continually evolving, highly-diversified applications.

     Technical Support & Hosting Services - These operations are principally
     engaged in providing bilingual technical support services, web-hosting, and
     Internet connectivity.

     Financial information for the two reporting segments is shown below:

                                                       YEAR ENDED
                                                       DECEMBER 31,
                                                   2007           2006
                                               -----------    -----------

      Net revenues:
        Media & Data Conversion Technologies   $ 2,700,082    $ 2,641,492
        Technical Support & Hosting Services       424,994           --
                                               -----------    -----------
                                               $ 3,125,076    $ 2,641,492
                                               ===========    ===========

      Net (loss):
        Media & Data Conversion Technologies   ($  849,373)   ($  303,697)
        Technical Support & Hosting Services       (24,727)          --
                                               -----------    -----------
                                               ($  874,100)   ($  303,697)
                                               ===========    ===========

      Identifiable assets:
        Media & Data Conversion Technologies   $   905,403    $ 1,048,627
        Technical Support & Hosting Services        60,699           --
                                               -----------    -----------
                                               $   966,102    $ 1,048,627
                                               ===========    ===========

      Net revenues by country:
        United States                          $ 3,053,624    $ 2,594,058
        Canada                                       9,839         14,357
        Spain                                       21,949           --
        United Kingdom                              39,664         33,077
                                               -----------    -----------
                                               $ 3,125,076    $ 2,641,492
                                               ===========    ===========





                                      F-26