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, 2002

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

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

                          Commission File No. 33-86242

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



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

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

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

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

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

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

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

As of December 31, 2002, 7,489,829 shares of the Registrant's no par value
Common Stock were outstanding. As of December 31, 2002, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$2,459,931 based upon a closing bid price of $0.35 per share of Common Stock on
the OTC Bulletin Board.

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

The Registrant's revenues for its most recent fiscal year were $0.

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


<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
Commission. The forward-looking statements included in the Report speak only as
of the date hereof.

Introduction

Through April 2002, the Company operated psnw.com, a full-service Internet
service provider with primary offices in Fresno, California. psnw.com has
refocused its strategy to concentrate on providing three types of services to
business customers:

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

On May 1, 2002, the Company entered into a conditional agreement to sell the
assets of the psnw.com business to Brand X Networks, Inc. ("Brand X"). Brand X
is a privately-held California-based company whose principal shareholders were
former employees of the Company. The Company agreed to lay off the remaining
employees based in Fresno on April 30th, 2002. Most terminated employees were
hired by Brand X. Additionally, Brand X assumed financial and operational
responsibility for the ISP business. On April 14, 2003, the Company completed a
fifth amendment to the purchase agreement with Brand X pursuant to which the
Company has agreed to accept an aggregate payment of $632,000 for the ISP
Division, less credits to Brand X of $112,686. Of such amount, $200,000 shall be
paid through the provision of services to the Company from Brand X. The balance
shall be paid at the rate of approximately $5,171 per month, until completely
paid.

New Business Strategy

     Over recent years the Internet has emerged as a vital medium of
communication for businesses and consumers. Many companies today are
implementing successful sales and marketing strategies that integrate multiple
media, of which the Internet and Print Publishing are two essential components.
The Company intends to focus on the "Print to Internet" market.

     A key part of this strategy is the acquisition of P2i Newspapers, Inc.,
headquartered in Bethlehem, Pennsylvania. 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 (the "Agreement"). The 19,383,531 shares will be reduced by the number of
shares equal to the total fees incurred to audit the financial statements of P2i
or P2i Newspaper, divided by $0.50 (the "Adjusted Shares"). The P2i Newspaper
shareholders shall receive 10 shares of ProtoSource common stock for each $1.00
of gross income (as defined in the Agreement) earned by P2i Newspaper during
calendar years 2003-2005, calculated quarterly, up to the total number of
Adjusted Shares. The Adjusted Shares shall be subject to a three-year lock-up,
which may be released upon the stock price and volume reaching established
thresholds. Upon closing of the transaction, ProtoSource will appoint Thomas
Butera, President of P2i, as a director of Protosource, and Mr. Butera, together
with Peter Wardle, President of ProtoSource, shall have the right to appoint
three members to the board of directors of ProtoSource. The closing of this
Agreement is subject to approval by the shareholders of ProtoSource and P2i
Newspaper, and other customary terms and conditions.

After the acquisition, P2i Newspaper will become a wholly owned subsidiary of
the Company. 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 West Coast Sales office and its data
conversion center is located in the Multimedia Super Corridor in Kuala Lumpur,
Malaysia.
psnw.com Business

                                       2

<PAGE>


Accessing The Internet.

Internet access services are the means by which ISPs interconnect business and
consumer users to the Internet's resources. Access services vary from dial-up
modem access for individuals and small businesses to high speed dedicated
transmission lines for broadband access by large organizations. An ISP provides
Internet access either by developing a proprietary network infrastructure or by
purchasing access service from a wholesale access vendor, or through a
combination of both. The rapid development and growth of the Internet have
resulted in a highly competitive and fragmented industry consisting of a few
large national and regional ISPs and a substantial number of local ISPs with
small subscriber bases. The industry has experienced pricing pressure of late
due to the number of free access companies that have emerged. Using a revenue
model based on advertising, these companies have lost tens of millions of
dollars but have siphoned customers away from traditional ISPs. Coupled with the
growing demand for high-speed access, the ISP industry is undergoing substantial
consolidation. Thus for most ISPs, future success depends on their ability to
refocus their business model.

Growth In Electronic Commerce

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. In the last several years, many companies
have emerged that focus solely on the Internet as the preferred medium for
selling products or delivering services directly to purchasers, bypassing
traditional wholesale and retail channels. Furthermore, traditional businesses
are implementing sophisticated web sites to effect electronic commerce
initiatives that offer competitive advantages. 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.

Outsourcing Of Internet Operations

As the Web increasingly becomes synonymous with electronic commerce, businesses
are placing greater emphasis on their Internet transaction and communication
operations. Internet-based companies, and to a growing extent, traditional
businesses, require non-congested and scalable Internet operations to allow them
to perform digital communication and commerce transactions globally over the
Internet. Due to constraints posed by the lack of technical personnel with
Internet skills or experience, the high cost of advanced networking equipment
and the complexity of innovative web solutions, many businesses are unable
internally to develop, maintain and continually enhance their facilities and
systems to conduct desired levels of Internet-based activities. As a result of
these constraints and other factors, many businesses are seeking to outsource
their facilities and systems requirements as the preferred means for providing
electronic commerce solutions. To this end, an increasing demand is developing
for:

- dedicated and broadband Internet access services to support reliable, high
speed and/or constantly connected Internet access and communication;

- web hosting and co-location services which enable businesses to obtain
equipment, technical expertise and infrastructure for their Internet needs on an
outsourced basis; and

- end-to-end electronic commerce solutions to sell goods and services on the Web
in a secure transaction environment.

- By outsourcing their facilities and systems needs, businesses are able to
focus on their core competencies rather than expending vital resources to
support their Internet operations.

                                       3

<PAGE>


Business of P2i Newspaper

     Print to Internet: the conversion of existing print content into
interactive web content with additional features such as search, mapping and
e-commerce. This is P2i's core competency and it delivers technology driven
processes to customers in North America and Europe, with the first Asian clients
expected to come aboard this year.

     Proven Internet business strategies are now being implemented by newspapers
that deliver quantifiable results. P2i has patented processes and proprietary
technologies that form the core of viable online business models.

     Today, virtually all printed material is first created electronically,
usually using desktop publishing software on Mac and PC systems. Those
electronic files are sent to P2i and converted into web content for clients. P2i
has a sales force in Europe and the USA selling both direct and via alliances to
publishers and retailers. Technical teams and account managers work directly
with clients in support of the sales effort. The `sale' is a long-term
relationship by nature.

     For newspapers, P2i converts print advertising and editorial into web
content, hosted by P2i, but seamlessly integrated into the newspaper website.
Once the relationship is established the newspaper feeds P2i data on a daily
basis: data is converted overnight and delivered as online content by
start-of-business the following day. The newspaper, still the largest local
portal, sells the online version of the print content to its advertisers and
pays P2i to convert it. The advertiser gets proven, quantifiable reach online,
above and beyond the print circulation.

     All newspaper content is converted by P2i's facility in Malaysia.

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. Total e-commerce sales for 2001 were estimated at
$32.6 billion, an increase of 19.3% from 2000. This is contrasted to total
retail sales in 2001, which increased just 3.3% over 2000 (Source: US Census
Bureau).

     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

     In 2001, just over $44 billion was spent on newspaper advertising across
the 1,500 daily and 6,000 weekly newspapers published in the U.S. (Source:
Market and Business Analysis, Newspaper Association of America). Newspapers have
been putting virtually all 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
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.

                                       4

<PAGE>


     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. Data from Media Sources indicates that this additional reach is as
high as 17%. Since advertising is all about reach and page impressions,
achieving an additional reach of 17% by putting a print ad online is of real
financial value to an advertiser. Furthermore, the web reporting of ad views and
the use of the enhanced online features show that site visitors view the
advertising.

     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 has proprietary processes
and a patent on format and functionality that position us well to acquire a
significant share of this market.

     Over the past six months 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.

Competition

     Infosis, a company P2i acquired in September 2000, was the first company to
establish a presence in the business space. As the revenue models have proved to
be viable, competitors have emerged. Some, such as Harvest and Print2Web have
adopted very similar strategies to those of P2i: sell directly to the newspapers
and deliver ever increasingly sophisticated solutions. Others, such as WSN and
Adexpedia 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 are also moving into this
space. Their original strategy was to aggregate sales content from newspaper
inserts and stores, publish it online within a destination site and attract
visitors. Their original business models proved uneconomic and many of their
competitors closed or merged. They are developing ASP solutions that are
retailer focused and view the newspaper as the means to distribute this online
content.

     Secondary competition comes from the software companies that have developed
ad management systems for newspapers, such as Mactive and PowerOne. 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
P2i solutions feature.

     There are many obstacles to newspapers adopting pure software solutions to
compete with P2i services. Firstly, ads are created in many different ways, even
within a single newspaper. Some are submitted electronically from advertising
agencies and design firms. Others are created by the newspaper's own creative
departments. Some are in color, some in black and white. FSI's are usually
created by agencies or print companies specializing in that field, and the
newspaper only receives the printed versions, rarely the electronic versions.
The "normalization" of incoming data is a key component of the proprietary
processes P2i 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 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
recognizes that it may need to modify its services to meet the newspaper's
evolving needs.

     Finally, as volumes have increased and more competitors seek to move into
this space, prices drop. Since January 2001, pricing fell as much as 80%. P2i
has been able to remain competitive by virtue of the reduced costs of operations
in Malaysia and the development of its new technology platform.

                                       5

<PAGE>


ITEM 2. DESCRIPTION OF PROPERTY

The Company has occupied 4,000 sq. ft. of office space at 2300 Tulare Street,
Suite 210, Fresno, CA, 93721 under the terms of a five-year lease that expired
in May 2002. The lease was extended on a month-to-month basis. Brand X continues
to operate the ISP at this address.

The Company also occupies a portion of P2i's office space at One Bethlehem
Plaza, Bethlehem, PA 18018. P2i, through its staff and infrastructure, provides
the administrative and accounting functions of the Company, as well as such
office space. Through December 31, 2002, P2i was not paid for such services. P2i
and the Company intend to enter into a services agreement for periods commencing
after January 1, 2003. No such agreement exists as of the date hereof


ITEM 3. LEGAL PROCEEDINGS

Not applicable.


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

Not applicable.







                                       6


<PAGE>

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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


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

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

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

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



As of April 10, 2003, there were approximately 1,500 record and beneficial
owners.


DIVIDEND POLICY

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



                                       7


<PAGE>



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

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

RESULTS OF OPERATIONS

Year Ended December 31, 2002 vs. Year Ended December 31, 2001

Net Revenues

For the year ended December 31, 2002, net revenues were $453,177 versus
$1,527,795 for the year ended December 31, 2001. The decrease in revenues is
attributable to two factors. Under the terms of a conditional agreement entered
on May 1, 2002, the ISP and web development assets of the Company were operated
by Brand X Networks. Notwithstanding, a decrease in our dial-up Internet access
business and our web design and development business resulted in lower revenues
during the four months ended April 30, 2002 compared to the same period in the
prior year. The operations of the ISP have been classified as discontinued
operations.

Operating Expenses

For the year ended December 31, 2002, operating expenses totaled $833,646 versus
$1,280,837 in 2001. During 2001, the Company incurred $283,882 of stock
compensation expense which did not recur in 2002. The Company's selling, general
and administrative expenses increased by $115,328, principally because of
increases in professional fees associated with the restructuring of the Company
and increases in officers' and directors' liability insurance. In addition, the
Company had impairment charges of $121,000 and $404,000 in 2002 and 2001,
respectively, in connection with the Company's investment in P2i. The operations
of the ISP have been classified as discontinued operations and the related
operating expenses of the ISP have not been included in the aforementioned
discussion.

Interest Expense

Interest expense totaled $1,734,346 for the year ended December 31, 2002 versus
interest expense of $880,866 in 2001. The increase in interest expense is a
result of the convertible notes obtained during 2002 to fund the operations of
the Company and P2i pending the merger. A significant component of interest
expense includes amortization of debt issuance costs in each year.

Other (Charges)

Other charges included losses on the sale of marketable securities (Dauphin
Technology, Inc. common stock) of $272,944 and $128,494 in 2002 and 2001,
respectively.

Discontinued Operations

Operations of the ISP division were discontinued under the terms of the Brand X
agreement. Although the ISP and web development assets are operated by Brand X
Networks, they continue to be carried on the Company's balance sheet since the
sale of those assets has not yet been completed. Effective July 1, 2001, the
Company sold the assets of the Suncoast Automation subsidiary. In connection
with the sale, the Company incurred a loss from discontinued operations of
$982,306 and a loss on its disposal of $6,786,621 in 2001.

Liquidity and Capital Resources

For the year ended December 31, 2002, we used cash of $447,473 for operating
activities, used net cash of $723,468 in investing activities and were provided
net cash of $1,055,347 from financing activities. We had negative working
capital of $410,696 at December 31, 2002. As of December 31, 2002, we had $2,671
in cash and $1,735,532 of total liabilities.

                                       8

<PAGE>


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

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

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

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


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

AAWC acted as placement agent for $1,500,000 of bridge financing completed in
May, 2000. The short-term financing was in the form of units containing
promissory notes with interest at 10%. In addition, each $25,000 unit consisted
of 4,000 shares of common stock. The promissory notes were due and paid at the
closing of our February 2001 public offering. AAWC was paid a 10% commission and
a 3% non-accountable expense allowance. In connection with this bridge
financing, we incurred debt costs of approximately $1,722,500. The unamortized
debt issuance costs were expensed as interest when the loans were repaid in
February, 2001.

On August 22, 2000, we acquired all the outstanding common stock of Suncoast
Automation, Inc. in exchange for 1,303,072 shares of our common stock. Although
we did not obtain an independent appraisal of the fair market value of Suncoast,
we based our valuation on the cable television industry standard at that time of
$5,000 per subscriber. On May 17, 2001, we entered into a Term Sheet to sell the
assets of Suncoast Automation to Dauphin Technology, Inc. (DNTK.OB), an Illinois
corporation. The sale was concluded effective July 1, 2001. As a result of the
sale, we received 766,058 shares of Dauphin common stock of which 38,303 shares
were paid to our investment banker, AAWC. Dauphin also agreed to assume $140,269
in Suncoast liabilities. In conjunction with the sale, we negotiated
approximately $362,498 of Suncoast-related liabilities for 268,466 shares of our
common stock and approximately $3,300 in cash. The write-down in connection with
this sale was recorded in the second quarter of 2001. The Dauphin Technology
stock we received was registered effective September 22, 2001. The Company began
liquidation of a portion of the securities in October 2001. Proceeds from the
sale of securities will be used to fund the Company's operations.

                                       9

<PAGE>


In December, 2000, AAWC acted as placement agent for a $175,000 bridge
financing. The short-term financing was in the form of a unit containing
promissory notes with interest at 10%. In addition, the unit consisted of 50,050
shares of our common stock. The promissory notes were due and paid at the
closing of the February, 2001 public offering. AAWC was paid a 10% commission
and a 3% non-accountable expense allowance. In connection with this bridge
financing, we incurred debt issuance costs of $197,750. The debt issuance costs
were expensed as interest when the loan was repaid in February, 2001.

In January, 2001, AAWC acted as placement agent for a $175,000 bridge financing.
The short-term financing was in the form of a unit containing promissory notes
with interest at 10%. In addition, the unit consisted of 50,050 shares of our
common stock. The promissory notes were due and paid at the closing of the
February, 2001 public offering. AAWC was paid a 10% commission and a 3%
non-accountable expense. In connection with this bridge financing, we incurred
debt issuance costs of approximately $197,750. The debt issuance costs were
expensed as interest when the loan was repaid in February, 2001.

In February, 2001, the Company sold 800,000 units of securities at $4.50 per
unit (the "February, 2001 public offering"). Each unit consisted of two shares
of Common Stock and one redeemable Common Stock purchase warrant exercisable at
$2.92 per share until February 14, 2006. The proceeds of this offering were
significantly lower than had been expected. As a result, the bulk of the funds
from the offering were used to repay the bridge loans incurred in 2000 and early
2001 as well as past due trade payables. The remaining capital was used to fund
the operations of the Company. Thus, the Company was unable to fund the
build-out of the cable TV contracts of the Suncoast division. Thus, the sale of
Suncoast was actively sought and concluded effective July 1, 2001.

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

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

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

On May 1, 2002, the Company entered into a conditional agreement to sell the
assets of the Fresno-based ISP business to Brand X Networks. Brand X Networks is
a privately-held California-based company whose principal shareholders were
former employees of the Company. The Company agreed to lay off the remaining
employees based in Fresno on April 30th. Most terminated employees were hired by
Brand X. Additionally, Brand X has assumed financial and operational
responsibility for the ISP business. On April 14, 2003, the Company completed a
fifth amendment to the purchase agreement with Brand X pursuant to which the
Company has agreed to accept an aggregate payment of $632,000 for the ISP
Division, less credits to Brand X of $112,686. Of such amount, $200,000 shall be
paid through the provision of services to the Company from Brand X. The balance
shall be paid at the rate of approximately $5,171 per month, until completely
paid.

In July, 2002, the Company executed its merger agreement with P2i. Concurrently,
the Company's CEO, Mr. William Conis, resigned his position as both CEO and
Director. Mr. Peter Wardle, CEO of P2i and a ProtoSource Director, became CEO of
the Company. Mr. Wardle is currently both CEO of ProtoSource and P2i even though
the closing on the P2i acquisition has not yet occurred. This inherent conflict
of interest will remain until the closing of the P2i acquisition takes place.

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

                                       10

<PAGE>


The number of shares of restricted common stock to be issued to P2i has
subsequently been revised to 19,383,531 shares (subject to earn-out through
2005) which will result in an ownership of approximately 66% by the stockholders
of P2i, on a fully diluted basis assuming conversion of certain bridge loans
into common stock, the balance being held by the current stockholders of
ProtoSource. After the acquisition of P2i is completed, the Board of Directors
of Protosource will consist of seven members. One member shall be appointed by
the investment banker, AAWC (this appointment must be approved by P2i but can't
be unreasonably withheld). One member shall be appointed by Suncoast under the
terms of the Suncoast sale agreement and will expire in accordance with that
agreement to be replaced by a Wardle/Butera appointment. Messrs. Wardle and
Butera will be on the Board and they shall appoint the two independent members
plus one other as long as they hold 25% or more of P2i New Media, Inc. (see
below), collectively, and P2i New Media, Inc. owns 25% or more of ProtoSource.
In the event that P2i's ownership drops below 25% but is not less than 10%, P2i
shall appoint one board member. In the event that P2i's ownership drops below
10%, P2i shall not have the right to appoint any board member. ProtoSource and
P2i both used the same investment banker to represent them in the transaction
and each will pay the investment banker a fee based on the value of the
transaction using a pre-set formula. The investment banking fees to be paid are
$406,844 by ProtoSource and $413,422 by P2i. The amounts paid to the investment
banker will be paid through the issuance of common stock, which is restricted
for a three-year period, based on an agreed-upon value of $.50 per share at the
time of signing the term sheet, or 813,688 shares for ProtoSource and 826,844
shares for P2i. The shares to be issued for P2i's investment banking fees will
be subtracted from the shares to be issued to the P2i stockholders for the
acquisition. P2i's remaining catalog and new media business will stay with P2i
and ProtoSource will change its name to P2i NewMedia, Inc. However, ProtoSource
will increase its ownership in P2i from the current 2.18% (506,225 shares) to
19.8%. The consideration to be paid is $1,100,000 comprising the forgiveness of
P2i debt to ProtoSource ($829,400 at the time the term sheet was approved) and
the balance in the form of a six-month note commencing the day the merger is
approved by shareholders of ProtoSource.

During 2002, the Company entered into an agreement with AAWC to act as a
placement agent for the sale of convertible notes aggregating $1,300,000. The
notes are secured by stock in P2i and accrue interest at 10% per annum. The
Company pays the cost and obligations of the first $200,000 incurred with this
financing and P2i has agreed to pay all remaining costs and obligations. Through
December 31, 2002, $1,125,000 in funding had been completed. AAWC was paid a 10%
commission and a 3% non-accountable expense. Substantially, all of the proceeds
from these notes have been loaned to P2i. The loans are in the form of demand
notes which accrue interest at 8% per annum.

On July 1, 2001 an agreement was entered into with Dauphin Technology, Inc.
where Dauphin Technoloy, Inc. is to pay the two leases guaranteed by ProtoSource
for leased equipment located at Suncoast Automation's locations. Payments are
currently in default.

Recently Issued Accounting Standards

In December, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which provides alternative methods of
transition for a voluntary change to a fair value based method of accounting for
stock-based employee compensation as prescribed in SFAS No. 123. Additionally,
SFAS No. 148 requires more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15, 2002.
Management does not expect the adoption of this Statement to have a material
impact on the Company's financial condition or results of operations.


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. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (and superceded in 2001 by
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"),
the Company recorded impairment charges in 2001 of $328,543 to write-down
goodwill to zero and $121,000 and $404,000 to reduce the carrying value of its
investment in P2i in 2002 and 2001, respectively.

                                       11

<PAGE>


In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
maintains a valuation allowance of $5,505,000 as of December 31, 2002 on
deferred tax assets relating to its net operating losses which the Company has
not determined to be more likely than not realizable.

Through December 31, 2002, the Company has advanced $1,045,280 to P2i, a company
whose Chief Executive Officer serves in the same capacity at ProtoSource
Corporation. The ultimate repayment of this receivable is highly dependent upon
the completion of a merger between P2i's Newspaper Division and the Company
which the Company believes will occur prior to August 12, 2003.



                                       12

<PAGE>


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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements                                                   Page
                                                                       ----

Independent Auditors' Reports                                          F-2 & 3

Consolidated Balance Sheet as of December 31, 2002                     F-4

Consolidated Statement of Operations
  for the years ended December 31, 2002 and 2001                       F-5

Consolidated Statement of Changes in Stockholders' Equity              F-6
  for the years ended December 31, 2002 and 2001

Consolidated Statement of Cash Flows
  for the years ended December 31, 2002 and 2001                       F-7 & 8

Notes to Consolidated Financial Statements                             F-9






<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
ProtoSource Corporation

We have audited the accompanying consolidated balance sheet of ProtoSource
Corporation and Subsidiary as of December 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year the
ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProtoSource Corporation and
Subsidiary as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended 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 a net loss of $2,798,497 and $10,750,100 during
the years ended December 31, 2002 and 2001, 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 6, 2003





                                       F-2


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors
ProtoSource Corporation

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of ProtoSource Corporation and Subsidiary
for the year ended December 31, 2001. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of ProtoSource
Corporation and Subsidiary for the year ended December 31, 2001 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 financial statements,
the Company incurred a net loss of $10,750,100 during the year ended December
31, 2001. 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/  Angell & Deering
                                                 Certified Public Accountants

Denver, Colorado
February 21, 2002






                                       F-3

<PAGE>


                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2002
--------------------------------------------------------------------------------

                                     ASSETS

Current assets:
   Cash                                                            $      2,671
   Marketable securities                                                 10,924
   Interest receivable                                                   49,556
   Notes receivable                                                   1,045,280
   Assets held for sale                                                 178,115
   Prepaid expenses and other                                             2,651
                                                                   ------------

       Total current assets                                           1,289,197
                                                                   ------------

Property and equipment under capital lease, at cost,
   net of accumulated amortization of $13,090                            48,005
                                                                   ------------
Other assets:
   Debt issuance costs, net of accumulated amortization
     of $617,236                                                        543,543
   Investment in corporation                                            105,000
                                                                   ------------

       Total other assets                                               648,543
                                                                   ------------

       Total assets                                                $  1,985,745
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Notes payable                                                   $  1,125,000
   Current portion of obligations under capital leases                   13,775
   Accounts payable                                                      80,834
   Accrued expenses                                                     315,952
   Deferred revenue                                                       9,000
   Liabilities to be assumed upon sale                                  155,332
                                                                   ------------

       Total current liabilities                                      1,699,893
                                                                   ------------

Obligations under capital leases, non-current portion                    35,639
                                                                   ------------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, no par value; 5,000,000 shares
     authorized, none issued and outstanding                               --
   Common stock, no par value; 10,000,000 shares
     authorized, 7,489,829 shares issued and outstanding             25,635,960
   Additional paid-in capital                                         1,487,891
   Accumulated other comprehensive (loss)                               (62,069)
   Accumulated deficit                                              (26,811,569)
                                                                   ------------

       Net  stockholders' equity                                        250,213
                                                                   ------------

       Total liabilities and stockholders' equity                  $  1,985,745
                                                                   ============



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

                                       F-4

<PAGE>
<TABLE>
<CAPTION>

                               PROTOSOURCE CORPORATION AND SUBSIDIARY
                               ======================================

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

                                                                         YEAR ENDED
                                                                         DECEMBER 31,
                                                                2002                     2001
                                                           ------------              ------------
<S>                                                        <C>                        <C>
Operating expenses:
   Selling, general and administrative                     $    703,920              $    588,592
   Depreciation and amortization                                  8,726                     4,363
   Stock compensation expense                                      --                     283,882
   Impairment of investment                                     121,000                   404,000
                                                           ------------              ------------

         Total operating expenses                               833,646                 1,280,837
                                                           ------------              ------------

         Operating loss                                        (833,646)               (1,280,837)
                                                           ------------              ------------

Other income (charges):
   Interest income                                               49,615                      --
   Other income                                                  20,157                      --
   Interest expense                                          (1,734,346)                 (880,866)
   Loss on sale of marketable securities                       (272,944)                 (128,494)
                                                           ------------              ------------

          Net other (charges)                                (1,937,518)               (1,009,360)
                                                           ------------              ------------


Net loss from continuing operations                          (2,771,164)               (2,290,197)
                                                           ------------              ------------

Discontinued operations:
   Loss from discontinued operations - ISP                      (27,333)                 (690,976)
   Loss from discontinued operations - Suncoast                    --                    (982,306)
   Loss on disposal - Suncoast                                     --                  (6,786,621)
                                                           ------------              ------------

          Total loss from discontinued operations               (27,333)               (8,459,903)
                                                           ------------              ------------

Net loss                                                   ($ 2,798,497)             ($10,750,100)
                                                           ============              ============

Net loss per basic and diluted share of common stock:
   Continuing operations                                   ($       .44)             ($       .47)
   Discontinued operations                                         (.01)                    (1.72)
                                                           ------------              ------------

Net loss                                                   ($       .45)             ($      2.19)
                                                           ============              ============

Weighted average number of basic and
  diluted common shares outstanding                           6,268,183                 4,912,026
                                                           ============              ============


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

                                            F-5


<PAGE>


                                                          PROTOSOURCE CORPORATION AND SUBSIDIARY
                                                          ======================================

                                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                                       FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                        Accumulated
                                             Common Stock                Additional   Current Year's       Other
                                          ---------------------           Paid-In     Comprehensive   Comprehensive    Accumulated
                                         Shares           Amount           Capital      (Loss)           (Loss)          Deficit
                                       ---------      ------------      ------------  ------------    --------------   ------------

Balance at December 31, 2000           3,551,636      $ 21,168,125      $    221,325                                   ($13,262,972)

Issuance of common stock
 in connection with financing             50,050           175,000
Issuance of common stock
 in public offering (net of
 offering costs of $800,255)           1,600,000         2,799,745
Issuance of common stock
 for payment of liabilities              393,915           308,740
Issuance of common stock
 for payment of notes payable             75,502           102,683
Issuance of stock options
 for settlement of liabilities                                              171,420
Other comprehensive (loss),
 net of tax:
   Unrealized (loss) on
    marketable securities                                                             ($   161,637)     ($   161,637)
Net loss                                                                               (10,750,100)                     (10,750,100)
                                     ------------      ------------      ------------ ------------      ------------    -----------

     Total comprehensive (loss)                                                       ($10,911,737)
                                                                                      ============

Balance at December 31, 2001           5,671,103        24,554,293          392,745                         (161,637)   (24,013,072)


Issuance of common stock
 in connection with financing          1,818,726         1,081,667
Warrants issued in connection
 with financing                                                              46,362
Beneficial conversion feature
 of convertible notes                                                     1,048,784
Other comprehensive (loss),
 net of tax:
  Unrealized (loss) on marketable
   securities                                                                         ($   173,376)         (173,376)
  Reclassification adjustment
   for losses included in net
   loss                                                                                    272,944           272,944
Net loss                                                                                (2,798,497)                      (2,798,497)
                                    ------------      ------------      ------------  ------------      ------------    -----------

     Total comprehensive (loss)                                                       ($ 2,698,929)
                                                                                      ============

Balance at December 31, 2002           7,489,829      $ 25,635,960      $  1,487,891                    ($    62,069)  ($26,811,569)
                                    ============      ============      ============                    ============   ============






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


                                                       F-6

<PAGE>


                                 PROTOSOURCE CORPORATION AND SUBSIDIARY
                                 ======================================

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


                                                                               YEAR ENDED
                                                                              DECEMBER 31,
                                                                     2002                      2001
                                                                 ------------              ------------

                                   INCREASE (DECREASE) IN CASH

Cash flows from operating activities:
  Net loss                                                       ($ 2,798,497)             ($10,750,100)
  Adjustments to reconcile net loss to net cash
       (used in) operating activities:
     Depreciation and amortization                                     22,968                 1,725,959
     Impairment of investment                                         121,000                   404,000
     Provision for bad debts                                            2,950                    56,708
     Compensation from issuance of stock options                         --                     171,420
     Loss on sale of marketable securities                            272,944                   128,494
     Impairment of goodwill                                              --                     328,543
     Loss on disposal of Suncoast assets                                 --                   6,786,621
     Amortization of debt issuance costs                              617,236                      --
     Amortization of beneficial conversion
       of notes payable                                             1,048,784                      --
     Changes in operating assets and liabilities:
       Accounts receivable                                            (55,252)                   54,525
       Inventories                                                       --                     216,150
       Prepaid expenses and other assets                               39,063                   136,625
       Assets and liabilities held for sale                            (2,243)                     --
       Accounts payable                                                 7,811                  (431,565)
       Accrued expenses                                               279,763                  (173,204)
       Deferred revenue                                                (4,000)                  (22,965)
                                                                 ------------              ------------

              Net cash (used in) operating activities                (447,473)               (1,368,789)
                                                                 ------------              ------------

Cash flows from investing activities:
  Purchases of property and equipment                                    --                     (18,340)
  Increase in notes receivable                                       (986,280)                  (50,000)
  Increase in employee receivables                                       --                     (12,000)
  Deposits                                                               (500)                    4,550
  Payment of costs for sale of Suncoast assets                           --                     (10,037)
  Proceeds from sale of marketable securities                         263,312                   332,058
                                                                 ------------              ------------

              Net cash provided by
                (used in) investing activities                       (723,468)                  246,231
                                                                 ------------              ------------



                                       CONTINUED ON NEXT PAGE



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


                                                     F-7



<PAGE>



                                 PROTOSOURCE CORPORATION AND SUBSIDIARY
                                 ======================================

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


                                                                               YEAR ENDED
                                                                              DECEMBER 31,
                                                                     2002                     2001
                                                                 -----------              -----------

Cash flows from financing activities:
  Proceeds from borrowings                                         1,125,000                  175,000
  Payments on notes payable                                          (36,903)              (1,942,756)
  Issuance of common stock                                              --                  3,600,000
  Offering costs incurred                                               --                   (666,654)
  Debt issuance costs incurred                                       (32,750)                 (22,750)
                                                                 -----------              -----------

           Net cash provided by financing activities               1,055,347                1,142,840
                                                                 -----------              -----------

Net increase (decrease) in cash                                     (115,594)                  20,282

Cash at beginning of year                                            118,265                   97,983
                                                                 -----------              -----------

Cash at end of year                                              $     2,671              $   118,265
                                                                 ===========              ===========


                          SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:
  Interest                                                       $    69,494              $   147,146
                                                                 -----------              -----------
  Income taxes                                                          --                       --
                                                                 -----------              -----------



SUPPLEMENTAL DISCLOSURES OF NON-CASH  INVESTING AND FINANCING ACTIVITIES

Issuance of common stock in connection with financing            $ 1,081,667              $   175,000
Warrants issued in connection with financing                          46,362                     --
Sale of Suncoast assets in exchange for
  marketable securities                                                 --                  1,126,105
Obligation under capital lease incurred for equipment                   --                     61,095
Issuance of common stock in exchange
  for payment of liabilities                                            --                    308,740
Issuance of common stock in exchange for
  payment of notes payable                                              --                    102,683
Unrealized loss on marketable securities                             (99,569)                 161,637
Notes payable incurred for financing of insurance                       --                     58,765






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

                                                 F-8
</TABLE>


<PAGE>



                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     =======================================

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


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

         Nature of operations - ProtoSource Corporation, formerly SHR
         Corporation doing business as Software Solutions Company (the
         "Company'), was incorporated on July 1, 1988, under the laws of the
         state of California. Until May 1, 2002, the Company was an Internet
         service provider (ISP). The Company provided dial-up Internet access,
         web hosting services and web development services. The Company entered
         into an agreement on May 1, 2002 to sell substantially all of the
         assets pertaining to the ISP to Brand X Networks, Inc. (see Note 2).

         The Company also operated as a private cable operator through its
         wholly-owned subsidiary, Suncoast Automation, Inc. ("Suncoast").
         Suncoast builds, upgrades and maintains cable TV systems as well as
         manages programming for the timeshare industry. Suncoast developed an
         interactive system that delivers basic cable TV, premium channel
         packages and high-speed Internet access to this market. The Company
         sold substantially all of the assets of Suncoast on July 1, 2001 (see
         Note 2).

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

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

          o    In February,  2003,  the Company  signed an Agreement and Plan of
               Merger with P2i, Inc. ("P2i") to acquire P2i's  Print-to-Internet
               business in exchange  for a  controlling  interest in the Company
               (see Note 9).

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

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

                                       F-9

<PAGE>



                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


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

         Revenue recognition - In connection with its ISP business, the Company
         charged customers monthly access fees to the Internet and recognized
         the revenue in the month the access was provided. The Company charged
         customers monthly web hosting fees for maintaining the customers' web
         sites on its server and recognized the revenue in the month the service
         was provided. For certain customers billed in advance, the Company
         recognized the revenue over the period the billing covered. The Company
         recognized revenue from cable TV service contracts in the period in
         which the service was recognized as the service was performed.

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

         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.

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

         Depreciation and amortization of property and equipment charged to
         operations was $22,968 and $144,862 for the years ended December 31,
         2002 and 2001, respectively.

         Marketable securities - Marketable securities consist of the Company's
         investment in Dauphin Technology, Inc. common stock (see Note 2). This
         investment is stated at fair value as determined by the most recently
         traded price as of the balance sheet date. This investment is
         considered as securities available-for-sale under the provisions of
         Statement of Financial Accounting Standards ("SFAS") No. 115,
         "Accounting for Certain Investments in Debt and Equity Securities."

         Available-for-sale securities are carried at fair value, with the
         unrealized gains and losses, net of tax, reported as a separate
         component of stockholders' equity.

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



                                      F-10

<PAGE>



                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


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

         Investment in Corporation - The Company's investment is in P2i, a
         privately-held corporation, which represents less than a ten percent
         ownership interest in that corporation. The Company's investment in P2i
         is recorded using the cost method of accounting. The Company reviews
         its investment for impairment whenever events or changes in
         circumstances indicate that the fair value of its investment is less
         than its cost or carrying value. An impairment charge is recognized if
         there is a decline in value below the Company's cost of the investment,
         if the decline is other than temporary. The Company utilizes publicly
         available market information or other appropriate estimates determined
         by management to evaluate impairment.

         An impairment charge of $121,000 and $404,000 was recognized for the
         years ended December 31, 2002 and 2001, respectively, as there was a
         decline in the fair value of the investment below its cost, which was
         considered other than temporary. The fair value was based on financial
         projections, consultation with the Company's investment banker and an
         outside consultant, and management's estimates. In February, 2003, the
         Company entered into an agreement to acquire P2i's Print-to-Internet
         business (see Note 9).

         Deferred offering costs - In connection with the Company's public
         offering (see Note 6), costs incurred to complete the offering were
         deferred and were offset against the proceeds of the offering when it
         was completed.

         Stock-based compensation - The Company adopted SFAS No. 123,
         "Accounting for Stock-Based Compensation" for its stock-based
         compensation plans. The Company will continue 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.

         If the Company had elected to recognize compensation expense based upon
         the fair value at the grant date for awards under these plans
         consistent with the methodology prescribed by SFAS No. 123, the
         Company's net loss and loss per share would be increased to the
         following pro forma amounts for the years ended December 31, 2002 and
         2001:

<TABLE>
<CAPTION>

                                                               2002           2001
                                                               ----           ----
<S>                                                        <C>              <C>
         Net loss:
           As reported                                     ($2,798,497)    ($10,750,100)
           Deduct:
             Total stock-based compensation
               determined under Black-Scholes
               option valuation model for all awards,
               net of income taxes                             (35,000)        (152,451)
                                                           -----------     ------------

         Pro forma                                         ($2,833,497)    ($10,902,551)
                                                             =========       ==========

         Net loss per share of common stock:
           As reported                                     ($      .45)          ($2.19)
           Pro forma                                       ($      .46)          ($2.22)



                                      F-11

</TABLE>


<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


1.       Summary of Significant Accounting Policies - Continued

         These pro forma amounts may not be representative of future disclosures
         since the estimated fair value of stock options is amortized to expense
         over the vesting period and additional options may be granted in future
         years. The fair value for these options was estimated at the date of
         grant using the Black-Scholes option pricing model with the following
         assumptions for the year ended December 31, 2001:

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

         Long-lived assets - When facts and circumstances indicate that the cost
         of long-lived assets may be impaired, an evaluation of the
         recoverability is performed by comparing the carrying value of the
         assets to the projected future cash flows. Upon indication that the
         carrying value of such assets may not be recoverable, the Company
         recognizes an impairment loss by a charge against current operations.

         A forecast showing lack of long-term profitability, a current period
         operating or cash flow loss, combined with a history of operating or
         cash flow losses are conditions, among others, that would trigger an
         impairment assessment of the carrying amount of enterprise goodwill.
         The impairment would be determined using discounted cash flows or
         market appraisals.

         In 2001, the Company recognized an impairment charge of $328,543 from a
         write-down of its goodwill from its acquisition of Micronet in 1999.
         The expense is a result of a decline in the number of subscribers. The
         valuation was based on a per subscriber value of the business and the
         difference between the carrying value of the business and the fair
         value at December 31, 2001 was recognized as a charge to operations.

         Advertising - Prior to 2002, the Company advertised through radio,
         television and print media. The Company's policy is to expense
         advertising costs, including production costs, as incurred. Advertising
         expense was $-0- and $5,292 for the years ended December 31, 2002 and
         2001, respectively.

         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 basic and diluted loss per share are the same since the Company had
         a net loss for 2002 and 2001 and the inclusion of stock options and
         other incremental shares would be anti-dilutive. Options and warrants
         to purchase 3,532,000 and 3,588,500 shares of common stock at December,
         2002 and 2001, respectively, were not included in the computation of
         diluted earnings per share because the Company had a net loss and their
         effect would be anti-dilutive.

                                      F-12

<PAGE>


                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


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

         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.

         Recently issued accounting standards - In June, 2001, the Financial
         Accounting Standard Board ("FASB") issued No. 142, "Goodwill and Other
         Intangible Assets". SFAS No. 142 requires that goodwill and certain
         intangibles no longer be amortized, but instead tested for impairment
         at least annually. The Company adopted SFAS No. 142 on January 1, 2002.


         If SFAS No 142 had been in effect during the years ended December 31,
         2002 and 2001, the Company's losses would have been reduced because of
         reduced amortization as described below:


                                                 2002               2001
                                              -----------       ------------

         Net loss as reported                ($2,798,497)      ($10,750,100)

         Add amortization                              -            731,827
                                              ----------       ------------

         Adjusted net loss                   ($2,798,497)      ($10,018,273)
                                              ==========        ===========

         Net loss per basic and diluted
          share of common stock:
           As reported                        ($    .45)       ($      2.19)
           Add amortization                           -                 .15
                                             ----------        ------------

           Adjusted net loss                  ($     .45)      ($      2.04)
                                              ==========       ============


         Reclassifications - Certain reclassifications have been made to the
         2001 financial statement presentation for comparability with the 2002
         financial statements. The results of the Company's operations for all
         periods presented have been restated for the discontinued operations of
         the ISP business, pending sale to Brand X Networks, Inc.







                                      F-13


<PAGE>



                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


2.       Discontinued Operations
         -----------------------

         Pending 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.
         The sale is still pending final negotiations between the Company and
         Brand X Networks. Accordingly, the sale has not yet been recognized.

         The results of the Company's operations for all periods presented have
         been restated for the discontinued operations of the ISP division.

         A summary of operating results of this discontinued operation follows:

                                                  YEAR ENDED
                                                  DECEMBER 31,
                                             2002             2001
                                         -----------      ------------

         Net revenues                      $ 453,177      $  1,527,795
         Operating expenses                  479,342         2,215,102
                                             -------         ---------

         Operating loss                  (    26,165)     (    687,307)
         Other (expense)                 (     1,168)     (      3,669)
                                           ---------       -----------

         Net loss                         ($  27,333)     ($   690,976)
                                            ========        ==========


         Suncoast Automation, Inc.
         -------------------------

         On August 22, 2000, the Company acquired all of the outstanding common
         stock of Suncoast, effective as of August 1, 2000, in exchange for
         1,303,072 shares of the Company's common stock, which was valued at
         approximately $7,700,000. The Company also paid a finder's fee of
         approximately $315,000 in connection with the acquisition and legal
         expenses and other direct costs of the acquisition of approximately
         $78,000. The acquisition was accounted for as a purchase. In addition,
         the Company was to deposit 1,000,000 shares of its common stock (the
         "Earnout Shares") with an escrow agent.

         The shares were to be held for a maximum of 27 months following the
         effective date of the Company's public offering (see Note 6). The
         Earnout Shares could be earned by Suncoast's shareholders upon meeting
         certain subscriber and cash flow provisions over a 27-month period.







                                      F-14

<PAGE>


                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

2.       Discontinued Operations - Continued
         -----------------------------------

         Suncoast Automation, Inc. - continued
         -------------------------------------

         In January, 2001, Nasdaq informed the Company that as a result of the
         Suncoast transaction, it violated a Nasdaq marketplace rule which
         requires shareholder approval for the issuance of 20% or more of an
         issuer's securities in connection with an acquisition of assets or
         securities of another company. In order to remain in compliance with
         Nasdaq continued listing requirements, Suncoast's shareholders agreed
         to return to the Company 866,988 shares out of the 1,303,072 shares of
         common stock issued to them in order to reduce the issuance of the
         Company's common stock in this acquisition to under 20% and maintain
         the Company's listing on the Nasdaq Small Cap Market.

         Effective January 16, 2001, the Company entered into an amendment to
         the stock exchange agreement with the former Suncoast shareholders,
         which provides the following:

          o    The former  Suncoast  shareholders  agreed to return an aggregate
               866,988 shares of the Company's common stock.

          o    The  Suncoast  acquisition  agreement  was  further  modified  to
               provide that no additional  shares of common stock will be issued
               to  the  former  Suncoast  shareholders,  unless  and  until  the
               Company's  shareholders approve the issuance.  The agreement also
               states that no other  compensation  of any kind or nature will be
               issued to the  former  Suncoast  shareholders  at any time in the
               event the Company fails to receive  shareholder  approval for the
               issuance.  The  agreement  specifically  states  that even if the
               Company  is   eventually   delisted   from  Nasdaq,   no  further
               compensation will be issued to the former Suncoast shareholders.

          o    The 866,988  shares of common  stock were  reissued to the former
               shareholders   of  Suncoast   after  approval  by  the  Company's
               shareholders was obtained on May 1, 2001.

         Effective July 1, 2001, the Company sold substantially all of the
         assets of Suncoast to Dauphin Technology, Inc. through Suncoast
         Acquisition Corp., an Illinois corporation, for 766,058 shares of
         Dauphin Technology common stock valued at approximately $1,126,000
         based on the closing bid price of $1.47 per share on June 29, 2001.

         The Company recorded a loss of $6,786,621 on the sale of the Suncoast
         assets. The results of the Company's operations for the year ended
         December 31, 2001 have been restated for the discontinued operations of
         Suncoast.

         A summary of operating results of this discontinued operation for the
year ended December 31, 2001 follows:

         Net revenues                                    $    120,625
         Operating expenses                                 1,101,255
                                                         ------------
         Operating loss                                  (    980,630)
         Other (expense)                                 (      1,676)
                                                         ------------

         Net loss                                        ($   982,306)
                                                         ============

                                      F-15


<PAGE>



                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


3.       Marketable Securities
         ----------------------

         Marketable securities, which are composed of the Company's investment
         in Dauphin Technology, are carried on the balance sheet at their market
         value.

<TABLE>
<CAPTION>


                                                                             UNREALIZED       MARKET
                                                                 COST           (LOSS)         VALUE
                                                               -------       ----------       -------
         As of December 31, 2002:
<S>                                                            <C>            <C>             <C>
           Available-for-sale equity securities                $72,993        ($62,069)       $10,924
                                                                ======          ======         ======
</TABLE>

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

         These are promissory notes issued to various individuals during 2002,
         each with a one year maturity date with interest payable at the rate of
         10% per annum, and each with a conversion feature which permits the
         holder to convert the principal and accrued interest into the Company's
         common stock at any time prior to the due date of the repayment of the
         note by the Company. The conversion rate is generally the amount to be
         converted divided by 50% of the average closing bid price of the common
         stock for the five trading days prior to the date of the note. An
         amount of approximately $1,049,000 has been recognized in 2002 as
         interest expense and additional paid-in capital as the result of the
         beneficial conversion feature of these notes.

         Also in connection with the issuance of these notes, the Company issued
         1,818,726 shares of common stock valued at approximately $1,082,000. In
         addition, the Company issued 112,500 warrants, valued at approximately
         $46,000, to the underwriter. These amounts are being amortized to
         interest expense on a monthly basis over the one-year term of the
         notes.

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

         Significant components of deferred income taxes as of December 31, 2002
         are as follows:

                 Net operating loss carryforward                   $4,900,000
                 Impairment of investment                             605,000
                                                                   ----------
                 Total deferred tax asset                           5,505,000
                 Less valuation allowance                         ( 5,505,000)
                                                                   ----------
                 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 $5,505,000 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 an increase of $910,000. The Company will
         continue to review this valuation on a quarterly basis and make
         adjustments as appropriate.

         At December 31, 2002, the Company had federal and state net operating
         loss carryforwards of approximately $16,500,000 and $5,500,000,
         respectively. Such carryforwards expire in the years 2007 through 2022
         and 2003 through 2007 for federal and state purposes, respectively.

                                      F-16

<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


6.       Stockholders' Equity
         --------------------

         Public stock offering - The closing for the Company's secondary
         offering occurred on February 21, 2001. The Company sold 800,000 units
         of the Company's securities at $4.50 per unit and paid the underwriter
         a 10% commission and a 3% non-accountable expense allowance. Each unit
         consisted of two shares of the Company's common stock and one
         redeemable common stock purchase warrant. Each warrant is exercisable
         to purchase one share of common stock at $2.93 per share until February
         14, 2006 and may be redeemed by the company anytime after February 14,
         2002 if the closing price of the Company's common stock is at least
         $4.39 per share for 20 consecutive trading days.

         In connection with the offering, the Company issued the underwriter a
         warrant, for $100, to purchase up to 80,000 units which are exercisable
         at $7.43 per unit. The underwriter's warrant is exercisable through
         February 14, 2007. The units subject to the underwriter's warrant
         consists of two shares of the company's common stock and one common
         stock purchase warrant, which entitles the holder to purchase one share
         of the Company's common stock at $12.26 per share. The Company has also
         retained the underwriter as a financial consultant for a period of one
         year at a monthly fee of $5,833 (a total of $70,000) which was paid in
         full upon completion of the offering.


7.       Preferred Stock
         ---------------

         The authorized preferred stock of the Company consists of 5,000,000
         shares, no par value. 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.


8.       Stock Options and Warrants
         --------------------------

         Incentive stock option plan - In November, 1994, the Company's Board of
         Directors authorized, and the shareholders approved, a stock option
         plan which provides for the grant of incentive and nonqualified options
         to eligible officers and key employees 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 2004. Under the Company's
         stock option plan, outstanding options vest over three years from the
         grant date and are generally for a six-year term.


                                      F-17

<PAGE>


                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     =======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


8.       Stock Options and Warrants - Continued
         --------------------------------------

         Incentive stock option plan - continued

         The following table contains information on the stock options under
         this plan.

<TABLE>
<CAPTION>


                                                                 Number of           Weighted Average
                                                                   Shares              Exercise Price
                                                                   ------              --------------

<S>                                                                <C>                    <C>
         Options outstanding at December 31, 2000                   141,000                $5.48
           Granted                                                    -                      -
           Exercised                                                  -                      -
           Cancelled                                               (104,500)                5.30
                                                                    -------                 ----

         Options outstanding at December 31, 2001                    36,500                 6.19
           Granted                                                    -                      -
           Exercised                                                  -                      -
           Cancelled                                              (  36,500)             (  6.19)
                                                                   --------                 ----

         Options outstanding at December 31, 2002                     -                  $    -
                                                                   ========               =======

         1999 Executive Officers Stock Option Plan

         In May, 1999, the Company's Board of Directors authorized a stock
         option plan which 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.

         The following table contains information on the stock options under
         this plan.

                                                                   Number of            Weighted Average
                                                                    Shares              Exercise Price
                                                                    ------              --------------

         Options outstanding at December 31, 2000                    100,000                $6.88
           Granted                                                    50,000                 1.36
           Exercised                                                   -                      -
           Cancelled                                                   -                      -
                                                                    --------               -------

         Options outstanding at December 31, 2001                    150,000                 5.04
           Granted                                                     -                      -
           Exercised                                                   -                      -
           Cancelled                                                (150,000)             (  5.04)
                                                                     -------               ------

         Options outstanding at December 31, 2002                      -                   $  -
                                                                    ========               ======


         The weighted average fair value price of options granted in 2001 was
          $.84.

</TABLE>

                                      F-18

<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


8.       Stock Options and Warrants - Continued
         --------------------------------------

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

         In May, 2001, the Company's shareholders approved the Company's 2000
         Employee Stock Option Plan and the 2000 Executive Stock Option Plan.
         Each Plan has 350,000 shares reserved for issuance and no stock options
         have been granted under either plan as of December 31, 2002.


         Severance Warrants
         ------------------

         The Company issued 22,500 warrants to a former officer in connection
         with termination of his employment. The warrants are exercisable at
         $6.00 per share until November, 2004.


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

         The Company issued 115,000 stock options to its Non-Employee Directors
         from October, 1998 to December 31, 2001. The options vest immediately,
         or over a three-year period and are exercisable at $1.36 to $6.00 per
         share and the options are for a five-year term. As of December 31,
         2002, 92,500 options are outstanding.

         Warrants from Secondary Offering
         --------------------------------

         The Company issued 1,137,000 redeemable common stock purchase warrants
         in connection with a secondary offering of its common stock in May
         1998. Each warrant is exercisable to purchase one share of common stock
         at $6.33 per share until May 13, 2003 and may be redeemed by the
         Company if the closing price of the Company's common stock is at least
         $8.63 per share for twenty consecutive trading days. As of December 31,
         2002, 1,137,000 warrants are outstanding.

         In connection with the offering, the Company issued the underwriter a
         warrant to purchase 105,000 units of the Company's securities at $9.49
         per unit until May 13, 2003. Each unit consists of one share of the
         Company's common stock and one redeemable common stock purchase
         warrant. As of December 31, 2002, 105,000 warrants are outstanding.


         Non-Plan Compensation Expense
         -----------------------------

         The Company recorded compensation expense of $189,164 for the year
         ended December 31, 2001 for the value of certain options granted for
         settlement of liabilities of the Company and to consultants. The
         valuation of the options and warrants granted to employees is based on
         the difference between the exercise price and the market value of the
         stock on the measurement date. The valuation of the options granted to
         non-employees is estimated using the Black-Scholes option pricing
         model.


                                      F-19


<PAGE>



                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     =====================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


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

         Leases
         ------

         The Company leases certain computer equipment under noncancellable
         capital leases.

         The following is a schedule of future minimum lease payments at
         December 31, 2002 under the Company's capital leases (together with the
         present value of minimum lease payments).

                        2003                                        $20,462
                        2004                                         17,859
                        2005                                         17,859
                        2006                                          7,442
                                                                    -------
            Total minimum lease payments                             63,622
         Less amount representing interest                        (  14,208)
                                                                     ------
         Present value of net minimum lease payments                $49,414
                                                                     ======

         Rent expense under operating leases was $21,808 and $72,777 for the
         years ended December 31, 2002 and 2001, respectively. As of December
         31, 2002, the Company had no future operating lease commitments.

         Proposed Acquisition
         --------------------

         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 has loaned an additional $23,363 in 2003 through
         March 15, 2003. The loans to P2i are in the form of demand notes which,
         in the event that the merger does not get completed, will be due on
         demand. The notes accrue interest at the rate of 8% per annum. Subject
         to the conditions of the Agreement and Plan of Merger, the closing date
         for the transaction must occur by August 12, 2003. The ultimate
         repayment of this receivable is highly dependent upon the completion of
         the merger.


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

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


                                      F-20

<PAGE>

                     PROTOSOURCE CORPORATION AND SUBSIDIARY
                     ======================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


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

         Effective May 29, 1997, the Company adopted 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
         matching contributions of $-0- and $949 for the years ended December
         31, 2002 and 2001, respectively. Company contributions vest as follows:

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

                              1                              33%
                              2                              66%
                              3                             100%


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

         Disclosures about the fair value of financial instruments for the
         Company's financial instruments are presented in the table below. These
         calculations are subjective in nature and involve uncertainties and
         significant matters of judgment and do not include income tax
         considerations.

         Therefore, the results cannot be determined with precision and cannot
         be substantiated by comparison to independent market values and may not
         be realized in actual sale or settlement of the instruments. There may
         be inherent weaknesses in any calculation technique, and changes in the
         underlying assumptions used could significantly affect the results. The
         following table presents a summary of the Company's financial
         instruments as of December 31, 2002:

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

         Financial assets:
           Marketable securities               $     10,924     $     10,924
           Notes receivable                       1,045,280        1,045,280

         Financial liabilities:
           Notes payable                          1,125,000        1,125,000
           Capital lease obligations                 49,414           49,414

         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 marketable securities is determined by
         the most recently traded price of each security at the balance sheet
         date. The fair value of the notes receivable approximates market value
         as it is an 8% interest bearing note and is due upon demand only if the
         P2i acquisition does not occur (see Note 9). 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.

                                      F-21











<PAGE>



                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

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,47                    Chief Executive Officer, President,
                                   Chief Financial Officer and Director
Mark Blanchard,49                  Director
Stewart Kalter,31                  Director


Peter Wardle became a director in December 2001 and then became ProtoSource
Corporation's Chief Executive Officer, President, and Chief Financial Officer in
May 2002. Mr. Wardle is Chief Executive Officer of P2i, Inc. which he co-founded
in May 2000. Mr. Wardle served as Chief Executive Officer of Twenty Twenty, Inc.
from 1993 when he co-founded the company until it was acquired by P2i in July
2001. Prior to that, Mr. Wardle served as a database marketing consultant from
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.

Mark Blanchard became a director in May 2002. Since July 2001, Mr. Blanchard has
served as Suncoast Automation, Inc.'s Chief Operating Officer. Suncoast
Automation was a wholly owned subsidiary of ProtoSource. ProtoSource sold
Suncoast Automation to Dauphin Technology, Inc. in July 2001. Mr. Blanchard
became Vice President and General Manager of Suncoast in August 2000. Mr.
Blanchard formed Suncoast in September 1998. Prior thereto, from 1995 to 1998 he
was founder and President of Internet Stock Market, Inc., a company which
facilitated the promotion of public companies.

Stewart Kalter became a director in October 2001. Mr. Kalter has served as
Director of Corporate Finance and Research of Andrew, Alexander, Wise & Company,
Inc., since June 2001. Prior to that, he was Director of Research at Global
Capital Markets, having served in that capacity since 1999. Mr. Kalter was a
Research Analyst with Spencer Clarke during 1998 and 1999. From 1995 till 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.

Section 16(A) Beneficial Ownership Reporting Compliance

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

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company pursuant to Rule 16a-3(e) under the Exchange Act during fiscal 2002
and Forms 5 and amendments thereto furnished to the Company with respect to
fiscal 2002, no persons during the last fiscal year failed to file on a timely
basis.

ITEM 10. EXECUTIVE COMPENSATION


None of the Company's executive officers or directors currently receive
compensation in excess of $100,000 per year.

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


                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                                                       Long Term
Name and                                                                             Compensation
Principal                                         Other        Annual    All Other      Awards/Securities
Position                   Year    Salary ($)  Compensation    Bonus    Compensation   Underlying Options(#)
--------                   ----    ----------  ------------    -----    ------------   ---------------------

<S>                        <C>       <C>
Peter Wardle, CEO          2002     -0-              -           -           -                     -

William Conis, Former      2002     $ 89,519

Chief Executive            2001     $182,291         -           -           -                50,000
 Officer                   2000     $163,333     $12,000(1)      -           -                     -
</TABLE>

----------

     (1)  As per Mr. Conis's 1999 Consulting Agreement.

Option Grants in Last Year and Stock Option Grant

No options were granted during the year ended December 31, 2002.



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

The following table provides information on the value of the named executive
officers' unexercised options at December 31, 2002. No shares of Common Stock
were acquired upon exercise of options during the fiscal year ended December 31,
2002.

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

None.


1995 Stock Option Plan

In November 1994, the Company adopted a stock option plan (the Plan) which
provides for the grant of options intended to qualify as incentive stock options
and nonqualified stock options within the meaning of Section 422 of the United
States Internal Revenue Code of 1986 (the Code). Incentive stock options are
issuable only to eligible officers, directors, key employees and consultants of
the Company.

The Plan is administered by the Board of Directors and terminates in November
2004. At December 31, 2002, the Company had reserved 150,000 shares of Common
Stock for issuance under the Plan. Under the Plan, the Board of Directors
determines which individuals shall receive options, the time period during which
the options may be partially or fully exercised, the number of shares of Common
Stock that may be purchased under each option and the option price.

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

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

                                       15

<PAGE>


As of December 31, 2002, no options are outstanding under this Plan.

2000 Employee Stock Option Plan

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

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

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

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

As of December 31, 2002, no options are outstanding under this Plan.

1999 Executive Officer Stock Option Plan

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

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

A total of 150,000 shares of authorized but unissued common stock have been
reserved for issuance pursuant to the 1999 Plan. As of December 31, 2002, 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.

                                       16

<PAGE>


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

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

2000 Executive Officer Stock Option Plan

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

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

A total of 350,000 shares of authorized but unissued common stock have been
reserved for issuance pursuant to the 2000 Plan. As of December 31, 2002, no
options are outstanding under this Plan.

Options under the 2000 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 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.

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.

                                       17


<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information concerning the holdings of Common
Stock by each person who, as of March 31, 2003, 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..


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

Peter Wardle                                        -                   -

Stewart Kalter                                      -                   -
Mark Blanchard (3)                            461,454                 6.2%
Kent Spears                                   367,173                 4.9%
Peter J. Pappas (4)                         1,319,748                16.2%

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


* Less than 1%

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

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

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

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


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 2003, the Company signed an agreement and Plan of Merger with P2i to
acquire P2i's Print-to-Internet business in exchange for a controlling interest
in the Company and satisfaction of the existing P2i debt to the Company. The
Company loaned P2i $50,000 in 2001, $995,280 in 2002 and has loaned an
additional $23,363 in 2003 through March 15, 2003. The loans to P2i are in the
form of demand notes which, in the event that the merger does not get completed,
will be due on demand. The notes accrue interest at the rate of 8% per annum.
Subject to the conditions of the Agreement and Plan of Merger, the closing date
for the transaction must occur by August 12, 2003.

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. Mr. Wardle is not drawing a salary from the Company, but his expenses
are being reimbursed.

P2i, through its staff and infrastructure, provides the administrative and
accounting functions of the Company, as well as office space. Through December
31, 2002, P2i was not paid for such services. P2i and the Company intend to
enter into a services agreement for periods commencing after January 1, 2003. No
such agreement exists as of the date hereof.

                                       18

<PAGE>


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

3.01        Restated Articles of Incorporation of the Registrant (1)

3.02        By-laws of the Registrant (1)

3.03        Class A warrant agreement

3.04        Class B warrant agreement (6)

10.01       1995 Incentive Stock Option Plan (2)

10.02       2001 Employee Stock Option Plan

10.03       1999 Executive Officer Option Plan (5)

10.04       2001 Executive Officer Option Plan

10.05       Employment Agreement with William Conis (3)

10.06       Stock Exchange Agreement, dated as of August 22, 2000 and effective
            as of August 1, 2000, by and among ProtoSource Corporation, Suncoast
            Automation, Inc. and the shareholders of Suncoast Automation, Inc.
            (4)

10.7        Form of Master Agreement for Construction between Suncoast
            Automation, Inc. and Walt Disney World (6)

10.8        Exclusive Cable Development and Programming Services Agreement
            between Suncoast Automation, Inc. and Sunterra Communications
            Corporation for Scottsdale Village Mirage (6)

10.9        Exclusive Cable Development and Programming Services Agreement
            between Suncoast Automation, Inc. and Sunterra Communications
            Corporation for Greenspring Plantation and Powhatan Plantation (6)

10.10       Exclusive Cable Development and Programming Services Agreement
            between Suncoast Automation, Inc. and Sunterra Communications
            Corporation for Carambola Beach Estate, Flamingo Beach, and Royal
            Palm Beach (6)

10.11       Exclusive Cable Development and Programming Services Agreement
            between Suncoast Automation, Inc. and Bluegreen Resorts Management,
            Inc for Laurel Crest, Mountainloft, Shenandoah Crossing and
            Christmas Mountain Resorts (6)

10.12       Exclusive Cable Development and Programming Services Agreement
            between Suncoast Automation, Inc. and Sunterra Communications
            Corporation for Cypress Point Resort located in Lake Buena Vista,
            Florida (6)

10.13       Amendment No. 1 to the Stock Exchange Agreement, dated as of
            August22, 2000 and effective as of August 1, 2000, by and among
            ProtoSource Corporation, Suncoast Automation, Inc. and the
            Shareholders of Suncoast Automation, Inc., dated January 15, 2001
            (6)

10.14       Agreement between ProtoSource Corporation, Suncoast Acquisition
            Corp. and Suncoast Automation, Inc., dated as of July 1, 2001 (7)

10.15       Agreement and Plan of Merger, dated as of February 13, 2003, by and
            among Protosouce Corporation, Protosource Acquisition LLC, P2i, Inc.
            and P2i Newspaper, Inc. (8)

                                       19

<PAGE>


99.1        Certifications  Pursuant to 18 U.S.C. Section  1350, As Adopted
            Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.

99.2        Code of Ethics and Business Conduct of Officers, Directors and
            Employees of iDial Networks, Inc.

----------


(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 to the Company's Registration Statement on Form
SB-2, declared effective by the Securities and Exchange Commission on February
14, 2001, file number 333-45778.

(7) Incorporated by reference from the Company's Form 8-K, as filed with the
Securities and Exchange Commission on July 16, 2001.

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

Item 14. Controls and Procedures.

As of December 31, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to December 31,
2002.



                                       20
<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 April 14, 2003.

                                            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       April 14, 2003
----------------------------      Chief Financial Officer
     Peter Wardle                (Principal Accounting
                                  Officer), and Director


/s/  Stewart Kalter               Director                       April 14, 2003
----------------------------
     Stewart Kalter


/s/  Mark Blanchard               Director                       April 14, 2003
----------------------------
     Mark Blanchard



                                       21

<PAGE>



                                  CERTIFICATION

     I, Peter Wardle, certify that:

1. I have reviewed this annual report on Form 10-KSB of Protosource Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            a) designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

            b) evaluated the effectiveness of the registrant's disclosure
            controls and procedures as of a date within 90 days prior to the
            filing date of this annual report (the "Evaluation Date"); and

            c) presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

            a) all significant deficiencies in the design or operation of
            internal controls which could adversely affect the registrant's
            ability to record, process, summarize and report financial data and
            have identified for the registrant's auditors any material
            weaknesses in internal controls; and

            b) any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

April 14,  2003

/s/ PETER WARDLE
Peter Wardle
Chief Executive Officer



                                       22