SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                                   (Mark One)

     [X]  Annual  report  pursuant  to  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934 [Fee Required]

                 For the fiscal year ended December 31, 1999 or

     [ ]  Transition  report  pursuant to Section 13 or 15(d) of the  Securities
Exchange Act of 1934 [No Fee Required]

       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)

                           2800 28th Street, Suite 170
                         Santa Monica, California 90405
                 ----------------------------------- ----------
               (Address of principal executive offices) (Zip Code)



                    Issuer's telephone number: (559) 490-8600

        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
                                (Title of Class)


<PAGE>
     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 March 17, 2000,  1,884,332  shares of the  Registrant's  no par value
Common Stock were  outstanding.  As of March 17,  2000,  the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$11,777,075 based upon a closing bid price of $6.25 per share of Common Stock on
the Nasdaq SmallCap Market.

     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. [ X ]

     The Registrant's revenues for its most recent fiscal year were $1,125,225.

   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  Company's  periodic  reports  filed  with the  Commission.  The
         forward-looking  statements included in the Report speak only as of the
         date hereof.

         Introduction

                  The Company  provides  Internet access,  Web development,  Web
         hosting  and related  services  to  individuals,  public  agencies  and
         businesses on a national level.  The Company  operates its own Internet
         network  facilities in Central  California and offers  Internet  access
         nationwide  through  three  "backbone"  providers  with  which  it  has
         agreements.  As of December  31,  1999,  the Company had  approximately
         6,500  subscribers for whom it provided  Internet  access.  The Company
         seeks to  acquire  other  small  Internet  providers  in  markets  with
         populations  less than 2,000,000.  The Company believes that certain of
         these  local  Internet  providers   currently  doing  business  in  the
         Company's  target  markets  may not be able to  effectively  manage the
         financial and administrative burdens imposed by the continuing consumer
         demand  for  local  Internet  services,   unless  these  providers  are
         integrated into larger, more diversified Internet products and services
         companies.  The Company has  addressed  these  kinds of  financial  and
         administrative burdens by (i) expanding its operations nationwide, (ii)
         developing diversified services similar to its larger competitors, such
         as special  access  packages for business  and high speed  access,  and
         (iii) investing in automated billing and  administrative  systems.  The
         Company  believes  these  resources  will not only  allow it to compete
         effectively  with larger access firms  entering the Company's  markets,
         but also  will  facilitate  the  Company's  efforts  to  attract  small
         Internet providers.

         History

                  From  July 1988  until  August  1996,  the  Company's  primary
         business  was to design,  develop  and market  software  programs  (and
         related  hardware) for the  agri-business  industry  including  produce
         broker accounting  programs,  product tracking programs,  crop chemical
         usage  reports,  crop cost and  billing  systems  and fruit  accounting
         programs. The programs were packaged under the Company's "Classic" line
         of products and were divided by function,  sophistication  and the size
         of the customer. The Company also designed and sold customized computer
         system  configurations  which  integrated  hardware and  software.  The
         Classic  product line together with the Company's  design  services and
         hardware and software sales is collectively referred to as the "Classic
         Line."

                  In July 1995, the Company  acquired  ValleyNet  Communications
         ("ValleyNet"), a small Internet access provider for $50,000 in cash and
         the issuance of 334 shares of the Company's  Common Stock.  At the time
         of its acquisition,  ValleyNet  operated out of one location in Fresno,
         California  and had 250  subscribers.  Since that time, the Company has
         increased  its  capacity  to offer  Internet  services  nationwide  and
         increased its subscribers to 6,500 at December 31, 1999.


<PAGE>
                  In  December  1996,  the Company  sold the  Classic  Line to a
         Canadian company for $300,000 in cash and an unsecured  promissory note
         which  the  Company  has  not  carried  as an  asset  on its  financial
         statements,  due to the high degree of uncertainty as to the payment of
         the promissory note. As a part of the transaction, the Company received
         an exclusive  worldwide  license  through  December  2006 to market the
         Classic  Line subject to the payment of a royalty of 16% of gross sales
         to the  Canadian  company.  To date,  the Company has not  incurred any
         liability to pay royalties.

                  In January 1997, the Company sold the remaining  assets of the
         Classic Line to SSC Technologies,  Inc. ("SSC") for $770,850  evidenced
         by a  promissory  note  bearing  interest  at 10% per annum  payable in
         January 2007, and the  assumption by SSC of all the  liabilities of the
         Classic Line and certain other liabilities,  aggregating  approximately
         $500,000.   Under  the  terms  of  the  asset  sales   agreement   (the
         "Divestiture  Agreement"),  the Company acquired 25% of the outstanding
         Common Stock of SSC for $500,000 in cash (less  $200,000 of liabilities
         which were paid by the Company and deducted  from the $500,000) and the
         remaining  75% of the  outstanding  Common  Stock  was  issued to other
         stockholders including Charles T. Howard, David L. Green, Ding Yang and
         Steven L. Wilson who were  previously  officers  and  directors  of the
         Company (the "SSC Principals").  As part of the Divestiture  Agreement,
         the SSC  Principals  also (i) canceled  900,000  shares of  Convertible
         Preferred  Stock  held by them (and one other  individual)  which  were
         previously exercisable into shares of Common Stock on a fifteen for one
         basis,  (ii) agreed not to sell an aggregate of 30,300 shares of Common
         Stock owned by them until October 1999, (iii) agreed to sublease office
         space from the Company at a monthly rental of $12,000 through  February
         28, 1998, (iv) granted to Steven A. Kriegsman, a former director of the
         Company, an option to purchase up to 10,000 shares of Common Stock held
         by  the  SSC  Principals  at any  time  until  October  2001,  and  (v)
         personally  guaranteed,  on a joint and  several  basis,  the  $770,850
         promissory note and all other obligations of SSC to the Company.

                  In  May  1998,  the  Company  sold  1,137,000   units  of  its
         securities  at $5.75 per unit (the "May 1998  Public  Offering").  Each
         unit consisted of one share of Common Stock and one  redeemable  Common
         Stock  purchase  warrant  exercisable  at $6.33 per share until May 13,
         2003.

                  In June 1998, the Company entered into a settlement  agreement
         with SSC and the SSC  Principals  pursuant to which it settled  certain
         claims  asserted by it and the SSC  Principals  by accepting a $275,000
         promissory  note from the SSC  Principals  payable  interest only until
         June 2000. A subsequent  settlement  agreement was reached  between the
         parties as of March 31,  1999,  which  required a final  payment in the
         amount of $105,000 to settle all matters.  The obligation was satisfied
         on April 1999.

                   The Company was  incorporated  in the State of  California as
         SHR  Corporation  in July 1988,  and changed  its name to  "ProtoSource
         Corporation" in October 1994. The Company's principal executive offices
         are located at 2800 28th Street,  Suite 170,  Santa Monica,  California
         90405, telephone (559) 490-8600.

         Strategy

                  The Company's  strategy is to provide low cost direct Internet
         access and other Internet  related products and services to subscribers
         or customers  in target  markets.  The Company will seek to  effectuate
         this  strategy by  acquiring  small  Internet  providers,  by expanding
         marketing  operations  in its existing  markets,  by offering  Internet
         related  products and services and by acquiring other Internet  related
         companies.  The Company will also seek to generate  additional revenues
         by  (i)  increasing   monthly   Internet  access  fees  while  offering

<PAGE>
         additional  Internet  products and services,  (ii)  providing  Internet
         consulting  services,  and (iii) generating marketing service fees from
         businesses  seeking a Web site on the  Internet.  The Company  believes
         that it can increase the  profitability  of its monthly  access fees by
         developing  economies of scale as a result of  increasing  total access
         subscribers and earning  additional  revenues from such  subscribers by
         providing additional access services.

                  Increasing  Monthly  Internet Access Fees. The Company intends
         to continue to provide  low-priced  direct  Internet access through the
         Company's  telecommunication  network infrastructure which is comprised
         of two high speed  dedicated  data lines that  connect  directly to the
         backbone  of  the  Internet.   The  Company  plans  to  add  additional
         high-speed dedicated data lines, enhance system-wide access software in
         order to offer additional  Internet  products and services,  and expand
         the number of points of presence  ("POPs") in local markets in order to
         attract and support additional subscribers. By increasing the number of
         POPs, the Company will offer more users access to the Internet  through
         local  phone calls to more  geographic  areas which in turn may promote
         growth in its subscriber base.

                  The Company also provides  Integrated Services Digital Network
         ("ISDN") and high-speed  Internet  access using dedicated data lines to
         business customers. The Company believes that the demand for high-speed
         Internet  access and the ability to  integrate  Internet  access into a
         corporate-wide   computer   network  is  becoming   increasingly   more
         important. In December 1999, the Company entered into an agreement with
         New  Edge,  Inc to  provide  DSL  Internet  access  to  businesses  and
         consumers in the central California Valley.

                  Providing Internet Consulting  Services.  The Company provides
         its  customers  with a number of Internet  services  such as consulting
         services  for  network  setup,  Internet  application   implementation,
         Intranet design, and Web site implementation.

                  Generating  Marketing  Service Fees.  The Company  designs and
         develops  Web sites for its  clients  with  sophisticated  graphics  to
         attract  user  attention.  The  Company  also  provides  all  necessary
         hardware  and  software  and  stores  its  clients'  Web  pages  on its
         dedicated  servers,  which are monitored and maintained 24 hours a day,
         365 days a year, to assure subscriber access.

         Acquisition Strategies

                  The  Company  will  seek  to  acquire  local  Internet  access
         providers in its target  markets.  The  criteria  for such  acquisition
         candidates  calls for  attracting  companies  that (i) are  located  in
         markets with a population under 2,000,000, (ii) have been in business a
         minimum of one year,  (iii) have at least 1000  subscribers,  (iv) have
         current owners and staff with strong technical  backgrounds,  (v) enjoy
         strong community  contacts,  and (vi) can contribute  positively to the
         Company's  revenue  growth  and  profitability.  The  Company  may also
         acquire or enter into  partnership  or joint  venture  agreements  with
         other small computer oriented companies.

         Competition

                  The Internet services business is highly competitive and there
         are few significant barriers to entry. Currently,  the Company competes
         with a  number  of  national  and  local  California  Internet  service
         providers.  In  addition,  a  number  of  multinational   corporations,
         including giant  communications  carriers such as AT&T, MCI, Sprint and
         some of the regional Bell operating  companies,  are offering,  or have
         announced  plans to offer,  Internet  access or on-line  services.  The

<PAGE>
         Company  also  faces  significant   competition  from  Internet  access
         consolidators  such as Verio,  Earthlink,  OneMain.com and from on-line
         service  firms such as America  OnLine (AOL) and  Prodigy.  The Company
         believes that new competitors  which may include computer  software and
         services,  telephone,  media,  publishing,  cable  television and other
         companies, are likely to enter the on-line services market.

                  The  ability of some of the  Company's  competitors  to bundle
         Internet access software with other popular products and services could
         give those competitors an advantage over the Company.  For example, MCI
         and PSI offer  retail  software  packages  and  Compuserve  and Prodigy
         bundle their software with new PCs.

                  Many of the Company's  competitors possess financial resources
         significantly greater than those of the Company and, accordingly, could
         initiate and support  prolonged price competition to gain market share.
         If significant price competition were to develop,  the Company might be
         forced to lower its prices,  possibly  for a protracted  period,  which
         would have a material  adverse  effect on its  financial  condition and
         results of operations  and could  threaten its economic  viability.  In
         addition,  the Company  believes that the Internet  service and on-line
         service businesses will further consolidate in the future,  which could
         result in  increased  price and other  competition  in the industry and
         consequently  adversely impact the Company.  In the last year, a number
         of on-line  services have lowered their monthly service fees, which may
         cause the Company to lower its monthly fees in order to compete.

                  The  Company  believes  that the primary  competitive  factors
         among Internet  access  providers are price,  customer  support,  local
         presence in a market, ease of use, variety of value-added  services and
         reliability.  The Company  believes it is able to compete  favorably in
         these areas.  The Company's  success in its markets will depend heavily
         upon its ability to provide  high  quality  Internet  connectivity  and
         value-added Internet services targeted in select target markets.  Other
         factors that will affect the Company's success in these markets include
         the  Company's  continued  ability  to attract  additional  experienced
         marketing,  sales and management  talent, and the expansion of support,
         training and field service capabilities.

         Employees

                  As of December  31,  1999,  the Company  employed 23 full-time
         employees and one part-time employee. The Company believes it maintains
         good relations with its employees.  None of the Company's employees are
         represented  by a labor  union or  covered by a  collective  bargaining
         agreement.

         ITEM 2.  DESCRIPTION OF PROPERTY

                  The  Company  leases  approximately  400  square  feet for its
         corporate  office space at 2800 28th Street,  Suite 170,  Santa Monica,
         California  90405 on a  month-to-month  lease for $1,025 per month. The
         Company  also  leases  4,000  square  feet of space for its offices and
         operating   facilities  at  2300  Tulare  Street,  Suite  210,  Fresno,
         California  93721.  The lease term is five  years,  ending May 2002 and
         requires minimum annual payments of $40,250  increasing every year to a
         maximum of $55,375 in 2002.

         ITEM 3.  LEGAL PROCEEDINGS

                  Not applicable.

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

                  Not applicable.



<PAGE>
                                     PART II

         ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                  The Company's Common Stock and Common Stock purchase  warrants
         trade on the  Nasdaq  SmallCap  Market  under the  symbols  "PSCO"  and
         "PSCOW",  respectively. The following table sets forth for the quarters
         indicated  the range of high and low  closing  prices of the  Company's
         Common Stock as reported by Nasdaq and the  Electronic  Bulletin  Board
         but does not include retail markup, markdown or commissions.
<TABLE>
<CAPTION>

         Common Stock                                                   Warrants
         By Quarter Ended:                                            High      Low              High         Low

        <S>                                                           <C>       <C>              <C>           <C>
         March 31, 2000 (through March 21, 2000) .......              $7.18     $5.75            $1.69         $1.13

         December 31, 1999 .........................................  $7.44     $5.75            $2.00         $1.13
         September 30, 1999 ........................................  $7.63     $6.25            $2.19         $1.13
         June 30, 1999 .............................................  $9.25     $6.63            $3.75         $1.25
         March 31, 1999 ............................................  $8.31     $6.25            $3.00         $1.53

         December 31, 1998 .........................................  $7.38     $5.38            $2.00         $0.66
         September 30, 1998 ........................................  $5.50     $5.38            $1.06         $0.63
         June 30, 1998 .............................................  $6.50     $5.38            $1.00         $0.75
         March 31, 1998 ............................................  $6.25     $5.25
</TABLE>

                  As of March 20, 2000, the Company had approximately 900 record
         and beneficial stockholders.

         Dividend Policy

                  The Company has never paid cash  dividends on its Common Stock
         and intends to retain  earnings,  if any, for use in the  operation and
         expansion of its business. The amount of future dividends, if any, will
         be  determined  by the  Board of  Directors  based  upon the  Company's
         earnings,   financial   condition,   capital   requirements  and  other
         conditions.
<PAGE>
         ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


         Results of Operations

         Year Ended December 31, 1999 vs. Year Ended December 31, 1998

         Net Sales

                  For calendar 1999,  Internet services revenues were $1,125,225
         versus $882,651 in calendar 1998, an increase of 27.5%. The increase in
         revenue  is  primarily  due  to an  increase  in  the  Internet  access
         subscriber base from acquisition and internal marketing  activities and
         web design and development projects.  Management believes revenues will
         continue  to  increase  as the  Company  (i)  develops  and  implements
         marketing  programs  focusing on increasing name brand  recognition and
         differentiation  of service offerings (i.e.,  Internet access, web site
         development  and  electronic  commerce),  and  (ii)  by  entering  into
         agreements with or acquiring other Internet related companies.

         Operating Expenses

                  1999 operating  expenses totaled  $2,566,218 versus $2,068,145
         in 1998.  This  increase of $498,073 is primarily  attributed to higher
         network lines,  salary,  legal,  insurance and advertising  costs.  The
         increase to network  lines  expense of $152,855  is  attributed  to the
         upgrade of network  backbone  capacity and the expansion of the dial-in
         Internet  serving area. The increase in employee salary and payroll tax
         expense from 1998 to 1999 totaled $211,203. This increase is attributed
         to the hiring of additional senior management and operations staff. The
         company  incurred  approximately  $30,000 of legal fees associated with
         SEC registration and reporting  requirements.  Management believes that
         operating expenses will increase as revenues increase.

         Operating Loss

                  The Company's 1999 operating  loss totaled  $1,440,993  versus
         $1,185,494  in 1998.  This  increase in  operating  loss of $255,499 is
         primarily  attributed to higher  operating  expenses as noted above and
         lower than expected Internet access revenue growth. Management believes
         that operating results will improve as revenues increase.

         Interest Income (Expense)

                  Net interest income  (expense) for 1999 totaled $75,103 versus
         ($577,261) in 1998.  Interest expense was reduced from $705,021 in 1998
         to  $16,763  in 1999  primarily  due to the  debt  issuance  costs  and
         associated  interest  total of $561,059  included  in the 1998  expense
         total. Interest income for 1999 totaled $91,866 versus $127,760 in 1998
         and is  attributed  to  investments  made with the net  proceeds of the
         Company's May 1998 secondary stock offering.

         Other Income

                  Net other income  decreased from $73,479 in 1998 to $72,250 in
         1999.  Net other  income for 1999 is  comprised  of  $105,000  from the
         collection of a note  receivable  which was  previously  written off as
         uncollectable  and the write off of a $32,750  note  receivable  deemed
         uncollectable.


<PAGE>
         Liquidity and Capital Resources

                  For the year ended December 31, 1999, The Company used cash of
         $1,078,513 for operating activities. The Company had working capital of
         $554,668 at December 31, 1999. As of December 31, 1999, the Company had
         $677,319  in  cash  and  cash   equivalents   and   $284,873  of  total
         liabilities.

                  Capital  expenditures  relating  primarily  to the purchase of
         computer  equipment,  furniture,  fixtures and other assets amounted to
         $63,793 and $54,082  for the years  ended  December  31, 1999 and 1998,
         respectively. The capital investment is mainly in computer equipment to
         sustain the future growth of the Company.

                  In connection with the 1998 cancellation of the Company's Shaw
         Avenue capital lease,  the Company agreed to purchase  15,112 shares of
         its common stock from the landlord. The stock was purchased in February
         1999 for $91,522 ($6.06 per share) and was subsequently  retired to the
         corporate treasury.

                  On  April  30,  1999,  the  Company   entered  into  strategic
         alliances with and has purchased 12.7%, on a non-diluted  basis, of the
         outstanding common stock of Infosis Corp. ("Infosis"), a privately held
         corporation.  The Company paid an aggregate of $1.8 million for 600,000
         shares of Infosis common stock.  At the time of the purchase,  the $1.8
         million  payment  represented  51.1% of the Company's  available  cash.
         30,000 of the purchased shares were paid to Andrew, Alexander, Wise and
         Company,  Incorporated  ("AAWC") as a finders fee. After payment of the
         30,000 shares of Infosis Common Stock to AAWC, the Company owns 570,000
         shares of Infosis common stock.

                  On October 28, 1999, the Company consummated their acquisition
         of  substantially  all of the  assets of  MicroNet  Services,  Inc.,  a
         Connecticut corporation  ("MicroNet"),  in exchange for the issuance of
         78,810  shares  of  ProtoSource  common  stock  and  $132,500  in  cash
         consideration.  The  transaction  was completed in accordance  with the
         terms of the asset  purchase  agreement,  dated  October 28, 1999,  and
         effective  as  of  November  1,  1999,  between  the  Company  and  the
         shareholders of MicroNet.

                  In December  1999,  the  Company  entered  into a  non-binding
         letter of intent  to  acquire  certain  assets of  Innovative  Software
         Designs,  Inc.  ("Innovative"),  a  Minnesota  based  Internet  service
         provider.  Innovative has filed for protection from creditors  pursuant
         to Chapter  11 of the  United  States  Bankruptcy  Code.  The letter of
         intent was  subsequently  amended to make it a binding letter of intent
         pursuant to which the Company will acquire all of  Innovative's  assets
         and operating  liabilities  (less those  discharged  in the  bankruptcy
         proceeding),   for  an  aggregate   purchase  price  of   approximately
         $3,500,000,  of which  $1,000,000 of the purchase price will be paid in
         cash and  $2,500,000  will be paid in shares of the Company's  stock at
         the thirty day average of the closing  price of the common  stock prior
         to the closing of the transaction.

                  On February 22, 2000, the Company  executed a letter of intent
         with an  Underwriter  to offer 800,000  shares of the Company's  common
         stock at approximately  $6.25 per share on a firm commitment basis. The
         Company  will also  grant the  Underwriter  an  option to  purchase  an
         additional 120,000 shares from the Company to cover over-allotments for
         a period of forty-five days from the effective date of the registration
         Statement.

                  The Company will pay the Underwriter a commission equal to ten
         percent of the gross  proceeds of the  offering  and a  non-accountable
         expense  allowance  equal to three percent of the gross proceeds of the
         offering.  In connection  with the offering,  the Company has agreed to
         issue to the  Underwriter a warrant,  for $10, to purchase up to 80,000
         shares of common stock. The Underwriter's  warrant is exercisable for a
         period of four years  beginning one year from the effective date of the
         Registration Statement. The exercise price of the Underwriter's warrant
         shall be an amount equal to 120% of the price of the shares sold to the
         public.   There  can  be  no  assurance   that  the  Offering  will  be
         successfully completed.


<PAGE>
                  The  Underwriter has also agreed to act as placement agent for
         a minimum  $250,000  bridge  financing on a best efforts basis prior to
         the public offering  described  above. The bridge financing is to be in
         the form of units containing  promissory notes with interest at 10%. In
         addition,  each $25,000 unit will contain 4,000 shares of the Company's
         common stock.  The  promissory  notes will be due at the closing of the
         above public offering or one year from the date of issuance,  whichever
         occurs first.  The  Underwriter  will be paid a 10% commission and a 3%
         non-accountable expense allowance and warrants to purchase up to 10% of
         the common  stock  issuable as part of the units at an  exercise  price
         equal to 120% of the closing price of the common stock on the day prior
         to closing.


<PAGE>
                          ITEM 7. FINANCIAL STATEMENTS

                             PROTOSOURCE CORPORATION


                          INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
         Financial Statements                                                                               Page

<S>                                                                                                         <C>
          Independent Auditors' Report                                                                      F-2

          Balance Sheet as of December 31, 1999                                                             F-3

          Statements of Operations for the years ended
           December 31, 1999 and 1998                                                                       F-5

          Statements of Changes in Stockholders' Equity for the
           years ended December 31, 1999 and 1998                                                           F-6

          Statements of Cash Flows for the years ended
           December 31, 1999 and 1998                                                                       F-7

          Notes To Financial Statements                                                                     F-9

</TABLE>























                                       F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT



         To the Board of Directors
         ProtoSource Corporation

         We  have  audited  the   accompanying   balance  sheet  of  ProtoSource
         Corporation  as of  December  31, 1999 and the  related  statements  of
         operations,  changes  in  stockholders'  equity  and cash flows for the
         years ended December 31, 1999 and 1998. These financial  statements are
         the responsibility of the Company's  management.  Our responsibility is
         to  express  an  opinion  on these  financial  statements  based on our
         audits.

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

         In our opinion,  the  financial  statements  referred to above  present
         fairly, in all material respects, the financial position of ProtoSource
         Corporation  as of December 31, 1999 and the results of its  operations
         and its cash flows for the years  ended  December  31, 1999 and 1998 in
         conformity with generally accepted accounting principles.

                                                    Angell & Deering
                                                    Certified Public Accountants

         Denver,  Colorado
         February 17, 2000, except for
         Note 14 as to which the date
         is February 22, 2000

                                       F-2
<PAGE>
                             PROTOSOURCE CORPORATION
                                  BALANCE SHEET
                                DECEMBER 31, 1999
<TABLE>
<CAPTION>




                                                      ASSETS
<S>                                                                                                  <C>
         Current Assets:
           Cash and cash equivalents                                                                 $  677,319
           Accounts receivable:
            Trade, net of allowance for
             doubtful accounts of $39,698                                                                97,752
            Employees                                                                                     5,000
           Prepaid expenses                                                                              38,451
                                                                                                   ------------

                  Total Current Assets                                                                  818,522
                                                                                                    -----------

         Property and Equipment, at cost:
           Equipment                                                                                    979,613
           Furniture                                                                                    147,533
           Leasehold improvements                                                                         6,462
                                                                                                  -------------
                                                                                                      1,133,608

           Less accumulated depreciation and amortization                                              (846,439)
                                                                                                    -----------

                  Net Property and Equipment                                                            287,169
                                                                                                    -----------

         Other Assets:
           Goodwill, net of accumulated amortization
            of $32,020                                                                                  762,165
           Investment in corporation                                                                  1,800,000
           Deposits                                                                                      17,325
                                                                                                    -----------

                  Total Other Assets                                                                  2,579,490
                                                                                                     ----------

                  Total Assets                                                                       $3,685,181
                                                                                                     ==========

</TABLE>



                     The accompanying notes are an integral
                       part of these financial statements.

                                       F-3
<PAGE>
                             PROTOSOURCE CORPORATION
                                  BALANCE SHEET
                                DECEMBER 31, 1999




                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
<S>                                                                                                <C>
         Current Liabilities:
           Accounts payable                                                                        $     96,639
           Accrued expenses:
             Payroll taxes and wages                                                                     47,113
             Other                                                                                       49,750
           Deferred revenue                                                                               6,911
           Current portion of long-term debt                                                             63,441
                                                                                                   ------------
                  Total Current Liabilities                                                             263,854
                                                                                                   ------------

         Long-Term Debt, net of current portion above:
           Obligations under capital leases                                                              84,460
           Less current portion above                                                                   (63,441)
                                                                                                   ------------
                  Total Long-Term Debt                                                                   21,019
                                                                                                   ------------

         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, 1,879,332 shares issued and outstanding                                      11,428,924
           Additional paid in capital                                                                    28,158
           Accumulated deficit                                                                       (8,056,774)
                                                                                                    -----------
                  Total Stockholders' Equity                                                          3,400,308
                                                                                                    -----------
                  Total Liabilities and Stockholders' Equity                                        $ 3,685,181
                                                                                                    ===========






</TABLE>







                     The accompanying notes are an integral
                       part of these financial statements.

                                       F-4
<PAGE>
                             PROTOSOURCE CORPORATION
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
<S>                                                                               <C>                  <C>
                                                                                      1999                1998
                                                                                      ----                ----
         Net Revenues:
          Internet service fees and other                                         $ 1,125,225          $   882,651
                                                                                  -----------          -----------

                  Total Revenues                                                    1,125,225              882,651
                                                                                  -----------          -----------

         Operating expenses:
          Selling, general and administrative                                       1,835,744              966,528
          Network lines                                                               494,897              342,042
          Depreciation and amortization                                               218,077              748,917
          Stock compensation expense                                                   17,500               10,658
                                                                                 ------------         ------------

                  Total Operating Expenses                                          2,566,218            2,068,145
                                                                                  -----------          -----------

                  Operating Loss                                                   (1,440,993)          (1,185,494)
                                                                                  -----------          -----------

         Other Income (Expense):
          Interest income                                                              91,866              127,760
          Interest expense                                                            (16,763)            (705,021)
          Rent and other income                                                        72,250               73,479
          Loss on disposal of assets                                                       --               (6,953)
                                                                                -------------          -----------

                  Total Other Income (Expense)                                        147,353             (510,735)
                                                                                -------------          -----------

         Income (Loss) Before
          Provision For Income Taxes                                               (1,293,640)          (1,696,229)

         Provision for income taxes                                                        --                   --
                                                                                -------------          ------------

         Net Loss                                                                 $(1,293,640)          $(1,696,229)
                                                                                  ===========           ===========

         Net Loss Per Share of Common Stock:
           Basic                                                                  $      (.72)        $       (1.24)
           Diluted                                                                $      (.72)        $       (1.24)

         Weighted Average Number of
          Common Shares Outstanding:
           Basic                                                                    1,789,453            1,365,484
           Diluted                                                                  1,789,453            1,365,484

</TABLE>



                     The accompanying notes are an integral
                       part of these financial statements.

                                       F-5
<PAGE>
                             PROTOSOURCE CORPORATION
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                  Additional
                                           Common Stock             Paid In     Accumulated
                                     Shares            Amount       Capital       Deficit
                                     ------            ------     ----------    -----------
<S>                 <C> <C>          <C>        <C>             <C>            <C>
Balance at December 31, 1997         665,333    $  5,590,455    $       --     $ (5,066,905)

Issuance of common stock and
 warrants in public offering
 (net of offering costs of ..      1,137,000       5,370,904            --             --
  $1,166,846)

Repurchase of common stock
 for cash ...................        (15,112)        (77,165)           --             --

Issuance of fractional shares
 from 1997 stock splits .....             79            --              --             --

Compensation from issuance of
 stock options to Directors .           --              --            10,658           --

Net loss ....................           --              --              --       (1,696,229)
                                   ----------   ------------    ------------   -------------


Balance at December 31, 1998       1,787,300      10,884,194          10,658     (6,763,134)

Issuance of common stock upon
 exercise of stock options ..         28,334         106,252            --             --

Repurchase of common stock
 for cash ...................        (15,112)        (91,522)           --             --

Compensation from issuance of
 stock options ..............           --              --            17,500           --

Issuance of common stock in
 connection with acquisition          78,810         530,000            --             --

Net loss ....................           --              --              --       (1,293,640)
                                   ----------   ------------    ------------   -------------

Balance at December 31, 1999       1,879,332    $ 11,428,924    $     28,158   $ (8,056,774)
                                   ==========   ============    ============   =============

</TABLE>






                     The accompanying notes are an integral
                       part of these financial statements.

                                       F-6
<PAGE>
                             PROTOSOURCE CORPORATION
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>

<S>                                                                               <C>                  <C>
                                                                                      1999                1998
                                                                                      ----                ----
         Cash Flows From Operating Activities:
          Net loss                                                                $(1,293,640)         $(1,696,229)
          Adjustments to reconcile net loss to net cash
              (used) by operating activities:
          Depreciation and amortization                                               218,077              748,917
          Provision for bad debts                                                      32,198              173,000
          Compensation from issuance of stock options                                  17,500               10,658
          Loss on termination of capital lease                                             --                6,953
          Changes in operating assets and liabilities:
          Accounts receivable                                                         (75,851)             (31,609)
          Prepaid expenses and other assets                                            57,807              (34,550)
          Accounts payable                                                            (25,079)              25,611
          Accrued liabilities                                                          (2,689)             (14,665)
          Deferred revenue                                                             (6,836)              13,747
                                                                                 ------------         ------------

         Net Cash (Used) By Operating Activities                                   (1,078,513)            (798,167)
                                                                                  -----------          ------------

         Cash Flows From Investing Activities:
          Purchase of property and equipment                                          (63,793)             (54,082)
          Payment for termination of capital lease                                         --             (150,000)
          Increase in note receivable                                                      --              (24,999)
          Increase in employee receivables                                             (5,000)                  --
          Receipt of principal on note receivable                                          --              250,817
          Deposits                                                                     (1,501)                  --
          Investment in corporation                                                (1,800,000)                  --
          Cash paid for acquisition                                                  (203,985)                  --
                                                                                  -----------       --------------

         Net Cash Provided (Used) By Investing Activities                          (2,074,279)              21,736
                                                                                  -----------         ------------

         Cash Flows From Financing Activities:
          Payments on notes payable                                                   (70,503)            (828,095)
          Issuance of common stock                                                    106,252            6,537,750
          Offering costs incurred                                                          --           (1,068,323)
          Purchase of common stock                                                    (91,522)             (77,165)
                                                                                  -----------         ------------

         Net Cash Provided (Used) By Financing Activities                             (55,773)           4,564,167
                                                                                  -----------          -----------


</TABLE>




                     The accompanying notes are an integral
                       part of these financial statements.

                                       F-7
<PAGE>
                             PROTOSOURCE CORPORATION
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>


                                                                                      1999                1998
                                                                                      ----                ----
<S>                                                                               <C>                   <C>
          Net Increase (Decrease) in Cash and Cash Equivalents                    $(3,208,565)          $3,787,736

          Cash and Cash Equivalents at Beginning of Year                            3,885,884               98,148
                                                                                  -----------          -----------

          Cash and Cash Equivalents at End of Year                                $   677,319           $3,885,884
                                                                                  ===========           ==========

          Supplemental Disclosure of Cash Flow Information:
             Cash paid during the year for:
              Interest                                                            $    16,763           $  222,737
              Income taxes                                                                 --                1,600

           Supplemental Disclosure of Noncash
            Investing and Financing Activities:
             Acquisition of equipment under capital leases                        $        --           $   80,515
             Issuance of common stock in connection with acquisition                  530,000                   --



</TABLE>


























                     The accompanying notes are an integral
                       part of these financial statements.

                                       F-8
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


1.       Summary of Significant Accounting Policies
         Description of Business

             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.  The Company is an
         Internet service provider.

         Revenue Recognition

             Revenue from the Internet  operations is recognized over the period
         the services  are  provided.  Deferred  revenue  consists  primarily of
         monthly  subscription fees billed in advance.  Advance payments for web
         development  services  received  prior to  completion  of the  services
         performed are also recorded as deferred  revenue until the services are
         completed.

         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

             Depreciation and amortization of equipment, furniture and leasehold
         improvements are computed using the straight-line method over estimated
         useful lives of three to seven years.  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  of  property  and  equipment  charged to  operations  was
         $190,896 and  $220,168 for the years ended  December 31, 1999 and 1998,
         respectively.

         Amortization

             Goodwill is being amortized using the straight-line  method over an
         estimated useful life of 5 to 15 years.

             Debt issuance  costs are being  amortized  using the  straight-line
         method over the fifteen month term of the loans.

         Investment

             The Company's  investment is in a privately-held  corporation which
         represents  less  than  a  ten  percent   ownership   interest  in  the
         corporation.  The Company's  investment in the  corporation is recorded
         using the cost method of accounting.

         Stock-Based Compensation

             The Company  adopted  Statement of Financial  Accounting  Standards
         ("SFAS")  No.  123,  "Accounting  for  Stock-Based  Compensation".  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".  See Note 8 for pro forma  disclosures of net income and
         earnings per share as if the fair value-based method prescribed by SFAS
         No. 123 had been applied in measuring compensation expense.

         Long-Lived Assets

             In accordance with SFAS No. 121,  "Accounting for the Impairment of
         Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of", the
         Company  reviews  for the  impairment  of  long-lived  assets,  certain
         identifiable intangibles, and associated goodwill, whenever

                                       F-9
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


1.       Summary of Significant Accounting Policies (Continued)
         Long-Lived Assets (Continued)

             events or changes in circumstances indicate that the carrying value
         of an  asset  may not be  recoverable.  An  impairment  loss  would  be
         recognized  when the  estimated  future  cash  flows  is less  than the
         carrying amount of the asset. No impairment losses have been identified
         by the Company.

         Advertising

             The Company  advertises  primarily  through  radio,  television and
         print media.  The  Company's  policy is to expense  advertising  costs,
         including  productions  costs,  as  incurred.  Advertising  expense was
         $123,841  and $29,820 for the years ended  December  31, 1999 and 1998,
         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 Income (Loss) Per Share of Common Stock

             The Company  adopted SFAS No. 128,  "Earnings Per Share",  which
         specifies the method of computation, presentation  and  disclosure  for
         earnings  per share.  SFAS No. 128  requires  the  presentation  of two
         earnings per share amounts, basic and diluted.

             Basic earnings per share is calculated  using the average number of
         common shares  outstanding.  Diluted  earnings per share is computed on
         the basis of the average number of common shares  outstanding  plus the
         dilutive effect of outstanding stock options using the "treasury stock"
         method.

             The basic and  diluted  earnings  per share are the same  since the
         Company  had a net loss for  1999 and 1998 and the  inclusion  of stock
         options and other incremental shares would be antidilutive. Options and
         warrants to purchase  1,823,000 and 1,673,333 shares of common stock at
         December  1999  and  1998,   respectively  were  not  included  in  the
         computation of diluted earnings per share because the Company had a net
         loss and their effect would be antidilutive.

         Estimates

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

         Reclassifications

             Certain prior period amounts have been reclassified to conform with
         the current period presentation.

                                      F-10
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

2.     Long-Term Debt
         Obligations Under Capital Leases

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
<S>         <C>                                                                                        <C>
         15.4% to 23.0% installment notes due in 2000
         to 2001, collateralized by equipment.                                                         $ 84,460
                                                                                                       --------

                  Total Long-Term Debt                                                                   84,460
                  Less current portion of long-term debt                                                (63,441)
                                                                                                       --------

                  Long-Term Debt                                                                       $ 21,019
                                                                                                       ========

         Installments  due on debt principal,  including the capital leases,
         at December 31, 1999 are as follows:

             Year Ending
              December 31,

                    2000                                                                               $ 63,441
                    2001                                                                                 21,019
                                                                                                       --------

                     Total                                                                             $ 84,460
                                                                                                        =======
</TABLE>

3.     Income Taxes

         The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
<S>                                                                                    <C>                <C>
                                                                                         1999               1998
                                                                                         ----               ----
                 Current:
                     Federal                                                           $     --           $     --
                     State                                                                   --                 --
                                                                                      ---------          ---------
                       Total                                                                 --                 --
                                                                                      ---------          ---------

                 Deferred:
                     Federal                                                                 --                 --
                     State                                                                   --                 --
                                                                                      ---------          ---------
                       Total                                                                 --                 --
                                                                                      ---------          ---------

                 Total Provision For Income Taxes                                      $     --           $     --
                                                                                       ========           ========
</TABLE>

         The provision for income taxes reconciles to the amount computed by
         applying the federal  statutory rate to income before the provision for
         income taxes as follows:
<TABLE>
<CAPTION>

                                                                                      1999               1998
                                                                                      ----               ----
<S>                                                                                   <C>               <C>
                 Federal statutory rate                                               (25)%             (25)%
                 State franchise taxes,
                  net of federal benefits                                              (4)               (4)
                 Valuation allowance                                                    29               29
                                                                                     -----              ----

                  Total                                                               --%                --%
                                                                                    ======             ======
</TABLE>

         Significant  components of deferred income taxes as of December 31,
         1999 are as follows:

                                      F-11
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


3.     Income Taxes (Continued)
       ------------------------

<TABLE>
<CAPTION>
<S>                                                                              <C>
                 Net operating loss carryforward                                 $ 2,291,200
                 Vacation accrual                                                      4,100
                 Allowance for bad debts                                              13,600
                 Amortization of goodwill                                              5,900
                 Stock option compensation                                             6,000
                                                                                ------------

                 Total Deferred Tax Asset                                          2,320,800
                                                                                ------------

                 Accelerated depreciation                                            (17,300)
                                                                                ------------

                 Total Deferred Tax Liability                                        (17,300)
                 Less valuation allowance                                         (2,303,500)
                                                                                ------------

                 Net Deferred Tax Asset                                          $        --
                                                                                ============
</TABLE>

       The Company has assessed its past earnings  history and trends,  budgeted
       sales, 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  $2,303,500  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  $356,200.  The  Company  will
       continue  to  review  this  valuation  on  a  quarterly  basis  and  make
       adjustments as appropriate.

       At December  31,  1999,  the Company had federal and state net  operating
       loss   carryforwards   of   approximately   $8,000,000  and   $3,800,000,
       respectively.  Such  carryforwards  expire in the years 2007 through 2019
       and 2000 through 2004 for federal and state purposes, respectively.

4.     Stockholders' Equity
       Public Stock Offering

       The  closing for the  Company's  secondary  offering  occurred on May 20,
       1998.  The Company sold  1,137,000  units of the Company's  securities at
       $5.75  per  unit  and  paid the  Underwriter  a 10%  commission  and a 3%
       non-accountable  expense  allowance.  Each unit consisted of one share 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 $6.33 per share  until May 13,  2003 and may be  redeemed by the
       Company  anytime after May 13, 1999 if the closing price of the Company's
       common stock is at least $8.63 per share for 20 consecutive trading days.

       In connection  with the offering,  the Company  issued the  Underwriter a
       warrant,  for $10, to purchase up to 105,000 units which are  exercisable
       at $9.49 per unit  (equal  to 165% of the  public  offering  price of the
       Units).  The Underwriter's  warrant is exercisable  through May 13, 2003.
       The units subject to the Underwriter's warrant are identical to the units
       sold to the public.  The Company has also retained the  Underwriter  as a
       financial  consultant for a period of one year at a monthly fee of $5,000
       (a total  of  $60,000)  which  was paid in full  upon  completion  of the
       Offering.  In May 1999,  the  consulting  agreement  was  extended for an
       additional two years at $5,000 per month through May 2001.

                                      F-12

<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


5.     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.

6.     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.

       The following  table contains  information on the stock options under the
       Company's  plan for the years  ended  December  31,  1998 and  1999.  The
       outstanding agreements expire from May 2004 to November 2005.
<TABLE>
<CAPTION>

                                                                              Number of         Weighted Average
                                                                               Shares            Exercise Price

             <S>                                                              <C>                   <C>
             Options outstanding at December 31, 1997                               --              $     --
              Granted                                                           56,750                   5.75
              Exercised                                                             --                    --
              Cancelled                                                         (2,750)                  5.75
                                                                              --------                  -----

             Options outstanding at December 31, 1998                           54,000                   5.75
              Granted                                                           78,500                   6.71
              Exercised                                                             --                    --
              Cancelled                                                        (16,500)                  5.75
                                                                               -------                  -----

             Options outstanding at December 31, 1999                          116,000                  $6.67
                                                                               =======                  =====
</TABLE>

       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. Under the Company's stock option plan,
       options are  generally  for a six year term.  The Company had  previously
       granted options to its Chief  Executive  Officer in 1996 which were added
       to this stock option plan in May 1999 and are reflected as outstanding at
       December 31, 1998 in the table below.

                                      F-13
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


6.     Stock Options and Warrants (Continued)

       1999 Executive Officers Stock Option Plan (Continued)

       The following  table contains  information on the stock options under the
       Company's  plan for the year ended  December  31, 1999.  The  outstanding
       agreements expire from October 2001 to November 2005.
<TABLE>
<CAPTION>

                                                                            Number of             Weighted Average
                                                                              Shares               Exercise Price

<S>                                          <C> <C>                            <C>                       <C>
             Options outstanding at December 31, 1998                           36,667                    $3.75
               Granted                                                         100,000                     6.88
               Exercised                                                            --                       --
               Cancelled                                                            --                       --
                                                                               -------                  -------

             Options outstanding at December 31, 1999                          136,667                    $6.04
                                                                               =======                  =======
</TABLE>


       Financing Warrants

       As a part of a  restructuring  of its  operations  in 1996,  the  Company
       granted an  Underwriter  and a  financial  consulting  firm  warrants  to
       purchase  common stock.  The warrants are  exercisable at $3.75 per share
       for a four year period through  October 31, 2001. In 1999 28,334 warrants
       were  exercised  and  as of  December  31,  1999,  158,333  warrants  are
       outstanding.

       Severance Warrants

       The Company issued 20,000 warrants to a former officer in connection with
       termination of his  employment.  The warrants are  exercisable at anytime
       after January 31, 2000 at $6.00 per share until November 2004.

       Board of Directors Options

       The  Company  issued  45,000  stock  options  to its  three  Non-Employee
       Directors in October 1998.  The options vest over a three year period and
       are  exercisable  at $6.00 per share and the  options are for a five year
       term.

       Warrants From Secondary Offering

       The Company issued  warrants in connection  with a secondary  offering of
       its common stock (Note 4).

7.     Commitments and Contingencies
       Leases

       The Company leases certain computer  equipment and furniture and fixtures
       under  noncancellable  capital leases.  The Company leases its facilities
       and certain computer equipment under noncancellable operating leases. The
       Company's facilities lease contains a five year renewal option.

       The following is a schedule of future  minimum lease payments at December
       31, 1999 under the Company's  capital  leases  (together with the present
       value of minimum lease  payments) and operating  leases that have initial
       or remaining noncancellable lease terms in excess of one year:

                                      F-14
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


7.     Commitments and Contingencies (Continued)

       Leases (Continued)
<TABLE>
<CAPTION>
                  Year Ending                                      Capital           Operating
                 December 31,                                      Leases             Leases               Total
                 ------------                                      ------             ------               -----
<S>                   <C>                                       <C>                 <C>                    <C>
                      2000                                      $  73,678            $ 54,918              $128,596
                      2001                                         22,375              56,016                78,391
                      2002                                             --              23,340                23,340
                                                                --------------      ---------             ---------

             Total Minimum Lease

                   Payments                                        96,053            $134,274              $230,327
                                                                                     ========              ========

            Less amount representing interest                     (11,593)
                                                                 ---------

            Present Value of Net Minimum

                Lease Payments                                   $ 84,460
                                                                =========
</TABLE>

         Rent expense amounted to approximately  $72,081 and $62,703 for the
         years ended December 31, 1999 and 1998, respectively.

             Leased equipment under capital leases as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>

<S>                                                                                                    <C>
                 Equipment                                                                             $ 188,738
                 Less accumulated amortization                                                          (125,924)
                                                                                                       ---------

                 Net Property and Equipment Under Capital Lease                                        $  62,814
                                                                                                       =========
</TABLE>

8.     Stock-Based Compensation Plans

       In accordance  with the  provisions of SFAS No. 123, the Company  applies
       APB Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees",  and
       related  interpretations  in  accounting  for  its  plans  and  does  not
       recognize  compensation  expense for its stock-based  compensation  plans
       other than for  options  granted to  non-employees.  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 income and
       earnings per share would be reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
<S>                                                                            <C>                   <C>
                                                                                   1999                  1998
                                                                                   ----                  ----
             Net Loss:
               As reported                                                     $(1,293,640)          $(1,696,229)
               Pro forma                                                       $(1,388,153)          $(1,732,742)

             Net Loss Per Share of Common Stock:
               As reported                                                     $      (.72)          $     (1.24)
               Pro forma                                                       $      (.78)          $     (1.27)
</TABLE>

       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, 1999 and 1998:

                                      F-15
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


8.     Stock-Based Compensation Plans (Continued)
<TABLE>
<CAPTION>
                                                                                     1999                   1998
                                                                                     ----                   ----
<S>                                                                                 <C>                       <C>
             Risk free interest rate                                                5.99%                     5.28%
             Expected life                                                        5.0 years               5.0 years
             Expected volatility                                                   38.18%                    41.25%
             Expected dividend yield                                                   0%                        0%
</TABLE>

       The  Black-Scholes  option  valuation  model  was  developed  for  use in
       estimating  the fair  value  of  traded  options  which  have no  vesting
       restrictions and are fully  transferable.  In addition,  option valuation
       models require the input of highly subjective  assumptions  including the
       expected  stock price  volatility.  Because the Company's  employee stock
       options have characteristics significantly different from those of traded
       options,   and  because  changes  in  subjective  input  assumptions  can
       materially affect the fair value estimates,  in management's opinion, the
       existing models do not  necessarily  provide a reliable single measure of
       the fair value of its employee stock-based compensation plans.

       The weighted average fair value price of options granted in 1999 and 1998
       was $2.92 and $2.48, respectively.

       The  following   table   summarizes   information   about  the  Company's
       stock-based compensation plans outstanding at December 31, 1999:
<TABLE>
<CAPTION>

                                              Options Outstanding                          Options Exercisable

                                                   Weighted
                                                    Average         Weighted                            Weighted
                Range of                           Remaining         Average                             Average
                Exercise           Number         Contractual       Exercise          Number            Exercise
                 Prices          Outstanding      Life-Years          Price         Exercisable           Price
                 ------          -----------      ----------          -----         -----------           -----
<S>          <C>     <C>           <C>                  <C>          <C>              <C>                 <C>
             $3.75 - 5.50         36,667                1.84         $3.75            36,667              $3.75
             $5.75 - 7.00        216,000                5.59         $6.62            12,500              $5.75
             ------------        -------                ----         -----            ------              -----

             $3.75 - 7.00        252,667                5.05         $6.20            49,167              $4.26
             ============        =======                ====         =====            ======              =====
</TABLE>

       Compensation Expense

       The Company recorded  compensation expense of $17,500 and $10,658 for the
       years ended  December 31, 1999 and 1998,  respectively,  for the value of
       certain  options  granted to officers and  Directors of the Company.  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.

9.     Concentration of Credit Risk

       Financial   instruments   which   potentially   subject  the  Company  to
       concentrations  of credit risk  consist  principally  of  temporary  cash
       investments  and  accounts  receivable.   The  Company  places  its  cash
       equivalents and short term investments with high credit quality financial
       institutions  and  limits  its  credit  exposure  with any one  financial
       institution.  The  Company  provides  credit,  in the  normal  course  of
       business,  to a  large  number  of  companies  in the  Internet  services
       industry.  The  Company's  accounts  receivable  are due  from  customers
       located in  California  and  throughout  the United  States.  The Company
       performs  periodic  credit   evaluations  of  its  customers'   financial
       condition and generally

                                      F-16
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


9.     Concentration of Credit Risk (Continued)

       requires no  collateral.  The Company  maintains  reserves for  potential
       credit   losses,   and  such  losses  have  not   exceeded   management's
       expectations.

10.    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 $2,364 and $3,070 for the years ended December
       31, 1999 and 1998, respectively. Company contributions vest as follows:
<TABLE>
<CAPTION>

                         Years of Service                                 Percent Vested
                         ----------------                                 --------------
<S>                              <C>                                            <C>
                                 1                                              33%
                                 2                                              66%
                                 3                                             100%

</TABLE>
11.    Acquisition

       On October 28, 1999, the Company  purchased the Internet  subscriber base
       and  Web  hosting   subscriber   base  from   MicroNet   Services,   Inc.
       ("MicroNet"),  a New Haven,  Connecticut based Internet service provider.
       The  Company  paid  cash of  $132,500  and  issued  78,810  shares of the
       Company's  common stock valued at $530,000.  The Company also incurred an
       additional  $38,955 in cash and common stock which is payable in 2000 for
       certain  post-closing  adjustments which was accrued in 1999. The Company
       also  incurred  legal,  accounting,  finders  fees and other direct costs
       related to the acquisition of approximately  $71,485. The acquisition was
       accounted  for using the purchase  method of  accounting.  Results of the
       acquired  entity are included in the Company's  operations  commencing on
       the acquisition date.

       The following  presents the unaudited proforma results of operation as if
       the  acquisition  of  MicroNet  occurred  on January 1 of each year.  The
       proforma  information  does not purport to be  indicative  of the results
       that  actually  would  have  been  obtained  if the  operations  had been
       combined  during  the  years  presented  and  is  not  intended  to  be a
       projection of a future results.
<TABLE>
<CAPTION>

                                                                                   1999                  1998
                                                                                   ----                  ----
                                                                                (Unaudited)           (Unaudited)
<S>                                                                            <C>                   <C>
                 Net sales                                                     $ 1,966,563           $ 1,795,788
                 Net income (loss)                                              (1,363,349)           (2,026,020)
                 Net income (loss) per share of common stock                          (.73)                (1.40)
</TABLE>

12.    Fair Value of Financial Instruments

       Disclosures  about 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, 1999:

                                      F-17
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


12.    Fair Value of Financial Instruments (Continued)

<TABLE>
<CAPTION>

                                                                                                1999

                                                                                      Carrying         Estimated
                                                                                       Amount          Fair Value
<S>                                                                                 <C>                    <C>
       Financial Assets:
             Cash and cash equivalents                                              $677,319               $677,319

       Financial Liabilities:
             Long-term debt                                                           84,460                 84,460
</TABLE>

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

13.    Proposed Acquisition

       In December 1999, the Company entered into a nonbinding  letter of intent
       to  acquire  certain  assets  of  Innovative   Software   Designs,   Inc.
       ("Innovative"), an Internet service provider in Minnesota. Innovative has
       filed for  protection  from  creditors  pursuant to chapter eleven of the
       United  States  Bankruptcy  Code.  The Company will acquire  Innovative's
       subscriber base and certain  intangible assets for an aggregate  purchase
       price of approximately $2,600,000 plus 50% of Innovative's gross revenues
       for a period of 90 days  following the closing date.  $1.6 million of the
       purchase  price  shall  be paid in cash  and $1  million  will be paid in
       shares of the  Company's  stock at the thirty day  average of the closing
       price of the common stock prior to closing.

14.    Proposed Public Stock Offering

       On February  22,  2000,  the Company  executed a letter of intent with an
       Underwriter  to offer  800,000  shares of the  Company's  common stock at
       approximately  $6.25 per share on a firm  commitment  basis.  The Company
       will also  grant the  Underwriter  an option to  purchase  an  additional
       120,000 shares from the Company to cover  over-allotments for a period of
       forty-five days from the effective date of the Registration Statement.

       The Company will pay the Underwriter a commission equal to ten percent of
       the  gross  proceeds  of  the  offering  and  a  non-accountable  expense
       allowance  equal to three percent of the gross  proceeds of the offering.
       In  connection  with the  offering,  the  Company has agreed to issue the
       Underwriter a warrant, for $10, to purchase up to 80,000 shares of common
       stock.  The  Underwriter's  warrant is  exercisable  for a period of four
       years  beginning  one year from the  effective  date of the  Registration
       Statement.  The exercise price of the  Underwriter's  warrant shall be an
       amount equal to 120% of the price of the shares sold to the public. There
       can be no assurance that the Offering will be successfully completed.

       The  Underwriter  has also agreed to act as placement agent for a minimum
       $1,000,000  bridge  financing on a best efforts basis prior to the public
       offering  described  above.  The bridge financing is to be in the form of
       units which would contain  promissory  notes with interest at 10% to 12%.
       In addition, each $25,000 unit would contain such number of shares of the
       Company's  common  stock equal to $25,000  divided by the  closing  stock
       price on the closing date for the bridge financing.  The promissory notes
       will be due at the closing of the above public  offering or one year from
       the date of

                                      F-18
<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


14.    Proposed Public Stock Offering (Continued)

       issuance,  whichever  occurs first.  The  Underwriter  will be paid a 10%
       commission  and a 3%  nonaccountable  expense  allowance  and warrants to
       purchase up to 10% of the common  stock  issuable as part of the units at
       an exercise  price equal to 120% of the closing price of the common stock
       on the day prior to closing.

                                      F-19

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


                  None.





                                    PART III

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

         Officers and Directors

                  The name, age and position of each of the Company's  executive
         officers and directors are set forth below:
<TABLE>
<CAPTION>

         Name                       Age                             Officer/ Director                Since
                                                                       Position

         <S>                         <C>                             <C>                             <C>
         William Conis               52                              Chief Executive                 1998
                                                                     Officer, Chief Financial
                                                                     Officer and Director

         Andrew Stathopoulos         50                              Director                        1998

         Michael A. Gales            54                              Director                        1999

         Seymour G. Siegel           57                              Director                        2000

         Raymond J. Meyers           43                              Former Chief Executive          1996
                                                                     Officer, Chief Financial
                                                                     Officer and Director

</TABLE>
                  Directors  hold  office  for a period of one year  from  their
         election  at  the  annual  meeting  of   stockholders  or  until  their
         successors are duly elected and qualified.  Officers of the Company are
         elected  by, and serve at the  discretion  of, the Board of  Directors.
         Board members  receive $100 per hour for time expended on behalf of the
         Company  including  attendance at Board  meetings.  The Company's audit
         committee  is composed of all four  members of its Board of  Directors.
         The   Company's   compensation   committee   is   composed  of  Messrs.
         Stathopoulos and Conis.


<PAGE>
         Background

                  The following is a summary of the business experience,  for at
         least the last five years,  of each  executive  officer and director of
         the Company:

            William  Conis has been a director  since July 1998 and became Chief
         Executive  Officer and Chief Financial Officer in November 1999. He was
         Vice President--Eastern  Region for Hitachi Data Systems from July 1997
         through July 1999,  and was Hitachi's New York-based  District  Manager
         from July 1995 to July 1997.  From March 1984 to July 1995,  Mr.  Conis
         was a senior  consultant for the Kappa Group,  a management  consulting
         firm located in New Jersey.  He earned a Bachelor's degree and Master's
         degree in Electrical  Engineering  from New York University in 1968 and
         1971, respectively.

                  Andrew  Stathopoulos  has over 25 years experience in finance,
         operations,   marketing,   mergers   and   acquisitions,   engineering,
         manufacturing and consulting.  In March 1998, he joined the Bank of New
         York as a Vice  President  to launch a  software  and  hardware  vendor
         management program. From 1996 to 1997, he was Vice President of Finance
         for  New  Alliance   Corp.,   an  emerging   markets   investment  bank
         specializing  in  Eastern  Europe.  He was  responsible  for  financial
         reporting,  internal  audit and controls,  mid-office  and  back-office
         operations, information systems, and management reporting. From 1994 to
         1996,  he was Vice  President  of  Business  Development  for  Nautical
         Technology  Corp., an independent  software  developer for the maritime
         industry.  He was  responsible  for developing  and  implementing a new
         marketing and sales program,  seeking strategic  partners and providing
         general business advice. Also, from 1994 to 1996, he was Vice President
         of Business  Development for Interbank of New York, a Greek  commercial
         bank  where  he was  responsible  for  identifying  and  marketing  new
         products and pursuing new business opportunities. From 1992 to 1994, he
         was the Vice  President  of  Finance  and  Administration  for  Societe
         Generale Energie,  an oil trading products firm. He was responsible for
         establishing  financial controls,  accounting and reporting procedures;
         monitoring cash flow and working capital  requirements;  managing human
         resources  administration;  and dealing  with  auditors,  insurers  and
         vendors.  Mr. Stathopoulos holds a BS degree in Industrial  Engineering
         and an MBA  degree in Finance  and  International  Business,  both from
         Columbia University.

               Michael A. Gales became a director in October 1999. Mr. Gales has
          served  as  Executive  Vice  President/Corporate  Finance  of  Andrew,
          Alexander,  Wise & Company,  Inc.,  since June 1999. From 1998 to June
          1999,  Mr.  Gales  served as Managing  Director of  InterBank  Capital
          Group, LLC. Prior to joining InterBank,  from 1996 Mr. Gales served as
          Managing  Director/Corporate Finance of Janssen-Meyers Associates, LP.
          From 1990 to 1995,  Mr.  Gales served as Chief  Executive  Officer and
          Chairman of the Board of Anchor  Capital Co., LLC.  Prior to 1990, Mr.
          Gales spent over 13 years in successively  senior  management roles in
          international engineering and technology licensing operations focusing
          on the  maritime,  petroleum  and  process  industries.  Mr.  Gales is
          Chairman of the Board of TEAMIES,  LLC, a  privately  held  television
          production  and  licensing  organization  focusing  on sports  related
          children's programming.

               Seymour G. Siegel (Certified Public Accountant - inactive) became
          a  director  in  February  2000.  Since  1994,  Mr.  Siegel,  has been
          president of Siegel Rich Inc., a New York firm which provides advisory
          services to businesses  primarily in strategic  planning,  mergers and
          acquisitions.  From 1974 to 1990, he was senior partner and founder of
          Siegel Rich & Co., CPA's,  P.C. In 1990, Siegel Rich & Co. merged with
          M.R. Weiser & Co., a large regional accounting firm, where he remained
          a  senior  partner  until  1993.  Mr.  Siegel  is also a  director  of
          BarPoint.Com,   a  public  company   engaged  in  the  collection  and
          processing of bar code information.

               Raymond J. Meyers became the Company's Chief Executive Officer in
          December  1996.  From 1985 to 1996,  he was  employed by  Transamerica

<PAGE>
          Corporation  holding a variety of positions,  most recently (from 1991
          to  1996)  as   Director  of  Business   Services   for   Transamerica
          Telecommunications.  Mr. Meyers  graduated from Rutgers  University in
          1979, with a Bachelor of Arts degree in Economics. Mr. Meyers resigned
          from all positions with the Company as of November 1, 1999.

            On November 3, 1999,  and effective as of November 1, 1999,  Raymond
         Meyers  resigned  from  his  positions  as  Chief  Executive   Officer,
         President,  Chief  Financial  Officer and Secretary of the Company.  In
         connection  with  his  resignation,  the  Company  has  entered  into a
         severance agreement with Mr. Meyers, pursuant to which the Company will
         pay Mr. Meyers $35,000,  over a period of no more than six months,  and
         grant him 20,000  options to purchase the Company's  common stock at an
         exercise  price of $6.00 per share.  In addition,  the Company  entered
         into a six month  consulting  agreement  with Mr.  Meyers,  pursuant to
         which the Company  will pay Mr.  Meyers at an hourly rate of $100.  Mr.
         Meyers Resigned as a Director in January 2000.

         Section 16(A) Beneficial Ownership Reporting Compliance

                  Based solely upon a review of Forms 3, 4 and 5, and amendments
         thereto,  furnished to the Company during fiscal year 1999, the Company
         is not aware of any director,  officer or beneficial owner of more than
         ten percent of the  Company's  Common Stock that failed to file reports
         required by Section 16(a) of the  Securities  Exchange Act of 1934 on a
         timely basis during fiscal year 1999.

         ITEM 10.  EXECUTIVE COMPENSATION

                  None  of  the  Company's   executive   officers  or  directors
         currently  receive  compensation  in excess of $100,000 per year except
         Mr. Conis, the Company's Chief Executive  Officer,  who receives a base
         salary of $175,000 per year pursuant to an Employment  Agreement  which
         expires on October 31, 2001, subject to renewal. Mr. Conis' base salary
         increases to $200,000 per year once the Company's gross revenues run at
         the rate of $3,500,000 annually and operating  profitability exceeds on
         an annual  basis  $600,000  for at least three  consecutive  months and
         further  increases to $250,000 if the Company's  gross  revenues run at
         the rate of  $5,000,000  annually  and  operating  profitability  on an
         annual basis exceeds $1,200,000 for at least three consecutive  months.
         The  Employment  Agreement  also  provides  for the issuance of 100,000
         stock  options  exercisable  at $6.875 per share,  subject to a vesting
         schedule.  Other than Mr.  Meyers,  no  executive  officer or  director
         received  compensation  in excess of $100,000  for the  calendar  years
         ended  December  31, 1999 or 1998.  Compensation  for all  officers and
         directors as a group for the calendar years ended December 31, 1999 and
         1998 aggregated $190,054 and $158,753, respectively.

                  The following table discloses certain compensation paid to the
         Company's Chief Executive Officer for the calendar years ended December
         31, 1999 and 1998.


<PAGE>
<TABLE>
<CAPTION>
                                                                                                            Long Term
Name          and                                                                                          Compensation
Principal                                                 Other        Annual        All Other     Awards/Securities Underlying
Position                      Year     Salary ($)      Compensation    Bonus      Compensation              Options(#)
--------                      ----     ----------      ------------    -----      ------------              ----------
<S>                           <C>       <C>                <C>           <C>          <C>                   <C>
William Conis, Chief
Executive Officer (1)
                              1999      $27,259            -             -             -                    100,000
                              1998         -               -             -             -                       -
Raymond J. Meyers, Former
Chief Executive Officer
(1)                           1999       $162,795          -             -             -                    20,000
                              1998       $140,005          -             -             -                       -

</TABLE>

         Option Grants in Last Year and Stock Option Grant

                  The  following  table  provides  information  on option grants
         during  the year  ended  December  31,  1999,  to the  named  executive
         officers:
<TABLE>
<CAPTION>

                                                              Percent of Total
                                        Number of              Options
                                      Common Stock             Granted to
                                    Underlying Options         Employees in        Exercise Price
Name                                     Granted               Fiscal Year          ($/Share)        Expiration Date
----                                     -------               -----------          ---------        ---------------
<S>                                      <C>                      <C>                 <C>                 <C>
William Conis                            100,000                  50.4%               $6.875              2004
Raymond J. Meyers                         20,000                  10.1%               $6.00               2004
</TABLE>

               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, 1999. No
         shares of Common Stock were acquired  upon  exercise of options  during
         the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>

                                                                                           Value of
                                                      Number of Unexercised        Unexercised In-The-Money
                                                      Options at Year End (1)       Options at Year End (1)
                    Name                            Exercisable   Unexercisable    Exercisable     Unexercisable

<S>                                                     <C>            <C>              <C>             <C>
         William Conis                                  5,000          110,000          $0              $0

         Raymond J. Meyers                            36,667          20,000            $91,668         $5,000
</TABLE>

         (1) The closing  price of the Common  Stock on December  31,  1999,  as
         reported by on the Nasdaq SmallCap Market was $6.25.

         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.


<PAGE>
                  The  Plan  is  administered  by the  Board  of  Directors  and
         terminates  in November  2004.  At December 31,  1999,  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.

                  As of December  31,  1999,  135,250  options have been granted
         under the Plan and 116,000 options are outstanding.

         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 of which
         136,667  options are  currently  outstanding,  exercisable  at $3.75 to
         $6.875 per share.


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

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

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

         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 the date of this
         Report, 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.  The address of all persons is in
         care of the  Company  at 2800 28th  Street,  Suite 170,  Santa  Monica,
         California 90405.

                                           Amount of        Percent of
         Name                             Ownership             Class

         William Conis(1)                     5,300             *

         Andrew Stathopoulos (2)              5,000             *

         Michael A. Gales                     -                  -

         Seymour G. Siegel(3)                 5,000            .*

         All officers and
         directors as  a

         group (4 persons)(1)(2))(3)         15,300            *
         ----------------------
          *  Less than 1%

         (1)      Includes  presently  exercisable  options  to  purchase  5,000
                  shares at $6.875 per share.  Does not include shares  issuable
                  upon  exercise  of  110,000  options  which are not  presently
                  exercisable.

         (2)      Represents  stock options to purchase  5,000 shares at $6.00
                  per share at any time until November 2003.

         (3)      Represents  stock options to purchase 5,000 shares at $6.00
                  per share at any time until February 2005.



<PAGE>
         ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                  None.


         ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

           a.     Exhibits:

<TABLE>
<CAPTION>
         Exhibit No.        Title

         <S>            <C>
         3.01           Restated Articles of Incorporation of the Registrant (1)

         3.02           Bylaws of the Registrant (1)

         4.01           1995 Incentive Stock Option Plan (1)

         4.02           Form of Incentive Stock Option  Agreement  under the 1995 Executive  Officer Stock
                        Option Plan (1)

         4.03           1999 Executive Officer Stock Option Plan (2)

         4.04           Form of Incentive Stock Option  Agreement  under the 1995 Executive  Officer Stock
                        Option Plan (2)

         4.05           Form of  Non-Statutory  Stock Option  Agreement  under the 1995 Executive  Officer
                        Stock Option Plan (2)

         4.06           Warrant Agreement with Andrew, Alexander, Wise & Co., Incorporated (3)

         10.01          Capitalized Lease Agreement (1)

         10.02          Divestiture Agreement (2)

         10.03          Employment Agreement with Mr. Conis (4)

         10.04          Severance agreement with Mr. Meyers (4)

         10.05          Asset Purchase Agreement, dated as of October 28, 1999, and effective as of
                        November 1, 1999, by and among MicroNet Services, Inc., Kanfer Associates, Denise
                        Rosenkrantz, James M. Sette and ProtoSource Corporation (4)

         10.06          Form of Consulting Agreement, dated as of November 3, between ProtoSource
                        Corporation and Raymond J. Meyers. (4)

         24.01          Consent of Angell & Deering
</TABLE>
<PAGE>
         (1)  Incorporated  by  reference  to  the   Registrant's   Registration
         Statement on Form SB-2, file number 33-86242.

         (2)  Incorporated  by  reference  to  the   Registrant's   Registration
         Statement on Form S-8, file number 333-85361.

         (3)  Incorporated  by  reference  to  the   Registrant's   Registration
         Statement on Form SB-2, file number 333-20543.

         (4)  Incorporated by reference to the  Registrant's  Form 8-K, filed on
         November 9, 1999.


<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  Santa  Monica,
         California, on March 29, 2000.

                                              PROTOSOURCE CORPORATION



                                              By  /s/ William Conis
                                                  William Conis
                                                  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.

<TABLE>
<CAPTION>
         Signature                          Title                           Date

         <S>                                <C>                             <C>
         /s/ William Conis                  Chief  Executive Officer        March 29, 2000
         -----------------
         William Conis                      Chief Financial Officer
                                            (Principal Accounting
                                            Officer), and Director

         /s/ Andrew Stathopoulos            Director                        March 29, 2000
         -----------------------
         Andrew Stathopoulos

         /s/ Michael A. Gales               Director                        March 29, 2000
         --------------------
         Michael A. Gales

         /s/ Seymour G. Siegel              Director                        March 29, 2000
         ---------------------
         Seymour G. Siegel
</TABLE>