PSCO ProtoSource Corporation (PK)

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

FORM 10-KSB

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

For the fiscal year ended December 31, 2007

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

Commission File No. 000-25594

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

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

Issuer's telephone number: (610) 814-0550

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

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

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

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

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

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

DOCUMENTS ARE INCORPORATED BY REFERENCE:
None.

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

PROTOSOURCE CORPORATION

 Page
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PART I
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Item 1. Description of Business. 4

 2. Description of Property. 9

 3. Legal Proceedings. 9

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

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

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

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

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

 8A. Controls and Procedures. 18

 8B. Other Information. 18

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

 10. Executive Compensation. 20

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

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

 13. Exhibits. 27

 14. Principal Accountant Fees and Services. 28


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

 Signatures. 29

 Certifications. 30

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

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

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

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

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

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

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

- Technical support and hosting.

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

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

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

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

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

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

Effective May 1, 2002, the Company entered into an agreement to sell substantially all of the assets of the ISP division to Brand X Networks, Inc., a California Corporation, for $632,000. The assets have been held and operated by Brand X Networks, Inc. for its purposes since May 1, 2002, at which time the Company discontinued its ISP operations. On April 14, 2003, the Company completed a fifth amendment to the purchase agreement with Brand X pursuant to which the Company agreed to accept an aggregate payment of $632,000 for the ISP Division, less credits to Brand X of $112,686. Of such amount, $200,000 was to be paid through the provision of services to the Company from Brand X. And the balance was to be paid at the rate of approximately $5,172 per month, until completely paid.

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

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

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

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

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

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

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

On January 1, 2004, the acquisition of P2i's newspaper business closed with the issuance of 193,836 preferred shares of ProtoSource. Each share of preferred stock is convertible into the right to receive 100 shares of ProtoSource common stock at any time after the authorized number of shares of common stock is increased to 500,000,000 shares.

Upon closing of the transaction, ProtoSource appointed Thomas Butera, President of P2i, as a director of ProtoSource. Mr. Butera, together with Peter Wardle, President of ProtoSource, shall have the right to appoint three members to the board of directors of ProtoSource.

P2i Newspaper became a wholly owned subsidiary of the Company on January 1, 2004. P2i Newspaper is a leader in the conversion of print content into Web content, and its clients include newspapers from the Tribune, McClatchy Copley and Gannett newspaper groups in the US, Northcliffe and Tindle newspaper groups in the UK, as well as many others. In addition to its headquarters in Pennsylvania, P2i Newspaper has a data conversion center located in the Multimedia Super Corridor in Kuala Lumpur, Malaysia.

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

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

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

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

Through 2008, the Company will continue to focus on increasing market share in the newspaper vertical and targeting government, retail and manufacturing verticals. The Company believes it can grow its business over the next five years from these vertical markets.

E-commerce overview

For most businesses, the Internet has created a new communication and sales channel that enables companies to interact with large numbers of geographically dispersed consumers and businesses. Traditional businesses are implementing sophisticated Web sites to drive customers to brick-and-mortar stores, effect electronic commerce initiatives that offer competitive advantages and mine customer data. These businesses are deploying an expanding variety of Internet-enabled applications, ranging from Web site marketing and recruiting programs to on-line customer interaction systems and integrated purchase order and just-in-time inventory solutions for key customers and suppliers. These capabilities require increasingly complex Web sites and support operations. In addition, advances in on-line security and payment mechanisms are alleviating concerns associated with conducting transactions in an open-platform environment, thus prompting more consumers and businesses to use the Internet in conjunction with purchases and more businesses to offer a greater breadth of electronic commerce services.

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

Newspapers

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

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

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

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

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

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

Competition

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

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

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

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

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

As of December 31, 2007, P2i Newspaper had a combination of 131 full-time and part time employees. Of such employees, 3 were engaged in marketing and sales, 4 were devoted to research, development and technical support, 118 to production services and 6 were responsible for management, finance and administration. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be good.

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

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

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

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

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

ITEM 2. DESCRIPTION OF PROPERTY.

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

ITEM 3. LEGAL PROCEEDINGS.

Not applicable.

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

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

 PART II

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

Since March 2002, all of the Company's securities have traded on the OTC
Bulletin Board. The following table sets forth, for the periods indicated, the
high and low sales price per share of our common stock and our common stock
purchase warrants.

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

March 31, 2006 $0.06 $0.06 N/A N/A N/A N/A
June 30, 2006 $0.06 $0.06 N/A N/A N/A N/A
September 30, 2006 $0.06 $0.06 N/A N/A N/A N/A
December 31, 2006 $0.04 $0.04 N/A N/A N/A N/A

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


As of March 15, 2008, there were approximately 466 record and beneficial owners.


DIVIDEND POLICY

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


EQUITY COMPENSATION PLAN INFORMATION

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

-------------------------------------------------------------------------------------------------------------------
 Number of securities Weighted average Number of securities
Plan category to be issued upon exercise price of remaining available for
 exercise of outstanding options, future issuance under
 outstanding options, warrants and rights equity compensation
 warrants and rights plans (excluding
 securities reflected in
 column (a)
-------------------------------------------------------------------------------------------------------------------
 (a) (b) (c)
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Equity compensation plans approved by -0- -0- 350,000
security holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved -0- -0- 150,000
by security holders
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Total -0- -0- 500,000
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 11

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

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

Year Ended December 31, 2007 vs. Year Ended December 31, 2006

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

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

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

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

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

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

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

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

Discontinued Operations - Effective May 1, 2002, the Company entered into an agreement to sell substantially all of the assets of the ISP division to Brand X Networks, Inc., a California Corporation, for $632,000. The assets have been held and operated by Brand X Networks, Inc. for its purposes since May 1, 2002, at which time the Company discontinued its ISP operations. On April 14, 2003, the Company completed a fifth amendment to the purchase agreement with Brand X pursuant to which the Company agreed to accept an aggregate payment of $632,000 for the ISP Division, less credits to Brand X of $112,686. Of such amount, $200,000 was to be paid through the provision of services to the Company from Brand X, and the balance was to be paid at the rate of $5,172 per month, until completely paid.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company maintains a valuation allowance of $5,600,000 as of December 31, 2007 on deferred tax assets relating to its net operating losses which the Company has not determined to be more likely than not realizable.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill is not amortized, rather, management tests goodwill annually for impairment in the fourth quarter. In August 2007 in connection with a foreclosure acquisition agreement with Brand X Networks, Inc., the Company recognized $566,186 of goodwill related to the transaction but deemed it fully impaired, as this matter involved P2i, Inc., a related party.

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

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

ITEM 7. FINANCIAL STATEMENTS.

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

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

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

None.

ITEM 8A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

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

Changes in Internal Controls.

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

Management's Report of Internal Control Over Financial Reporting.

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

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

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

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

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

ITEM 8B. OTHER INFORMATION.

None.

PART III

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

Executive Officers, Directors, Director Nominees And Key Employees

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

NAME POSITION
---- --------
Peter Wardle 53 Chief Executive Officer, President,
 Chief Financial Officer and Director
Thomas Butera 41 Chief Operating Officer and Director
Joseph DiMarino 65 Director
Mark Blanchard 55 Director
Stewart Kalter 37 Director

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

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

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

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

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

Section 16(A) Beneficial Ownership Reporting Compliance.

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

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


Code of Ethics.

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


ITEM 10. EXECUTIVE COMPENSATION.

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

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

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

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









 20

Option Grants in Last Year and Stock Option Grant.

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



Outstanding Equity Awards at Fiscal Year-End.

None.

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

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


Director Compensation

None.

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

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

 21

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

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

A total of 150,000 shares of authorized but unissued common stock have been reserved for issuance pursuant to the 1999 Plan. As of December 31, 2007, no options are outstanding under this Plan.

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

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

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

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

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

A total of 350,000 shares of authorized but unissued common stock have been reserved for issuance pursuant to the 2000 Plan. As of December 31, 2007, no options are outstanding under this Plan.

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

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

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

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

The following table sets forth information concerning the holdings of Common Stock by each person who, as of March 30, 2008, holds of record or is known by the Company to hold beneficially or of record, more than 5% of the Company's Common Stock, by each director, and by all directors and executive officers as a group. All shares are owned beneficially and of record and all share amounts include stock options and Common Stock purchase warrants exercisable within 60 days from the date hereof. Such amounts also include shares of common stock issuable upon conversion of the 193,836 shares of preferred stock which are each convertible into 100 shares of common stock at any time after the authorized number of shares of common stock is increased to 500,000,000.

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

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

* Less than 1%

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

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

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

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

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

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

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

In May 2002, Peter Wardle, CEO and a principal stockholder of P2i, Inc. and a director of the Company, assumed the duties and responsibilities of CEO of the Company. As of January 2004, Mr. Wardle draws a salary from the Company and his expenses are being reimbursed. Additionally, through 2007, Mr. Wardle received $222,197 in advances in accordance with a note-holders' security agreement. Such advances are reimbursable to the Company by sale of ProtoSource common stock that is to be issued to P2i, Inc. in accordance with the merger agreement of Company with P2i Newspaper, Inc. $150,308 ($73,679 in 2007 and $76,629 in 2006) of the $222,197 relates to amounts advanced to Mr. Wardle but reclassified (recorded) as compensation to Mr. Wardle through 2007. At December 31, 2007, $71,889 is classified as a reimbursable advance with potential to be recognized as future compensation for Mr. Wardle.

In January 2004, Thomas Butera, COO and a principal stockholder of P2i, Inc. and a director of the Company, assumed the duties and responsibilities of COO of the Company. As of January 2004, Mr. Butera draws a salary from the Company and his expenses are being reimbursed. During 2005 and 2006, for purposes of providing working capital to the Company, Mr. Butera advanced $24,000 to the Company for an indefinite period of time. Through December 31, 2007, $12,000 had been repaid to Mr. Butera leaving a balance of $12,000. Additionally, through 2007, Mr. Butera received $63,645 in advances in accordance with a note-holders' security agreement. Such advances are reimbursable to the Company by sale of ProtoSource common stock that is to be issued to P2i, Inc. in accordance with the merger agreement of Company with P2i Newspaper, Inc. $20,261 in 2007 and $20,261 in 2006, the full amount, had been reclassified (recorded) as compensation to Mr. Butera. There are no outstanding advances attributable to Mr. Butera at December 31, 2007.

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

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

As of December 31, 2006, an amount of $400 is due from P2i, Inc. As CEO and principal stockholder of P2i, Inc. and a director of the Company, Peter Wardle has pledged that any such funds provided to P2i, Inc. by the Company will be reimbursed by sale of ProtoSource common stock that is to be issued to P2i, Inc. in accordance with the agreement of merger of Company with P2i Newspaper, Inc.

P2i, through its infrastructure, provides office space to the Company. For periods commencing after January 1, 2004, the Company has been making direct payments to P2i's office space leaseholder. During 2007 and 2006, payments of approximately $35,800 and $35,300, respectively, were paid to P2i's leaseholder.

ITEM 13. EXHIBITS.

a. EXIBITS

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

3.01 Restated Articles of Incorporation of the Registrant (1)

3.02 By-laws of the Registrant (1)

3.03 Class A warrant agreement

3.04 Class B warrant agreement (6)

10.01 1995 Incentive Stock Option Plan (2)

10.02 2001 Employee Stock Option Plan

10.03 1999 Executive Officer Option Plan (5)

10.04 2001 Executive Officer Option Plan

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

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

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

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

----------

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

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

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

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

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

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

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

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees. The aggregate fees billed by our auditors to date, for professional services rendered for the audit of the Company's annual financial statements for the years ended December 31, 2007 and December 31, 2006, and for review of the financial statements included in the Company's quarterly reports on Form 10-QSB during such fiscal years, were $35,500 and $34,450, respectively.

Audit-Related Fees. The aggregate fees billed for assurance and related services by our auditors that are reasonably related to the performance of the audit or review of our financial statements were $0 and $4,000 for the years ended December 31, 2007 and 2006, respectively.

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

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

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Bethlehem, Pennsylvania, on March 31, 2008.

PROTOSOURCE CORPORATION

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

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

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


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

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

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

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

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 Page
 ----

Financial Statements Index F-1

Report of Independent Registered Public Accounting Firm F-2

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

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

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

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

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders ProtoSource Corporation

We have audited the accompanying consolidated balance sheet of ProtoSource Corporation and Subsidiaries as of December 31, 2007, and the related consolidated statements of operations, stockholders' (deficiency), and cash flows for the years ended December 31, 2007 and 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ProtoSource Corporation and Subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company incurred net losses of $874,100 and $303,697 during the years ended December 31, 2007 and 2006, respectively. As discussed in Note 1 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

Bala Cynwyd, Pennsylvania
March 24, 2008

PROTOSOURCE CORPORATION AND SUBSIDIARIES

ASSETS

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

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

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

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

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

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

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

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

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

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

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

Commitments and contingencies

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

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

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

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

 PROTOSOURCE CORPORATION AND SUBSIDIARIES

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



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


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

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

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

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

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

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


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



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

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



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

 F-4

 PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

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

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

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

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

Total comprehensive (loss)



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


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

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

Total comprehensive (loss)


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


Table continues below.

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

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

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

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

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

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


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


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

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

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

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

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

 F-5

 PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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


 INCREASE (DECREASE) IN CASH

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

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

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

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



 CONTINUED ON NEXT PAGE


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

 F-6

 PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

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


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

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

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

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




 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

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




SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

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


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

 F-7

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Nature of operations - ProtoSource Corporation, formerly SHR Corporation doing business as Software Solutions Company (the Company), was incorporated on July 1, 1988, under the laws of the state of California. Until May 1, 2002, the Company was an Internet service provider (ISP). The Company provided dial-up Internet access, web hosting services and web development services. On May 1, 2002, the Company entered into an agreement to sell substantially all of the assets pertaining to the ISP to Brand X Networks, Inc. (see Note 2). On August 16, 2007, the Company exercised its security interests and entered into a foreclosure acquisition agreement with Brand X Networks, Inc., taking possession of its business assets as collateral due to its inability to pay its debt to the Company. These assets were transferred to ProtoSource Acquisition II, Inc., a Nevada corporation (incorporated August 15, 2007) and a wholly owned subsidiary of the Company on September 1, 2007. Effective September 1, 2007, the Company provides bilingual technical support services, web-hosting, and Internet connectivity (see Note 2).

Effective January 1, 2004, the Company acquired P2i Newspaper, LLC (see Note 14). P2i Newspaper is principally engaged in the conversion of text and graphics from print to interactive Web content. Its clients include newspaper groups located in the United States and the United Kingdom. P2i Newspaper is headquartered in Bethlehem, Pennsylvania and has a data conversion center located in Kuala Lumpur, Malaysia.

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

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

- Technical support and hosting.

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

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

Services of P2i Newspaper comprise the following:

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

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

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

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Principles of consolidation - The consolidated financial statements include the accounts of the Company and two wholly-owned subsidiaries, P2i Newspaper, LLC and Protosource Acquisition II, Inc. All significant intercompany accounts and transactions have been eliminated.

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

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

Accounts receivable - Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. It is the policy of management to review the outstanding accounts receivable at the end of each reporting period, as well as the bad debt write-offs experienced in the past, and establish an allowance for doubtful accounts for uncollectable amounts. As of December 31, 2007, management believes that an allowance for bad debts was not considered necessary.

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

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

Impairment - As of December 31, 2004, the investment in P2i, Inc. had been effectively written down to $0. The fair value was based on financial projections, consultation with the Company's investment banker and an outside consultant, and management's estimates. Effective January 1, 2004, the Company acquired P2i's Print-to-Internet business (see Note 14). In August 2007, in connection with a foreclosure acquisition agreement with Brand X Networks, Inc., the Company recognized $566,186 of goodwill related to the transaction but deemed it fully impaired, as this matter involved P2i, Inc., a related party (see Note 2).

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

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

 PROTOSOURCE CORPORATION AND SUBSIDIARIES

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


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

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

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

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

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

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

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

 Reclassifications - Certain reclassifications have been made to the 2006
 financial statement presentation for comparability with the 2007 financial
 statements.

 F-13

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Effective May 1, 2002, the Company entered into an agreement to sell substantially all of the assets of the ISP division to Brand X Networks, Inc., a California Corporation, for $632,000. The assets have been held and operated by Brand X Networks, Inc. for its purposes since May 1, 2002, at which time the Company discontinued its ISP operations. On April 14, 2003, the Company completed a fifth amendment to the purchase agreement with Brand X pursuant to which the Company agreed to accept an aggregate payment of $632,000 for the ISP Division, less credits to Brand X of $112,686. Of such amount, $200,000 was to be paid through the provision of services to the Company from Brand X, and the balance was to be paid at the rate of approximately $5,172 per month, until completely paid.

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Foreclosure acquisition:

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

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

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

Assets recovered:

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

Liabilities assumed:

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Consideration given in respect to foreclosure acquisition:

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Notes payable of $2,425,000 is composed of 32 individual notes executed during the period beginning March 2002 and continuing through April 2004. These notes, which are secured by the assets of ProtoSource and P2i Newspaper, range between $25,000 and $200,000 on their face. All notes are one-year renewable 10% interest (per annum) convertible promissory notes. Each note can be prepaid, in whole or in part, without premium or penalty, at any time. Upon prepayment of the entire principle amount of a note, all accrued, but unpaid interest shall be paid to the holder on the date of prepayment. At any time prior to or at the time of repayment, the holder may elect to convert some or all of the principal and interest owing into shares of the Company's common stock. The conversion rate shall equal the amount to be converted, divided by each note's predetermined conversion price established at note issuance or renewal. {Conversion prices, after a series of renewals, range between $0.0667 and $0.10.} As a result of the beneficial conversion feature of these notes, through December 31, 2007, the Company has recognized $1,852,500 as interest expense and additional paid-in capital. Also in connection with the issuance of these notes, as an added inducement to loan to the Company, the Company entered into accompanying subscription agreements to provide each noteholder shares of its no par value common stock. As a result, the Company issued or will issue a total of 7,006,226 shares of common stock valued at approximately $1,844,168.

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

Net operating loss carryforward $ 5,600,000
Less valuation allowance (5,600,000)
 -----------
Net deferred tax asset $ --
 ===========

The Company has assessed its past earnings history and trends and expiration dates of carryforwards and has determined that it is more likely than not that no deferred tax assets will be realized. The valuation allowance of $5,600,000 is maintained on deferred tax assets, which the Company has not determined to be more likely than not realizable at this time. The net change in the valuation allowance for deferred tax assets was a decrease of $200,000. The Company will continue to review this valuation on a quarterly basis and make adjustments as appropriate.

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

In May 2001, the Company's shareholders approved the Company's 2000 Employee Stock Option Plan and the 2000 Executive Stock Option Plan which remains in effect until May 2010 but may be terminated or extended by the Board of Directors. The Executive Stock Option Plan has 350,000 shares reserved for issuance with no stock options having been granted as of December 31, 2007.

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Leases

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

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

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

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

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

2008 $ 30,304

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

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

2008 $ 46,900

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

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

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

The Company has a 401(k) savings plan for employees who are not covered by any collective bargaining agreement, have attained age 21 and have completed one year of service. Employee and Company matching contributions are discretionary. The Company made no contributions for the years ended December 31, 2007 and 2006. Company contributions, if any, vest as follows:

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

 1 33%
 2 66%
 3 100%

PROTOSOURCE CORPORATION AND SUBSIDIARIES

Disclosures about the fair value of financial instruments, for the Company's financial instruments, are presented in the table below. These calculations are subjective in nature and involve uncertainties and significant matters of judgment and do not include income tax considerations. Therefore, the results cannot be determined with precision and cannot be substantiated by comparison to independent market values and may not be realized in actual sale or settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used could significantly affect the results. The following table presents a summary of the Company's financial instruments as of December 31, 2007:

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

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

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

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

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

On January 1, 2004, the Company, P2i Newspaper and P2i amended the terms of the Agreement (the "Amendment"). Pursuant to the terms of the Amendment, in exchange for all of the issued and outstanding shares of P2i Newspaper, the Company issued 193,836 shares of series B preferred stock (the "Preferred Stock").

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

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

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

PROTOSOURCE CORPORATION AND SUBSIDIARIES

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

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

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

Financial information for the two reporting segments is shown below:

YEAR ENDED
DECEMBER 31,

 2007 2006
 ----------- -----------

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

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

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

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

Grafico Azioni ProtoSource (PK) (USOTC:PSCO)
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Da Mag 2024 a Giu 2024

Grafico Azioni ProtoSource (PK) (USOTC:PSCO)
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