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

FORM 10-K

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

For the fiscal year ended December 31, 2008

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

For the transition period from to
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Commission File No. 000-25594

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

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

1236 Main St., Suite C
Hellertown, Pennsylvania 18055
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(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

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. [X]

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-K/A or any amendment to
this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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 $3,535,734.

As of December 31, 2008, the market value of the Registrant's no par value
Common Stock, excluding shares held by affiliates, was $283,977 based upon a
closing bid price of $0.03 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, 2008, 9,927,329 shares of the Registrant's no par value
Common Stock were outstanding.

DOCUMENTS ARE INCORPORATED BY REFERENCE:
None.

PROTOSOURCE CORPORATION

ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
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INDEX
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PART I PAGE
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Item 1. Business 4
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13

Part II
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Item 5. Market for Registrant's Common Equity, Equity, 14
Related Stockholder Matters and Issuer
Purchases of Equity
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures 20
about Market Risk
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants 20
on Accounting and Financial Disclosures
Item 9A(T). Controls and Procedures 20
Item 9B. Other Information 21

Part III
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Item 10. Directors, Executive Officers and Corporate Governance 22
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial 28
Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related 29
Transactions and Director Independence
Item 14. Principal Accountant Fees and Services 29

Part IV
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Item 15. Exhibits and Financial Statement Schedules 30

Signatures 31

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-K. Any such changes will be
reflected in amended filings made after the date hereof.

Introduction
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ProtoSource's primary focus is the delivery of ePublishing Solutions and related
services, to newspapers, retailers, and magazines, utilizing
internally-developed, proprietary applications bridging the divide between
traditional print revenue and the opportunities online via a coordinated sales
and marketing strategy in the United States and Europe. Currently the Company
has two distinct suites of services and solutions offered by the Company's two
principle operating units: P2i Newspapers and BX-Solutions.

P2i Newspapers offers products and services tailored specifically to support the
online publishing of editorial content, advertising, discounts, deals and
offers.

Every day of the week, 52 weeks a year, P2i receives electronic files from
customers at its facility in Cyberjaya, just south of Kuala Lumpur, Malaysia.
P2i employs approximately 100 staff in this 6,000 square foot office. Incoming
data files are processed overnight for delivery the following morning. Data is
delivered not only to P2i's web servers for seamless integration into our
clients' existing, hosted web sites, but also distributed back to clients and
their business partners in a wide range of formats. The combination of low labor
costs, a well-educated labor pool fluent in English, and sophisticated
technologies makes P2i effective and competitive.

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 either the same electronic
files that generate print output, or existing online content in the public
domain and uses that content 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 from the customers of technology
companies. These comprise small and mid-size Internet service providers ("ISP")
and telecommunication companies in the United States. This facility also houses
and manages servers for its own customers.

BX-Solutions provides technical support and hosting.

Since being re-acquired by the company (see History below) BX-Solutions has
evolved from an ISP into a bilingual technical support and hosting company.
Approximately two-thirds of BX revenue is derived from technical support and
hosting for other ISPs; the remainder comes from its own ISP customers.

There is considerable synergy between BX and P2i. Operating 24/7/52, BX is now
integrated with P2i's Malaysia facility. The company believes there is a
substantial opportunity to provide expanded tech support and hosting to P2i
customers, and launched the first product combining the services and solutions
of both P2i and BX in March 2009.

History
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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 collectability 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 year end of December 31, 2007, 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 deemed it to be impaired and recorded the charge of $566,186 in other
charges in the consolidated statement of operations for the year ended December
31, 2007.

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,
then-President of P2i, as a director of ProtoSource. Mr. Butera, together with
Peter Wardle, President of ProtoSource, shall have the right to appoint three
members to the board of directors of ProtoSource.

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

Business of ProtoSource's Media & Data Conversion Business Segment
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The primary business of P2i Newspaper is the mining, management, and databasing
of content for the publishers and retailers, and its ultimate distribution via
the Internet.

Directly and indirectly, P2i provides the data that drives online advertising
and editorial solutions for hundreds of newspapers, retailers and other
publishers in the US, Canada and Europe. Customers include individual newspapers
(Minneapolis Star Tribune, Press of Atlantic City, Milwaukee Journal Sentinel,
etc.), newspaper groups (Tribune, Gannett, etc.), shopping channels (ShopLocal,
etc), and publishing companies (SRDS etc.).

Solutions and Services

Hosted Solutions: Utilizing proprietary technology, P2i converts print media
content into interactive, online content that is seamlessly incorporated into
existing newspaper/publisher web sites. All print content is first created
electronically at the newspaper or publisher, merged with electronically-created
editorial copy, paginated using sophisticated software, edited on a local or
wide area network, and transmitted to the printing presses. At the end of every
business day, publishing clients send to P2i, via ftp, the same electronic
versions of advertising and editorial that were sent to press. These files are
received by P2i's production group, processed, quality checked, and delivered to
the hosting servers by the start of the following business day.

Data Extraction: Multiple forms of disparate electronic content are streamed all
day from customers, to be processed into one constant data flow. Extracting
relevant data points, merging consistencies and fielding content to produce a
data feed, per the client's or third party's specifications, is core to P2i's
technology. The fielded data is then converted & delivered as XML, txt or
pipe-delimited data.

Content Processing: Online content needs to reflect the values, relevance, and
accuracy of its owners. P2i's Content Processing team currently examines
thousands of items a day for retailers and newspapers, sorting, databasing,
editing, proofing, and determining relevancy. Staff members review pricing,
language, relevance, brand names, and scores of other specifics, delivering a
critical component in the publishing of user-generated content.

Through 2009, the Company will continue to focus on increasing market share in
the retail and publishing verticals. The current economic climate is expected to
force existing and potential customers to look even more closely at maximizing
their online revenue.

Industry and Competition
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E-commerce overview

The current economic climate has adversely affected the fortunes of virtually
all newspapers and retailers. Advertising is down for newspapers and magazines,
and declining consumer spending is hurting retailers. The Company does not
anticipate that changing in 2009 and expects more bankruptcies among its
newspaper customers. (Tribune Group and Minneapolis Star being two of the
Company's customers that have already filed for bankruptcy protection.)

Notwithstanding these challenges, the Company believes a combination of
aggressive sales and marketing allied to tight cost-controls will keep the
Company moving in the right direction. In the first quarter of 2009, the Company
has launched several new customer programs and one entirely new product suite.

Consumers, and "online search" are the key drivers of the online publishing and
presentation of display advertising, run-of-print advertising ("ROP"), special
sections, free-standing-inserts ("FSIs"), offers and deals.

Consumers using the Web demand a high level of interactivity and enhanced
features from online content, particularly accurate search results and relevant
content. Developing and enabling solutions that will deliver this requires a
substantial financial investment in both R&D and servers, connectivity and
processes that is best justified when amortized across as wide a spectrum as
possible. Indications are that these costs are deemed prohibitive to
individuals, publishers and retailers, and many groups of companies.

These types of solutions have become increasingly more sophisticated, evolving
into online shopping channels where site visitors can search and browse across
many offers from multiple sources: inventory feeds, display classified
advertising, ROP advertising, FSIs and special sections. Accurate,
database-driven content is the key to the success of these solutions and the
Company believes its suite of services in this area will enjoy increasing demand
over the next few years.

Competition

Approximately 15% of the Company's total revenue, 20% of P2i Newspaper, comes
from direct relationships with newspapers and newspaper groups. The rest of P2i
Newspaper's revenue comes from other publishers, media companies and online
shopping channels. As such, the threat to P2i from competitors in the newspaper
space has diminished. Notwithstanding, some of those competitors have attempted
to win some of P2i's non-newspaper business, particularly the conversion,
databasing and delivery of print ads into online advertising.

Infosis, a company P2i, Inc. acquired in September 2000, was the first company
to establish a business converting print ads and content into web content. As
the revenue models have proved to be viable, competitors emerged. Harvest
Print2Web, and Travidia, all offer online ad and editorial solutions to
newspapers and retailers, and compete directly with P2i for the revenue the
Company derives from its direct relationships with newspapers.

Companies such as Daily Shopper and Saleshound (now combined as one entity,
ShopLocal) have moved into this arena, having been acquired by Tribune, Gannett
and Knight-Ridder in 2004 (now solely owned by Gannett). 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. This strategy has been expanded to
encompass offers, discounts and coupons to provide the consumer with many sites
to choose from. As P2i has evolved, these companies have become potential
customers of P2i, not competitors.

Secondary competition for direct newspaper business 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.

The rest of P2i's business faces competition primarily from off-shore suppliers
in an industry category known as Business Process Outsourcing. However, P2i's
own off-shore facility in Malaysia, the caliber of its workforce and its
proprietary processes, have made P2i extremely competitive in this space.
Notwithstanding, the current economic climate is expected to drive pricing down
over the coming months and if the Company is to continue to sustain and expand
in this area, it will have to maintain tight cost controls.

As of December 31, 2008, P2i Newspaper had a combination of 150 full-time and
part time employees. Of such employees, 3 were engaged in marketing and sales, 9
were devoted to research, development and technical support, 132 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.

Business of ProtoSource's Technical Support & Hosting Services Business Segment
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The Company's business strategy includes its facility located in Fresno, CA
which is operated by, and branded as, "BX-Solutions", and is a wholly-owned
subsidiary of the Company, 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. Strategically, the Company plans to
utilize this business unit to provide technical support to the customers of
certain of P2i's services and solutions. The first of these launched on March 1,
2009.

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.

Industry and Competition
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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 for BX continues to be the traditional ones
facing most companies operating in large markets: price and service levels.

ITEM 1A - RISK FACTORS

If any of the following risks actually occur, our business could be harmed. In
that event, the trading price of our shares might decline, and you could lose
all or part of your investment. You should carefully consider the following
factors as well as other information contained in this prospectus before
deciding to invest in shares of our securities. Additional risks that are not
currently known to us or that we deem immaterial may also harm us and the value
of your investment. An investment in our securities involves a high degree of
risk.

Our results of operations could be adversely affected by economic and political
conditions and the effects of these conditions on our clients' businesses and
levels of business activity.
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Global economic and political conditions affect our clients' businesses and
the markets they serve. A severe and/or prolonged economic downturn or a
negative or uncertain political climate could adversely affect our clients'
financial condition and the levels of business activity of our clients and the
industries we serve. This may reduce demand for our services or depress pricing
of those services and have a material adverse effect on our results of
operations. Changes in global economic conditions could also shift demand to
services for which we do not have competitive advantages, and this could
negatively affect the amount of business that we are able to obtain. In
addition, if we are unable to successfully anticipate changing economic and
political conditions, we may be unable to effectively plan for and respond to
those changes, and our business could be negatively affected.

We have a history of operating losses and we expect these losses to continue;
Need for Additional Capital.
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We have experienced significant losses. We expect to continue to incur
losses for the foreseeable future. We have an accumulated deficit of $34,060,229
at December 31, 2008. We expect our expenses to increase as we expand our
business. We will require substantial working capital to fund our business. If
we raise additional funds through the issuance of equity, equity-related or
convertible debt securities, these securities may have rights, preferences or
privileges senior to those of the rights of holders of our common stock, which
may experience additional dilution. We cannot predict whether additional
financing will be available to us on favorable terms when required, or at all.
Since our inception, we have experienced negative cash flow from operations and
expect to experience significant negative cash flow from operations in the
future. The issuance of additional common stock by our management, may have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.

If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
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Rapidly changing technology and continuing process development characterize
the market for our products and services. The future success of our business
will depend in large part upon our ability to maintain and enhance our
technological capabilities, to develop and market products and services that
meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition, we
could in the future encounter competition from new or revised technologies that
render existing technology less competitive or obsolete or that reduce the
demand for our services. There can be no assurance that we will effectively
respond to the technological requirements of the changing market. To the extent
we determine that new technologies and equipment are required to remain
competitive, the development, acquisition and implementation of such
technologies and equipment may require us to make significant capital
investments. There can be no assurance that capital will be available for these
purposes in the future or that investments in new technologies will result in
commercially viable technological processes.

Our results of operations may be affected by the rate of growth in the use of
technology in business and the type and level of technology spending by our
clients.
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Our business depends in part upon continued growth in the use of technology
in business by our clients and prospective clients and their customers and
suppliers. In challenging economic environments, our clients may reduce or defer
their spending on new technologies in order to focus on other priorities. At the
same time, many companies have already invested substantial resources in their
current means of conducting commerce and exchanging information, and they may be
reluctant or slow to adopt new approaches that could disrupt existing personnel,
processes and infrastructures. If the growth of use of technology in business or
our clients' spending on technology in business declines or if we cannot
convince our clients or potential clients to embrace new technology solutions,
our results of operations could be adversely affected.

Our ability to operate profitably is dependent in part on our ability to
maintain favorable pricing rates.
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Our potential profitability is dependent on the rates we are able to charge
for our services. If we are not able to maintain favorable pricing for our
services, our profit margin and our profitability could suffer. The rates we are
able to charge for our services are affected by a number of factors, including:

o our clients' perceptions of our ability to add value through our
services;

o competition;

o introduction of new services or products by us or our competitors;

o our competitors' pricing policies;

o our ability to charge higher prices where market demand or the value
of our services justifies it;

o our ability to accurately estimate, attain and sustain contract
revenues, margins and cash flows over long contract periods;

o procurement practices of clients and their use of third-party
advisors;

o aggressive use by our competitors of off-shore resources to provide
lower-cost service delivery capabilities; and

o general economic and political conditions.

Consolidation in the industries that we serve could adversely affect our
business.
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Companies in the industries that we serve may seek to achieve economies of
scale and other synergies by combining with or acquiring other companies. If two
or more of our current clients merge or consolidate and combine their
operations, it may decrease the amount of work that we perform for these
clients. If one of our current clients merges or consolidates with a company
that relies on another provider for its consulting, systems integration and
technology, or outsourcing services, we may lose work from that client or lose
the opportunity to gain additional work. The increased market power of larger
companies could also increase pricing and competitive pressures on us. Any of
these possible results of industry consolidation could adversely affect our
business.

Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
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We depend on the services of our key senior executives, including Peter
Wardle and Thomas Butera. Our business also depends on our ability to continue
to recruit, train and retain skilled employees, particularly executive
management, engineering and sales personnel. Recruiting personnel in our
industry is highly competitive. In addition, our ability to successfully
integrate acquired companies depends in part on our ability to retain key
management and existing employees at the time of the acquisition. There can be
no assurance that we will be able to retain our executive officers and key
personnel or attract additional qualified management in the future.

State and federal government regulation could require us to change our business.
- --------------------------------------------------------------------------------

We provide Internet access and cable TV, in part, using telecommunications
services provided by carriers that are subject to the jurisdiction of state and
federal regulators. Due to the increasing popularity and use of the Internet,
state and federal regulators may adopt additional laws and regulations relating
to content, user privacy, pricing, copyright infringements and other matters. We
cannot predict the impact, if any, that future regulation or regulatory changes
may have on our business.

We face risks of claims from third parties for intellectual property
infringement and other matters that could adversely affect our business.
- ------------------------------------------------------------------------

Our services operate in part by making Internet content available to our
users. This creates the potential for claims to be made against us, either
directly or through contractual indemnification provisions with third parties.
Claims might, for example, be made for defamation, negligence, copyright,
trademark or patent infringement, personal injury, invasion of privacy or upon
other legal theories. Any claims could result in costly litigation and be time
consuming to defend, divert management's attention and resources, cause delays
in releasing new or upgraded existing services or require us to enter into
royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on acceptable terms, if at all.

Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect that Internet technologies and software
products and services may be increasingly subject to third-party infringement
claims as the number of competitors in our industry segment grows and the
functionality of products in different industry segments overlaps.

There can be no assurance that our services do not infringe the
intellectual property rights of third parties. A successful claim of
infringement against us and our failure or inability to license the infringed or
similar technology could adversely affect our business, financial condition and
results of operations.

We may incur liabilities for the activities of users of our service resulting in
unanticipated expenses.
- --------------------------------------------------------------------------------

The law relating to the liability of providers of online services for
activities of their users is currently unsettled and could damage our business.
We do not carry insurance that will indemnify us for all liability for
activities of our users. Our advertisers' websites may contain text, images or
information that could infringe third-party copyrights, trademarks or other
intellectual property rights. We cannot assure you that we will successfully
avoid civil or criminal liability for unlawful activities carried out by users
of our service. The imposition upon us of potential liability for unlawful
activities of users of our service could require us to implement measures to
reduce our exposure to such liability, which may require us, among other things,
to spend substantial resources or to discontinue certain service offerings. Any
costs incurred as a result of such liability or asserted liability could damage
our business.

The exercise of our outstanding warrants and options and conversion of
outstanding promissory notes may depress our stock price.
- ----------------------------------------------------------------------

We currently have 3,820,000 warrants and options to purchase shares of our
common stock outstanding and an additional $4,277,500 worth of shares of common
stock are issuable upon exercise of convertible promissory notes at an exercise
price yet to be determined. The sale of such shares of common stock within a
relatively short period of time could have the effect of depressing the market
price of our common stock and could impair our ability to raise capital through
the sale of additional equity securities.

We may experience variability in our operating results, which could negatively
impact the price of our shares.
- ------------------------------------------------------------------------------

Our annual and quarterly results have fluctuated in the past. The reasons
for these fluctuations may similarly affect us in the future. Prospective
investors should not rely on results of operations in any past period to
indicate what our results will be for any future period. Our operating results
may fluctuate in the future as a result of many factors, including:

.. variations in the timing and volume of customer orders;
.. introduction and market acceptance of our new services;
.. changes in demand for our existing services;
.. the accuracy of our forecasts of future requirements;
.. changes in competitive and economic conditions generally or in our markets;
and
.. the timing of, and the price we pay for, acquisitions and related
integration costs.

Any of these factors or a combination of these factors could have a
material adverse effect on our business, financial condition and results of
operations.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

The Company occupies 1,300 square feet of office space at 1236 Main Street,
Hellertown, PA 18055, 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

None

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
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, 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

March 31, 2008 $0.07 $0.04 N/A N/A N/A N/A
June 30, 2008 $0.09 $0.05 N/A N/A N/A N/A
September 30, 2008 $0.07 $0.05 N/A N/A N/A N/A
December 31, 2008 $0.06 $0.02 N/A N/A N/A N/A

As of March 15, 2009, there were approximately 466 record and beneficial owners.

DIVIDEND POLICY

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

EQUITY COMPENSATION PLAN INFORMATION

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

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

ITEM 6 - SELECTED FINANCIAL DATA

Not required under Regulation S-K for "smaller reporting companies."

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN RESULTS
OF OPERATIONS.

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

RESULTS OF OPERATIONS
- ---------------------

Year Ended December 31, 2008 vs. Year Ended December 31, 2007

Net Revenues - For the year ended December 31, 2008, net revenues were
$3,535,734 versus $3,125,076 for the year ended December 31, 2007, a rise over
the previous year of $410,658. Full year revenues of $1,364,881 for 2008 versus
$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 $529,229 decrease in P2i
Newspaper revenues over the previous year is mostly attributable to
macroeconomic conditions within the newspaper industry. In 2008, published
industry statistics indicate that total newspaper industry advertising revenue
fell 16.6% and print advertising revenue fell 17.7%., rates which are consistent
with the Company's decrease.

Operating Costs and Expenses - For the year ended December 31, 2008, operating
costs and expenses totaled $3,726,672 versus $3,033,786 in 2007, a $692,886 rise
over the previous year. $893,476 of this amount is directly attributable to the
operations of ProtoSource Acquisition II, Inc. ("BX-Solutions") which commenced
operations September 1, 2007. However, $200,590 represents a net reduction of
P2i Newspaper operating costs and expenses over the previous year. Such costs
were $2,383,516 and $2,584,106 for 2008 and 2007, respectively.

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

In respect to the Company's cost of revenues, $1,515,112 is attributable to P2i
Newspaper and $1,127,119 to BX-Solutions for 2008. As P2i Newspaper's cost of
revenues were $1,564,060 in 2007, this represents a net reduction of $48,948
over the previous year. P2i Newspaper's recorded cost of revenues, as a
percentage of revenues, were 69.8% in 2008 versus 57.9% in 2007.

In respect to the Company's selling, general and administrative expenses
("SGA"), $807,783 is attributable to P2i Newspaper and $192,717 to BX-Solutions
for 2008. BX-Solutions total SGA were $46,807 in 2007, and is virtually all
attributed to clerical staff and general office expenses. The increase of
$145,910 is primarily due to full year operations versus four months of
operations in 2007. As P2i Newspaper's SGA were $966,095 in 2007, this
represents a $158,312 net decrease in P2i Newspaper's SGA expenses over the
previous year.

The following were significant P2i Newspaper SGA components that accounted for
the decrease over the previous year: Approximately $60,300 more in selling
expenses were incurred in 2008 over 2007. Approximately $218,610 less in general
and administrative costs were incurred in 2008 over 2007. {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 $445,923 for the year ended December
31, 2008 versus interest expense of $394,356 in 2007. 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) - In 2008, other income included $12,605 for the sale of
assets and an assignment of a lease relating to BX Solutions' Madera Area
Digital Network.

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, in
2007 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 deemed it to be impaired and recorded
the charge of $566,186 in other charges in the consolidated statement of
operations for the year ended December 31, 2007.

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

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

For the year ended December 31, 2008, the Company generated, or obtained from
the Company's operating, investing and financing activities, $59,500 less cash
than was used during the year.

Though the Company's net loss for the year ended December 31, 2008 was $625,382,
cash flows used in operations approximated $13,800.

The cash flows from operations were due, in part, to approximately $84,000 of
depreciation and amortization and further aided by $48,509 of year-over-year net
changes in the Company's working capital components. Significant components
affecting working capital and availability of cash were as follows:
approximately $174,000 increase in accrued supplier and service provider
obligations, approximately $79,000 increase in accrued payroll liabilities, and
approximately $2,000 increase in other accrued expenses. These positive
contributing factors to working capital and available cash were offset by a
reduction of $103,125 in unpaid obligations to P2i, Inc., along with an
approximately $103,800 increase in prepaid rents and accounts receivable.
Accounts receivable as reported at year-end are generally current. An $80,000
reserve for potential uncollectible receivables was established in 2008.

During the year ended December 31, 2008, the Company had negative cash flows
from investing activities of approximately $23,000. This consisted of
approximately $5,600 for acquisitions of new equipment, approximately $5,300
increase to security deposits, approximately $24,600 increase in advances issued
to an employee and officer, as offset by approximately $12,600 in proceeds from
the sale of equipment.

During the year ended December 31, 2008, the Company used, through its financing
activities, $40,500 of funds for payments on capital leases.

As of December 31, 2008, the Company had $12,826 in cash and $475,972 in
accounts receivable and other current assets. Taken together with $5,374,091 of
total current liabilities, this resulted in a negative working capital position
of $4,885,293 at December 31, 2008. $4,343,354 of this amount pertains to the
Company's obligations to its convertible debt holders and $135,275 of this
amount pertains to the Company's net obligations to P2i, Inc., a related party.

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
expired June 14, 2008 and the residual maturity date was 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, were personal guarantors of this agreement.

In July 2007, the Company entered into an investment banking agreement with
Colebrooke Capital, Inc. The agreement was 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 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. Due to the economic downturn at the end of 2007 which
accelerated in 2008 the agreement did not yield any results and has ended.

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.

On May 15, 2008, the Company entered into two 24-month term capital lease
agreements with Bankers Capital for the purchase of computer and computer
related items valued at $25,579 and $37,571, respectively, with monthly lease
payments of $1,478 and $2,048, respectively. The lease terms expire April 07,
2010 and the residual maturity date is April 15, 2010 with a $1 purchase option

for each agreement. Amounts of $3,450 and $4,590 were paid to Bankers Capital at
the start of the respective leases 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 both
of these agreements.

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 2008, two of the Company's directors, Stewart Kalter and Joseph DiMarino
resigned. The Company is currently seeking two new directors to replace them.

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

In May 2008, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles". This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement shall be effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles". The Company believes
that the adoption of SFAS No. 162 will not have an effect on the Company's
financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133".
This statement requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, results of operations and cash flows. SFAS No. 161 is
effective for the Company beginning January 1, 2009. The Company believes that
the adoption of SFAS No. 162 will not have an effect on the Company's financial
position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" (SFAS 141R"). SFAS 141R will significantly change the accounting
for business combinations in a number of areas including the treatment of
contingent consideration, contingencies, acquisition costs, research and
development assets and restructuring costs. In addition, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income taxes. SFAS 141R is effective for fiscal years beginning after December
15, 2008. The adoption of the provisions of SFAS 141R is not expected to have a
material effect on the Company's financial position, results of operations, or
cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, An Amendment of ARB No. 51," SFAS 160 amends
ARB 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It also
amends certain of ARB 51's consolidation procedures for consistency with the
requirements of SFAS 141R. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
statement shall be applied prospectively as of the beginning of the fiscal year
in which the statement is initially adopted. The adoption of the provisions of
SFAS 160 is not expected to have a material effect on the Company's financial
position, results of operations, or cash flows.

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.

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 was required to be adopted by the Company in the first quarter of 2008.
The adoption SFAS No. 157 did not have a material impact on our financial
position, results of operations, or cash flows.

Critical Accounting Policies and Estimates
- ------------------------------------------

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

In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
maintains a valuation allowance of $5,600,000 as of December 31, 2008 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.

In 2008, the Company did review its trade accounts receivable and determined
that there was a potential of doubtful collection; accordingly, the Company has
created an allowance for doubtful accounts of $80,000.

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 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for "smaller reporting companies."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements of ProtoSource Corporation for the years
ended December 31, 2008 and 2007 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 Sheets as of December 31, 2008 and 2007 F-3
Consolidated Statements of Operations
for the years ended December 31, 2008 and 2007 F-4
Consolidated Statements of Stockholders' Deficiency
for the years ended December 31, 2008 and 2007 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2008 and 2007. F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
ProtoSource Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of ProtoSource
Corporation and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years then ended. Protosource Corporation and Subsidiaries' management
is responsible for these financial statements. 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, 2008, and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying financial
statements, the Company incurred net losses of $625,382 and $874,100 during the
years ended December 31, 2008 and 2007, respectively. It experienced a working
capital deficiency of approximately $4,900,000 and $4,300,000 during the years
ended December 31, 2008 and 2007, respectively. The Company's significant
operating losses and working capital deficiencies raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are discussed in Note 1 to the financial statements. 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
April 7, 2009

F-2

PROTOSOURCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------

DECEMBER 31,
2008 2007
------------ ------------

ASSETS

Current assets:
Cash $ 12,826 $ 72,381
Accounts receivable, net of allowance of $80,000 and $0, respectively 380,040 356,263
Advances to officer 95,167 71,341
Advance to employee 765 --
------------ ------------

Total current assets 488,798 499,985

Property and equipment, at cost, net of
accumulated depreciation and amortization of
$655,383 and $575,657 respectively 78,767 93,901

Goodwill - acquisition of P2i Newspaper 375,067 375,067

Deposits 14,074 8,749
------------ ------------

Total assets $ 956,706 $ 977,702
============ ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Notes payable $ 2,425,000 $ 2,425,000
Current portion of obligations under capital leases 49,524 28,359
Accounts payable 299,865 126,289
Accrued interest 1,918,354 1,506,658
Amounts due to related party - P2i, Inc., net 135,275 238,400
Accrued expenses - other 534,073 452,238
Advance from officer 12,000 12,000
------------ ------------

Total current liabilities 5,374,091 4,788,944

Obligations under capital leases, non-current portion 19,046 17,561

Stock subscriptions payable 661,844 661,844
------------ ------------

Total liabilities 6,054,981 5,468,349
------------ ------------

Commitments and contingencies

Stockholders' deficiency:
Preferred stock, Series B, no par value; 5,000,000 shares
authorized, 193,836 shares issued and outstanding 416,179 416,179
Common stock, no par value; 500,000,000 shares
authorized, 9,927,329 shares issued and outstanding 26,143,461 26,143,461
Additional paid-in capital 2,291,607 2,291,607
Accumulated deficit (34,060,229) (33,434,847)
Accumulated other comprehensive income 110,707 92,953
------------ ------------

Net stockholders' deficiency (5,098,275) (4,490,647)
------------ ------------

Total liabilities and stockholders' deficiency $ 956,706 $ 977,702
============ ============

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

F-3

PROTOSOURCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------

YEARS ENDED
DECEMBER 31,
2008 2007
------------ ------------

Net revenues $ 3,535,734 $ 3,125,076
------------ ------------

Operating costs and expenses:
Cost of revenues 2,642,231 1,943,654
Selling, general and administrative 1,000,500 1,012,902
Depreciation and amortization 83,941 77,230
------------ ------------

Total operating costs and expenses 3,726,672 3,033,786
------------ ------------

Operating income (loss) (190,938) 91,290
------------ ------------

Other income (charges):
Interest expense (445,923) (394,356)
Gain (loss) on sale or disposal of equipment 12,605 (40)
Impairment charges -- (566,186)
Other expense, net (1,126) (4,808)
------------ ------------

Net other (charges) (434,444) (965,390)
------------ ------------

Net loss ($ 625,382) ($ 874,100)
============ ============

Net loss per basic and diluted share of common stock: ($ .02) ($ .03)
============ ============

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 STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

Preferred Stock Common Stock Additional
--------------------------- --------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------

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

Comprehensive income (loss)

Net loss -- -- -- -- --
Foreign currency
translation adjustment -- -- -- -- --
Total comprehensive
loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------

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

Comprehensive income (loss)

Net loss -- -- -- -- --
Foreign currency
translation adjustment -- -- -- -- --
Total comprehensive
loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------

Balance, December 31, 2008 193,836 $ 416,179 9,927,329 $ 26,143,461 $ 2,291,607
============ ============ ============ ============ ============

Table continues below.

Accumulated
Other
Accumulated Comprehensive
Deficit Income Total
------------ ------------ ------------

Balance, December 31, 2006 ($32,560,747) $ 43,532 ($ 3,665,968)

Comprehensive income (loss)

Net loss (874,100) -- --
Foreign currency
translation adjustment -- 49,421 --
Total comprehensive
loss -- -- (824,679)
------------ ------------ ------------

Balance, December 31, 2007 (33,434,847) 92,953 (4,490,647)

Comprehensive income (loss)

Net loss (625,382) -- --
Foreign currency
translation adjustment -- 17,754 --
Total comprehensive
loss -- -- (607,628)
------------ ------------ ------------

Balance, December 31, 2008 ($34,060,229) $ 110,707 ($ 5,098,275)
============ ============ ============

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

F-5

PROTOSOURCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

YEARS ENDED
DECEMBER 31,
2008 2007
--------- ---------

INCREASE (DECREASE) IN CASH

Cash flows from operating activities:
Net loss ($625,382) ($874,100)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 83,941 77,230
Provision for bad debts 80,000 --
Accrued Interest 411,696 372,672
(Gain) loss on sale or disposal of equipment (12,605) 40
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 (103,777) 6,968
Prepaid expenses and other assets -- 10,883
Accounts payable 173,576 72,784
Amounts due to related party - P2i, Inc., net (103,125) 171,800
Accrued expenses 81,835 (10,789)
--------- ---------

Net cash provided by (used in) operating activities (13,841) 69,344
--------- ---------

Cash flows from investing activities:
Acquisitions of property and equipment (5,657) (6,666)
Proceeds from the sale of equipment 12,605 --
Increase in advances to officer (23,826) (10,250)
Increase in advance to employee (765) --
Increase in deposits (5,325) (975)
--------- ---------

Net cash (used in) investing activities (22,968) (17,891)
--------- ---------

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 STATEMENTS OF CASH FLOWS - CONTINUED

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

YEAR ENDED
DECEMBER 31,
2008 2007
-------- --------

Cash flows from financing activities:
Payments on obligations under capital leases ($40,500) ($33,335)
-------- --------

Net cash (used in) financing activities (40,500) (33,335)
-------- --------

Effect of exchange rate changes on cash 17,754 49,421
-------- --------

Net increase (decrease) in cash (59,555) 67,539

Cash at beginning of year 72,381 4,842
-------- --------

Cash at end of year $ 12,826 $ 72,381
======== ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:
Interest $ 34,227 $ 21,684
-------- --------
Income taxes $ -- $ --
-------- --------

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Acquisition of equipment under capital lease obligation $ 63,150 $ 46,480
Acquisition of equipment arising from note foreclosure -- 46,638
Acquisition of prepaid expense arising from note foreclosure -- 10,000
Assumption 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

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

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

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

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

F-8

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

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

- Technical support and hosting.

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

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

Services of P2i Newspaper comprise the following:

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

F-9

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

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

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

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

The Company's second facility in Fresno, CA, operated by, and branded as,
BX-Solutions, is a wholly-owned subsidiary of the Company, 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 and telecommunications
providers in the United States. This facility also houses and manages
servers for its own customers.

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

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

F-10

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

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

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

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

F-11

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

Accounts receivable - Trade accounts receivable are stated at the amount
management expects to collect from outstanding balances. It is the policy
of management to review the outstanding accounts receivable at the end of
each reporting period, as well as the bad debt write-offs experienced in
the past, and establish an allowance for doubtful accounts for
uncollectible amounts. As of December 31, 2008, management determined that
an allowance for bad debts of $80,000 was considered necessary.

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

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

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

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

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

F-12

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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, 2008 9,927,329
Stock subscriptions payable - note holders (Note 3) 2,750,000
Stock subscriptions payable - investment banker (Note 7) 813,688
Series B convertible preferred stock issued to P2i, Inc. (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 2008 and 2007 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, 2008 and 2007 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 were made to the 2007
financial statement presentation for comparability with the 2008 financial
statements.

F-13

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

In May 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 162, "The
Hierarchy of Generally Accepted Accounting Principles". This Statement
identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity
with generally accepted accounting principles (GAAP) in the United States
(the GAAP hierarchy). This Statement shall be effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board (PCAOB)
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles". The Company believes that
the adoption of SFAS No. 162 will not have an effect on the Company's
financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133". This statement requires additional disclosures about the objectives
of the derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such
instruments and related hedged items on our financial position, results of
operations and cash flows. SFAS No. 161 is effective for the Company
beginning January 1, 2009. The Company believes that the adoption of SFAS
No. 162 will not have an effect on the Company's financial position,
results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" (SFAS 141R"). SFAS 141R will significantly change the
accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition, under
SFAS 141R, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement
period will impact income taxes. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The adoption of the provisions of SFAS
141R is not expected to have a material effect on the Company's financial
position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, An Amendment of ARB No. 51," SFAS 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51's consolidation procedures for
consistency with the requirements of SFAS 141R. SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The statement shall be applied prospectively as
of the beginning of the fiscal year in which the statement is initially
adopted. The adoption of the provisions of SFAS 160 is not expected to have
a material effect on the Company's financial position, results of
operations, or cash flows.

F-14

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", providing companies with an
option to report selected financial assets and liabilities at fair value.
The Standard's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different
assets and liabilities that can create artificial volatility in earnings.
SFAS No. 159 helps to mitigate this type of accounting-induced volatility
by enabling companies to report related assets and liabilities at fair
value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types of assets and liabilities. The Standard requires companies to provide
additional information that will help investors and other users of
financial statements to more easily understand the effect of the Company's
choice to use fair value on its earnings. It also requires entities to
display the fair value of those assets and liabilities for which the
Company has chosen to use fair value on the face of the balance sheet. SFAS
No. 159 is effective for the Company on January 1, 2009. 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.

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 was required
to be adopted by the Company in the first quarter of 2008. The adoption
SFAS No. 157 did not have a material impact on our financial position,
results of operations, or cash flows.

F-15

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

In 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.

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.

F-16

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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
=======

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 2007 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,
2008 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 $ --
=========

F-17

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

3. Notes Payable
-------------

Notes payable of $2,425,000 is composed of 32 individual notes executed
during the period beginning March 2002 and continuing through April 2004.
These notes, which are secured by the assets of ProtoSource and P2i
Newspaper, range between $25,000 and $200,000 on their face. All notes are
one-year renewable 10% interest (per annum) convertible promissory notes.
Each note can be prepaid, in whole or in part, without premium or penalty,
at any time. Upon prepayment of the entire principle amount of a note, all
accrued, but unpaid interest shall be paid to the holder on the date of
prepayment. At any time prior to or at the time of repayment, the holder
may elect to convert some or all of the principal and interest owing into
shares of the Company's common stock. The conversion rate shall equal the
amount to be converted, divided by each note's predetermined conversion
price established at note issuance or renewal. (Conversion prices, after a
series of renewals, range between $0.07 and $0.10.)

As a result of the beneficial conversion feature of these notes, through
December 31, 2008, 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, 2008 and 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, 2008 and
2007.

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

Significant components of deferred income taxes as of December 31, 2008 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. There was no change in the valuation allowance for deferred tax
assets during 2008. The Company will continue to review this valuation on a
quarterly basis and make adjustments as appropriate.

At December 31, 2008, the Company had federal and state net operating loss
carryforwards of approximately $15,900,000 and $3,300,000, respectively.
Such carryforwards expire in the years 2014 through 2028 and 2012 through
2028 for federal and state purposes, respectively.

F-18

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

5. Preferred Stock
---------------

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

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

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

Through December 10, 2007, the Company had authority for 10,000,000 shares
of no par value common stock with 9,927,329 shares issued and outstanding.
On December 11, 2007, the Company's shareholders approved an amendment to
our certificate of incorporation pursuant to which the authorized number of
shares of common would be increased to 500,000,000. The final vote
consisted of 6,153,548 ballots cast as follows: 5,713,630 "For", 431,355
"Against", and 8,563 "Abstain". At December 31, 2008 and 2007, 9,927,329 of
common shares were issued and outstanding.

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

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

On December 10 the board ratified a Company proposal to compensate
Colebrook Capital in full with 250,000 common shares. This is in respect of
an investment banking relationship entered into by the Company in 2007. The
goal was to raise funds to make an acquisition but the deterioration of the
equities markets has made this untenable and the relationship has been
terminated. The Company anticipates issuing these shares in Q2 of 2009.

F-19

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

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

In May 2001, the Company's shareholders approved the Company's 2000
Employee Stock Option Plan and the 2000 Executive Stock Option Plan which
remains in effect until May 2010 but may be terminated or extended by the
Board of Directors. The Executive Stock Option Plan has 350,000 shares
reserved for issuance with no stock options having been granted as of
December 31, 2008.

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

Leases - Capital
----------------

During 2008 and 2007, the Company leased certain computer equipment under
five noncancellable capital leases.

The following is a schedule of future minimum lease payments at December
31, 2008 under the Company's capital leases (together with the present
value of minimum lease payments).

2009 $ 59,544
2010 19,417
--------
Total minimum lease payments 78,961
Less amount representing interest (10,391)
--------
Present value of net minimum lease payments 68,570
Less current portion (49,524)
--------
$ 19,046
========

The cost for the capitalized leases was $134,480 and accumulated
depreciation was $55,132 as of December 31, 2008.

Leases - Operating
------------------

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 $27,400 and $36,000 of rent expense for each of
the years ended December 31, 2008 and 2007, respectively. This lease
commitment expired October 2008.

F-20

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

Leases - Operating
------------------

Beginning September 22, 2008, the company contracted to lease 1,300 square
feet of office space at 1236 Main Street, Hellertown, PA 18055. The term of
the tenancy agreement is for three years. The agreement states that the
company can terminate the agreement by giving written notice of 90 days to
the landlord. Under this arrangement, the Company has recorded
approximately $4,590 of rent expense in the year ended December 31, 2008.

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

2009 $18,610
2010 19,540
2011 14,760

Through June 2007, the Company leased 3,200 square feet of office space at
its facility in Cyberjaya, Selangor Malaysia. Beginning July 1, 2007 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 the company, as the tenant, has an option to renew
the lease through June 30, 2009. The company has continued to lease the
property under this understanding and will negotiate a new lease to be
effective July 1, 2009. The agreement also 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
$96,400 and $93,700 of rent expense for each of the years ended December
31, 2008 and 2007, respectively.

The Company's commitment under this lease is $48,200 for the year ended
December 31, 2009.

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:

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

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

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

F-21

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

The Company has a 401(k) savings plan for employees who are not covered by
any collective bargaining agreement, have attained age 21 and have
completed one year of service. Employee and Company matching contributions
are discretionary. The Company made no contributions for the years ended
December 31, 2008 and 2007. Company contributions, if any, vest as follows:

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

1 33%
2 66%
3 100%

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

Disclosures about the fair value of financial instruments, for the
Company's financial instruments, are presented in the table below. These
calculations are subjective in nature and involve uncertainties and
significant matters of judgment and do not include income tax
considerations. Therefore, the results cannot be determined with precision
and cannot be substantiated by comparison to independent market values and
may not be realized in actual sale or settlement of the instruments. There
may be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used could significantly affect the results. The
following table presents a summary of the Company's financial instruments
as of December 31, 2008 and 2007:

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

Financial liabilities - 2008:
Notes payable $2,425,000 $2,425,000
Capital lease obligations 68,570 68,570

Financial liabilities - 2007:
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.

F-22

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

13. Concentrations
--------------

Revenues for the years ended December 31, 2008 and 2007 include revenues
from one major customer that accounted for 14% and 31%, respectively, of
total Company revenues. Accounts receivable from this customer amounted to
5% and 24% of the Company's total accounts receivable at December 31, 2008
and 2007, respectively.

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

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

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

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

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

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

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

F-23

PROTOSOURCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
- --------------------------------------------------------------------------------

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

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

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

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

Financial information for the two reporting segments is shown below:

YEAR ENDED
DECEMBER 31,
2008 2007
----------- -----------

Net revenues:
Media & Data Conversion Technologies $ 2,170,853 $ 2,700,082
Technical Support & Hosting Services 1,364,881 424,994
----------- -----------
$ 3,535,734 $ 3,125,076
=========== ===========

Operating costs and expenses:
Media & Data Conversion Technologies $ 2,383,516 $ 2,584,106
Technical Support & Hosting Services 1,343,156 449,680
----------- -----------
$ 3,726,672 $ 3,033,786
=========== ===========

Net income (loss):
Media & Data Conversion Technologies ($ 657,823) ($ 849,373)
Technical Support & Hosting Services 32,441 (24,727)
----------- -----------
($ 625,382) ($ 874,100)
=========== ===========

Identifiable assets:
Media & Data Conversion Technologies $ 787,701 $ 917,003
Technical Support & Hosting Services 169,005 60,699
----------- -----------
$ 956,706 $ 977,702
=========== ===========

Net revenues by country:
United States $ 3,436,794 $ 3,053,624
Canada 13,678 9,839
Spain 31,488 21,949
United Kingdom 53,774 39,664
----------- -----------
$ 3,535,734 $ 3,125,076
=========== ===========

F-24

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 9A(T). 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 (COSO) 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, 2008.

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 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

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 from 1990 to 1993. From 1987 to
1990, he was Chief Executive Officer of Autoroos, Inc. Mr. Wardle received a
degree in accounting from Stockport College in the UK in 1978.

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. Resigned November
17 2008.

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. Resigned Nov 19 2008.

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-K.

ITEM 11. EXECUTIVE COMPENSATION.

Overview
- --------

The following is a discussion of our program for compensating our named
executive officers and directors. Currently, we do not have a compensation
committee, and as such, our board of directors is responsible for determining
the compensation of our named executive officers.

Compensation Program Objectives and Philosophy
- ----------------------------------------------

The primary goals of our policy of executive compensation are to attract and
retain the most talented and dedicated executives possible, to assure that our
executives are compensated effectively in a manner consistent with our strategy
and competitive practice and to align executives compensation with the
achievement of our short- and long-term business objectives.

The board of directors considers a variety of factors in determining
compensation of executives, including their particular background and
circumstances, such as their training and prior relevant work experience, their
success in attracting and retaining savvy and technically proficient managers
and employees, increasing our revenues, broadening our product line offerings,
managing our costs and otherwise helping to lead our Company.

Elements of Compensation
- ------------------------

Our compensation program for the named executive officers consists primarily of
base salary. There is no bonus plan, retirement plan, long-term incentive plan
or other such plans. The base salary we provide is intended to equitably
compensate the named executive officers based upon their level of
responsibility, complexity and importance of role, leadership and growth
potential, and experience.

Base Salary
- -----------

Our named executive officers receive base salaries commensurate with their roles
and responsibilities. Base salaries and subsequent adjustments, if any, are
reviewed and approved by our board of directors annually, based on an informal
review of relevant market data and each executive's performance for the prior
year, as well as each executive's experience, expertise and position. The base
salaries paid to our named executive officers in 2008 are reflected in the
Summary Compensation Table below.

Stock-Based Awards under the Equity Incentive Plan
- --------------------------------------------------

We reserve the right to provide equity awards as a component of compensation.
Our Stock Option Plan permits the granting of stock options to our employees,
directors, consultants and independent contractors. We believe that such awards
encourage employees to remain employed by the Company and also to attract
persons of exceptional ability to become employees of the Company.

Retirement Benefits
- -------------------

Currently, we do not provide any company sponsored retirement benefits to any
employee, including the named executive officers.

Perquisites
- -----------

Historically, we have not provided our named executive officers with any
perquisites and other personal benefits. We do not view perquisites as a
significant element of our compensation structure, but do believe that
perquisites can be useful in attracting, motivating and retaining the executive
talent for which we compete. It is expected that our historical practices
regarding perquisites will continue and will be subject to periodic review by
our by our board of directors.

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

Change in
Pension
Value and Non-
Qualified
Name & Stock Option Non-Equity Deferred All
Principal Salary Bonus Awards Awards Incentive Plan Compensation Other Total
Position Year ($) ($) ($) ($) Compensation ($) Earnings ($) Compensation ($) ($)
- ---------------------------------------------------------------------------------------------------------------------

Peter Wardle,
CEO (1) 2008 $150,735 0 0 0 0 0 0 $150,735
Peter Wardle,
CEO (1) 2007 198,679 0 0 0 0 0 0 198,679
Peter Wardle,
CEO (1) 2006 201,629 0 0 0 0 0 0 201,629
Thomas Butera,
COO (2) 2008 98,204 0 0 0 0 0 0 98,204
Thomas Butera,
COO (2) 2007 132,761 0 0 0 0 0 0 132,761
Thomas Butera
COO (2) 2006 155,884 0 0 0 0 0 0 155,884

(1) In respect to fiscal 2008, this represents salary of $78,846 and
$71,889 that relates to amounts advanced during 2007 but reclassified
(recorded) as compensation to Mr. Wardle during 2008. In respect to
fiscal 2007, this represents salary of $125,000 and $73,679 that
relates to amounts advanced during 2006 but reclassified (recorded) as
compensation to Mr. Wardle during 2007. In respect to fiscal 2006,
this represents salary of $125,000 and $76,629 that relates to amounts
advanced prior to January 1, 2006, but reclassified (recorded) as
compensation to Mr. Wardle during 2006. At December 31, 2008, $95,167
is classified as a reimbursable advance with potential to be
recognized as future compensation for Mr. Wardle.

(2) In respect to fiscal 2008, this represents salary of $70,962 and
$27,242 that relates to amounts advanced and reclassified (recorded)
as compensation to Mr. Butera during 2008. In respect to fiscal 2007,
this represents salary of $112,500 and $20,261 advanced to Mr. Butera
through December 31, 2007 and that relates to amounts advanced and
reclassified (recorded) as compensation to Mr. Butera during 2007. In
respect to fiscal 2006, this represents salary of $112,500 and $ 5,673
that relates to amounts advanced prior to 2006 and $37,711 that
relates to amounts advanced during 2006 and reclassified (recorded) as
compensation to Mr. Butera during 2006.

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 - - - - - - - - -
- --------------------- ------------ ------------- ------------ --------- ---------- ---------- ----------- ----------- -----------
Mark Balanchard - - - - - - - - -
- --------------------- ------------ ------------- ------------ --------- ---------- ---------- ----------- ----------- -----------
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 - - - - - - -
- ----------------------- ------------- ---------- ---------- ---------------- ------------------------ ---------------- -----------
Mark Blanchard - - - - - - -
- ----------------------- ------------- ---------- ---------- ---------------- ------------------------ ---------------- -----------
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, 2008, none of the Company's directors currently
receive any compensation for their service on the Board of Directors.

1999 Executive Officer Stock Option Plan
- ----------------------------------------

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

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

A total of 150,000 shares of authorized but unissued common stock have been
reserved for issuance pursuant to the 1999 Plan. As of December 31, 2008, no
options are outstanding under this Plan.

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

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

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

2000 Executive Officer Stock Option Plan
- ----------------------------------------

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

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

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, 2008, 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 12. 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, 2009, 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%
Mark Blanchard (4) 461,454 4.6%
Peter J. Pappas (5) 1,319,748 12.5%

All officers and directors as a group
(3 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, 1236 Main St, Unit C, Hellertown, PA 18055.

(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 13. 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
$294,086 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. $222,197 ($71,889 in 2008, $73,679 in 2007 and
$76,629 in 2006) of the $294,086 relates to amounts advanced to Mr. Wardle but
reclassified (recorded) as compensation to Mr. Wardle through 2008. At December
31, 2008, $95,167 was classified as an 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 $43,384 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, 2008 and 2007.

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 2008 and 2007, payments of
approximately $27,400 and $35,800, respectively, were paid to P2i's leaseholder.
The lease terminated October 31, 2008.

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, 2008 and December 31, 2007, and for review of the
financial statements included in the Company's quarterly reports on Form 10-QSB
during such fiscal years, were $37,000 and $35,500, respectively.

Audit-Related Fees. There were no 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 for the years ended December 31, 2008 or
2007.

Tax Fees. The aggregate fees billed for tax preparation and related services by
our auditors were $9,900 and $3,500 for the years ended December 31, 2008 and
2007, respectively.

All Other Fees. For the fiscal years ended December 31, 2008 and 2007, 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".

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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-K for the year ended
December 31, 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in Bethlehem, Pennsylvania, on April 13, 2009.

PROTOSOURCE CORPORATION

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

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

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

/s/ Peter Wardle Chief Executive Officer April 13, 2009
- ---------------------------- Chief Financial Officer
Peter Wardle (Principal Accounting
Officer), and Director

/s/ Thomas Butera Chief Operating Officer April 13, 2009
- ---------------------------- Director
Thomas Butera

/s/ Mark Blanchard Director April 13, 2009
- ----------------------------
Mark Blanchard