PSCO ProtoSource Corporation (PK)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission file number: 0-25594

 California 77-0190772
 ---------- ----------
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer", "accelerated filer," and "smaller" reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer? [ ]
Non-accelerated filer [ ] Smaller reporting company? [ X ]
(Do not check if a smaller reporting company)

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

There were 9,927,329 shares of the registrant's common stock, no par value,
outstanding as of March 31, 2008.

 PROTOSOURCE CORPORATION

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 MARCH 31, 2008
------------------------------------------------------------------------------------------


 INDEX
 -----


Part I - Financial Information (unaudited):


 Item 1. Condensed consolidated balance sheet -
 March 31, 2008 3

 Condensed consolidated statement of operations for the
 three-month periods ended
 March 31, 2008 and 2007 4

 Condensed consolidated statement of stockholders'
 deficiency for the three-month period ended March 31, 2008 5

 Condensed consolidated statement of cash flows for the
 three-month periods ended March 31, 2008 and 2007 6 & 7

 Notes to condensed consolidated financial statements
 for the three-month period ended March 31, 2008 8 to 16

 Item 2. Management's discussion and analysis of financial condition
 and results of operations 17 to 21

 Item 3. Quantitative and qualitative disclosures about market risk 21

 Item 4T. Controls and procedures 21


Part II - Other Information

 Other Information 22

 Signature and certifications 23



When used in this report, the words "estimate," "project," "intend," "believe"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures and
new product or service introductions by the Company and its competitors. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release updates or revisions to these statements.


- 2 -

 PROTOSOURCE CORPORATION

 CONDENSED CONSOLIDATED BALANCE SHEET
 MARCH 31, 2008
 (unaudited)
--------------------------------------------------------------------------------

 ASSETS

Current assets:
 Cash $ 168,528
 Accounts receivable, net of allowance of $2,000 303,402
 Advances to officers, net of obligations to officers 45,077
 ------------

 Total current assets 517,007
 ------------

Property and equipment, at cost, net of
 accumulated depreciation and amortization of $594,120 77,829
 ------------

Other assets:
 Goodwill - Acquisition of P2i Newspaper 375,067
 Deposits 8,748
 ------------

 Total other assets 383,815
 ------------

 Total assets $ 978,651
 ============


 LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
 Notes payable $ 2,425,000
 Current portion of obligations under capital leases 26,080
 Accounts payable 179,837
 Accrued interest 1,605,771
 Accrued expenses - other 589,710
 Amounts due to related party - P2i, Inc. 211,775
 ------------

 Total current liabilities 5,038,173
 ------------


Obligations under capital leases, non-current portion 11,447
Stock subscriptions payable 661,844
 ------------

 Total non-current liabilities 673,291
 ------------


Stockholders' deficiency:
 Preferred stock, Series B, no par value; 5,000,000 shares
 authorized, 193,836 shares issued and outstanding 416,179
 Common stock, no par value; 500,000,000 shares
 authorized, 9,927,329 shares issued and outstanding 26,143,461
 Additional paid-in capital 2,291,607
 Accumulated other comprehensive income 93,106
 Accumulated deficit (33,677,166)
 ------------

 Net stockholders' deficiency (4,732,813)
 ------------

 Total liabilities and net stockholders' deficiency $ 978,651
 ============

See accompanying notes.

- 3 -

 PROTOSOURCE CORPORATION

 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (unaudited)
--------------------------------------------------------------------------------



 THREE-MONTH
 PERIOD ENDED
 MARCH 31,
 2008 2007
 ------------ ------------



Net revenues $ 880,545 $ 659,314
 ------------ ------------

Operating costs and expenses:
 Cost of revenues 699,684 395,258
 Selling, general and administrative 300,754 225,159
 Depreciation and amortization 18,464 11,002
 ------------ ------------

 Total operating costs and expenses 1,018,902 631,419
 ------------ ------------

 Operating income (loss) (138,357) 27,895
 ------------ ------------

Other income (charges):
 Interest expense (103,940) (93,398)
 Other expense (22) (991)
 ------------ ------------

 Net other (charges) (103,962) (94,389)
 ------------ ------------


Net loss ($ 242,319) ($ 66,494)
 ============ ============


Net loss per basic and diluted
 share of common stock ($ 0.01) ($ -- )
 ============ ============


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




See accompanying notes.

- 4 -

 PROTOSOURCE CORPORATION

 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
 FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2008
 (unaudited)
------------------------------------------------------------------------------------------------------------------



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


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

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

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

 Total comprehensive (loss) -- -- -- -- --



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

Table continues below.

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


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

Net loss -- (242,319) (242,319) ($ 242,319)

Other comprehensive income, net of tax:
 Foreign currency translation
 adjustments 153 -- 153 153
 ------------ ------------ ------------ ------------

 Total comprehensive (loss) -- -- -- ($ 242,166)
 ============


Balance, March 31, 2008 $ 93,106 ($33,677,166) ($ 4,732,813)
 ============ ============ ============


See accompanying notes.

- 5 -

 PROTOSOURCE CORPORATION

 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 (unaudited)
------------------------------------------------------------------------------------------


 THREE-MONTH PERIOD
 ENDED
 MARCH 31,
 2008 2007
 --------- ---------


 INCREASE (DECREASE) IN CASH

Cash flows from operating activities:
 Net loss ($242,319) ($ 66,494)
 Adjustments to reconcile net loss to net cash
 provided by operating activities:
 Depreciation and amortization 18,464 11,002
 Provision for bad debts 2,000 --
 Changes in operating assets and liabilities:
 Accounts receivable 50,861 19,339
 Prepaid expenses and other assets -- (620)
 Accounts payable 53,548 27,370
 Accrued liability to related party - P2i, Inc. (27,025) --
 Accrued expenses 236,585 83,199
 --------- ---------

 Net cash provided by operating activities 92,114 73,796
 --------- ---------

Cash flows from investing activities:
 Acquisitions of property and equipment (2,391) (4,123)
 (Increase) decrease in amount due from related company 400 (22,471)
 (Increase) decrease in advances to officers 14,264 (9,035)
 --------- ---------

 Net cash provided by (used in) investing activities 12,273 (35,629)
 --------- ---------

Cash flows from financing activities:
 Payments on obligations under capital leases (8,393) (6,542)
 --------- ---------

 Net cash (used in) financing activities (8,393) (6,542)
 --------- ---------


Net increase in cash before effect of
 exchange rate changes on cash 95,994 31,625

Effect of exchange rate changes on cash 153 3,950
 --------- ---------

Net increase in cash 96,147 35,575

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

Cash at end of period $ 168,528 $ 40,417
 ========= =========


 CONTINUED ON NEXT PAGE


See accompanying notes.

- 6 -

 PROTOSOURCE CORPORATION

 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
 (unaudited)
------------------------------------------------------------------------------------



 THREE-MONTH PERIOD
 ENDED
 MARCH 31,
 2008 2007
 ------ ------


 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
 Interest $4,828 $3,680
 ------ ------
 Income taxes $ -- $ --
 ------ ------










See accompanying notes.

- 7 -

PROTOSOURCE CORPORATION

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. 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 3).

Effective January 1, 2004, the Company acquired P2i Newspaper, LLC. (see Note 4). P2i Newspaper is principally engaged in the conversion of text and graphics from print to interactive Web content. Its clients include newspaper groups located in the United States and the United Kingdom. P2i Newspaper is headquartered in Bethlehem, Pennsylvania and has a data conversion center located in Kuala Lumpur, Malaysia.

Basis of presentation - The accompanying unaudited condensed consolidated financial statements of the Company are prepared in conformity with generally accepted accounting principles. The disclosures presented are sufficient, in management's opinion, to make the interim information presented not misleading. All adjustments consisting of normal recurring adjustments, which are necessary so as to make the interim information not misleading, have been made. Results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results expected for the full fiscal year or for any future period. It is recommended that this financial information be read with the complete financial statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007 previously filed with the Securities and Exchange Commission. The accompanying condensed 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 of P2i Newspaper to successfully implement its strategic plan as follows:

PROTOSOURCE CORPORATION

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.

PROTOSOURCE CORPORATION

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

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

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

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

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

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

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

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

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

 PROTOSOURCE CORPORATION

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2008
 (unaudited)
--------------------------------------------------------------------------------

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

 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 March 31, 2008 9,927,329
 Stock subscriptions payable - note holders 2,750,000
 Stock subscriptions payable - investment banker 813,688
 Series B convertible preferred stock issued to P2i, Inc. (see Note 4) 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 March 31, 2008 and 2007 were not
 included in the computation of diluted loss per share.

 Reclassifications - Certain reclassifications have been made to the 2007
 financial statement presentation for comparability with the 2008 financial
 statements.











- 11 -

PROTOSOURCE CORPORATION

2. Recently Issued Accounting Standards

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 cost, 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 provision of SFAS 141R is not expected to have a material effect on the Company's financial position, results of operation, 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 interests 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.

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 was effective for the Company on January 1, 2007. The adoption of the provisions of SFAS No. 159 did not have a material effect on the Company's financial position, results of operations, or cash flows.

PROTOSOURCE CORPORATION

3. 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 is collateralized by a pledge of shares in Brand X. In addition, ProtoSource was entitled to appoint one person to the board of directors of Brand X for the duration of the agreement.

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

In an agreement dated March 2006, ProtoSource sold, assigned and transferred the promissory note it held in respect of the January 2004 sale of its ISP business to Brand X Networks, Inc. to P2i, Inc., a related party. As set forth in this transaction, a new promissory note, secured by all the assets of Brand X Networks, Inc., was issued to P2i, Inc. in the net amount of $162,582. The principal with interest shall be paid in 33 equal monthly installments of $5,172, until completely paid. Because regular payments have not been made, this successor note was in default status and has been fully reserved. During 2006, ProtoSource recovered $13,800 from the P2i, Inc. / Brand X Networks, Inc. promissory note arrangement. As the value of this note was written down to $0 at December 31, 2005, these 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 valued at approximately $57,000. Furthermore, it assumed specific 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.

PROTOSOURCE CORPORATION

3. 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 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 at August 28, 2007, plus an additional $272,000 in future obligations. As a consequence of this action, during 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 has deemed it to be impaired and recorded the charge of $566,186 in other charges in the consolidated statement of operations in 2007.

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

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

PROTOSOURCE CORPORATION

4. 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").

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

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

Market value of preferred stock to be issued $416,179
Fair market value of net assets of P2i Newspaper 41,112
 --------
Goodwill $375,067
 ========

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

PROTOSOURCE CORPORATION

5. 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:

THREE-MONTH
PERIOD ENDED
MARCH 31,

 2008 2007
 ----------- -----------


Net revenues
 Media & Data Conversion Technologies $ 534,631 $ 659,314
 Technical Support & Hosting Services 345,914 --
 ----------- -----------
 $ 880,545 $ 659,314
 =========== ===========

Income (loss) from operations
 Media & Data Conversion Technologies ($ 259,949) ($ 66,494)
 Technical Support & Hosting Services 17,630 --
 ----------- -----------
 ($ 242,319) ($ 66,494)
 =========== ===========

 MARCH 31, MARCH 31,
 2008 2007
 ----------- -----------

Identifiable assets
 Media & Data Conversion Technologies $ 823,472 $ 1,090,110
 Technical Support & Hosting Services 155,179 --
 ----------- -----------
 $ 978,651 $ 1,090,110
 =========== ===========

PROTOSOURCE CORPORATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.

Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking in nature and relate to the Company's plans, objectives, estimates and goals. Words such as "expects," "anticipates," "intends," "plans," "projects," "forecasts," "believes," and "estimates," and variations of such words and similar expressions, identify such forward-looking statements. Such statements are made pursuant to the safe harbor provisions of the private securities litigation reform act of 1995 and speak only as of the date of this report. The statements are based on current expectations, are inherently uncertain, are subject to risks and uncertainties and should be viewed with caution. Actual results and experience may differ materially from those expressed or implied by the forward-looking statements as a result of many factors, including, without limitation, those set forth under "Description of Business" in the Company's most recent Annual Report on Form 10-KSB. The Company makes no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.

Net Revenues - For the three months ended March 31, 2008 and 2007, net revenues were $880,545 and $659,314 respectively. $534,631 of revenues are attributed to the operations of P2i Newspaper acquired January 1, 2004 and $345,914 are attributed to the operations of ProtoSource Acquisition II (d.b.a.
"BX-Solutions") established August 15, 2007 with operations commencing September 1, 2007. This represents a combined increase of $221,231 in revenues over the previous year.

P2i Newspaper's net revenues are attributable to Media and Data Conversion Technologies and BX-Solutions' (ProtoSource Acquisition II) net revenues are attributable to Technical Support and Hosting Services operations.

As BX-Solutions did not operate in the 1st quarter of 2007, its revenues in the 1st quarter of 2008 represent an entirely new contribution to combined revenues. However, as P2i Newspaper recorded $659,314 during the same quarter in 2007, it recorded a reduction in revenues over last year of $124,683. This is largely attributable to competitive pricing in the marketplace that has resulted in substantially reduced unit prices to media companies within the newspaper vertical that have a demand for the conversion of large volumes.

Operating Costs and Expenses - For the three months ended March 31, 2008, operating costs and expenses totaled $1,018,902 versus $631,419 in 2007, a $387,483 rise over the previous year. $328,284 of this amount is directly attributable to the operations of ProtoSource Acquisition II, Inc. (d.b.a. BX-Solutions) which commenced operations September 1, 2007 and $59,199 is directly attributable to the operations of P2i Newspaper.

$690,618 of total operating costs and expenses are related to the operations of P2i Newspaper. This is an increase of approximately $59,000 over the preceding year and breaks down as follows: Approximately $19,000 in higher production expenditures needed to meet increased volumes, approximately $46,000 more in selling expenses, attributable to the retention of the Company's V.P. of Marketing and Sales, approximately $8,000 less in general and administrative costs, and approximately $2,000 more in depreciation expense.

For the three months ended March 31, 2008, combined cost of revenues as a percentage of revenues is 79.5% versus 60.0% for the same period in 2007. P2i Newspaper's cost of revenues rose 17.6% over the same period in 2007. This is due largely to the effect of a reduction in unit sales prices during a period of rising production costs driven by adverse changes in the Ringgit exchange rate. In respect to BX-Solutions, its cost of revenues for the three months ended March 31, 2008 reported to be 82.4%. {For comparison purposes, there were no BX-Solution operations during the three months ended March 31, 2007.}

PROTOSOURCE CORPORATION

For the three months ended March 31, 2008, combined selling, general and administrative expenses posted an increase of approximately $76,000 over the previous year due to the following significant components: In respect to BX-Solutions, which did not operate this time last year, approximately $36,000 is attributable to general and administrative costs for the facility in Fresno, CA and a $2,000 provision recorded for uncollectible accounts during the quarter. In respect to P2i Newspaper, approximately $46,000 more in selling expenses is attributable to the Company's sales and marketing program now driven by the hiring of a V.P. of Marketing and Sales, and approximately $8,000 less in general and administrative expenses, mostly attributable to a reduction in the Company's liability insurance and the period's travel expenses.

{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 $103,940 for the three-month period ended March 31, 2008 versus $93,398 in the same period in 2007. The interest expense is predominantly due to the convertible notes obtained during 2002, 2003, and 2004 to fund the operations of the Company and P2i Newspaper, pending and post merger, with approximately $5,000 and $4,000 attributable to equipment lease financing during 2008 and 2007, respectively.

PROTOSOURCE CORPORATION

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 three-month period ended March 31, 2008, the Company generated, or obtained from the Company's working capital resources, approximately $96,000 more cash than was used.

Even though the Company's net loss for the three-month period ended March 31, 2008 was approximately $242,000, cash flows provided by operations approximated $92,000. In part, this was due to non-cash charges of approximately $18,000 of depreciation and amortization and a $2,000 provision for uncollectible accounts included in the net loss. Additionally, cash flows from operations were enhanced approximately $315,000 by net positive changes in the Company's working capital components. Significant components enhancing working capital and available cash
- because they were accrued but unpaid during the period -- were as follows:
Approximately $99,000 of accrued interest arising from the Company's convertible debt obligations, approximately $127,000 of accrued supplier and service provider obligations together with office and facilities maintenance expenses, approximately $64,000 of accrued payroll expenses, and approximately $51,000 reduction in outstanding accounts receivable levels over that at the beginning of the year. These positive contributing factors of working capital and available cash were offset by an approximately $26,000 reduction in related party obligations.

During the three-month period ended March 31, 2008, the Company had net positive cash flows from investing activities of approximately $12,000. This primarily was due to an approximately $14,000 reduction in advances to directors and officers, offset by approximately $2,000 for acquisitions of new equipment.

And during the three-month period ended March 31, 2008, the Company used, through its financing activities, approximately $8,000 of funds for payments on capital lease obligations.

As of March 31, 2008, the Company had $168,528 in cash and $348,479 in accounts receivable and other current assets. Taken together with $5,038,173 of total current liabilities, this resulted in a negative working capital position of $4,521,166 at March 31, 2008. $4,030,771 of this amount pertains to the Company's obligations to its convertible debt holders.

PROTOSOURCE CORPORATION

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

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

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

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

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

At a meeting held on December 11, 2007, the Company's shareholders approved an increase in authorized shares of common stock to 500,000,000. At March 31, 2008, 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.

PROTOSOURCE CORPORATION

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

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

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

The Company considers certain trade accounts receivable to be of doubtful collection; accordingly, the Company has a $2,000 allowance for doubtful accounts.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A

Item 4T. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures.

As of March 31, 2008, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer, or CEO, who is also the acting chief financial officer, or CFO, of the effectiveness of the design and operation of our disclosure procedures. Based on management's evaluation as of as of the end of the period covered by this Report, our principal executive officer and chief financial officer has 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 significant 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.

PROTOSOURCE CORPORATION

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

From time to time the Company is subject to litigation incidental to its business. The Company is not currently a party to any material legal proceedings

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

None.

Item 5. OTHER INFORMATION.

Item 6. EXHIBITS.

Exhibits.

The following exhibits are filed with this report:

Exhibit 31.1 - Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350

PROTOSOURCE CORPORATION

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PROTOSOURCE CORPORATION

 /s/ Peter Wardle
 ----------------
 Peter Wardle,
 Chief Executive Officer/
 Chief Financial Officer


Date: May 15, 2008

ProtoSource (PK) (USOTC:PSCO)
過去 株価チャート
から 10 2024 まで 12 2024

ProtoSource (PK) (USOTC:PSCO)
過去 株価チャート
から 12 2023 まで 12 2024