PROTOSOURCE CORP
SB-2, 1997-11-21
COMPUTER INTEGRATED SYSTEMS DESIGN
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Filed with the Securities and Exchange Commission on November 21, 1997.
                                       Securities Act Registration No. 333-_____
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM SB-2
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

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

                             PROTOSOURCE CORPORATION
                 (Name of small business issuer in its charter)

        California                         7373                   77-0190772
        ----------                         ----                   ----------
  (State or jurisdiction of    (Primary Standard Industrial     (IRS Employer
incorporation or organization)   Classification Code No.)    Identification No.)

                          2300 Tulare Street, Suite 210
                                Fresno, CA 93721
                                 (209) 490-8600
          (Address and telephone number of principal executive offices)

                          2300 Tulare Street, Suite 210
                                Fresno, CA 93721
                                 (209) 490-8600
               (Address of principal place of business or intended
                          principal place of business)

                   Raymond J. Meyers, Chief Executive Officer
                          2300 Tulare Street, Suite 210
                                Fresno, CA 93721
                                 (209) 490-8600
           (Name, address, and telephone number of agent for service)

                        Copies of all communications to:

         Gary A. Agron, Esq.                      Snow Becker Krauss P.C.
         5445 DTC Parkway, Suite 520              Charles Snow, Esq.
         Englewood, CO 80111                      605 Third Avenue
         (303) 770-7254                           New York, New York 10158
         (303) 770-7257 (Fax)                     (212) 687-3860
                                                  (212) 949-7052 (fax)

     Approximate date of proposed sale to public:  As soon as practicable  after
the effective date of the Offering.

                                                   

<PAGE>



     If this Form is filed to  register  additional  securities  for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list  the  Securities  Act  registration  statement  number  of the  earlier
effective registration statement for the same offering.

     If this Form is a  post-effective  amendment  filed pursuant to Rule 462(c)
under the  Securities  Act,  check the following box and list the Securities Act
registration  statement number of the earlier effective  registration  statement
for the same offering.

     If delivery of the  Prospectus is expected to be made pursuant to Rule 434,
please check the following box:

                         CALCULATION OF REGISTRATION FEE
================================================================================

 Title of each class        Amount to       Proposed     Proposed     Amount of
    of securities         be registered   maximum price   maximum   registration
   to be registered                         per unit     aggregate      fee
                                                         offering
                                                           price
================================================================================
Units, consisting of       1,035,000
one share of Common         Units           $6.00(1)     $6,210,000     $1882
Stock, no par value
and one Warrant

Common Stock, no           1,035,000        $6.00(2)     $6,210,000     $1882
par value, underlying       Shares
Warrants included in
the Units

Underwriter's                 90,000         $.0011                     $ -0-
Warrants                    Warrants

Units underlying              90,000        $7.20(4)       $648,000     $ 196
Underwriter's               Units(3)
Warrants consisting of
one share of Common
Stock and one
Warrant

Common Stock, no              90,000        $6.00(2)       $540,000     $ 164
par value, underlying       Shares
Warrants included in
Underwriter's
Warrants
Totals.......................................           $13,608,000     $4124


                                       ii


<PAGE>

(1)  Based upon the closing bid price of the  Registrant's  Common  Stock on the
     Electronic  Bulletin Board of the NASD (the  "Bulletin  Board") on November
     18, 1997, which is the price for which the Units are to be offered.

(2)  Represents  the closing bid price of the  Registrant's  Common Stock on the
     Bulletin Board on November 18, 1997.

(3)  Pursuant to Rule 416 of the Securities Act of 1933, as amended,  the number
     of shares issuable upon exercise of the  Underwriter's  Warrants is subject
     to adjustment with anti-dilution provisions of such warrants.

(4)  Based upon 120% of the Unit public offering price.

     The registrant  hereby amends this  registration  statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further  amendment  which  specifically  states  that  this  registration
statement shall  thereafter  become effective in accordance with Section 8(a) of
the  Securities  Act of 1933 or until the  registration  statement  shall become
effective on such date as the Commission,  acting pursuant to said Section 8(a),
may determine.

               (EXHIBIT INDEX LOCATED ON PAGE     OF THIS FILING)



                                       iii

<PAGE>



Subject to Completion                                    Dated November 21, 1997

                             PROTOSOURCE CORPORATION

                                  900,000 Units

     ProtoSource  Corporation  (the  "Company")  is  offering  (the  "Offering")
through  Andrew,  Alexander,  Wise &  Company,  Inc.  as  representative  of the
underwriters  (the  "Underwriter"),  900,000 Units of the  Company's  securities
("Units"). Each Unit consists of one share of no par value common stock ("Common
Stock") and one redeemable common stock purchase warrant ("Warrant"),  priced at
$_____ per Unit  representing  the closing bid price of the Common  Stock on the
Electronic  Bulletin Board of the National  Association  of Securities  Dealers,
Inc.  ("Bulletin  Board") on the date of this  Prospectus.  The Common Stock and
Warrants are separately  tradeable  immediately  upon issuance.  Each Warrant is
exercisable to purchase one share of Common Stock at an exercise price of $_____
per share (100% of the  closing  bid price of the Common  Stock one day prior to
the date hereof on the Bulletin  Board) for a period of five years from the date
hereof and may be redeemed  by the  Company  after one year from the date hereof
for $.10 per Warrant on 30 days'  written  notice to the  Warrantholders  if the
closing  bid price of the  Common  Stock on the  NASDAQ  SmallCap  Market or the
Bulletin Board is at least $____ per share (150% of the closing bid price of the
Common  Stock on the  Bulletin  Board one day prior to the date  hereof)  for 20
consecutive  trading  days,  ending not earlier than 15 days before the Warrants
are called for redemption. See "Risk Factors" and "Underwriting."

     The Company's Common Stock currently trades on the Bulletin Board under the
symbol  "PSCO".  On November 18, 1997, the closing bid price of the Common Stock
on the Bulletin  Board was $5.75 per share.  The Company has applied to list the
Common Stock and Warrants (but not the Units) on the NASDAQ SmallCap Market.

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

             THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
            BY THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION")
                     NOR HAS THE COMMISSION PASSED UPON THE
                    ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
            ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

           THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
            AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN
              A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS."

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

     The  Units are  offered  by the  Underwriter  on a firm  commitment  basis,
subject  to  prior  sale,  when,  as and if  delivered  to and  accepted  by the
Underwriter  and  subject  to  certain  conditions,  including  the right of the
Underwriter  to  reject  orders  in  whole or in part.  It is  anticipated  that
delivery  of  certificates  representing  the  securities  will be made  against
payment  therefor in New York, New York on or about three business days from the
date of this Prospectus.

                                        1

<PAGE>


================================================================================
                 Price to Public  Underwriting Discounts    Proceeds to Company
                                  and Commissions(1)        (2)(3)
- -------------------------------------------------------------------------------
Per Unit.............$__________  $_______________          $____________


- -------------------------------------------------------------------------------
Total................$__________  $_______________          $____________

===============================================================================

(1)  Excludes a nonaccountable  expense  allowance payable to the Underwriter of
     $________,  a $180,000  three year  consulting  fee,  and the  issuance  of
     warrants to the Underwriter (the  "Underwriter's  Warrants") to purchase up
     to 90,000  Units at a price of $______  per Unit.  The  Company has granted
     certain  registration  rights  with  respect  to the Units  underlying  the
     Underwriters'  Warrants and has agreed to indemnify the Underwriter against
     certain liabilities, including liabilities under the Securities Act of 1933
     (the "1933 Act"). See "Underwriting."

(2)  Before deducting costs of the Offering estimated to be $________, including
     the Underwriter's nonaccountable expense allowance. See "Underwriting."

(3)  Does  not  include  the   exercise   of  the   Underwriter's   option  (the
     "Overallotment  Option"),  exercisable within 45 days from the date of this
     Prospectus,  to purchase from the Company up to 135,000 additional Units on
     the same terms as the Units offered hereby solely to cover  overallotments,
     if any. If the  Overallotment  Option is exercised in full, the total Price
     to Public,  Underwriting  Discounts and Commissions and Proceeds to Company
     will  be  $__________,   $__________  and  $________,   respectively.   See
     "Underwriting."

                     Andrew, Alexander, Wise & Company, Inc.
                                 17 State Street
                            New York, New York 10004
                                 (800) 303-5424

                The date of this Prospectus is __________, 1997.



                                        2

<PAGE>



                              AVAILABLE INFORMATION

     The Company has filed with the  Securities  and  Exchange  Commission  (the
"Commission"),  Washington,  D.C.,  a  Registration  Statement on Form SB-2 (the
"Registration  Statement")  under the 1933 Act with  respect  to the  securities
offered  hereby.  This Prospectus does not contain all the information set forth
in the Registration Statement,  certain items of which are omitted in accordance
with the rules and regulations of the Commission.  For further  information with
respect to the Company and the securities offered by this Prospectus,  reference
is made to such  Registration  Statement  and the exhibits  thereto.  Statements
contained  in this  Prospectus  as to the  contents  of any  contract  or  other
documents are not necessarily complete and in each instance reference is made to
the  copy  of such  contract  or  other  document  filed  as an  exhibit  to the
Registration Statement for a full statement of the provisions thereof; each such
statement contained herein is qualified in its entirety by such reference.

     The Company is subject to the informational  requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and, in accordance  therewith,
files reports, proxy statements and other information with the Commission.  Such
reports,  proxy statements and other  information may be inspected and copied at
public  reference  facilities  of the  Commission  at  450  Fifth  Street  N.W.,
Washington,  D.C. 20549; 500 West Madison Street, Suite 1400, Chicago,  Illinois
60661;  7 World  Trade  Center,  New York,  New York  10048;  and 5757  Wilshire
Boulevard,  Los  Angeles,  California  90036.  Copies  of such  material  can be
obtained from the Public Reference Section of the Commission at 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates.

     CERTAIN PERSONS  PARTICIPATING  IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE,  MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH  SECURITIES  AND THE  IMPOSITION  OF A PENALTY BID IN  CONNECTION  WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

     The Company  furnishes  annual  reports  which  include  audited  financial
statements to its stockholders. The Company may also furnish quarterly financial
statements  to its  stockholders  and such other reports as may be authorized by
its Board of Directors.





                                        3

<PAGE>



                               PROSPECTUS SUMMARY

     The  following  is a  summary  of  certain  information  contained  in this
Prospectus  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 Prospectus include
forward-looking statements which are subject to risks and uncertainties that may
cause actual results to differ  materially.  These risks and  uncertainties  are
detailed  throughout the  Prospectus and will be further  discussed from time to
time  in  the  Company's  periodic  reports  filed  with  the  Commission.   The
forward-looking  statements included in the Prospectus speak only as of the date
hereof.

                                   The Company

     The Company  provides  Internet access and related services to individuals,
public  agencies and businesses in six small Central  California  cities.  As of
September  30,  1997,  the  Company had 2,700  subscribers  for whom it provided
Internet access up from 250 subscribers in July 1995. See "History." The Company
intends to acquire other small Internet providers in markets with populations of
less than 500,000 that are located in various Central  California cities between
Sacramento  and  Bakersfield.  The Company  believes that certain of these local
Internet providers  currently doing business in the Company's target markets are
unable to effectively manage the financial and administrative burdens imposed by
the  continuing  consumer  demand  for local  Internet  services,  unless  these
providers are integrated into larger,  more  diversified  Internet  products and
services  companies.  The Company has  addressed  these kinds of  financial  and
administrative  burdens  by (i)  expanding  its  operations  throughout  Central
California,   (ii)  developing   diversified  services  similar  to  its  larger
competitors,  such as hourly-based  access services,  special access to packages
for business and high speed access, and (iii) investing in automated billing and
administrative systems. The Company believes these resources will not only allow
it to compete  effectively  with larger  access  firms  entering  the  Company's
markets,  but also will  facilitate  the  Company's  efforts  to  attract  small
Internet providers. The Company's long-term plan is to target a select number of
such markets and increase  revenues  through  acquisition in these markets.  The
Company is not  currently  negotiating  to acquire,  nor has it entered into any
agreement to acquire,  any other  companies.  See  "Management's  Discussion and
Analysis of  Financial  Condition  and Results of  Operations"  and  "Business -
Introduction.".

     The Company's  strategy is to provide low cost direct  Internet  access and
other  Internet  related  products and services to  subscribers  or customers in
target  markets.  The Company will seek to effectuate this strategy by acquiring
small  Internet  providers,  by expanding  marketing  operations in its existing
markets,  by offering  Internet  related  products and services and by acquiring
other  computer  oriented  companies.  The  Company  will also seek to  generate
additional  revenues  by (i)  increasing  monthly  Internet  access  fees  while
offering  additional  Internet  products and  services,  (ii)  offering  monthly
community access services,  (iii) providing Internet  consulting  services,  and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet.

                                        4

<PAGE>

    

                                  The Offering

Securities offered (1)....................   900,000 Units, each Unit consisting
                                             of one share of Common Stock and
                                             one Warrant

Offering price............................   $___________ per Unit

Common Stock outstanding
 prior to the Offering (1)................   665,333 shares

Common Stock Outstanding
 After the Offering (1)...................   1,565,333

Use of Proceeds...........................   For repayment of debt, acquisition
                                             of small Internet access providers
                                             and other computer oriented
                                             companies, for marketing expenses
                                             and working capital. 
                                             See "Use of Proceeds"

Bulletin Board Symbol.....................   PSCO - Common Stock

Proposed NASDAQ SmallCap Symbols..........   PSCO - Common Stock
                                             PSCOW - Warrants

Transfer Agent............................   Corporate Stock Transfer, Inc.

- ----------

(1)  Excludes (i) up to 900,000  shares  issuable upon exercise of the Warrants,
     (ii) up to 270,000  shares  issuable  upon  exercise  of the  Overallotment
     Option and the Warrants  included  therein,  and (iii) up to 453,333 shares
     issuable  upon  exercise of other  outstanding  warrants and  options.  See
     "Dilution", "Capitalization", "Management-Executive Compensation", "Certain
     Transactions", "Description of Securities" and "Underwriting."




                                        5

<PAGE>



                          Summary Financial Information

     The  following   financial   information  is  derived  from  the  financial
statements  of the  Company  appearing  elsewhere  herein  and should be read in
conjunction with such financial statements. See "Financial Statements."

                                                          Nine Months Ended
                           Year Ended December 31,           September 30,
                         --------------------------  --------------------------
                             1996          1995          1997            1996
                                                     (Unaudited)    (Unaudited)
Income Statement Data:
Revenues                 $   697,581   $   100,901   $   550,969    $   544,590
(Loss) from continuing
 operations                 (672,791)     (974,578)   (1,455,284)      (417,782)
Net (loss)                (1,409,800)   (1,816,285)   (1,455,284)      (681,982)
Net (loss) per share           (7.74)       (22.04)        (2.61)      (   7.69)
Weighted average number
  of shares outstanding      182,037        82,439       557,897         86,667


                                  September 30,
                                      1997         As Adjusted(1)
Balance Sheet Data:
Working capital (deficit)          $ (584,615)       $__________
Total assets                        3,255,812         __________
Long-term debt                      1,812,493         __________
Total liabilities                   2,716,996         __________
Stockholders' equity                  538,816         __________

 ----------

(1)  As adjusted to give effect to the receipt and  application of the estimated
     net  proceeds  of the  Offering  without  giving  effect to exercise of the
     Warrants, the Underwriter's Warrants or other outstanding warrants or stock
     options. See "Use of Proceeds" and "Description of Securities."




                                        6

<PAGE>
                                 THE COMPANY

     From July 1988,  until August 1996, the Company's  primary  business was to
design,  develop and market  software  programs  (and related  hardware) for the
agri-business  industry  including produce broker accounting  programs,  product
tracking  programs,  crop chemical usage reports,  crop cost and billing systems
and fruit  accounting  programs.  The programs were packaged under the Company's
"Classic" line of products and were divided by function, sophistication and size
of the customer into "Classic" (appropriate for customers whose annual sales are
less than $10 million),  "Classic  Advantage"  (appropriate  for customers whose
annual  sales are between $10 million and $100  million)  and  "Classic  Custom"
(appropriate  for  customers  whose annual sales  exceed $100  million).  Prices
ranged from $20,000 for a "Classic"  program to $200,000 for a "Classic  Custom"
program.   The  Company  also  designed  and  sold  customized  computer  system
configurations which integrated hardware and software. The Classic product line,
together with the Company's  design services and hardware and software sales, is
collectively referred to as the "Classic Line."

     In February 1995, the Company  completed an initial public offering ("IPO")
of its  securities,  consisting  of the sale of  46,000  Units to the  public at
$82.50 per Unit. Each Unit consisted of one share of Common Stock and one common
stock purchase warrant (the "Prior Warrants") to purchase an additional share of
Common  Stock  at  $97.50  per  share  until  February  1998.   McClurg  Capital
Corporation,  the  Representative  of the  Underwriters  of the IPO (the  "Prior
Representative"), received warrants (the "Prior Representative's Unit Warrants")
to purchase 4,000 Units at $99.00 per Unit until February 2000. In May 1997, the
Company  registered 186,666 Common Stock Purchase Warrants and 186,666 shares of
Common Stock  underlying  these Warrants  together with 426,667 shares of Common
Stock (collectively the "May 1997 Securities").

     In July 1995, the Company acquired ValleyNet Communications  ("ValleyNet"),
a small  Internet  access  provider  for $50,000 in cash and the issuance of 334
shares of the Company's Common Stock. At the time of its acquisition,  ValleyNet
operated  out of one  location in Fresno,  California  and had 250  subscribers.
Since that time,  the Company has increased  its Internet  locations to six, and
increased its subscribers to 2700 at September 30, 1997.

     In December 1996,  the Company sold the Classic Line to a Canadian  company
for $300,000 in cash and an unsecured  promissory note which the Company has not
carried as an asset on its financial  statements.  As a part of the transaction,
the Company  received an exclusive  worldwide  license through December 2006, to
market the  Classic  Line  subject  to the  payment of a royalty of 16% of gross
sales to the Canadian company.

                                        7

<PAGE>



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

     In October 1996,  the Company sold 400,000  shares of its Common Stock to a
group of  investors  for $3.75 per share or a total of  $1,500,000  (the "Common
Stock Placement").  Included in the $1,500,000 was the conversion of $200,000 of
debt to equity which was  originally  represented by a bridge loan for which the
Company  issued  26,667  shares of its  Common  Stock to the  bridge  lenders as
additional  consideration for the $200,000 loan. The Company also issued 186,666
Warrants  exercisable at $3.75 per share in connection  with the bridge loan and
the private placement.  The 426,667 shares,  186,666 Warrants and 186,666 shares
underlying the Warrants were registered with the Commission in May 1997.

     Between June and September  1997,  the Company issued 150,000 shares of its
Common Stock as additional consideration for a $750,000 bridge loan (the "Bridge
Loan") advanced to it by eight bridge lenders.  The Company intends to repay the
Bridge Loan with proceeds of the Offering.

     The Company was  incorporated in the State of California as SHR Corporation
on July 1, 1988, and changed its name to  "ProtoSource  Corporation"  in October
1994.  The  Company's  principal  executive  offices  are located at 2300 Tulare
Street, Suite 210, Fresno, California 93721, telephone (209) 490-8600.


                                       8

<PAGE>
             

                                  RISK FACTORS

     In evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other  information  presented
in this Prospectus.

     Prospective  purchasers of the Common Stock should  carefully  consider the
following risk factors and the other  information  contained in this  Prospectus
before making an investment in the Common Stock.  Information  contained in this
Prospectus contains "forward-looking  statements" which can be identified by the
use  of  forward-looking  terminology  such  as  "believes,"  "expects,"  "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology,  or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
"Business - Strategy." No assurance can be given that the future results covered
by the  forward-looking  statements  will be  achieved.  The  following  matters
constitute cautionary  statements  identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking  statements.  Other factors could also cause actual results
to vary  materially  from the future  results  covered in such forward-  looking
statements.

     Limited  History  of  Operations;  Significant  Losses:  Deficit In Working
Capital.  The  Company  was  incorporated  in July  1988 but has  only  provided
Internet access services since July 1995.  Prior to August 1996, the Company was
engaged primarily in the agricultural software development business and incurred
significant  losses of $373,096,  $1,816,285  and $1,409,800 for the years ended
December  31,  1994,  1995 and 1996,  respectively.  For the nine  months  ended
September 30, 1997, the Company  reported a loss of $1,455,284 and had a working
capital deficit of $584,615, which could significantly limit its operations. See
"Financial  Statements." There can be no assurance that the Company will achieve
profitability  or positive  cash flow from  operations.  The Company  expects to
focus in the near term on building and increasing its Internet  subscriber base,
which will require it to  significantly  increase  its  expenses for  personnel,
marketing,  network  infrastructure  and the  development of new services.  As a
result,  the Company believes that it may incur further losses in the near term.
The Company may find it necessary to seek additional  equity capital if its cash
flow continues to be insufficient  to fund its desired  growth.  There can be no
assurance  that the  Company can obtain such  additional  capital,  and if it is
unable to do so, it will be unable to expand its  operations,  should it require
such capital.  (See also "Risk Factors - Need for  Additional  Financing.")  The
Company's  prospects  must be  considered  in light of the risks,  expenses  and
difficulties  frequently  encountered  by  companies  in  their  early  stage of
development,  particularly companies in new and rapidly evolving markets such as
the  Internet.  To address these risks,  the Company  must,  among other things,
respond to  competitive  developments,  attract,  retain and motivate  qualified
persons,  and continue to upgrade its  technologies and  commercialize  services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing these and other risks.


                                        9

<PAGE>



     Risks  Associated With Defaults by SSC and the SSC Principals.  The Company
is the payee of a  promissory  note from SSC  guaranteed  by the SSC  principals
which bears  interest at 10% per annum and is due January 2007.  SSC and the SSC
principals have also agreed (i) to assume certain trade accounts  payable of the
Company in the  approximate  amount of $500,000  and (ii) to  sublease  from the
Company  certain office space at a rental of $12,000 per month through  February
1998.  In the event SSC and the SSC  principals  default  on, or for any  reason
elect not to pay, any of these  obligations,  the Company's  operations would be
materially  adversely affected.  The Company has not received rental payments on
the aforesaid  sublease  since April 1997 and has been advised by certain of its
trade account  creditors that such  creditors have not received  payments on the
accounts from SSC or the SSC principals. Some of these creditors have threatened
to bring suit  against the  Company and the Company has been  required to return
possession of the subject office space to the Company's landlord.  See "Business
- - Properties, "Business - Litigation", and "Certain Transactions."

     Litigation.  The  Company is  involved  in a number of  litigation  matters
generally  resulting  from  defaults  by SSC and the SSC  Principals  and claims
against the Company  filed by the SSC  Principals.  Payment of any  judgments or
settlements in connection with these litigation  matters together with the costs
of defending such matters could  materially  and adversely  affect the Company's
operations. See "Business - Litigation."

     Risks  Associated  With  Acquisitions.  Although  the  Company  intends  to
increase revenues in part through acquisition of small Internet access providers
and other computer  oriented  companies  using proceeds of the Offering,  it has
limited  experience  in this  regard  and may  acquire  companies  with  limited
operating  or  negative  operating  history.  Should the Company  acquire  other
companies that incur operating losses,  the Company's  operating results will be
further adversely affected. The Company is not negotiating to acquire nor has it
entered into any  agreements  to acquire any such  companies and there can be no
assurance it will complete any such acquisitions in the future.

     Fluctuations  in Operating  Results.  As a result of the Company's  limited
Internet  services  operating  history,   the  Company  has  limited  historical
financial  data on which to predict future  operating  expenses.  Moreover,  the
Company may experience fluctuations in operating results in the future caused by
various factors, some of which are outside of the Company's control,  including,
but not limited to, general economic conditions, specific economic conditions in
the Internet  services  industry,  user demand for the Internet,  the amounts of
capital expenditures and other costs related to the expansion of operations, the
timing of customer  subscriptions,  the introduction of new Internet services by
the Company or its  competitors,  the mix of such services sold and the channels
through  which those  services are sold.  As a strategic  response to a changing
competitive  environment,  the  Company  may elect,  from time to time,  to make
certain pricing,  service or marketing decisions or acquisitions that could have
a material adverse effect on the Company's  business,  results of operations and
cash flow from quarter to quarter. See "Business" and "Financial Statements."




                                       10

<PAGE>



     Competition.   The  market  for   Internet   services  is  new,   intensely
competitive,  rapidly evolving and subject to rapid  technological  change.  The
Company expects  competition to persist and intensify in the future.  Almost all
of the  Company's  current  and  potential  competitors  have  longer  operating
histories,  greater name  recognition,  larger customer bases and  significantly
greater  financial,  technical and marketing  resources  than the Company.  Such
competition could materially adversely affect the Company's business,  operating
results  or  financial  condition.  Moreover,  because  many  of  the  Company's
competitors possess financial resources  significantly greater than those of the
Company, such competitors could initiate and support prolonged price competition
to gain market share.  If significant  price  competition  were to develop,  the
Company  likely  would be forced to lower its prices,  possibly for a protracted
period,  which would have a material  adverse effect on its financial  condition
and  results  of  operations  and could  threaten  its  economic  viability.  In
addition,  the Company  believes that the Internet  service and on-line services
business is likely to encounter  consolidation  in the near future,  which could
result in increased price and other competition in the industry and consequently
have an  adverse  impact on the  Company's  business,  financial  condition  and
results of operations. See "Business - Competition."

     New and  Uncertain  Market;  New  Entrants.  The market for local  Internet
service providers is in its early stages.  Since this market is new, and because
current and future  competitors  are likely to  introduce  new  products,  it is
difficult  to  predict  the forms of  competition  or the  competitors  that may
develop.  There can be no assurance that the Company's  local Internet  provider
business can compete  against new or  developing  competitors  or that any local
provider can maintain its customer base against formidable national or other new
local   competitors,   or  that  Internet  access  will  remain   attractive  to
subscribers. See "Business - Marketing."

     Few Barriers to Entry.  There are few significant  barriers to entry in the
Internet access business.  Accordingly,  the Company expects ongoing substantial
competition in its markets from new local Internet service providers, as well as
existing  local and national  Internet  providers.  The  Company's  success will
depend on its ability to compete against these new and existing providers.

     Importance  of  Entering  New  Markets and  Identifying  Acquisitions.  The
Company's  business  plan calls for it to continue to enter new local markets in
order to grow.  Entry into new local markets  depends in part on acquiring small
access providers in secondary markets at favorable  prices.  Because there are a
limited number of small access providers in the Company's target markets,  there
can be no  assurance  that the Company can acquire  such  companies on favorable
terms, or at all, or that it can obtain financing for such acquisitions.  Should
the  Company  be  unable to locate  companies  in  suitable  local  markets  for
acquisitions its growth would be adversely affected. See "Business - Strategy."

     Technological  Changes.  The Internet is  characterized by rapidly changing
technology,  evolving industry standards, changes in customer needs and frequent
new service and product introductions. The Company's future success will depend,
in part,  on its ability to  effectively  use new  technologies,  to continue to
enhance its current Internet access and other services,  to develop new services
that meet changing  customer  needs, to advertise and market its services and to


                                       11

<PAGE>


influence and respond to emerging  industry  standards  and other  technological
changes on a timely and cost effective basis.

     Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct  regulation by any government  agency,  other than regulations
applicable  to  businesses  generally,  and  there  are  currently  few  laws or
regulations  directly  applicable to providing Internet access or other services
on the  Internet.  However,  due to the  increasing  popularity  and  use of the
Internet,  it is possible that laws and  regulations may be adopted with respect
to the Internet which may decrease the demand for Internet access,  increase the
Company's  cost of doing  business or  otherwise  have an adverse  effect on the
Company's operating results or financial condition.

     Dependence  on the Internet.  The  Company's  business will depend in large
part upon a robust industry and infrastructure for providing Internet access and
carrying  Internet  traffic.  Notwithstanding  current  interest  and  worldwide
subscriber growth, the Internet may not prove to be a viable marketplace because
of inadequate development of the necessary  infrastructure or timely development
of complementary  products,  such as high speed modems.  Because global commerce
and on-line  exchange of  information  on the Internet,  Web and other open area
networks are new and  evolving,  it is  difficult to predict with any  assurance
whether the Internet will prove to be  economically  viable in the long term. If
the necessary  infrastructure or complementary products are not developed, or if
the Internet does not become an economically viable  marketplace,  the Company's
business, operating results and financial condition will be materially adversely
affected. See "Business - The Internet and the World Wide Web."

     Potential  Liability for Information  Disseminated  On-Line.  Civil actions
have been  brought  for libel  and  negligence  in  connection  with  electronic
messages  posted  through  on-line access  systems.  Such actions seek to impose
liability   upon  Internet   access  and  service   providers  for   information
disseminated  through  their  systems.  Any actions  against  the Company  could
significantly  and adversely  effect its operations.  The Company does not carry
insurance against such actions or liabilities arising thereunder.

     Risk of System Failure;  Limited  Insurance.  The success of the Company is
dependent  upon its ability to offer high quality,  uninterrupted  access to the
Internet. Any system failure that causes interruptions in the Company's Internet
operations could have a material adverse effect on the Company. If the Company's
subscriber  base  expands,  there  will be  increased  stress  placed  upon  the
Company's server hardware and traffic management  systems.  The Company's server
hardware  is also  vulnerable  to damage  from fire,  earthquakes,  power  loss,
telecommunications  failures and similar events.  The Company  carries  property
damage  insurance  with a  basic  policy  limitation  of  $250,000,  subject  to
deductibles  and  exclusions.  Such  coverage,  however,  may not be adequate to
compensate the Company for all losses that may occur.  Moreover,  significant or
prolonged  system  failure could damage the reputation of the Company and result
in the loss of subscribers.




                                       12

<PAGE>



     Need for Additional Financing.  The Company may be required to seek debt or
equity financing in the future to fund expansion  activities and acquisitions of
small access providers. There can be no assurance that additional financing will
be available to the Company on  acceptable  terms,  or at all. Any future equity
financing  may involve  substantial  dilution to the  interests of the Company's
stockholders. See "Financial Statements."

     Dependance Upon Management. The Company's success is dependent in part upon
the continued  employment of Raymond J. Meyers, its Chief Executive Officer. The
Company has an employment  agreement with Mr.  Meyers,  and intends to apply for
key man life insurance upon his life in the face amount of $1,000,000.  The loss
of the services of Mr. Meyers for whatever reason would have a material  adverse
effect upon the Company's operations. See "Management."

     No Dividends.  The Company does not intend to pay any cash dividends on its
Common  Stock  in the  foreseeable  future.  Earnings,  if any,  will be used to
finance growth. See "Description of Securities - Dividends."

     Possible  Volatility of Securities  Prices.  The future market price of the
Company's  securities  may be  highly  volatile,  as has been the case  with the
securities  of  other  small  capitalization  companies.  Factors  such  as  the
Company's  operating  results  and public  announcements  by the  Company or its
competitors  may have a significant  effect on the market price of the Company's
securities.   In  addition,   market   prices  for   securities  of  many  small
capitalization  companies  have  experienced  wide  fluctuations  in response to
variations in quarterly operating results, general economic indicators and other
factors beyond the control of the Company.  The  registration  of the securities
offered hereby coupled with the exercise of the Warrants could further  increase
the  volatility  of the Common Stock by  increasing  the number of shares of the
Company's publicly traded Common Stock outstanding.

     Shares  Eligible for Future Sale.  Sales of  substantial  amounts of Common
Stock in the open  market or the  availability  of such  shares  for sale  could
adversely  affect the market price for the Common Stock.  As of the date hereof,
there are 665,333 shares of the Company's Common Stock outstanding, of which (i)
46,000 shares were registered for sale in the Company's IPO, (ii) 426,667 shares
and 186,666  shares  underlying  186,666  Common Stock  Purchase  Warrants  were
registered  in May 1997,  (iii) 42,666  shares may  currently be sold under Rule
144, and (iv) 150,000 shares may be sold under Rule 144 commencing in July 1998.
The holders of 30,300  shares have agreed to refrain  from  selling  such shares
until October 1999 without the prior  written  consent of the  Underwriter.  The
Underwriter's  Warrants  (and the  component  securities)  together with 150,000
shares of Common Stock issued in connection  with the Bridge Loan are subject to
piggy-back and demand  registration  rights.  See  "Description  of Securities -
Common Stock Eligible for Future Sale" and "Underwriting."

     Authorization  and Issuance of Preferred  Stock;  Prevention  of Changes in
Control. The Company's Articles of Incorporation authorize the issuance of up to
5,000,000  shares of Preferred  Stock with such rights and preferences as may be


                                       13

<PAGE>


determined from time to time by the Board of Directors.  Accordingly,  under the
Articles of  Incorporation,  the Board of  Directors  may,  without  shareholder
approval, issue Preferred Stock with dividend, liquidation,  conversion, voting,
redemption  or other  rights  which could  adversely  affect the voting power or
other rights of the holders of the Common  Stock.  The issuance of any shares of
Preferred  Stock having rights  superior to those of the Common Stock may result
in a decrease in the value or market price of the Common Stock and could be used
by the Board of  Directors  as a device to  prevent a change in  control  of the
Company.  The Company has no other  anti-takeover  provisions in its Articles of
Incorporation  or Bylaws.  Holders of the  Preferred  Stock,  if issued,  may be
granted the right to receive dividends,  certain preferences in liquidation, and
conversion rights at the discretion of the Board of Directors.  See "Description
of Securities - Use of Preferred Stock As  Anti-Takeover  Device" and "Principal
Stockholders."

     Elimination of Director Liability.  The Company's Articles of Incorporation
contain a provision  eliminating  directors'  liability to the Company or to its
stockholders  for  monetary  damages  for breach of  fiduciary  duty,  except in
circumstances   involving  a  financial  benefit  to  a  director,   intentional
infliction of harm to the Company or other wrongful acts,  such as the breach of
a director's  duty of loyalty or acts or  omissions  which  involve  intentional
misconduct or a knowing  violation of criminal law. The Company's Bylaws contain
provisions obligating the Company to indemnify its directors and officers to the
fullest extent  permitted under  California law. These provisions could serve to
insulate  officers and  directors of the Company  against  liability for actions
which damage the Company or its  stockholders.  See "Description of Securities -
Limitation on Liability."

     Underwriter's  Influence on the Market. A significant  amount of the Common
Stock and Warrants  offered hereby may be sold to customers of the  Underwriter.
Subsequently, such customers may engage in transactions for the sale or purchase
of  such  securities  through  or  with  the  Underwriter.  Although  it  has no
obligation to do so, the  Underwriter  intends to make a market in the Company's
Common Stock and Warrants and may otherwise  affect  transactions  in the Common
Stock and Warrants. This market making activity may terminate at any time. If it
participates in the market, the Underwriter may exert a dominating  influence on
the market,  if one develops,  for the Common Stock and Warrants.  The price and
liquidity of the Common Stock and Warrants may be significantly  affected by the
degree,  if  any,  of  the  Underwriter's  participation  in  such  market.  The
Underwriter may also engage in market making activities and soliciting brokerage
activities with respect to the purchase or sale of the Common Stock and Warrants
on the NASDAQ  SmallCap  Market where such  securities are anticipated to trade.
However,  no  assurance  can be given  that the  Underwriter  will  continue  to
participate  as market  maker for the Common  Stock and  Warrants  or that other
broker-dealers will make a market in such securities. See "Underwriting."

     Representatives' Lack of Underwriting Experience. The Underwriter commenced
business as a broker-dealer  in May 1996, and has not acted as an underwriter in
any  prior  public  offerings,  although  it has  participated  as a  dealer  in
offerings  underwritten by others and its Chief Executive  Officer has more than
ten years experience in public offering  financing.  The  Underwriter's  lack of
underwriting experience may (i) adversely affect the development or continuation


                                       14

<PAGE>


of a trading  market for the Common  Stock and  Warrants,  (ii) have limited the
effectiveness  of the Underwriter in negotiating the offering price of the Units
and the exercise  price of the  Warrants,  and (iii)  negatively  influence  the
market  price of the Common  Stock and  Warrants  following  the  Offering.  The
Underwriter  assisted  the  Company  in a  previous  private  placement  of  its
securities and with the Bridge Loan, pursuant to which the Underwriter  received
cash commissions and common stock purchase warrants. See "Underwriting."

     Non-Registration  in  Certain  Jurisdictions  of  Shares  of  Common  Stock
Underlying the Warrants. The Warrants are not convertible or exercisable unless,
at the time of  exercise,  the Company  has a current  prospectus  covering  the
shares of Common Stock issuable upon exercise of the Warrants and such shares of
Common  Stock have been  registered,  qualified or deemed to be exempt under the
securities  laws of the states of  residence  of the  holders of such  Warrants.
There can be no  assurance  that the  Company  will have or  maintain  a current
prospectus  or that the  securities  will be qualified or  registered  under any
state law.  Although  the  Company  has  undertaken  and intends to use its best
efforts to maintain a current prospectus covering the Common Stock issuable upon
exercise of the  Warrants  following  completion  of the  Offering to the extent
required by federal  securities laws, there can be no assurance that the Company
will be able to do so. The value of the  Warrants  may be  greatly  reduced if a
prospectus  covering the Common Stock  issuable upon exercise of the Warrants is
not kept current or if the Common Stock  issuable  upon exercise of the Warrants
is not  qualified,  or exempt  from  qualification,  in the  states in which the
holders  of  the  Warrants  reside.  Persons  holding  Warrants  who  reside  in
jurisdictions  in which such  securities are not qualified and in  jurisdictions
where there is no exemption  will be unable to exercise their Warrants and would
either  have to sell their  Warrants  in the open market or allow them to expire
unexercised.  If, and when, the Warrants become redeemable by the terms thereof,
the Company may  exercise its  redemption  right even if it is unable to qualify
the  Common  Stock  issuable  upon  exercise  of the  Warrants  for  sale  under
applicable state securities laws. See "Description of Securities Warrants."

     Redemption  of the  Warrants.  The  Warrants may be redeemed by the Company
under certain  circumstances (if there is a current prospectus covering exercise
of the Warrants) upon 30 days' written notice to the  Warrantholders at $.10 per
Warrant.  In such event,  the Warrants  will be  exercisable  until the close of
business on the date fixed for  redemption  in such  notice.  Any  Warrants  not
exercised  by such time will cease to be  exercisable,  and the holders  will be
entitled only to the redemption price,  which is likely to be substantially less
than the market value of the Warrants.  Accordingly, such redemption could force
the Warrantholders to exercise the Warrants and pay the exercise price at a time
when it might be  disadvantageous  for them to do so or to sell the  Warrants at
the then market price when they might otherwise prefer to hold the Warrants. See
"Description of Securities - Warrants."

     The Common Stock and the Warrants, which comprise the Units offered hereby,
are detachable and separately transferable immediately upon issuance. Purchasers
may buy Warrants in the  aftermarket or may move to  jurisdictions  in which the
shares of the  Common  Stock  underlying  the  Warrants  are not  registered  or


                                       15

<PAGE>


qualified  during the period that the Warrants are  exercisable.  In this event,
the Company would be unable to issue Common Stock to those  persons  desiring to
exercise their Warrants unless and until such shares could be qualified for sale
in  jurisdictions  in  which  the  purchasers   reside,  or  an  exemption  from
qualification exists in such jurisdiction.  In this event,  Warrantholders would
have no choice but to attempt to sell the Warrants in a jurisdiction  where such
sale is permissible or allow them to expire  unexercised.  See  "Description  of
Securities Warrants."

     Risks  Associated  With  Penny  Stocks  Such  as  the  Company's;  Lack  of
Liquidity.  The  Commission has adopted rules that define "penny stock" and such
definition  includes  the  securities  of the  Company  until  such  time as its
securities  are  listed  on  the  NASDAQ   SmallCap   Market.   In  such  event,
broker-dealers  dealing in the Company's  securities will be subject to specific
disclosure rules for  transactions  involving penny stocks such as the Company's
which  require  the  broker-dealer  among  other  things  to (i)  determine  the
suitability of purchasers of the  securities  and obtain the written  consent of
purchasers to purchase such  securities  and (ii) disclose the best (inside) bid
and offer prices for such  securities  and the price at which the  broker-dealer
last  purchased or sold the  securities.  The  additional  burdens  imposed upon
broker-dealers  might  discourage  them  from  affecting   transactions  in  the
Company's  securities,  which  would  reduce  the  liquidity  of  the  Company's
securities  making it more  difficult for  stockholders  to sell the  securities
should they desire to do so.

     Maintenance Criteria for the NASDAQ SmallCap Market Securities. The Company
has applied to have the Common Stock and Warrants  listed on the NASDAQ SmallCap
Market.  The NASD,  which  administers  the  NASDAQ  SmallCap  Market,  sets the
criteria for continued  eligibility on the NASDAQ SmallCap  Market.  In order to
continue to be included on the NASDAQ SmallCap  Market,  a company must maintain
$2 million in net  tangible  assets,  a $1  million  market  value of its public
float,  at least 300  holders of its Common  Stock and a minimum bid price of $1
per share. The Company's  failure to meet these  maintenance  criteria or future
maintenance requirements imposed by the NASDAQ SmallCap Market may result in the
discontinuance  of the  inclusion  of the  Company's  securities  in the  NASDAQ
SmallCap  Market.  In such event,  trading,  if any, in the  securities may then
continue  to be  conducted  in the  non-NASDAQ  over-the-counter  market  on the
Bulletin Board.



                                       16

<PAGE>



                                 CAPITALIZATION

     The  following  table sets forth the  capitalization  of the  Company as of
September  30,  1997,  and as adjusted to give effect to the sale of the 900,000
Units offered  hereby and  application  of the  estimated  net proceeds  without
giving effect to the exercise of the Warrants,  the  Overallotment  Option,  the
Underwriter's  Warrants,  or other outstanding  warrants or options. See "Use of
Proceeds" and "Description of Securities."

                                                   September 30,
                                                       1997         As Adjusted
                                                   -----------      -----------

Short term debt                                    $   789,358      $    39,358
                                                   -----------      -----------
Long term debt                                     $ 1,812,493        1,812,493
                                                   -----------      -----------
Stockholders' equity:
  Preferred Stock, 5,000,000 no par value
    shares authorized, none
    issued and outstanding                                --               --
  Common Stock, 10,000,000 no par value
    shares authorized, 665,333 shares
    issued and outstanding, 1,565,333 as
    adjusted                                         5,590,455      -----------
  Accumulated deficit                               (5,051,639)      (5,051,639)
                                                   -----------      -----------
Total stockholders' equity                             538,816          
                                                   -----------      -----------
         Total capitalization                      $ 3,140,667      $
                                                   ===========      ===========


                                       17

<PAGE>




                           PRICE RANGE OF COMMON STOCK

     The Company's  Common Stock traded on the NASDAQ  SmallCap Market under the
symbol "PSCO" from February 9, 1995,  until July 10, 1996,  when it was delisted
from the NASDAQ SmallCap Market and commenced trading on the Bulletin Board. The
Company currently trades on the Bulletin Board under the symbol "PSCO."

     The following table sets forth,  for the quarters  indicated,  the range of
high and low closing prices of the Company's  Common Stock as reported by NASDAQ
and the  Bulletin  Board  but  does  not  include  retail  markup,  markdown  or
commissions.

                                                                     Price
                                                                ----------------
By Quarter Ended:                                                High      Low
- -----------------                                               -----      -----

December 31, 1997 (through November 18, 1997)................    $6.25    $5.25
September 30, 1997...........................................     6.30     5.25
June 30, 1997................................................     5.50     3.15
March 31, 1997 ..............................................     4.65     3.15

December 31, 1996............................................    11.25     3.15
September 30, 1996...........................................    15.00     8.40
June 30, 1996................................................    26.25     8.40
March 31, 1996...............................................    31.95     14.10

December 31, 1995............................................    37.50     26.25
September 30, 1995...........................................    60.00     15.00
June 30, 1995................................................    73.20     50.10
March 31, 1995...............................................    75.00     63.75

     As of November  18,  1997,  the Company  had  approximately  365 record and
beneficial stockholders.

                                 USE OF PROCEEDS

     The net  proceeds  of the  Offering  will be used (i) to repay  $750,000 of
Bridge  Loan debt  incurred  by the  Company  for  working  capital  and bearing
interest at 12% per annum,  due the  earlier of the  closing of the  Offering or
September 15, 1998,  (ii) to acquire small Internet  access  providers and other
small computer oriented companies ($2,000,000),  (iii) for marketing expenses to
increase the Company's  Internet access customer base  ($450,000),  and (iv) for
working capital ($______). See "Business - Strategy."

                                       18

<PAGE>
<TABLE>
<CAPTION>



                             SELECTED FINANCIAL DATA

     The selected  financial  data set forth below for the years ended  December
31, 1996 and 1995 is derived from the Company's financial  statements which have
been audited by Angell & Deering. The financial  information for the nine months
ended  September  30,  1997,  and  1996,  has been  derived  from the  unaudited
financial statements of the Company. In the opinion of management, the unaudited
financial  statements  include  all  adjustments   (consisting  only  of  normal
recurring  adjustments)  that  are  necessary  for a  fair  presentation  of the
financial  position  and  results  of  operations  of such  periods.  Results of
operations  for the nine months ended  September 30, 1997, may not be indicative
of results for the year ending December 31, 1997. The selected financial data is
qualified  in its  entirety  by, and  should be read in  conjunction  with,  the
financial  statements  and the notes  thereto  included  elsewhere  herein.  See
"Financial Statements."

                                Year Ended December 31,       Nine Months Ended September 30,
                           ------------------------------     -------------------------------
                               1996               1995             1997             1996
                           -----------        -----------      -----------      -----------
                                                               (Unaudited)      (Unaudited)
Income Statement Data:
<S>                        <C>                <C>              <C>              <C>        
Revenues                   $   697,581        $   100,901      $   550,969      $   544,590
(Loss) from continuing
 operations                   (672,791)          (974,578)      (1,455,284)        (417,782)
Net (loss)                  (1,409,800)        (1,816,285)      (1,455,284)        (681,982)
Net (loss) per share             (7.74)            (22.04)           (2.61)           (7.69)
Weighted average number
  of shares outstanding        182,037             82,439          557,897           88,667



                            September 30,
                                1997         As Adjusted (1)
                             ----------      ---------------
Balance Sheet Data:          (Unaudited)       (Unaudited)

Working capital (deficit)    $(584,615)         _________
Total assets                  3,255,812         _________
Long-term debt                1,812,493         _________
Total liabilities             2,716,996         _________
Stockholders' equity            538,816         _________

 ----------

(1)  As adjusted to give effect to the receipt and  application of the estimated
     net  proceeds  of the  Offering  without  giving  effect to exercise of the
     Warrants, the Underwriter's Warrants or other outstanding warrants or stock
     options. See "Use of Proceeds" and "Description of Securities."




                                       19
</TABLE>

<PAGE>



                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Background

     The Company  provides  Internet access and related services to individuals,
public  agencies and businesses in six small Central  California  Cities.  As of
September  30,  1997,  the  Company  had 2700  subscribers  for whom it provided
Internet access.  The Company intends to acquire other small Internet  providers
in markets  with  populations  of less than  500,000 that are located in various
Central  California  cities  between  Sacramento  and  Bakersfield.  The Company
believes that certain of these local Internet providers currently doing business
in the Company's  target markets are unable to effectively  manage the financial
and administrative  burdens imposed by the continuing  consumer demand for local
Internet  services,  unless these  providers are  integrated  into larger,  more
diversified Internet products and services companies.  The Company has addressed
these  kinds of  financial  and  administrative  burdens  by (i)  expanding  its
operations throughout Central California,  (ii) developing  diversified services
similar to its larger competitors, such as hourly-based access services, special
access  packages  for  business and high speed  access,  and (iii)  investing in
automated  billing  and  administrative  systems.  The  Company  believes  these
resources will not only allow it to compete effectively with larger access firms
entering the Company's  markets,  but will also facilitate the Company's efforts
to attract small Internet providers. The Company's long-term plan is to increase
revenues  through  acquisitions in such markets together with the acquisition of
small  companies  which provide  related  Internet  products and  services.  The
Company is not  currently  negotiating  to acquire,  nor has it entered into any
agreement to acquire, any other companies.

Results of Operations

Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996

     Net Sales.  For the nine months ended  September  30, 1997,  net sales were
$550,969  versus  $544,590 in the same period of the prior year,  representing a
increase of $6,379. The slight increase in net sales is primarily  attributed to
higher customer retention rates.

     Gross Profit.  For the nine months ended  September 30, 1997,  gross profit
was $343,668  versus $387,667 in 1996,  representing a decrease of $44,009.  The
decrease in gross profit is attributed to higher telecommunications costs.

     Sales and Marketing. Sales and marketing expenses were $50,403 for the nine
months ended  September 30, 1997 versus  $47,528 in 1996.  The increase in sales
and  marketing  expenses  was caused by increased  advertising  and travel . The
Company believes that sales and marketing  expenses will continue to increase if
funds are available to the Company to promote its products and services.




                                       20

<PAGE>



     General and Administrative.  General and administrative  expenses increased
from  $693,014  in 1996 to  $1,157,315  in 1997.  The  increase  in general  and
administrative  costs is primarily  attributed to costs  associated with its May
1997  Registration  Statement  covering  the May 1997  Securities  and  expenses
associated with the Bridge Loan.

     Operating Loss. For the nine months ended September 30, 1997, the operating
loss was $864,050  compared to an operating  loss of $352,875 in the same period
of 1996. The operating loss in 1997 is attributed to the  significant  increases
in general and  administrative  expenses described above. The Company intends to
reduce costs and increase revenues in order to improve future operating results.

     Interest  Expense.  Net interest expense increased to $794,663 for the nine
months ended  September  30, 1997 from $136,187 in the same period of 1996, as a
result of costs  associated with the Bridge Loan. This interest expense includes
financing costs of $750,000 in connection with the issuance of 150,000 shares of
Common Stock in the Bridge Loan. The interest expense was somewhat offset by the
interest earned on cash and short term investments.

     Other  Income.  Net other income  increased to $203,429 for the nine months
ended  September  30,  1997,  as a result  of  rental  income  generated  by the
Company's office building and miscellaneous sales.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     Net Sales. For fiscal 1996, Internet services revenues were $697,581 versus
$100,901 in fiscal  1995,  which  represents  a 591%  increase  in revenue.  The
increases are attributed to increases in the number of Internet users  worldwide
and the Company's  increased market  penetration in the Central California area.
Management  believes that the Company's revenues will continue to increase as it
increases the number of points of presence ("POPS") through which it markets its
Internet  services.  The number of POPS to be developed in any given  geographic
area depends upon the Company's estimate of "demand" in such geographic area. In
turn,  demand is based upon the  population and rate of population  growth,  the
number of existing access  providers,  the number of access  subscribers and the
growth rate of such access subscribers in the particular area.

     Operating  Expenses.  Operating  expenses  were  $1,121,773  in 1996 versus
$1,079,503 in 1995. The increased  operating  expense is the result of increased
depreciation  expense,  additional  personnel  expenses and legal and accounting
expenses  related to the  Company's  restructuring  and the  divestiture  of the
Classic Line. Management believes that the operating expenses will remain at the
same level or decrease due to reduced  personnel  and  facilities  expenses as a
result of the Classic Line sale.  The  decreases  may be somewhat  offset by the
increases in operating expenses as the Company's Internet business grows.




                                       21

<PAGE>



     Operating  Loss. For fiscal 1996, the operating loss was $424,192  compared
to an operating  loss of $978,602 in 1995 which  represents a 56% decrease.  The
decrease  in the  operating  loss  in  1996  is  attributed  to the  significant
increases in Internet  services revenues by $596,680.  Management  believes that
operating  results will  improve as revenues  increase  and  operating  expenses
decrease.

     Interest  Expenses.  Net interest expense for 1996 was $268,721 compared to
$109,301 in 1995.  The increase in interest  expense is primarily  attributed to
additional  interest  expense related to the building which the Company acquired
under a 20-year capital lease. The net interest expense increased as a result of
a decrease in interest income in 1996.

     Financing Costs.  Financing costs were $126,000 in 1996, which  represented
commissions  and  expenses  related  to the  issuance  of  26,667  shares of the
Company's Common Stock to investors. The Common Stock issued was valued at $3.75
per share and resulted in a financing expense of $100,000 to the Company.

Liquidity and Capital Resources

     For the nine months  ended  September  30,  1997,  the Company used cash of
$1,018,558  for  operating  activities.   The  Company  had  a  working  capital
deficiency  of $584,615 at September  30, 1997 which is primarily  attributed to
the short term liability  treatment of the Bridge Loan.  The Company  intends to
reduce the  working  capital  deficit by (i)  increasing  sales,  (ii)  reducing
certain low margin operations and (iii) obtaining long-term financing. There can
be no assurance  that the Company  will be  successful  in these  actions and if
unsuccessful,   the  Company  may  be  required  to  substantially   reduce  its
operations.

     Capital  expenditures  relating  primarily  to  the  purchase  of  computer
equipment,  furniture  and  fixtures,  and other assets  amounted to $80,887 and
$448,210 for the nine months ended September 30, 1997 and 1996 respectively.  In
addition,  the Company acquired through lease $69,959 of computer  equipment for
its Internet operations during the nine month period ended September 30, 1997.

     Between  June and  September  1997,  the  Company  received  $750,000  from
proceeds  of the Bridge  Loan,  which was used for  working  capital,  marketing
expenses and the purchase of capital  equipment.  In connection  with the Bridge
Loan, the Company agreed to issue 150,000 restricted shares of its Common Stock,
subject to certain  piggy-back and demand  registration  rights at the Company's
expense.  The fair  market  value of the  Common  Stock  issued  was  charged to
operations  as an  additional  financing  expense  for  the  nine  months  ended
September 30, 1997.



                                       22

<PAGE>



                                    BUSINESS

Introduction

     The Company  provides  Internet access and related services to individuals,
public  agencies and businesses in six small Central  California  cities.  As of
September  30,  1997,  the  Company had 2,700  subscribers  for whom it provided
Internet access up from 250 subscribers in July 1995. See "History." The Company
intends to acquire other small Internet providers in markets with populations of
less than 500,000 that are located in various Central  California cities between
Sacramento  and  Bakersfield.  The Company  believes that certain of these local
Internet providers  currently doing business in the Company's target markets are
unable to effectively manage the financial and administrative burdens imposed by
the  continuing  consumer  demand  for local  Internet  services,  unless  these
providers are integrated into larger,  more  diversified  Internet  products and
services  companies.  The Company has  addressed  these kinds of  financial  and
administrative  burdens  by (i)  expanding  its  operations  throughout  Central
California,   (ii)  developing   diversified  services  similar  to  its  larger
competitors,  such as hourly-based  access services,  special access to packages
for business and high speed access, and (iii) investing in automated billing and
administrative systems. The Company believes these resources will not only allow
it to compete  effectively  with larger  access  firms  entering  the  Company's
markets,  but also will  facilitate  the  Company's  efforts  to  attract  small
Internet providers. The Company's long-term plan is to target a select number of
such markets and increase  revenues  through  acquisition in these markets.  The
Company is not  currently  negotiating  to acquire,  nor has it entered into any
agreement to acquire,  any other  companies.  See  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations".

     The Company's  strategy is to provide low cost direct  Internet  access and
other  Internet  related  products and services to  subscribers  or customers in
target  markets.  The Company will seek to effectuate this strategy by acquiring
small  Internet  providers,  by expanding  marketing  operations in its existing
markets,  by offering  Internet  related  products and services and by acquiring
other  computer  oriented  companies.  The  Company  will also seek to  generate
additional  revenues  by (i)  increasing  monthly  Internet  access  fees  while
offering  additional  Internet  products and  services,  (ii)  offering  monthly
community access services,  (iii) providing Internet  consulting  services,  and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet.

The Internet and the World Wide Web

     The  Internet is a worldwide  network  that links  thousands  of public and
private  computer  networks.  The  Internet  began in 1969 as a  project  of the
Advanced Research Projects Agency ("ARPA") of the U.S.  Department of Defense to
connect different types of computers across geographically  disparate areas. The
ARPA network was  designed to allow any  computer on the network to  communicate
with any other computer on the network through an open  communications  protocol
known as TCP/IP.

                                       23

<PAGE>



     Initially, use of the Internet was limited to governmental, educational and
commercial  organizations with a working knowledge of certain computer operating
systems  and  commands,  and  the  primary  use  made  of the  Internet  was the
communication  of information  via electronic  mail.  However,  there has been a
rapid  growth in the use and  popularity  of the  Internet  in the past  several
years.  According  to  industry  sources,  users  in  more  than  130  countries
throughout the world are connected to the Internet including 24 million users in
North America, 17.6 million of whom use the Web.

     The dramatic  growth in the number of Internet users is  attributable  to a
number of developments  and factors.  The first was the  introduction in 1992 of
the World Wide Web ("Web"),  a  client/server  system of hyperlinked  multimedia
databases  which began to unlock the potential of the Internet as a mass medium.
The Web,  developed by the European  Laboratory for Research Physics ("CERN") in
Switzerland, advanced the potential of the Internet in several significant ways.
First, it enabled full multimedia presentation (including text, graphics,  video
and audio) over the Internet.  Second,  through the Web's system of standardized
information  protocols and a  communications  format called  HyperText  Transfer
Protocol  ("HTTP"),  users were allowed to access information (to "navigate") on
the Web without entering complex alphanumeric  commands.  Third, using HyperText
Markup Language  ("HTML"),  document authors were able to link text or images in
one document to other documents anywhere else on the Web. When the user selected
or, if using a mouse,  clicked on the hypertext in one document (often displayed
on the  screen  as  highlighted  words  or  images),  the  linked  document  was
automatically accessed and displayed.

     The Web is based on a  client/server  system  in  which  certain  computers
("servers")  store information in files and respond to requests issued by remote
user computers to view or download files, thus allowing multiple, geographically
dispersed users to view and use the information  stored on a single server.  The
user must use  software,  known as a browser,  that can read HTML  documents and
follow their  hypertext  links to retrieve  and display  linked  documents  from
servers such as the Company.

     An early  limitation  to  growth of the Web was that the  browser  software
initially  provided by CERN was text-based and contained  limited  retrieval and
display  capabilities.  However,  in  January  1993,  the  National  Center  for
Supercomputing   Applications   ("NCSA")  at  the   University  of  Illinois  at
Urbana-Champaign  significantly  advanced  the use of Web  technology  with  the
introduction  of NCSA  Mosaic  for X Window  on the  UNIX  platform,  the  first
graphical  user  interface  browser for the Web. The NCSA Mosaic  graphical user
interface  allows  users  to  access  the  diverse  information  archives,  data
protocols and data formats of the Internet using  point-and-click,  mouse-driven
commands. NCSA Mosaic, which is offered to users on a free-with-copyright  basis
(making  it  available  for  use  without   charge  and  without  the  right  to
distribute),  served  as a  catalyst  for  increased  use of the Web.  When NCSA
released a version of NCSA Mosaic for Windows in September  1993, the Web became
accessible to personal computer users for the first time.

     The  increased  popularity  of the  Internet  is also  attributable  to the
proliferation of information and services available on the Internet,  as well as


                                       24

<PAGE>


the expanded use of home personal computers which increasingly contain modems as
a standard feature. Among the types of publications and information available to
Internet users are newspapers,  magazines, weather updates, government documents
and  industry  newsletters,  as well as a variety  of  commercial  products  and
services.

     In order to support the  continued  growth and  popularity of the Internet,
certain infrastructure elements must expand to handle the resulting increases in
Internet  demand and traffic.  These elements  include  widespread,  inexpensive
Internet access, either through Internet access providers such as the Company or
on-line services,  and widely available  high-speed  communications  channels to
accommodate the increasing number and size of files available for downloading.

     As  business  organizations  have begun to  realize  the  potential  of the
Internet as an inexpensive and effective means of offering products and services
directly to customers  and  potential  customers,  businesses  are  increasingly
advertising  and selling  such  products  and  services on the Web. For example,
business  organizations are now using the Web to provide product information and
support to existing  customers,  to advertise products and services and to offer
products and services for sale by means of on-line catalogs.  It is this market,
as well as Internet access, that the Company seeks to address.

     Computer users wishing to access the vast array of information and services
available  on the Web  use a  browser  that  can  read  HTML  documents,  follow
hypertext  links and interface  with the diverse  information  archives and data
formats of the Web. The basic needs of most  individual  computer users casually
browsing the Web can be fulfilled  by a number of different  browsers  available
today.

Strategy

     The Company's  strategy is to provide low cost direct  Internet  access and
other  Internet  related  products and services to  subscribers  or customers in
target  markets.  The Company will seek to effectuate this strategy by acquiring
small  Internet  providers,  by expanding  marketing  operations in its existing
markets,  by offering  Internet  related  products and services and by acquiring
other  compputer  oriented  companies.  The  Company  will also seek to generate
additional  revenues  by (i)  increasing  monthly  Internet  access  fees  while
offering  additional  Internet  products and  services,  (ii)  offering  monthly
community access services,  (iii) providing Internet  consulting  services,  and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet.  The Company  believes that it can increase the  profitability  of its
monthly  access fees by developing  economies of scale as a result of increasing
total access subscribers and earning  additional  revenues from such subscribers
by providing additional access services.

     Increasing  Monthly  Internet  Access  Fees.  The Web is the driving  force
behind the growth in Internet  subscribers who use the Web to access information
as well as to engage in  commerce  and  communication.  The  Company  intends to
continue to provide  low-priced  direct  Internet  access  through the Company's
telecommunication  network  infrastructure  which is comprised of two high speed
dedicated data lines that connect directly to the backbone of the Internet.  The


                                       25

<PAGE>


Company  plans  to add  additional  high-speed  dedicated  data  lines,  enhance
system-wide  access software in order to offer additional  Internet products and
services, and expand the number of POPs in local markets in order to attract and
support  additional  subscribers.  By increasing the number of POPs, the Company
will offer more users access to the Internet  through  local phone calls to more
geographic areas which in turn may promote growth in its subscriber base.

     The Company also provides  Integrated Services Digital Network ("ISDN") and
high-speed Internet access using dedicated data lines to business customers. The
Company believes that the demand for high-speed  Internet access and the ability
to integrate Internet access into a corporate-wide  computer network is becoming
increasingly more important.

     Offering Monthly Community Access Services. Local public agencies, (such as
city  agencies,  police  departments  and  libraries),  are  seeking  to provide
information  resources  directly to their citizens through  Community Web sites.
Believing that its  subscribers  will be willing to pay a recurring fee for such
community information access, the Company intends to offer such access in 1998.

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

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

Acquisition Strategies

     The Company will seek to acquire  local  Internet  access  providers in its
Central California target markets. The criteria for such acquisition  candidates
calls for attracting companies that (i) are located in markets with a population
under 500,000;  (ii) have been in business a minimum of one year;  (iii) have at
least 300 subscribers;  (iv) have current owners and staff with strong technical
backgrounds,  (v) enjoy  strong  community  contacts,  and (vi) offer  projected
annual  growth  rates in excess of 200%.  The  Company  may also seek to acquire
other small  computer  oriented  companies.  The Company is not  negotiating  to
acquire, nor has it entered into any agreement to acquire, any such companies.

Marketing

     The Company  primarily  markets its products and services to customers  who
are  new  to  the   Internet,   and  who  seek  to  access   information   using
point-and-click  graphical  interface.  Marketing is  conducted  through a small
sales force which  contacts  prospective  customers  through  advertisements  in


                                       26

<PAGE>


computer,  professional  and business  publications.  The Company also  attracts
customers by participating in industry trade shows and educational  seminars and
through  referrals  from  existing  customers.  In addition,  the Company  seeks
strategic  alliances with local computer retailers who offer Internet access fee
discounts  to  their  customers  and  through  joint  advertising  efforts  with
television and radio stations. The Company may also distribute Internet services
through retail channels.

     Direct mailings,  telemarketing programs, co-marketing agreements and joint
promotional efforts among organizations and individual users are strategies that
the  Company  may employ in the future.  Finally,  the  Company  seeks to retain
business  customers  and  individual  users  through  what  it  perceives  to be
responsive customer support and services programs.

Competition

     The  Internet  services  business is highly  competitive  and there are few
significant barriers to entry. Currently,  the Company competes with a number of
national and local California Internet service providers.  In addition, a number
of multinational  corporations,  including giant communications carriers such as
AT&T,  MCI,  Sprint  and some of the  regional  Bell  operating  companies,  are
offering, or have announced plans to offer, Internet access or on-line services.
The Company also faces significant competition from Internet access consolidates
such as Verio, Inc. and from on-line service firms such as America Online (AOL),
CompuServe,  and Prodigy.  The Company  believes that new competitors  which may
include computer  software and services,  telephone,  media,  publishing,  cable
television and other companies, are likely to enter the on-line services market.

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

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

     The Company  believes that the primary  competitive  factors among Internet
access  providers  are  price,  customer  support,  technical  expertise,  local
presence  in a  market,  ease  of  use,  variety  of  value-added  services  and
reliability.  The  Company  believes  it is able to compete  favorably  in these
areas. The Company's success in its markets will depend heavily upon its ability


                                       27

<PAGE>


to provide high quality Internet  connectivity and value-added Internet services
targeted in select target markets.  Other factors that will affect the Company's
success in these  markets  include the  Company's  continued  ability to attract
additional experienced marketing, sales and management talent, and the expansion
of support, training and field service capabilities.

Employees

     As of  September  30, 1997,  the Company  employed  ten  full-time  and two
part-time individuals. The Company believes it maintains good relations with its
employees.  None of the Company's  employees are represented by a labor union or
covered by a collective bargaining agreement.

Properties

     In September  1994, the Company  acquired,  under a 20-year  non-cancelable
capital lease, an office building,  including land and  improvements  located at
2580 West Shaw,  Fresno,  California  93711.  The lease requires  initial annual
minimum  lease  payments of $188,000,  increasing  every five years to a maximum
annual payment of $338,000 in 2009.  Under the lease,  the Company has an option
to purchase  the  building and land for  $1,800,000  until April 30, 1997.  Such
amount increases to $1,900,000 through April 30, 1998. After April 30, 1998, the
option amount  increases  annually by the  percentage  increase in the Consumers
Price Index,  as further  described in the lease.  Upon exercise of the purchase
option,  the principal portion of the lease payments made by the Company will be
applied  toward the down payment for the purchase  price based upon an amortized
20-year note with interest accruing at 9% per annum. The Company does not occupy
any space in the building, although it leased a portion of it to SSC and the SSC
Principals  based upon  monthly  payments  to the  Company  of  $12,000  through
February  1998.  See  "Certain  Transactions".  In May 1997,  as a result of the
Company's  default on the lease, the Company agreed to return  possession of the
office  building to the  landlord.  Accordingly,  the  landlord  collects  rents
directly from the tenants of the office  building and the Company is responsible
for the difference  between such aggregate rents and the Company's lease payment
to the landlord. As of the date hereof, the landlord is collecting monthly rents
aggregating  approximately $9,200 and the Company's monthly leasehold obligation
is  approximately  $15,600 leaving a monthly balance due from the Company to the
landlord of approximately $6,400.

     The Company leases 4,000 square feet of space for its offices and operating
facilities at 2300 Tulare Street, Suite 210, Fresno, California 93721. The lease
term is five years,  ending May 2002 and  requires  minimum  annual  payments of
$40,250  increasing every year to a maximum of $55,375 in 2002. The Company also
leases  approximately  250 square feet for its  corporate  office space in Santa
Monica, California on a month-to-month lease for $600 per month.





                                       28

<PAGE>



Litigation

     As a result of the  failure of SSC and the SSC  Principals  to pay  certain
trade  account  payables  and  certain  office  rent under a  sublease  from the
Company,  the  Company  has been  threatened  with  litigation  from such  trade
creditors (currently aggregating approximately $25,000) and has been required to
return  possession of the SSC subleased office space to the Company's  landlord.
The  Company  believes  that the total  contingent  liability  to trade  account
creditors  arising from defaults by SSC and the SSC  Principals  does not exceed
$100,000.  Moreover,  the total amount due from SSC and the SSC Principals under
the Company's office sublease aggregates approximately $100,000.

     In May 1997,  the SSC  Principals  brought an  administrative  labor  claim
against  the  Company  seeking  unpaid  wages  in the  amount  of  approximately
$160,000.  This Company  believes  the claim to be without  merit and intends to
vigorously defend it.

     The Company is a defendant in a civil action entitled "P/K Associates, Inc.
et al. v. Fresno  Business  Journal,  Inc., et al" civil action  number  97-5546
filed in the United State District Court for the Eastern District of California.
The suit  alleges  certain  copyright  violations  against  the Fresno  Business
Journal and the Company.  The Company  believes the claims are without merit and
intends to vigorously defend them.

     In February 1997, three of the Company's  former employees  brought a civil
action  against the Company  entitled  "David J.  Dague,  et al. v.  ProtoSource
Corporation"  for back wages  aggregating  approximately  $45,000.  The  Company
alleges that these amounts,  if due, are the  responsibility  of SSC and the SSC
Principals under the Divestiture Agreement. The Company is unable to predict the
outcome to the litigation.


                                       29

<PAGE>



                                   MANAGEMENT

Officers and Directors

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

                                                                Officer/Director
        Name                Age                  Position             Since
        ----                ---                  --------             -----

Raymond J. Meyers           41            Chief Executive Officer      1996
                                          Chief Financial Officer
                                          and Director

David A. Appell             34            Director                     1997

Dickon Pownall-Gray (1)     43            Director                     1997

- ----------

(1)  Mr.  Pownall-Gray  will  become a director of the Company at the closing of
     the Offering.

     Directors  hold office for a period of one year from their  election at the
annual meeting of  stockholders  or until their  successors are duly elected and
qualified.  Officers of the Company are elected by, and serve at the  discretion
of, the Board of Directors.  In January 1997, in connection with the sale of the
Company's  Classic Line, the SSC  Principals  resigned as officers and directors
and Raymond J. Meyers,  Andrew Chu,  Steven A. Kriegsman and Howard P. Silverman
were elected as officers and directors.  In May 1997 Mr. Kriegsman  resigned and
in August 1997 Messrs. Chu and Silverman resigned.

Background

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

     Raymond J. Meyers became the Company's Chief Executive  Officer in December
1996. From 1985 to 1996, he was employed by Transamerica  Corporation  holding a
variety of positions,  most recently (from 1991 to 1996) as Director of Business
Services for Transamerica Telecommunications.  Mr. Meyers graduated from Rutgers
University in 1979, with a Bachelor of Arts degree in Economics.

     David A. Appell became a Director of the Company in September  1997.  Since
January  1997, he has served as an investment  banker for the  Underwriter,  and
since  February  1992,  he has been engaged in the private  practice of law. Mr.
Appell also serves as a director of Allied Capital  Services,  LLC, a consulting
firm which provides financing and real estate development  services.  From April
1996 to January 1997 he served as Managing  Director of  Investment  Banking for
R.D.  White & Co., Inc. Mr. Appell is the General  Partner of HPH Capital Growth


                                       30

<PAGE>


L.P.,  a New York  Limited  Partnership  created to raise and  manage  funds for
equity  investments.  From  December  1993 through April 1996 he served as house
counsel for Comart,  Inc., an introducing broker registered with the commodities
futures trading commission. Mr. Appell received a Judicial Doctorate degree from
Cardozo Law School and holds a BBA in Accounting from Pace  University.  He is a
Member of the New York State Bar and New Jersey  State Bar.  He is a  registered
options principal,  general securities representative,  uniform securities agent
and general securities  principal.  He is also registered as a commodity trading
advisor and commodity pool operator.

     Dickon Pownall-Gray will become a director of the Company at the closing of
the  Offering.  Since  1994 he has  acted as an  independent  consultant  and an
investment  manager  for  his  own  account.  Since  1995  he  has  also  been a
stockholder  and a  director  of  Infosis,  Inc.  From 1992 to 1993 he served as
Senior Vice President in charge of acquisitions  for Preferred Health Care, Inc.
From 1988 to 1991 he was Chief Executive Officer and a founder of CareSys, Inc.,
a medical  monitoring  and database cost  containment  company.  In 1991 he sold
CareSys,  Inc. to  Preferred  Health Care,  Inc.  From 1985 to 1987 he served as
Chief  Executive  Officer  of Health  Care  Systems.  From 1982 to 1984 he was a
senior consultant for Bain & Co. in its London office. Mr. Pownall-Gray holds an
MBA from the London Business School, an MA in Sports Science from the University
of  California  Berkeley,  a BA (Honors  History  and Sports  Science)  from the
University of Birmingham.

Executive Compensation

     None of the Company's  executive  officers or directors  currently  receive
compensation  in excess of $100,000 per year except Mr.  Meyers,  the  Company's
Chief Executive Officer,  who receives a salary of $130,000 per year pursuant to
an Employment  Agreement which expires in January 1999. The Employment Agreement
also  provides  for cash bonuses  ranging from $25,000 (if the Company  earns at
least  $500,000  before  taxes in any year) to $75,000 (if the Company  earns at
least  $1,250,000  before taxes in any year). In connection with his employment,
Mr.  Meyers was also granted  options to purchase  36,667 shares of Common Stock
vesting  over a three  year  period at $3.75 per share  exercisable  at any time
until October 2001. No executive  officer or director  received  compensation in
excess of $100,000 for the calendar years ended December 31, 1996, 1995 or 1994.
Compensation  for all  officers and  directors as a group for the calendar  year
ended December 31, 1996, aggregated $64,000.



                                       31

<PAGE>
<TABLE>
<CAPTION>



     The following table discloses  certain  compensation  paid to the Company's
executive  officers for the  calendar  years ended  December 31, 1996,  1995 and
1994.

                                                Summary Compensation Table

                                                                             Long Term Compensation
                               Annual Compensation                           Awards          Payouts
                               -------------------                           -----------------------

    (a)           (b)        (c)         (d)            (e)            (f)            (g)             (h)            (i)
Name
and
Prin-                                                  Other                                                         All
cipal                                                 Annual       Restricted                                       Other
Posi-                                                 Compen-         Stock        Options/          LTIP          Compen-
tion             Year     Salary($)    Bonus($)      sation($)     Award(s)($)      SARS(#)        Payouts ($)     sation($)
- ------------     ----     ---------   --------       ---------     -----------      -------        ----------     ---------
<S>              <C>       <C>         <C>               <C>            <C>            <C>             <C>            <C>
James C.         1996      $61,925    $     0            0              0              0               0              0
Robinson         1995       61,425      5,941            0              0              0               0              0
Chief Execu-     1994       57,226     25,000            0              0              0               0              0
tive Officer

1995 Stock Option Plan

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

     The Plan is  administered  by the Board of  Directors.  As of September 30,
1997, the Company had reserved 150,000 shares of Common Stock for issuance under
the Plan. Under the Plan, the Board of Directors  determines  which  individuals
shall receive options, the time period during which the options may be partially
or fully  exercised,  the number of shares of Common Stock that may be purchased
under each option and the option price.

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

     No options may be transferred by an optionee other than by will or the laws
of descent and distribution, and, during the lifetime of an optionee, the option
may only be  exercisable  by the optionee.  Options may be exercised only if the
option holder remains continuously  associated with the Company from the date of
grant to the date of  exercise.  Options  under the Plan must be granted  within
five  years  from the  effective  date of the Plan and the  exercise  date of an


                                       32
</TABLE>

<PAGE>


option  cannot be later than ten years from the date of grant.  Any options that
expire  unexercised or that terminate upon an optionee's  ceasing to be employed
by the Company become  available for reissuance.  Shares issued upon exercise of
an option will rank equally with other shares then outstanding.

     As of the date of this  Prospectus,  no options have been granted under the
Plan.



                                       33

<PAGE>



                             PRINCIPAL STOCKHOLDERS

     The  following  table sets forth  information  concerning  the  holdings of
Common Stock (without  giving effect to any shares issuable upon exercise of the
Warrants,  the  Overallotment  Option,  or the  Underwriter's  Warrants) by each
person  who, as of the date of this  Prospectus,  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  warrants and options  exercisable  within 60 days from the date hereof.
The address of all persons listed below is in care of the Company at 2300 Tulare
Street, Suite 210, Fresno, California 93721.


                                                  Percent of         Percent of
                                Amount of       Class Prior to       Class After
Name                            Ownership          Offering           Offering
- ---------------                 ---------        -------------       -----------
Raymond J. Meyers (1)             13,333              2.0%               .8%
Andrew Chu(2)                     38,999              5.5%              2.4%
David A. Appell                        0                0%                0%
Dickon Pownall-Gray                    0                0%                0%
Steven A. Kriegsman(3)           117,667             15.0%              7.0%
Anaka Prakash                     38,667              5.8%              2.5%
World Spirit, Inc.                50,000              7.5%              3.2%
All officers and directors as
 a group (3 persons)(1)           13,333              2.0%               .8%

- ----------

(1)  Represents  stock  options to purchase  13,333 shares at $3.75 per share at
     any time until  October 2001.  Mr. Meyers holds an additional  23,334 stock
     options which vest in 1998 and 1999.

(2)  Represents  common stock  purchase  warrants to purchase  38,999  shares at
     $3.75 per share at any time until October 2001.

(3)  Represents  common stock  purchase  warrants to purchase  117,667 shares at
     $3.75 per share at any time until October 2001.  All common stock  purchase
     warrants  are held by the  Kriegsman  Group of which Mr.  Kriegsman  is the
     President and a principal stockholder.



                                       34

<PAGE>



                              CERTAIN TRANSACTIONS

     Management of the Company  believes that the  transactions  described below
were no more or less fair than the terms of transactions which the Company might
otherwise have entered into with third party nonaffiliated entities. All related
party  transactions  have been and will continue to be approved by a majority of
the disinterested members of the Company's Board of Directors.

     In November 1994,  the Company  issued  857,140  shares of its  Convertible
Preferred Stock to five of the Company's then officers and directors, each share
of which  was  convertible  for no  additional  consideration  into one share of
Common  Stock  for each  fifteen  shares of  Preferred  Stock.  The  Convertible
Preferred  Stock was canceled and returned to the Company by the five holders in
connection with the Divestiture Agreement described below.

     In February  1995,  the Company  loaned  $35,000 to Charles T. Howard,  the
Company's then President. Interest on the loan is payable monthly at the rate of
9% per annum and the  promissory  note  evidencing the  indebtedness  was due in
April 1997 and remains unpaid. The promissory note is secured by 3,333 shares of
the Company's  Common Stock owned by Mr. Howard and was  transferred to SSC as a
part of the Divestiture Agreement described below.

     In October 1996, the Company issued 146,666 common stock purchase  warrants
to the Kriegsman Group ("KG") for consulting  services.  Steven A. Kriegsman who
subsequently  became a director of the Company is the President and  controlling
stockholder of KG. KG subsequently assigned 35,666 of such warrants to Andy Chu,
the  Company's  President and a director.  KG also assigned  3,333 of the 10,000
stock options it received from the SSC Principals to Mr. Chu to provide him with
an equity  stake in the  Company.  KG believed  that the  Company's  success and
therefore the economic success of its investment in the Company depended in part
upon the participation of Mr. Chu as the Company's then President.

     In October 1996, the Company issued 146,667 common stock purchase  warrants
to the Underwriter as  compensation  for it assisting the Company in the private
placement  of  400,000  shares  of the  Company's  Common  Stock  to a group  of
investors for $3.75 per share. The Underwriter  subsequently  assigned 56,667 of
such warrants to Howard P. Silverman,  a former director of the Company, for his
assistance to the Underwriter in connection with the private  placement.  At the
time the subject Warrants were assigned, Mr. Silverman was not a director of the
Company.  The Company also paid to the  Underwriter a cash  commission of 10% of
the gross proceeds raised  ($150,000) and a nonaccountable  expense allowance of
3% of such gross  proceeds  ($45,000).  In June 1997,  the  Underwriter  and Mr.
Silverman returned 106,667 warrants to the Company without consideration.

     In January 1997, the Company sold the remaining  assets of the Classic Line
to SSC  Technologies,  Inc. ("SSC") for $770,850  evidenced by a promissory note
bearing interest at 10% per annum payable in January 2007, and the assumption by
SSC of all the  liabilities  of the Classic Line and certain other  liabilities,


                                       35

<PAGE>


aggregating approximately $500,000. Under the terms of the asset sales agreement
(the  "Divestiture  Agreement"),  the Company  acquired  25% of the  outstanding
common stock of SSC for  $500,000 in cash (less  $200,000 of  liabilities  which
were paid by the Company and deducted  from the  $500,000) and the remaining 75%
of the  outstanding  common  stock was  issued to other  stockholders  including
Charles T.  Howard,  David L.  Green,  Ding Yang and  Steven L.  Wilson who were
previously officers and directors of the Company (the "SSC Principals"). As part
of the  Divestiture  Agreement,  the SSC  Principals  also (i) canceled  900,000
shares  of  Convertible  Preferred  Stock  held by them  which  were  previously
exercisable into shares of Common Stock on a fifteen for one basis,  (ii) agreed
to refrain from the sale of an aggregate of 30,300  shares of Common Stock owned
by them  until  October  1999,  except  with the prior  written  consent  of the
Underwriter, (iii) agreed to sublease office space from the Company at a monthly
rental  of  $12,000  through  February  28,  1998,  (iv)  granted  to  Steven A.
Kriegsman,  then a director of the  Company,  an option to purchase up to 10,000
shares of Common  Stock held by the SSC  principals  at any time  until  October
2001, and (v) personally  guaranteed ,on a joint and several basis, the $770,850
promissory  note and all other  obligations  of SSC to the Company.  The Classic
Line assets were valued as a result of negotiations  between the Company and the
SSC Principals.

                            DESCRIPTION OF SECURITIES

Common Stock

     The Company is authorized to issue  10,000,000  shares of common stock,  no
par  value  (the  "Common  Stock"),   of  which  665,333  shares  are  currently
outstanding.  Upon  issuance,  the  shares of Common  Stock are not  subject  to
further assessment or call. The holders of Common Stock are entitled to one vote
for  each  share  held  of  record  on  each  matter  submitted  to  a  vote  of
stockholders.  Cumulative voting for election of directors is permitted. Subject
to the prior rights of any series of Preferred  Stock which may be issued by the
Company in the future,  holders of Common Stock are entitled to receive  ratably
such  dividends  that may be  declared  by the Board of  Directors  out of funds
legally available therefor, and, in the event of the liquidation, dissolution or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities.  Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities.  The
outstanding  Common  Stock  is,  and the  Common  Stock to be  outstanding  upon
completion  of  the  Offering   will  be,   validly   issued,   fully  paid  and
non-assessable.

Warrants

     Each Warrant  represents the right to purchase one share of Common stock at
an initial exercise price of $______ per share (100% of the closing bid price of
the Common Stock on the  Bulletin  Board one day prior to the date hereof) for a
period of five years from the date hereof.  The exercise price and the number of
shares  issuable  upon  exercise  of the  Warrants  will be  adjusted  upon  the
occurrence  of certain  events,  including  the  issuance  of Common  Stock as a
dividend  on  shares  of  Common  Stock,   subdivisions,   reclassifications  or
combinations of the Common Stock or similar events.  The Warrants do not contain
provisions  protecting  against  dilution  resulting from the sale of additional
shares of Common Stock for less than the  exercise  price of the Warrants or the


                                       36

<PAGE>


current  market price of the  Company's  securities  and do not entitle  Warrant
holders to any voting or other rights as a  shareholder  until such Warrants are
exercised and Common Stock is issued.

     Warrants  may be  redeemed in whole or in part at the option of the Company
after one year from the date  hereof,  upon 30 days' notice and with the consent
of the  Underwriter,  at a  redemption  price  equal to $.10 per  Warrant if the
closing price of the Company's  Common Stock on the NASDAQ  SmallCap  Market (or
the Bulletin Board) is at least $_______ per share (150% of the closing price of
the Common Stock on the Bulletin  Board one day prior to the date hereof) for 20
consecutive  trading  days,  ending not earlier than 15 days before the Warrants
are called for redemption.

     Holders of Warrants may exercise  their Warrants for the purchase of shares
of Common Stock only if a current prospectus  relating to such shares is then in
effect and only if such shares are  qualified  for sale,  or deemed to be exempt
from  qualification  under  applicable  state  securities  laws.  The Company is
required to use its best  efforts to maintain a current  prospectus  relating to
such  shares of Common  Stock at all times when the  market  price of the Common
Stock exceeds the exercise price of the Warrants  until the  expiration  date of
the Warrants,  although  there can be no assurance that the Company will be able
to do so.

     The shares of Common Stock  issuable on exercise of the  Warrants  will be,
when issued in accordance with the Warrants, duly and validly issued, fully paid
and non-assessable.  At all times that the Warrants are outstanding, the Company
will  authorize and reserve at least that number of shares of Common Stock equal
to  the  number  of  shares  of  Common  Stock  issuable  upon  exercise  of all
outstanding Warrants.

     For the term of the Warrants, the holders thereof are given the opportunity
to profit from an increase in the per share market price of the Company's Common
Stock, with a resulting dilution in the interest of all other  stockholders.  So
long as the  Warrants  are  outstanding,  the terms on which the  Company  could
obtain additional capital may be adversely affected. The holders of the Warrants
might be expected to exercise the Warrants at a time when the Company would,  in
all  likelihood,  be able to obtain  additional  capital  by a new  offering  of
securities on terms more favorable than those provided by the Warrants.

Prior Warrants

     In connection with the IPO, the Company issued 46,000 Prior Warrants.  Each
Prior Warrant  represents  the right to purchase one share of Common Stock at an
exercise  price of $97.50 per share at any time  until  February  9,  1998.  The
exercise  price and the number of shares  issuable  upon  exercise  of the Prior
Warrants are subject to adjustment in certain  events  including the issuance of
Common  Stock  as  a  dividend  on  shares  of  Common  Stock,  subdivisions  or
combinations  of the Common Stock or similar  events.  The Prior Warrants do not
contain  provisions  protecting  against  dilution  resulting  from  the sale of
additional  shares of Common Stock for less than the exercise price of the Prior
Warrants or the current market price of the Company's securities.


                                       37

<PAGE>



     Prior  Warrants  may be  redeemed  in whole or in part at the option of the
Company  upon 30 days'  notice,  at a  redemption  price equal to $.01 per Prior
Warrant if the closing price of the  Company's  Common Stock is at least $112.50
per share for 30 consecutive trading days.

     Holders  of Prior  Warrants  may  exercise  their  Prior  Warrants  for the
purchase of shares of Common Stock only if a current prospectus relating to such
shares is then in effect and only if such  shares  are  qualified  for sale,  or
deemed to be exempt from  qualification  under applicable state securities laws.
The Company is required to use its best efforts to maintain a current prospectus
relating  to such shares of Common  Stock at all times when the market  price of
the Common Stock  exceeds the  exercise  price of the Prior  Warrants  until the
expiration date of the Prior  Warrants,  although there can be no assurance that
the Company will be able to do so.

Other Warrants

     In October 1996, the Company issued to the Underwriter, Howard P. Silverman
and KG an  aggregate  of 186,666  Warrants,  which,  along  with the  underlying
186,666 shares of Common Stock,  were  registered for public sale by the Company
in May 1997.  Each  Warrant  entitles the holder to purchase one share of Common
Stock  for  $3.75  per  share at any  time  until  October  2001.  See  "Certain
Transactions."

Preferred Stock

     The Company is authorized to issue 5,000,000  shares of preferred stock, no
par value (the "Preferred Stock"),  none of which is currently  outstanding.  In
December 1994,  the Company issued 900,000 shares of Preferred  Stock to five of
the  Company's  then  executive  officers.  All such  shares  were  subsequently
canceled with the agreement of the holders.  The  Preferred  Stock may,  without
action by the  stockholders of the Company,  be issued by the Board of Directors
from time to time in one or more  series  for such  consideration  and with such
relative  rights,  privileges  and  preferences  as  the  Board  may  determine.
Accordingly,  the Board has the power to fix the dividend  rate and to establish
the provisions,  if any, relating to voting rights,  redemption  rates,  sinking
fund provisions, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.

Use of Preferred Stock As Anti-Takeover Device

     It is not  possible  to state the  actual  effect of any  authorization  of
Preferred  Stock  upon the rights of  holders  of Common  Stock  until the Board
determines  the specific  rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible  acquisitions and other corporate  purposes,
but could  have the  effect of making  it more  difficult  for a third  party to
acquire a majority of the  outstanding  voting  stock.  Accordingly,  the future
issuance  of  Preferred  Stock may have the  effect of  delaying,  deferring  or
preventing  a change in control of the  Company  without  further  action by the
stockholders and therefore,  may be used as an "anti-takeover"  device adversely
affecting the holders of the Common Stock and depressing the value of the Common


                                       38

<PAGE>


Stock.  The Company has no current plans to issue any other Preferred Stock. See
"Risk Factors - Control by Management;  Authorization  and Issuance of Preferred
Stock; Prevention of Changes in Control."

Common Stock Eligible For Future Sale

     Sales of  substantial  amounts  of Common  Stock in the open  market or the
availability of such shares for sale could adversely affect the market price for
the Common  Stock.  The Company is  registering  for public sale 900,000  Units,
consisting  of 900,000  shares of Common  Stock,  900,000  Warrants  and 900,000
shares of Common Stock underlying the warrants. As of the date hereof, there are
665,333 shares of the Company's  Common Stock  outstanding,  of which (i) 46,000
shares were  registered  for sale in the Company's  IPO, (ii) 426,667 shares and
186,666 shares underlying 186,666 Common Stock Purchase Warrants were registered
in May 1997,  (iii) 42,666 shares may currently be sold under Rule 144, and (iv)
150,000  shares may be sold under Rule 144  commencing in July 1998. The holders
of 30,300 have agreed to refrain from selling  such shares until  October  1999,
without the prior written consent of the Underwriter. See "Underwriting."

     The Company has granted certain demand and piggy-back  registration  rights
in connection with (i) the Underwriter's  Warrants and the component securities,
and (ii) the issuance of 150,000  shares of Common Stock as a part of the Bridge
Loan. See "Underwriting."

Transfer Agent and Warrant Agent

     Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350, Denver,
Colorado 80202, is the Company's transfer agent and warrant agent.

Dividends

     The Company has not paid cash  dividends  on its Common  Stock and does not
intend to pay any cash dividends on its Common Stock in the foreseeable  future.
Earnings,  if any,  will be  retained  to finance  growth.  The  Company  has no
financing or other agreements which prohibit payment of dividends.

Limitation on Liability

     The Company's Articles of Incorporation provide that liability of directors
to the Company for monetary damages is eliminated to the full extent provided by
California law. Under California law, a director is not personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director  except for liability  arising from (i) any breach of the  director's
duty of loyalty to the Company or its  shareholders;  (ii) acts or omissions not
in good faith or that involve  intentional  misconduct or a knowing violation of
law; (iii) authorizing the unlawful payment of a dividend or other  distribution
on the Company's  capital stock or the unlawful  purchases of its capital stock,
or (iv) any transaction  from which the director  derived any improper  personal
benefit.


                                       39

<PAGE>



     The  effect  of this  provision  in the  Articles  of  Incorporation  is to
eliminate the rights of the Company and its stockholders (through  stockholders'
derivative  suits on behalf of the Company) to recover  monetary  damages from a
director  for  breach of the  fiduciary  duty of care as a  director  (including
breaches  resulting from negligent or grossly negligent  behavior) except in the
situations  described  above.  This  provision  does not limit or eliminate  the
rights of the Company or any stockholder to seek non-monetary  relief such as an
injunction or  rescission in the event of a breach of a director's  duty of care
or any liability for violation of the federal securities laws.

                                  UNDERWRITING

     The  underwriters  named below acting  through  Andrew,  Alexander,  Wise &
Company,  Inc. (the "Underwriter")  have severally agreed,  subject to the terms
and conditions of the Underwriting  Agreement,  to purchase from the Company the
number of Units set forth opposite their names below:

                                                                       Number
Underwriters                                                          Of Units
- ------------                                                          --------

Andrew Alexander Wise & Company, Inc, ............................









Total.................................................................900,000

     The Company has been advised by the  Underwriter  that it proposes to offer
the Units  purchased  by it  directly to the public at the public  offering  set
forth on the cover page of this  Prospectus  and to  certain  dealers at a price
that  represents a concession of $.___ per Unit. The Underwriter is committed to
purchase and pay for all of the Units if any Units are taken.  After the initial
public  offering of the Units,  the offering  price and the selling terms may be
changed in the sole discretion of the Underwriter.

     The  Company has also  granted the  Underwriter  an  Overallotment  Option,
exercisable  within 45 days from the date of this  Prospectus,  to purchase from
the Company up to 135,000 Units solely to cover overallotments.  The Underwriter
is under no  obligation  to exercise  its  Overallotment  Option or purchase any
Units subject to the Overallotment Option.

     The  Underwriter  will purchase the Units  (including  Units subject to the
Overallotment  Option)  from the  Company  at a price of  $______  per Unit.  In


                                       40

<PAGE>


addition,  the Company  has agreed to pay the  Underwriter  a 3%  nonaccountable
expense  allowance on the aggregate  initial public offering price of the Units,
including Units subject to the Overallotment Option.

     The  Company  has  agreed  to  issue  the  Underwriter's  Warrants  to  the
Underwriter  for  a  consideration  of  $100.  The  Underwriter's  Warrants  are
exercisable  at any time in the four-year  period  commencing  one year from the
date of this  Prospectus  to purchase  up to an  aggregate  of 90,000  Units for
$______ per Unit in cash or on a cashless basis by exchanging the "value" of the
existing  Underwriter's Warrants (such "value" based upon the difference between
the  exercise  price and the market price of the  Underwriter's  Warrants on the
date of  exercise)  for  additional  Units at $___ per Unit.  The  Underwriter's
Warrants  are not  transferable  for one year  from the date of this  Prospectus
except (i) to an  Underwriter  or a partner or officer of an Underwriter or (ii)
by will or operation of law. During the term of the Underwriter's  Warrants, the
holder  thereof is given the  opportunity  to profit from an increase in the per
share market price of the  Company's  securities.  As long as the  Underwriter's
Warrants  are  outstanding,  the  Company  may find it more  difficult  to raise
additional equity capital.  At any time at which the Underwriter's  Warrants are
likely to be exercised,  the Company would probably be able to obtain additional
equity  capital on more  favorable  terms.  If the Company files a  registration
statement relating to an equity offering under the provisions of the 1933 Act at
any time during the five-year period following the date of this Prospectus,  the
holders of the  Underwriter's  Warrants or underlying Units will have the right,
subject to certain conditions, to include in such registration statement, at the
Company's  expense,  all or part of the  underlying  Units at the request of the
holders.  Additionally,  the  Company  has  agreed,  for a period of five  years
commencing  on the  date of this  Prospectus,  on  demand  of the  holders  of a
majority  of  the  Underwriter's  Warrants  or  the  Units  issued  or  issuable
thereunder, to register the Units underlying the Underwriter's Warrants one time
at the  Company's  expense.  The  registration  of  securities  pursuant  to the
Underwriter's  Warrants  may result in  substantial  expense to the Company at a
time  when it may not be able to  afford  such  expense  and may  impede  future
financing.  The number of Units  covered by the  Underwriter's  Warrants and the
exercise  price are  subject  to  adjustment  under  certain  events to  prevent
dilution.

     In connection with the Offering,  the Underwriter and selling group members
(if any) and  their  respective  affiliates  may  engage  in  transactions  that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants.  Such transactions may include stabilization  transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
or purchase Common Stock or Warrants for the purpose of stabilizing their market
prices.  The Underwriter may also create a short position for the account of the
Underwriter by selling more  securities in connection  with the Offering than it
is  committed  to  purchase  from the  Company  and in such  case  may  purchase
securities in the open market following  completion of the Offering to cover all
or a  portion  of  such  short  Overallotment  Option.  Any of the  transactions
described in this paragraph may result in the maintenance of the securities at a
level above that which might otherwise  prevail in the open market.  None of the
transactions  described  in  this  paragraph  is  required,  and,  if  they  are
undertaken, they may be discontinued at any time.


                                       41

<PAGE>



     In connection  with the Offering,  the  Underwriters  may also purchase and
sell the Common Stock and Warrants in the open market.  These  transactions  may
include  overallotment  and  stabilizing  transactions as described  above,  and
purchases to cover  syndicate  short  positions  created in connection  with the
Offering.  Stabilizing transactions consist of certain bids or purchases for the
purposes of  preventing or retarding a decline in the market price of the Common
Stock and  Warrants;  and  syndicate  short  positions  involve  the sale by the
Underwriters  of a greater  number of shares of Common Stock or of Warrants than
they are required to purchase from the Company in the Offering.  The Underwriter
also may impose a penalty bid, whereby selling  concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock and Warrants sold
in the Offering for their  account may be reclaimed by the  Underwriter  if such
securities  are  repurchased  by the  Underwriter  in  stabilizing  or  covering
transactions.  These activities may stabilize,  maintain or otherwise affect the
market  price of the Common  Stock and  Warrants,  which may be higher  than the
price that might otherwise prevail in the open market; and these activities,  if
commenced,  may be discontinued at any time. These  transactions may be effected
on the Bulletin Board in the over-the-counter market.

     Certain of the  Company's  shareholders  (holding  an  aggregate  of 30,300
shares) have entered into lock-up  agreements with the  Underwriter  pursuant to
which they have agreed not to sell or  otherwise  dispose of any of their shares
of Common Stock (including shares issuable upon exercise of stock options) for a
period of three years from the date of this Prospectus without the prior written
consent of the Underwriter.

     The  Company  has agreed  upon  completion  of the  Offering  to retain the
Underwriter as a financial consultant for a period of 36 months at a monthly fee
of  $5,000  (a total of  $180,000),  payable  in full  upon the  closing  of the
Offering.  The consulting agreement will not require the Underwriter to devote a
specific amount of time to the performance of its duties thereunder.

     The  Company  has  agreed (i) to allow the  Underwriter  to  designate  one
director or advisor to the  Company's  Board of  Directors  for a period of five
years  from the date  hereof  (ii) not to offer any equity  securities  or grant
options or warrants to purchase  Common Stock without the prior written  consent
of the  Underwriter  for a period of three years from the date hereof,  (iii) to
grant the  Underwriter  a right of first  refusal  for three years from the date
hereof with respect to any private placement or public offering of the Company's
securities,  or its subsidiaries and for sales by 5% or greater  stockholders of
the Company's securities under Rule 144.

     The  Company  has  agreed to  indemnify  the  Underwriter  against  certain
liabilities  including liabilities under the Securities Act and to contribute in
certain events to liabilities incurred by the Underwriter in connection with the
sale of the Units.  In the opinion of the  Commission,  indemnification  against
liabilities  under the  Securities Act is against public policy and is therefore
unenforceable.




                                       42

<PAGE>






                                  LEGAL MATTERS

     Certain legal  matters in connection  with the Offering will be passed upon
for the Company by the Law Office of Gary A. Agron,  Englewood,  Colorado.  Snow
Becker Krauss P.C., New York, New York, has acted as counsel for the Underwriter
in connection with the Offering.

                                     EXPERTS

     The financial  statements  of the Company for the years ended  December 31,
1995 and 1996,  appearing  in the  Registration  Statement  have been audited by
Angell & Deering,  independent  auditors,  as set forth in their report  thereon
appearing  elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.











                                       43

<PAGE>
                             PROTOSOURCE CORPORATION


                          INDEX TO FINANCIAL STATEMENTS



Financial Statements                                                Page
- --------------------                                                ----

 Independent Auditors' Report                                        F-2

 Balance Sheets as of September 30, 1997
   (Unaudited) and December 31, 1996                                 F-3

 Statements of Operations for the nine months
  ended  September 30, 1997 and 1996
  (Unaudited) and for the years ended
  December 31, 1996 and 1995                                         F-5

 Statements  Of  Changes  in  Shareholders'
  Equity  for the nine  months  ended
  September 30, 1997 (Unaudited)
  and for the years ended December 31, 1996 and 1995                 F-6

 Statements Of Cash Flows for the nine months
  ended  September 30, 1997 and 1996
  (Unaudited) and for the
  years ended December 31, 1996 and 1995                             F-7

 Notes To Financial Statements                                       F-9



























                                       F-1


<PAGE>








                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors
ProtoSource Corporation


We have audited the accompanying balance sheet of ProtoSource  Corporation as of
December  31,  1996  and  the  related  statements  of  operations,  changes  in
shareholders'  equity and cash flows for the years ended  December  31, 1996 and
1995.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of ProtoSource  Corporation as of
December 31, 1996 and the results of its  operations  and its cash flows for the
years ended  December 31, 1996 and 1995 in conformity  with  generally  accepted
accounting principles.


                                        /s/  Angell & Deering
                                        ---------------------------------------
                                        Angell & Deering
                                        Certified Public Accountants

Denver, Colorado
February 28, 1997, except for
Note 12 as to which the date
is April 25, 1997















                                       F-2


<PAGE>
                             PROTOSOURCE CORPORATION
                                 BALANCE SHEETS



                                     ASSETS
                                     ------
                                                    September 30,  December 31,
                                                        1997          1996
                                                    ------------   ------------
                                                     (Unaudited)
Current Assets:
  Cash and cash equivalents                          $   61,471    $  482,357
  Accounts receivable:
   Trade                                                183,220        29,156
   Employees and other                                     --          21,397
  Inventories                                             8,980         8,980
  Prepaid expenses and other                             18,932        14,587
  Current portion of note receivable                     47,285        47,285
                                                     ----------    ----------

         Total Current Assets                           319,888       603,762
                                                     ----------    ----------


Property and Equipment, at cost:
  Land                                                  411,176       411,176
  Building and improvements                           1,381,816     1,381,816
  Equipment                                             777,726       680,377
  Furniture                                             110,387       104,375
  Vehicles                                               10,090        10,090
                                                     ----------    ----------
                                                      2,691,195     2,587,834
  Less accumulated depreciation and amortization        659,141       486,441
                                                     ----------    ----------

         Net Property and Equipment                   2,032,054     2,101,393
                                                     ----------    ----------

Other Assets:
  Goodwill, net of accumulated amortization
   of $2,321 and $2,006, respectively                    18,924        19,239
  Deferred tax assets                                    71,550        71,550
  Note receivable, net of current portion above         723,565       723,565
  Deposits and other assets                              89,831        42,346
                                                     ----------    ----------

         Total Other Assets                             903,870       856,700
                                                     ----------    ----------

         Total Assets                                $3,255,812    $3,561,855
                                                     ==========    ==========









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

                                       F-3


<PAGE>



                             PROTOSOURCE CORPORATION
                                 BALANCE SHEETS




                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------

                                                    September 30,   December 31,
                                                        1997            1996
                                                        ----            ----
                                                     (Unaudited)
Current Liabilities:
  Accounts payable                                   $    99,716    $   195,694
  Accrued liabilities                                     13,929        267,228
  Customer deposits                                        1,500          1,500
  Notes payable                                          750,000           --
  Current portion of long-term debt                       39,358         39,358
                                                     -----------    -----------

         Total Current Liabilities                       904,503        503,780
                                                     -----------    -----------

Long-Term Debt, net of current portion above:
  Bank                                                      --            2,220
  Obligations under capital leases                     1,851,851      1,852,083
  Less current portion above                              39,358         39,358
                                                     -----------    -----------

         Total Long-Term Debt                          1,812,493      1,814,945
                                                     -----------    -----------

Commitments and contingencies                               --             --

Shareholders' Equity:
  Preferred stock, no par value;
   5,000,000 shares authorized,
   none issued and outstanding                              --             --
  Common stock, no par value;
   10,000,000 shares authorized,
   665,333 and 515,333 shares
   issued and outstanding                              5,590,455      4,839,485
  Accumulated deficit                                 (5,051,639)    (3,596,355)
                                                     -----------    -----------

         Total Shareholders' Equity                      538,816      1,243,130
                                                     -----------    -----------

         Total Liabilities and
           Shareholders' Equity                      $ 3,255,812    $ 3,561,855
                                                     ===========    ===========











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

                                       F-4


<PAGE>
<TABLE>
<CAPTION>



                                       PROTOSOURCE CORPORATION
                                      STATEMENTS OF OPERATIONS



                                               Nine Months Ended September 30,           Years Ended December 31,
                                               -------------------------------           ------------------------
                                                   1997              1996                1996              1995
                                                   ----              ----                ----              ----
                                                        (Unaudited)
Net Revenues:
<S>                                            <C>                <C>                <C>                <C>        
 Internet service fees                         $   550,969        $   544,590        $   697,581        $   100,901
                                               -----------        -----------        -----------        -----------

       Total Revenues                              550,969            544,590            697,581            100,901

Operating expenses                               1,415,019            897,465          1,121,773          1,079,503
                                               -----------        -----------        -----------        -----------

       Operating Loss                             (864,050)          (352,875)          (424,192)          (978,602)
                                               -----------        -----------        -----------        -----------

Other Income (Expense):
 Interest income                                   104,015                825              3,507             50,891
 Interest expense                                 (898,678)          (137,012)          (272,228)          (160,192)
 Financing costs                                      --                 --             (126,000)              --
 Rent and other income                             203,429             71,280            146,122            124,356
 Other, net                                           --                 --                 --              (10,231)
                                               -----------        -----------        -----------        -----------

       Total Other Income (Expense)               (591,234)           (64,907)          (248,599)             4,824
                                               -----------        -----------        -----------        -----------

Loss From Continuing Operations
 Before Provision For Income Taxes              (1,455,284)          (417,782)          (672,791)          (973,778)

Provision for income taxes                            --                 --                 --                  800
                                               -----------        -----------        -----------        -----------

Loss From Continuing Operations                 (1,455,284)          (417,782)          (672,791)          (974,578)
                                               -----------        -----------        -----------        -----------

Discontinued Operations:
  Loss from discontinued
   operations (Note 2)                                --             (264,200)          (532,663)          (841,707)
  Loss on disposal (Note 2)                           --                 --             (204,346)              --
                                               -----------        -----------        -----------        -----------

       Loss From Discontinued Operations              --             (264,200)          (737,009)          (841,707)
                                               -----------        -----------        -----------        -----------

Net Loss                                       $(1,455,284)       $  (681,982)       $(1,409,800)       $(1,816,285)
                                               -----------        -----------        ===========        ===========

Net Loss Per Share of Common Stock:
  Loss from continuing operations              $     (2.61)       $     (4.71)       $     (3.69)       $    (11.82)
  Discontinued operations                             --                (2.98)             (4.05)            (10.22)
                                               -----------        -----------        -----------        -----------

  Net Loss                                     $     (2.61)       $     (7.69)       $     (7.74)       $    (22.04)
                                               ===========        ===========        ===========        ===========

Weighted Average Number of
 Common Shares Outstanding                         557,897             88,667            182,037             82,439
                                               ===========        ===========        ===========        ===========






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

                                                          F-5

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                      PROTOSOURCE CORPORATION
                                  STATEMENTS OF SHAREHOLDERS' EQUITY


                                                                  Series A
                                                               Preferred Stock                 Common Stock            
                                                               ---------------                 ------------             Accumulated
                                                             Shares      Amount            Shares         Amount          Deficit
                                                             ------      ------            ------         ------          -------

<S>                                                          <C>           <C>             <C>         <C>              <C>         
Balance at December 31, 1994                                 900,000       $--             42,666      $   303,595      $  (370,270)

Issuance of common stock and warrants
 in public offering (net of offering
 costs of $808,476)                                             --          --             46,000        2,986,524             --

Contribution of shares to the Company
 by officers and directors for issuance
 in connection with an acquisition                              --          --               --             19,375             --

Net loss                                                        --          --               --               --         (1,816,285)
                                                         -----------       -----      -----------      -----------      -----------

Balance at December 31, 1995                                 900,000        --             88,666        3,309,494       (2,186,555)

Contribution of capital by officers
 through forgiveness of previously
 accrued salaries                                               --          --               --            154,792             --

Issuance of common stock in
 connection with bridge loans                                   --          --             26,667          100,000             --

Issuance of common stock in private
 offering (net of offering costs of
 $24,801)                                                        --          --            400,000        1,275,199             --

Cancellation of Preferred Stock in
 connection with divestiture of assets                      (900,000)       --               --               --               --

Net loss                                                        --          --               --               --         (1,409,800)
                                                         -----------       -----      -----------      -----------      -----------

Balance at December 31, 1996                                    --          --            515,333        4,839,485       (3,596,355)

Issuance of common stock (unaudited)                            --          --               --                970             --

Issuance of common stock in connection
 with bridge loans (unaudited)                                  --          --            150,000          750,000             --

Net loss (unaudited)                                            --          --               --               --         (1,455,284)
                                                         -----------       -----      -----------      -----------      -----------

Balance at September 30, 1997
 (unaudited)                                                    --         $--            665,333      $ 5,590,455      $(5,051,639)
                                                         ===========       =====      ===========      ===========      ===========






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

                                                       F-6

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                         PROTOSOURCE CORPORATION
                                        STATEMENTS OF CASH FLOWS


                                                     Nine Months Ended September 30,          Years Ended December 31,
                                                     -------------------------------          ------------------------
                                                         1997               1996               1996              1995
                                                         ----               ----               ----              ----
                                                               (Unaudited)
Cash Flows From Operating Activities:
<S>                                                  <C>                <C>                <C>                <C>         
  Net loss                                           $(1,455,284)       $  (681,982)       $(1,409,800)       $(1,816,285)
  Adjustments to reconcile net
   loss to net cash provided (used) by
   operating activities:
    Depreciation and amortization                        173,015            268,687            367,049            584,810
    Provision for bad debts                                 --                 --                 --              508,187
    Assets and liabilities disposed of in
     divestiture and note receivable received               --                 --               17,176               --
    Gain on disposal of equipment                           --                 --               (4,607)              --
    Issuance of common stock for
     costs of financing                                  750,000               --              100,000               --
    Changes in operating assets
     and liabilities:
     Accounts receivable                                (132,667)            35,853            163,556           (499,436)
     Inventories                                            --              (34,229)             7,079             (4,625)
     Deposits and other assets                            (4,345)            (5,523)            15,441            (18,814)
     Accounts payable                                    (95,978)           222,036             32,536           (150,623)
     Accrued liabilities                                (253,299)           371,766            344,284            (10,618)
     Customer deposits                                      --               38,915             (4,000)           (12,213)
     Unearned customer support revenue                      --               (9,443)           (34,542)            (5,286)
                                                     -----------        -----------        -----------        -----------

Net Cash Provided (Used) By
  Operating Activities                                (1,018,558)           206,080           (405,828)        (1,424,903)
                                                     -----------        -----------        -----------        -----------

Cash Flows From Investing Activities:
  Purchases of property and equipment                    (33,402)            (7,238)           (38,421)          (403,591)
  Proceeds from disposal of equipment                       --                 --               10,536               --
  Software development costs capitalized                    --             (442,186)          (442,100)          (592,754)
  Receivable from shareholders                              --                 --                 --              (35,000)
  Other                                                  (47,485)             1,214               --                 --
                                                     -----------        -----------        -----------        -----------

Net Cash (Used) By Investing Activities                  (80,887)          (448,210)          (469,985)        (1,031,345)
                                                     -----------        -----------        -----------        -----------

Cash Flows From Financing Activities:
  Payments on notes payable                              (72,411)          (106,146)           (55,675)          (625,998)
  Proceeds from borrowing                                750,000            232,000            200,000             20,000
  Issuance of common stock                                   970               --            1,300,000          3,795,000
  Offering costs incurred                                   --              (20,000)          (224,801)          (619,990)
                                                     -----------        -----------        -----------        -----------

Net Cash Provided By Financing Activities                678,559            105,854          1,219,524          2,569,012
                                                     -----------        -----------        -----------        -----------







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

                                                  F-7

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                     PROTOSOURCE CORPORATION
                                     STATEMENTS OF CASH FLOWS



                                                     Nine Months Ended September 30,      Years Ended December 31,
                                                     -------------------------------      ------------------------
                                                         1997             1996             1996              1995
                                                         ----             ----             ----              ----
                                                             (Unaudited)
Net Increase (Decrease) in Cash and
<S>                                                   <C>               <C>               <C>              <C>      
 Cash Equivalents                                     $(420,886)        $(136,276)        $ 343,711        $ 112,764

Cash and Cash Equivalents at
 Beginning of Period                                    482,357           138,646           138,646           25,882
                                                      ---------         ---------         ---------        ---------

Cash and Cash Equivalents at
 End of Period                                        $  61,471         $   2,370         $ 482,357        $ 138,646
                                                      =========         =========         =========        =========

 Supplemental Disclosure of
  Cash Flow Information:
   Cash paid during the period for:
    Interest                                          $ 148,678         $ 137,012         $ 272,228        $ 174,251
    Income taxes                                           --                --                --                800

 Supplemental Disclosure of Noncash
  Investing and Financing Activities:
   Acquisition of equipment under
    capital leases                                    $  69,959         $  90,802         $  90,349        $ 118,701
   Common stock contributed by
    stockholders for issuance in
    acquisition by the Company                             --                --                --             19,375
   Conversion of account payable to a
    note payable                                           --                --              32,000             --
   Capital contribution by officers through
    forgiveness of previously accrued salaries             --             154,792           154,792             --
   Conversion of note payable into common stock            --                --             200,000             --





















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

                                                        F-8

</TABLE>

<PAGE>
                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies
   ------------------------------------------
     Description of Business
     -----------------------
     ProtoSource  Corporation,  formerly  SHR  Corporation,  doing  business  as
     Software  Solutions  Company (the  "Company"),  was incorporated on July 1,
     1988, under the laws of the state of California. The Company is an Internet
     services provider.

     Unaudited Interim Financial Statements
     --------------------------------------
     The  financial  statements as of September 30, 1997 and for the nine months
     ended September 30, 1997 and 1996 are unaudited, however, in the opinion of
     management of the Company,  all  adjustments  (consisting  solely of normal
     recurring  adjustments)  necessary to a fair  presentation of the financial
     statements for the interim periods have been made.

     Reclassifications
     -----------------
     The former software development,  MarketStreet and computer training center
     divisions are  presented as  discontinued  operations  in  accordance  with
     Accounting  Principles  Board  (APB)  Opinion  No.  30 (Note  2).  The 1995
     operations and per share  information have been reclassified to present the
     operations of the three divisions as discontinued operations also.

     Stock Split
     -----------
     On February  28,  1997,  the  Company's  shareholders  adopted a resolution
     approving a one for ten reverse  stock split of the issued and  outstanding
     common shares, effective April 2, 1997. All share information and per share
     data have been retroactively  restated for all periods presented to reflect
     the reverse stock split (Note 12).

     Revenue Recognition
     -------------------
     Product  sales  represent  sales  of  application  software  to end  users.
     Equipment  sales  represent  sales of  computer  and  peripheral  equipment
     bundled with the Company's  software.  Professional  service fees represent
     revenue from custom  programming,  post  contract  customer  support  (PCS)
     agreements and training and installation related services.  Fees associated
     with insignificant  vendor  obligations  related to installation of systems
     are deferred and recognized upon  completion of  performance.  Other income
     represents  primarily sales of promotional  brochures,  marketing materials
     and sales of miscellaneous equipment and supplies.

     Revenue from product  sales is  recognized  upon  delivery to the customer,
     provided  that  no  significant  vendor  or  PCS  obligations  remain,  and
     collection of the related  receivable is deemed probable.  Revenue from PCS
     agreements is recognized  on a  straight-line  basis over the period of the
     PCS agreement.

     Revenue  from the Internet  operations  is  recognized  over the period the
     services  are  provided.  Deferred  revenue  consists  primarily of monthly
     subscription fees billed in advance.

     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 to be
     cash equivalents.

     Inventories
     -----------
     Inventories, consisting of computer equipment and supplies held for resale,
     are  stated at the  lower of cost  (determined  on the first in,  first out
     method) or market.

                                       F-9


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies (Continued)
   -----------------------------------------------------
     Property and Equipment
     ----------------------
     Depreciation  and  amortization  of  equipment,  furniture and vehicles are
     computed  using the  straight-line  method over  estimated  useful lives of
     three  to  seven  years.  Assets  held  under  capital  lease  obligations,
     exclusive of land, are amortized  using the  straight-line  method over the
     shorter  of the  useful  lives  of the  assets  or the  term of the  lease.
     Depreciation  of property and equipment  charged to operations was $233,201
     and $171,695 for the years ended December 31, 1996 and 1995, respectively.

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

     Investment
     ----------
     The Company has a 25% ownership interest in SSC Technologies, Inc. ("SSC").
     The Company received the equity interest in connection with the divestiture
     of three  operating  divisions  of the  Company  (Note 2).  The cost of its
     investment  is $--,  and since the  Company  does not have the  ability  to
     exercise  influence  over  operating  and  financial  policies of SSC,  the
     Company is accounting  for its  investment in SSC utilizing the cost method
     of  accounting.  Under the cost  method,  net  accumulated  earnings  of an
     investee  subsequent  to the  date  of  investment  are  recognized  by the
     investor  only to the extent  distributed  by the  investee  as  dividends.
     Dividends  received  in  excess  of  earnings  subsequent  to the  date  of
     investment  are  considered  a return of  investment  and are  recorded  as
     reductions of cost of the investment.

     Software Development Costs
     --------------------------
     Software  development  costs are capitalized with respect to those products
     for which  technological  feasibility (as defined in Statement of Financial
     Accounting Standards No. 86) has been established.  Capitalized amounts are
     reported at the lower of unamortized  cost or net realizable  value.  These
     costs are amortized into cost of goods sold on a product-by-product  basis.
     The annual amortization expense is the greater of the amount computed using
     the ratio of  current  revenue  to the total  anticipated  revenue  for the
     product or the straight-line  method over the estimated life of the product
     starting  when the product is available  for general  release to customers.
     Generally,  the Company  amortizes  these costs over three years.  Software
     development  costs  capitalized  relate primarily to product  enhancements.
     Amortization expense for capitalized software was $132,254 and $412,258 for
     the years ended December 31, 1996 and 1995, respectively.

     Deferred Offering Costs
     -----------------------
     In connection  with the Company's  public offering (Note 6), costs incurred
     to complete the  offering  have been  deferred and were offset  against the
     proceeds of the offering.

     Stock-Based Compensation
     ------------------------
     During the year ended December 31, 1996, the Company  adopted  Statement of
     Financial  Accounting Standard (SFAS) No. 123,  "Accounting for Stock-Based
     Compensation".  The Company will continue to measure  compensation  expense
     for its stock-based  employee  compensation plans using the intrinsic value
     method  prescribed by APB Opinion No. 25,  "Accounting  for Stock Issued to
     Employees". See Note 8 for pro forma disclosures of net income and earnings
     per share as if the fair value-based method prescribed by SFAS 123 had been
     applied in measuring compensation expense.


                                      F-10


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies (Continued)
   -----------------------------------------------------
     Income Taxes
     ------------
     The Company adopted  Statement of Financial  Accounting  Standards No. 109,
     "Accounting  for Income  Taxes,"  in 1992.  Under the  statement,  deferred
     income taxes are provided for temporary  differences  between the financial
     reporting  and tax bases of assets and  liabilities  using enacted tax laws
     and rates for the years when the differences are expected to reverse.

     Net Income (Loss) Per Share of Common Stock
     -------------------------------------------
     Net  income  (loss) per share of common  stock is based  upon the  weighted
     average  number  of shares of common  stock and  common  stock  equivalents
     outstanding  during  the  year.  Common  stock  equivalents  represent  the
     dilutive  effect of the  assumed  exercise  of  certain  outstanding  stock
     options and warrants.

     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.

2. Discontinued Operations
   -----------------------
     In  1996,  the  Company  retained  the  Kriegsman  Group  ("Kriegsman"),  a
     financial  consulting firm, to assist it with a financial  restructuring of
     its operations.  In connection with the financial restructuring the Company
     divested the software development,  MarketStreet (advertising division) and
     the computer training center  divisions.  The divisions were to be spun-off
     to a new Company owned by the former  management  of the Company  effective
     August 31, 1996. The closing for the  divestiture  occurred on December 31,
     1996. All of the assets of the three divisions and the related  liabilities
     and  facilities  leases were  assumed by the former  management  and a note
     payable was issued by the former management to the Company in the amount of
     $770,850  (Note 9). Also  included in the assets of the divested  divisions
     was $500,000 in cash less approximately  $200,000 in liabilities which were
     paid by the Company which resulted in  approximately  $300,000 in cash paid
     to the divested  divisions.  The management of the divested  divisions also
     assumed all litigation  and claims related to the divisions  which includes
     one law suit in the amount of  approximately  $70,000.  The Kriegsman Group
     also  nominated new members for the Board of Directors  upon  completion of
     the divestiture of the three divisions which were approved in January 1997.
     The Company  received a 25%  ownership  interest in the common stock of the
     new  company  formed to acquire the  divested  divisions  and the  divested
     divisions will lease the principal  office from the Company for a period of
     eighteen months at the current market rate.

     Kriegsman was to use its best efforts to provide a minimum of $1,500,000 of
     financing  for the Company  through  bridge loans or equity  financing.  In
     August  1996,  a bridge  loan of $200,000  was  obtained by the Company for
     which the  Company  issued  26,667  shares of  common  stock to the  bridge
     lenders as additional  consideration  for the $200,000 loan. In October and
     November 1996 the Company sold 400,000  shares of its common stock at $3.75
     per share  through an  Underwriter,  which  included the  conversion of the
     $200,000 bridge loan into common stock.  The Company paid the Underwriter a
     

                                      F-11


<PAGE>

                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


2. Discontinued Operations (Continued)
   ----------------------------------
     10% sales  commission  and a 3%  nonaccountable  expense  allowance  on the
     bridge loan and sale of common  stock.  The Company also entered into a two
     year financial consulting agreement with the Underwriter which provides for
     a monthly consulting fee of $5,000 for the two year period.

     As a part of the  financing  transaction,  the  Company  granted  both  the
     Underwriter and Kriegsman  warrants to purchase  common stock.  The Company
     granted  146,667  warrants to each which are exercisable at $3.75 per share
     for a four year period through October 31, 2001. The Company also agreed to
     use its best efforts to file a Registration Statement within 90 days of the
     closing of the  Private  Placement  to  register  the shares  issued in the
     Private  Placement  and the shares  underlying  the warrants  issued to the
     Underwriter and Kriegsman.

     Revenues applicable to the Company's discontinued  operations were $540,112
     and   $1,734,605   for  the  years  ended   December  31,  1996  and  1995,
     respectively.

3. Long-Term Debt
   ---------------
     Long-term debt consists of the following:

     Bank
     ----
     10.5%   installment  note  due  in  1997  with  monthly
     principal and interest payments of $328, collateralized
     by an automobile.                                            $     2,220

     Obligations Under Capital Leases
     --------------------------------
     5.7% to 25.1%  installment  notes  due in 1997 to 2001,
     collateralized by equipment.                                     193,146

     13% capital  lease for building and land with a 20 year
     lease  term,   with  monthly   principal  and  interest
     payments of $15,634  for the first five years,  $19,021
     for the next  five  years,  $23,142  for the next  five
     years  and  $28,156  for the next  five  years  with an
     escalating purchase option (Note 7).                           1,658,937
                                                                   ----------

        Total Long-Term Debt                                        1,854,303
        Less current portion of long-term debt                        (39,358)
                                                                   ----------
        Long-Term Debt                                             $1,814,945
                                                                   ==========

     Installments  due on debt  principal,  including  the  capital  leases,  at
     December 31, 1996 are as follows:

              Year Ending
              December 31,
                 1997                                          $   39,358
                 1998                                              26,058
                 1999                                              16,325
                 2000                                              42,101
                 2001                                              10,591
                 Later years                                    1,719,870
                                                               ----------

                Total                                          $1,854,303
                                                               ==========
                                      F-12


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


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

     The components of the provision for income taxes are as follows:

                                                  1996               1995
                                                  ----               ----
             Current:
                 Federal                       $     --          $      --
                 State                               --                800
                                               --------           --------
                   Total                             --                800
                                               --------           --------

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

             Total Provision For
                 Income Taxes                  $     --          $     800
                                               ========          =========


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

                                                  1996               1995
                                                  ----               ----

    Federal statutory rate                        (25)%              (25)%
    State franchise taxes,
     net of federal benefits                       (4)                (4)
    Valuation allowance                            29                 29
                                                -----              -----

        Total                                     --  %              --  %
                                                =====              =====

     Significant components of deferred income taxes as of December 31, 1996 are
     as follows:

      Net operating loss carryforward                       $1,051,240
      Vacation accrual                                           2,070
                                                            ----------
      Total deferred tax asset                               1,053,310
                                                            ----------
      Accelerated depreciation                                 (43,540)
      State income taxes                                        (1,520)
                                                            ----------
      Total deferred tax liability                             (45,060)
      Less valuation allowance                                (936,700)
                                                            ----------

      Net Deferred Tax Asset                                $   71,550
                                                            ==========

     The Company  has  assessed  its past  earnings  history  and trends,  sales
     backlog,  budgeted sales,  and expiration  dates of  carryforwards  and has
     determined  that it is more  likely than not that  $71,550 of deferred  tax
     assets will be realized.  The remaining  valuation allowance of $936,700 is
     maintained  on deferred tax assets which the Company has not  determined to
     be more  likely  than not  realizable  at this time.  The net change in the
     valuation  allowance  for  deferred tax assets was an increase of $406,760.
     The Company will continue to review this valuation on a quarterly basis and
     make adjustments as appropriate.


                                      F-13


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


4. Income Taxes (Continued)
   -----------------------
     At December 31, 1996,  the Company had federal and California net operating
     loss   carryforwards   of   approximately    $3,900,000   and   $1,900,000,
     respectively.  Such carryforwards expire in the years 2007 through 2011 and
     1997 through 2001 for federal and California purposes, respectively.

5. Acquisitions
   ------------

     In July 1995, the Company purchased,  from an unrelated  individual certain
     assets of ValleyNet  Communications,  an Internet  services  provider.  The
     purchase  price was $50,000 in cash and 334 shares of the Company's  common
     stock.  The  common  stock was  issued  by the  Company's  shareholders  in
     accordance  with  their  agreement  to use  certain of their  shares  owned
     individually  in connection  with future  acquisitions of the Company (Note
     9). The assets  acquired  consists of computer  hardware and software,  and
     goodwill of $21,245 was recorded in connection  with the  acquisition.  The
     goodwill is being amortized over a fifteen year useful life.

6. Shareholders' Equity
   --------------------
     Incentive Stock Option Plan
     ---------------------------
     In November  1994,  the  Company's  Board of Directors  authorized  and the
     shareholders  approved, a stock option plan which provides for the grant of
     incentive and nonqualified  options to eligible  officers and key employees
     of the  Company to purchase up to 150,000  shares of the  Company's  common
     stock.  The  purchase  price of such shares  shall be at least equal to the
     fair market value at the date of grant. Such options vest at the discretion
     of the Board of Directors,  generally  over a four-year  period.  The stock
     option plan expires in 2004.  As of December 31, 1996, no options have been
     granted under the Plan.

     Preferred Stock
     ---------------
     In December  1994,  the Company  issued to six  individuals,  including the
     Company's five executive officers, for no consideration, a total of 900,000
     shares of Series A Convertible  Preferred Stock, no par value.  Such shares
     are automatically convertible,  in varying amounts per year, into shares of
     common stock on a fifteen for one basis through 2003 if certain revenue and
     net income milestones are met as follows:

          (i) an  aggregate  of 9,375  shares of Series A  Preferred  Stock will
          convert to common stock if the Company  reports gross annual  revenues
          of at least  $9,600,000  and  annual  after tax  earnings  of at least
          $1,550,000   for  the  calendar  year  ended  December  31,  1996,  an
          additional  9,375  shares per year will  convert to common  stock from
          1997 to 2002, and 121,875 shares in 2003 if the company  reports gross
          annual revenues of at least $9,600,000,  and annual after tax earnings
          of at least $1,550,000 for calendar years 1997 through 2003.

          (ii) an  aggregate  of 9,375  shares of Series A Preferred  Stock will
          convert to common stock if the Company  reports gross annual  revenues
          of at least  $15,500,000  and annual  after tax  earnings  of at least
          $3,000,000  for  the  calendar  year  ending  December  31,  1997,  an
          additional  9,375  shares per year will  convert to common  stock from
          1998 to 2002, and 131,250 shares in 2003 if the Company  reports gross
          annual revenues of at least $15,500,000, and annual after tax earnings
          of at least $3,000,000 for calendar years 1998 through 2003.



                                      F-14


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


6. Shareholders' Equity (Continued)
   --------------------------------
     Preferred Stock (Continued)
     ---------------------------
               (iii) An aggregate of 15,000  shares of Series A Preferred  Stock
               will convert to common stock if the Company  reports gross annual
               revenues of at least $23,800,000 and annual after tax earnings of
               at least  $5,100,000  for the calendar  year ending  December 31,
               1998, an additional  5,000 shares per year will convert to common
               stock  from  1999 to  2002,  and  225,000  shares  in 2003 if the
               Company  reports gross annual  revenues of at least  $23,800,000,
               and annual after tax earnings of at least $5,100,000 for calendar
               years 1999 through 2003.

     The fair market value of the common stock  issued upon  conversion  will be
     charged to  operations  at that time.  Any  preferred  shares not converted
     during such period will be cancelled.  If, prior to January 1, 1999 (i) the
     Company consolidates with or merges into another corporation or entity (and
     the  Company  is not  the  survivor)  or if the  Company  sells  or  leases
     substantially  all of  its  assets  and  the  Company's  common  stock  has
     appreciated an average of 10% per annum for each 12 month period  following
     the date of the Company's Prospectus (February 9, 1995) or (ii) any person,
     entity  or  affiliated  group  or  entities  acquires  40% or  more  of the
     Company's  common stock in any 12 month period,  then all  preferred  stock
     will be automatically  converted into common stock. While outstanding,  the
     preferred  stock does not carry voting rights or dividend  rights and has a
     liquidation preference of $.01 per share.

     In connection with the  divestiture of three  operating  divisions (Note 2)
     all of the outstanding shares of Series A Preferred Stock were cancelled on
     December 31, 1996.

     Common Stock and Warrants
     -------------------------
     The closing for the  Company's  IPO  occurred on  February  17,  1995.  The
     Company sold 46,000 units at $82.50 per unit and paid the Underwriter a 10%
     commission and a 3% nonaccountable  expense allowance which resulted in net
     proceeds to the Company of  $2,986,524.  Each unit consists of one share of
     the Company's  common stock and one warrant to purchase an additional share
     of common  stock at $97.50 per share until  February 9, 1998.  The warrants
     may be redeemed by the Company at any time,  upon 30 days written notice to
     the  holders  at a price of $.01 per  warrant if the  closing  price of the
     common stock is $112.50 or more for 30  consecutive  days. The Company also
     entered into a one year financial  consulting contract with the Underwriter
     for  $36,000  which was paid in full in  advance.  In  connection  with the
     offering,  the  Company  issued  the  Underwriter,  for $100,  a warrant to
     purchase  10% of the number of Units sold in the  offering.  The Warrant is
     exercisable  for a period of four years  beginning  February  9, 1996.  The
     Underwriter's  Warrant is  exercisable  at a price of $99.00 per Unit.  The
     Units subject to the Underwriter's  Warrant are identical to the Units sold
     to the public.

7. Commitments and Contingencies
   -----------------------------

     In September  1994, the Company  acquired,  under a 20 year  noncancellable
     capital lease, an office  building,  including land and  improvements.  The
     Company  occupied  approximately  half of the space as its corporate office
     facility and has sublet the remaining space to unrelated parties. The lease
     requires  initial  annual  minimum lease  payments of $187,608,  increasing
     every five years to a maximum annual payment of $337,872 in 2009. Under the
     lease,  the Company has an option at any time through  April 30,  1996,  to
     purchase  the building and land for  $1,700,000.  Such amount  increases to
     $1,800,000  through April 30, 1997 and  $1,900,000  through April 30, 1998.
     After  April  30,  1998,  the  option  amount  increases  annually  by  the
     
          

                                      F-15


<PAGE>

                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


7. Commitments and Contingencies (Continued)
   ----------------------------------------
     percentage  increase in the Consumer Price Index,  as further  described in
     the lease. Upon exercise of the purchase option, all lease payments made by
     the Company will be applied  toward the down payment for the purchase price
     based upon an amortized 20 year note with interest accrued at 9% per annum.

     The Company  also leases  certain  computer  equipment  and  furniture  and
     fixtures  under  noncancellable  capital  leases.  The Company leases other
     facilities,  certain vehicles and computer  equipment under  noncancellable
     operating  leases.  The  Company  entered  into a  sublease  for its office
     building  described  above  in  connection  with the  divestiture  of three
     operating divisions.  The sublease rentals to be received in the future are
     approximately $168,000 and have been deducted from the future minimum lease
     payments in the table below.

     The following is a schedule of future  minimum  lease  payments at December
     31, 1996 under the  Company's  capital  leases  (together  with the present
     value of minimum lease payments) and operating  leases that have initial or
     remaining noncancellable lease terms in excess of one year:
<TABLE>
<CAPTION>

          Year Ending                      Capital          Operating
         December 31,                      Leases             Leases               Total
         ------------                      ------             ------               -----
<S>         <C>                         <C>                 <C>                 <C>       
            1997                        $   132,142         $  57,074           $  189,216
            1998                            235,146            53,242              288,388
            1999                            245,162            53,841              299,003
            2000                            266,169            54,918              321,087
            2001                            230,523            56,016              286,539
       Later years                        3,705,573            23,340            3,728,913
                                        -----------         ---------           ----------

    Total Minimum Lease
     Payments                             4,814,715          $298,431           $5,113,146
                                                             ========           ==========
</TABLE>

    Less amount representing interest    (2,962,632)
                                        -----------
    Present Value of Net Minimum
     Lease Payments                     $ 1,852,083
                                        ===========

     Rent expense amounted to approximately  $120,100 and $133,600 for the years
     ended December 31, 1996 and 1995, respectively.

     Leased  equipment  under  capital  leases  as of  December  31,  1996 is as
     follows:

      Building                                                       $1,348,824
      Land                                                              411,176
      Equipment                                                         276,441
      Less accumulated amortization                                    (252,939)
                                                                     ----------

      Net Property and Equipment Under Capital Leases                $1,783,502
                                                                     ==========





                                      F-16


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


8. Stock Based Compensation Plans
   ------------------------------
     The Company adopted Financial  Accounting Standard No. 123, "Accounting for
     Stock- Based  Compensation"  (SFAS 123) during the year ended  December 31,
     1996. In accordance with the provision of SFAS 123, the Company applies APB
     Opinion No. 25,  "Accounting  for Stock Issued to  Employees",  and related
     interpretations  in  accounting  for  its  plans  and  does  not  recognize
     compensation expense for its stock-based  compensation plans other than for
     options granted to  non-employees.  If the Company had elected to recognize
     compensation expense based upon the fair value at the grant date for awards
     under these plans  consistent with the methodology  prescribed by SFAS 123,
     the  Company's  net income and  earnings  per share would be reduced to the
     following  pro forma  amounts: 

                                                     1996           1995
                                                     ----           ---- 
     Net Loss:  
          As  reported                           $(1,409,800)    $(1,816,285) 
          Pro forma                               (1,412,843)     (1,816,285)

     Net Loss Per Share of Common Stock:
          As reported                            $     (7.74)    $    (22.04)
          Pro forma                              $     (7.76)    $    (22.04)

     These pro forma  amounts may not be  representative  of future  disclosures
     since the  estimated  fair value of stock  options is  amortized to expense
     over the  vesting  period and  additional  options may be granted in future
     years.  The fair value for these options was estimated at the date of grant
     using the Black-Scholes option pricing model with the following assumptions
     for the year ended December 31, 1996:

                                                              1996
                                                              ----
     Risk free interest rate                                    5.97%
     Expected life                                          3.5 years
     Expected volatility                                       129.3%
     Expected dividend yield                                       0%

     The Company did not grant any stock options in 1995.

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

9. Related Party Transactions
   ---------------------------

     The Company has entered into  transactions with its officers and directors,
     as follows.

     The Company had a note receivable  from its former  President of $35,000 at
     December 31, 1995. Interest is payable monthly at 9% per annum and the note
     is due in April 1997.  The note is secured by 3,333 shares of the Company's
     common stock which are owned by the Company's  former  President.  The note
     receivable  and  accrued   interest  were  sold  in  connection   with  the
     divestiture of three operating divisions (Note 2).

                                      F-17


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


9. Related Party Transactions (Continued)
   --------------------------------------
     On November 1, 1994,  all of the Company's  shareholders  agreed in writing
     with each  other and with the  Company  to  contribute  pro rata from their
     shareholdings  up to a total of 13,334 shares of common stock to be used by
     the Company (at any time until December 31, 1999) for acquisitions of other
     companies or lines of business. The Company in its sole discretion may call
     for  such  contributions  at any  time  and  from  time to time  for  these
     purposes.  The Company will not issue any additional  equity securities for
     purposes  of  acquisition  of other  companies  or product  lines until all
     13,334 shares have been  contributed.  The shareholders did not receive any
     compensation  or  other  form  of  remuneration   for  their  agreement  to
     contribute  the shares and will have no interest in any of the companies or
     product lines which may be acquired. The shareholders agreed to provide the
     13,334 shares at the request of the  Underwriter  of the Company's  IPO, in
     order to reduce  any  dilution  to  existing  shareholders  if the  Company
     elected  to use  common  stock  for  acquisition  purposes.  In  1995,  the
     Company's  shareholders  contributed  334  shares  in  connection  with the
     acquisition of ValleyNet Communications (Note 5).

     The  Company  incurred  expenses  in  connection  with  desktop  publishing
     services provided by a Corporation  controlled by the wife of the Company's
     former Chief  Executive  Officer of $7,800 for the year ended  December 31,
     1995.

     In connection  with the divestiture of three divisions (Note 2) the Company
     received a note  receivable of $770,850 from SSC which is controlled by the
     former management of the Company.  The note bears interest at 10% per annum
     and is payable in monthly  principal and interest  installments  of $10,187
     through 2006. The note is collateralized by substantially all assets of SSC
     and is guaranteed by the former management of the Company.

     The  Company  issued  36,667  warrants  to its Chief  Executive  Officer in
     connection  with his  employment  agreement in November  1996. The warrants
     vest as to 13,333  warrants in December  1997,  13,334 in December 1998 and
     10,000 in December 1999. The warrants are exercisable at $3.75 per share at
     anytime through December 2001.

10. Concentration of Credit Risk and Major Customers
    ------------------------------------------------
     The Company provides credit,  in the normal course of business,  to a large
     number of  companies  in the  Internet  services  industry.  The  Company's
     accounts  receivable  are due from customers  located  primarily in central
     California.  The  Company  performs  periodic  credit  evaluations  of  its
     customers'  financial  condition and generally requires no collateral.  The
     Company  maintains  reserves for potential  credit losses,  and such losses
     have not exceeded management's expectations.

11. Sale of Software
    ----------------
     In  December  1995,  the  Company  entered  into an  agreement  to sell its
     "Classic"  Software to a Canadian Limited  Partnership (the  "Partnership")
     for a promissory note in the amount of $8,080,000. The Partnership acquired
     all of the Company's  interest in the Classic  Software defined as follows;
     all existing  and future  updates,  upgrades  additions,  improvements  and
     enhancements  and any new  versions of the  software.  The  Partnership  is
     selling limited partnership units in Canada and the promissory note will be
     replaced by cash and  promissory  notes as the units are sold. If all units
     are sold,  the  Company  would  receive  $1,333,200  cash at closing  (less
     expenses),  $1,333,200  cash on March 21,  1996 (less  expenses)  and notes
     receivable from the limited partners of $5,413,600. The notes bear interest

                                      F-18


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


11. Sale of Software (Continued)
    ---------------------------
     at 8.5% per annum and are due  December  27,  2005  with  interest  payable
     annually.  The  Partnership  closed on  December  28,  1995  selling  units
     representing  18.81% of the purchase  price of the software and the Company
     received  $188,000,  net of expenses,  and  received the second  payment of
     $188,000 in March 1996. A second  partnership  was formed in 1996 in Canada
     to sell units to acquire the remaining 81.19% of the Software.  The Company
     received approximately  $150,000, net of expenses, on December 31, 1996 for
     the sale of software to the second  partnership.  The  $150,000 was paid to
     the Company that acquired the software development division pursuant to the
     terms of the Divestiture Agreement.

     The  Company  also  entered  into  a   Distribution   Agreement   with  the
     Partnership, whereby the Company was appointed as the exclusive distributor
     of the Classic  Software  throughout  the world for a term of twenty years.
     Under the terms of the  Distribution  Agreement  the Company will  purchase
     copies of the Classic Software for resale to third parties.  Until December
     31, 2000,  the Company shall pay the following  prices for each copy of the
     Software purchased from the Partnership:

          (a) until the Company has  purchased  $475,000 of copies in each year,
          100% of the price the Company  invoices to its customers for each copy
          of the Software; plus
<TABLE>
<CAPTION>

                                                              Percentage of Sales
                                                              -------------------
                Until                                       Below             Over
             December 31,           Sales Benchmark        Benchmark        Benchmark
             ------------           ---------------        ---------        ---------
                <S>                  <C>                     <C>           <C>           
                1997                $ 8,850,000                5%              .1%
                1998                 10,275,000                4               .1
                1999                 15,150,000                3               .1
                2000                 34,000,000                5               .1
             Later Years                    -0-                6                6
</TABLE>

     Prior to the repayment of the Promissory Notes, payments to the Partnership
     for Software will be applied by the Partnership as follows:

          i)   first, the Partnership shall pay to the Company on behalf of each
               Limited Partner,  an amount equal to the interest then payable in
               respect of the Promissory Note issued by such Limited Partner;

          ii)  second,  the balance remaining  allocable to each Limited Partner
               will be paid (A) 55% to the  Limited  Partner  and (B) 45% to the
               Company for repayment of the principal amount then outstanding on
               the Limited Partner's Promissory Note.

     The Partnership has also entered into an Option  Agreement with the Company
     whereby the Company may  purchase the Software  from the  Partnership  upon
     certain  triggering  events.  Upon the occurrence of such triggering events
     the  Company,  at its sole  option,  may  purchase  the  software  from the
     Partnership for a purchase price based upon the following.

     The purchase  price payable by the Company for the Software  shall be equal
     to the fair market value of the Software on the Exercise Date as determined
     by a qualified arm's length  appraiser  agreed to by the parties,  provided
     that, if  as a  result of a  Triggering Event, securities are issued by the

                                      F-19


<PAGE>



                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


11. Sale of Software (Continued)
    ---------------------------
     Company, or to the Company or its shareholders, the purchase price shall be
     satisfied by the transfer by the Company to the  Partnership of that number
     of  securities  having  a fair  market  value  equal to the  lesser  of the
     purchase price and 22.0% of the securities issued or received,  as the case
     may be, on a fully diluted basis. The Company agrees to jointly elect under
     applicable   taxing   statutes,   with  the  Partnership  to  complete  the
     transaction  on a tax  deferred  basis,  with  respect to the  issuance  of
     securities to the  Partnership by allowing the  Partnership to transfer the
     Software to a Canadian subsidiary of the Company on a tax deferred basis.

     In the event that sales revenue earned by the Partnership in any year under
     the  terms of the  Distribution  Agreement  are less than  $475,000  in any
     calendar year prior to the Exercise  Date, the percentage of the securities
     to be transferred by the Company to the  Partnership  shall be increased by
     1% for each 10% shortfall to a maximum of 5% in any calendar year, provided
     that the option of the Partnership to acquire such additional  shares shall
     not be exercisable by the Partnership  until the promissory notes issued by
     limited partners to the Company have been paid in full and until such time,
     such additional options may be repurchased by the Company for a price equal
     to 150% of the cash shortfalls for which the options were issued.

     Since the Company is responsible for maintaining,  upgrading and developing
     future  revisions of the Software,  the  transaction has not been accounted
     for as a sale by the Company.  In addition,  the notes  receivable have not
     been recorded by the Company as a result of their long-term nature and they
     are primarily  expected to be repaid as the Company sells software to third
     parties  and makes  payments  to the  Partnership  pursuant to terms of the
     Distribution Agreement.  Therefore, repayment prior to 2005 will only occur
     out of  revenue  generated  by  the  Company.  This  transaction  has  been
     accounted for by the Company on a cost recovery basis and the cash received
     from the Partnership will reduce the capitalized software costs and revenue
     will be recognized when the capitalized software costs have been reduced to
     zero since the Company has, in essence,  retained  substantially all rights
     of ownership.

     The  software  and all  rights  to the  above  agreements  were sold by the
     Company in  connection  with the  divestiture  of the software  development
     division (Note 2).

12. Subsequent Events
    ------------------
     Reverse Stock Split
     -------------------
     On March  26,  1997,  the  Company  filed a Proxy  Statement  for a special
     meeting of  stockholders  to be held  April 25,  1997 to vote on a proposed
     reverse  stock  split of the  Company's  common  stock on the  basis of two
     shares  for each  three  shares  outstanding.  The  Company's  stockholders
     approved  the reverse  stock split on April 25, 1997 and  accordingly,  all
     share  amounts  and  earnings  per share  amounts  have been  retroactively
     restated to give effect to the reverse stock split.

13. Subsequent Events (Unaudited)
    ----------------------------
     Warrants (Unaudited)
     --------------------
     In June 1997,  the  Underwriter  returned  106,667  warrants to the Company
     without consideration.



                                      F-20


<PAGE>


                             PROTOSOURCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


13. Subsequent Events (Unaudited) (Continued)
    ----------------------------------------
     Bridge Loans (Unaudited)
     ------------------------
     In June through August 1997, the Company borrowed  $750,000 from a group of
     nine lenders (the "1997 Bridge Loan").  As additional  compensation for the
     1997 Bridge Loan,  the Company  issued an  aggregate  of 150,000  shares of
     common stock to the  lenders,  one share for each $5 loaned to the Company.
     The  Bridge  Loan  bears  interest  at 12% per annum and is  payable on the
     earlier of the closing of a public or private offering of securities by the
     Company  for at least  $1,000,000  or fifteen  months  from the date of the
     Bridge Loan.

     The Company paid the Private  Placement Agent a sales  commission of 10% of
     the proceeds of the Bridge Loans and a 3% nonaccountable expense allowance.

     Proposed Public Stock Offering (Unaudited)
     ------------------------------------------
     The Company has  executed a letter of intent with an  Underwriter  to offer
     900,000  units of the  Company's  securities,  each unit  consisting of one
     share  of the  Company's  common  stock  and one  redeemable  common  stock
     purchase warrant. The offering price per unit will be the average bid price
     of the common stock in the over-the-counter  market for the common stock on
     the day prior to the Offering.  Each warrant is exercisable to purchase one
     share of  common  stock at the  public  offering  price of the  Units for a
     period of five years from the effective date of the Company's  Registration
     Statement  and may be redeemed by the Company.  The Company will also grant
     the Underwriter an option to purchase an additional  135,000 units from the
     Company to cover  over-allotments  for a period of forty five days from the
     effective date of the Registration Statement.

     The Company will pay the  Underwriter a commission  equal to ten percent of
     the gross proceeds of the offering and a non-accountable  expense allowance
     equal to three percent of the gross proceeds of the offering. In connection
     with the  offering,  the  Company  has  agreed to issue the  Underwriter  a
     warrant,  for  $100,  to  purchase  up  to  90,000  units  which  shall  be
     exercisable at a price per unit equal to 120% of the public  offering price
     of the Units. The Underwriter's warrant is exercisable for a period of four
     years  beginning  one year  from  the  effective  date of the  Registration
     Statement. The units subject to the Underwriter's warrant will be identical
     to the  units  sold  to the  public.  The  Company  has  also  agreed  upon
     completion  of the  Offering  to  retain  the  Underwriter  as a  financial
     consultant for a period of 36 months at a monthly fee of $5,000 (a total of
     $180,000)  payable in full upon  completion of the  Offering.  There can be
     assurance that the Offering will be successfully completed.















                                      F-21

<PAGE>




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


     No dealer, salesman or other person
has   been   authorized   to  give   any
information     or    to    make     any
representations  other than contained in
this  Prospectus in connection  with the
Offering  described herein, and if given
or    made,    such    information    or
representations  must not be relied upon
as  having   been   authorized   by  the
Company.   This   Prospectus   does  not
constitute  an  offer  to  sell,  or the
solicitation  of an  offer  to buy,  the
securities  offered hereby to any person                                        
in any  state or other  jurisdiction  in                900,000 Units        
which  such  offer  or  solicitation  is                                     
unlawful.  Neither the  delivery of this                                     
Prospectus nor any sale hereunder shall,                                     
under  any  circumstances,   create  any                                     
implication   that  there  has  been  no                                     
change  in the  affairs  of the  Company                                     
since the date hereof.                                                       
                                                   PROTOSOURCE CORPORATION   
               ------------                                                  
                                                                             
            TABLE OF CONTENTS                                                
                                                                             
                                    Page                                     
                                    ----               ---------------       
Available Information................  3                                     
Prospectus Summary...................  4                 PROSPECTUS    
The Company .........................  7      
Risk Factors.........................  9               ---------------       
Capitalization....................... 17                                     
Price Range of Common Stock.......... 18                                     
Use of Proceeds...................... 18                                     
Selected Financial Data.............. 19          Andrew, Alexander, Wise &  
Management's Discussion and                             Company, Inc.        
  Analysis of Financial Condition                                            
  and Results of Operations.......... 20                                     
Business............................. 23              __________, 1997       
Management........................... 30                                     
Principal Stockholders............... 34      
Certain Transactions................. 35
Description of Securities............ 36
Underwriting......................... 40
Legal Matters........................ 43
Experts.............................. 43
Financial Statements.................F-1

     Until  __________,  1997  (25  days
after the date of this Prospectus),  all
dealers  effecting  transactions  in the
registered  securities,  whether  or not
participating in this distribution,  may
be  required  to  deliver a  Prospectus.
This is in addition to the obligation of
dealers  to  deliver a  Prospectus  when
acting as underwriters  and with respect
to   their    unsold    allotments    or
subscriptions.



                                                     

<PAGE>



                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. Indemnification of Directors and Officers.
- ---------------------------------------------------

     Section 5 of the Registrant's  Restated  Articles of Incorporation  provide
that  liability of directors  for monetary  damage is  eliminated to the fullest
extent possible with California law. Section 6 provides for  indemnification  of
all of the Registrant's  agents (including  officers and directors) subject only
to limits imposed by California law.

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933,  as  amended,  may be  permitted  to  officers,  directors  or  persons
controlling  the Company,  the Company has been advised  that, in the opinion of
the  Securities  and  Exchange   Commission,   Washington,   D.C.  20549,   such
indemnification  is  against  public  policy  as  expressed  in such Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by the Registrant of expenses incurred
or paid by an officer,  director or controlling  person of the Registrant in the
successful  defense of any  action,  suit or  proceeding)  is  asserted  by such
officer,  director or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as expressed  in such Act and will be governed by the final  adjudication
of such issue.

ITEM 25. Other Expenses of Issuance and Distribution.(1)
- --------------------------------------------------------

         SEC Registration Fee...............................  $     4,124
         NASD Filing Fee....................................        1,861
         Blue Sky Legal and Filing Fees.....................       15,000
         Printing Expenses..................................       30,000
         Legal Fees and Expenses............................       60,000
         Accounting Fees....................................       45,000
         NASDAQ Application Fee.............................       10,000
         Transfer Agent Fees................................        3,000
         Miscellaneous Expenses.............................       31,015
                                                                   ------

         TOTAL..............................................     $200,000 (1)

(1)  All expenses,  except the SEC and NASD  registration  fees,  are estimated.
     Does not include the Underwriter's  commission of $_______,  nonaccountable
     expense allowance of $_______, and consulting fee of $180,000.




                                      II-1

<PAGE>



ITEM 26. Recent Sales of Unregistered Securities
- ------------------------------------------------

     During the last three years,  the Registrant  sold the following  shares of
its securities  which were not  registered  under the Securities Act of 1933, as
amended.

     (i) In September  1996, the  Registrant  issued 26,667 shares of its Common
Stock to the following individuals as additional consideration for a loan to the
Registrant in the amount of $200,000.

     Name                                                Number of Shares
     ----                                                ----------------
John Benedetto                                                 6,667
James Ippolito                                                 3,333
Anaka Prakash                                                  6,667
Larry Pensa                                                    3,333
Isaac Paschalidis                                              6,667

     (ii) In October 1996, the Registrant sold an aggregate of 400,000 shares of
its Common Stock to the following individuals for $3.75 per share.

      Name                                               Number of Shares
      ----                                               ----------------

John Benedetto                                                40,000
Brian A. Brewer                                                6,667
James Ippolito                                                20,000
Raymond King                                                   6,667
Jack Ko and Wendy Ko                                          13,333
Anaka Prakash                                                 40,000
Isaac Paschalidis                                             53,333
Larry Pensa                                                   20,000
Francis Sajeski and Barbara Sajeski                            6,667
Jerry Silberman                                                6,667
Rao-Qi Zhang                                                   6,667
George P. Argerakis                                           13,333
Robert Cavallaro                                               6,667
Ding Chu Fuh Chen                                              6,667
Murray Frank                                                   6,667
Donald Gross                                                  13,333
Gloria Ippolito                                               40,000
Chris Meshouris                                                6,667
James Meshouris                                                6,667
Matthew Mulhern and Mary Mulhern                              26,667
Michael Pizite                                                20,000
Bernard Schwartz and Barbara Schwartz                          6,667
George Stripas and Matthew Ianello                             6,666

                                      II-2

<PAGE>



Kuei-Chi Tsai                                                  6,666
Saul Unter                                                     6,666
Osweld Valenti, Jack Valenti and Barbara Davis                 6,666

     (iii) Between June and September  1997, the Registrant  issued an aggregate
of 150,000 shares of Common Stock in connection  with a bridge loan financing of
$750,000 at the rate of one share of Common Stock for each $5.00 of bridge loan.
The following individuals received the number of shares set forth opposite their
names:

                Names                                     Number of Shares
                -----                                     ----------------

         World Spirit, Inc.                                    50,000
         Francis E. Sajeski                                     5,000
         Anaka Prakash                                         30,000
         James Ippolito                                        20,000
         Saul Unter                                             5,000
         Bernard Schwartz and Barbara Schwartz                  5,000
         Isaac Paschalidis                                     20,000
         John Benedetto                                        15,000

     With respect to the sales made,  the  Registrant  relied on Section 4(2) of
the  Securities Act of 1933, as amended (the "1933 Act"),  and/or  Regulation D,
Rule 506. No  advertising or general  solicitation  was employed in offering the
securities.  The securities  were offered to a limited number of individuals and
the  transfer  thereof  was  appropriately  restricted  by the  Registrant.  All
stockholders were accredited  investors as that term is defined under Regulation
D under the 1933 Act who were capable of analyzing the merits and risks of their
investment  and who  acknowledged  in  writing  that  they  were  acquiring  the
securities for investment and not with a view toward  distribution or resale and
that they understood the speculative nature of their investment.

ITEM 27. Exhibits.
- ------------------

     Exhibit No.                  Title
     -----------                  -----

        1.05          Form of Underwriting Agreement

        1.06          Form of Underwriter's Warrant Agreement

        1.07          Form of Warrant Agreement

        1.08          Financial Advisory and Investment Banking Agreement

        2.01          Restated Articles of Incorporation of the Registrant(1)


                                      II-3

<PAGE>



        2.02          Bylaws of the Registrant(1)

        5.05          Opinion of Gary A. Agron, regarding legality of the Common
                      Stock and Warrants (includes Consent)

       10.01          1995 Incentive Stock Option Plan (1)

       10.02          Capitalized Lease Agreement (1)

       10.12          Divestiture Agreement (2)

       10.13          Selling Agreement with AAWC (2)

       10.14          Warrant Agreement with AAWC (2)

       10.15          Lock-up Agreement (2)

       10.16          Registration Rights Agreement (2)

       10.17          Employment Agreement with Mr. Meyers

       10.18          Bridge Loan Agreement

       23.10          Consent of Angell & Deering

       23.11          Consent of Gary A. Agron (See 5.05, above)

       27.01          Financial Data Schedule

- ---------

(1) Incorporated by reference to the Registrant's Registration Statement on Form
SB-2  declared  effective  by the  Commission  on February 9, 1995,  file number
33-86242.

(2) Incorporated by reference by the Registrant's Registration Statement on Form
SB-2  declared  effective  by  the  Commission  on May  14,  1997,  file  Number
333-20543.

ITEM 28. Undertakings.
- ----------------------

     The Registrant hereby undertakes:

     (a) That  insofar as  indemnification  for  liabilities  arising  under the
Securities Act of 1933 may be permitted to directors,  officers and  controlling
persons of the  Registrant,  the Registrant has been advised that in the opinion


                                      II-4

<PAGE>


of the  Securities  and Exchange  Commission,  such  indemnification  is against
public policy as expressed in the Act and is, therefore,  unenforceable.  In the
event that a claim for indemnification  against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling  person of the Registrant in the  successful  defense of any action,
suit or proceeding) is asserted by such director,  officer or controlling person
in connection with the securities being registered,  the Registrant will, unless
in the  opinion  of its  counsel  the matter  has been  settled  by  controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such  indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

     (b) That  subject  to the  terms and  conditions  of  Section  13(a) of the
Securities  Exchange Act of 1934, it will file with the  Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be  prescribed by any rule or  regulation  of the  Commission  heretofore or
hereafter duly adopted pursuant to authority conferred in that section.

     (c) That any post-effective amendment filed will comply with the applicable
forms,  rules  and  regulations  of the  Commission  in  effect at the time such
post-effective amendment is filed.

     (d) To file,  during any period in which  offers or sales are being made, a
post-effective amendment to this registration statement:

          (i) To include  any  prospectus  required  by section  10(a)(3) of the
     Securities Act of 1933;

          (ii) To reflect in the  prospectus  any facts or events  arising after
     the  effective  date of the  registration  statement  (or the  most  recent
     post-effective amendment thereof) which,  individually or in the aggregate,
     represent  a  fundamental  change  in  the  information  set  forth  in the
     registration statement;

          (iii) To include any material  information with respect to the plan of
     distribution not previously disclosed in the registration  statement or any
     material change to such information in the registration statement;

     (e) That, for the purpose of determining any liability under the Securities
Act of 1933,  each  such  post-effective  amendment  shall be deemed to be a new
registration  statement  relating to the  securities  offered  therein,  and the
offering of such  securities at that time shall be deemed to be the initial bona
fide offering thereof.

     (f) To remove from registration by means of a post-effective  amendment any
of the securities being registered which remain unsold at the termination of the
Offering.

     (g)  To  provide  to  the  Underwriter  at  the  closing  specified  in the
Underwriting Agreement certificates in such denominations and registered in such
names  as  required  by the  Underwriter  to  permit  prompt  delivery  to  each
purchaser.

                                      II-5

<PAGE>





                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the  requirements  of filing on Form SB-2 and has  caused  this  Registration
Statement  to be  signed  on its  behalf  by  the  undersigned,  thereunto  duly
authorized, in Fresno, California, on November 18, 1997

                                      PROTOSOURCE CORPORATION



                                      By: /s/ Raymond J. Meyers
                                         ---------------------------------------
                                         Raymond J. Meyers
                                         Chief Executive Officer

     Pursuant to the  requirements  of the  Securities  Act of 1933, as amended,
this  Registration  Statement has been signed below by the following  persons on
the dates indicated.

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

/s/ Raymond J. Meyers          Chief Executive Officer        November 18, 1997
- --------------------------
Raymond J. Meyers              Chief Financial Officer,
                               (Principal Accounting Officer),
                               and Director


/s/ David A. Appell            Director                       November 18, 1997
- --------------------------
David A. Appell

/s/ Dickon Pownall-Gray        Director                       November 18, 1997
- --------------------------
Dickon Pownall-Gray



                                      II-6

<PAGE>



                                  EXHIBIT INDEX


     Exhibit No.                      Title
     -----------                      -----

        1.05              Form of Underwriting Agreement

        1.06              Form of Underwriter's Warrant Agreement

        1.07              Form of Warrant Agreement

        1.08              Financial Advisory and Investment Banking Agreement

        5.05              Opinion of Gary A. Agron, regarding legality of
                          the Common Stock and Warrants (includes Consent)

       10.17              Employment Agreement with Mr. Meyers

       10.18              Bridge Loan Agreement

       23.10              Consent of Angell & Deering

       23.11              Consent of Gary A. Agron (See 5.05, above)

       27.01              Financial Data Schedule



                                      II-7






                             PROTOSOURCE CORPORATION



                         900,000 Shares of Common Stock
                                       and
                900,000 Redeemable Common Stock Purchase Warrants



                             UNDERWRITING AGREEMENT
                             ----------------------





                                                                          , 1998
                                                               -----------



Andrew Alexander Wise & Company, Inc.
as Representative of the Underwriters
17 State Street
New York, New York 10004

Gentlemen:

     ProtoSource Corporation,  a California corporation (the "Company"),  hereby
confirms  its  agreement  with  Andrew,  Alexander,  Wise &  Company,  Inc.,  as
representative  (the  "Representative")  of the several  Underwriters  listed on
Schedule 1 annexed hereto (the "Underwriters"), as set forth below.

     The Company  proposes to issue and sell to the Underwriters an aggregate of
(i) 900,000 shares (the "Firm Shares") of the Company's  common stock, par value
$.001 per share (the "Common Stock"),  and (ii) 900,000  redeemable  warrants to
purchase  Common Stock (the "Firm  Warrants")  in units  consisting  of one Firm
Share  and  one  Firm  Warrant.  The  Company  also  proposes  to  grant  to the
Underwriters  an option to purchase (i) an additional  135,000  shares of Common
Stock and (ii) an  additional  135,000  redeemable  warrants to purchase  Common
Stock in units  consisting  of one share of Common  Stock  and one  Warrant,  as
provided in section 2(c) of this agreement (the "Agreement"). Any and all shares
of Common Stock to be  purchased  pursuant to such option are referred to herein
as the  "Option  Shares,"  and  the  Firm  Shares  and  any  Option  Shares  are
collectively referred to herein as the "Shares." Any and all redeemable warrants
to purchase Common Stock to be purchased pursuant to such option are referred to
herein as the "Option  Warrants," and the Firm Warrants and any Option  Warrants
are  collectively  referred  to herein as the  "Warrants."  Any shares of Common
Stock  issuable  upon the  exercise of any  Warrants  are  referred to herein as



<PAGE>



"Warrant  Shares."  The Firm  Shares  and the  Firm  Warrants  are  collectively
referred to herein as the "Firm  Securities;"  the Option  Shares and the Option
Warrants are collectively referred to herein as the "Option Securities;" and the
Firm Securities,  the Option  Securities and the Warrant Shares are collectively
referred to herein as the "Securities."

     Pursuant  to an  agreement  to be  entered  into  among  the  Company,  the
Representative  and Corporate  Stock Transfer,  Inc. (the "Warrant  Agreement"),
each  Warrant  will be  exercisable  during the period  commencing  on the first
anniversary of the effective date of the Registration  Statement (as hereinafter
defined) (the "Effective Date") and expiring on the fifth  anniversary  thereof,
subject  to  redemption  by the  Company  (as  described  below),  at an initial
exercise  price of $____ per share,  subject to  adjustment  as set forth in the
Warrant  Agreement.  The  Warrants  will be  redeemable  at a price  of $.10 per
Warrant,  commencing on the first anniversary of the Effective Date and prior to
their expiration, upon not less than 30 days prior written notice to the holders
of the Warrants,  provided the closing bid price of the Common Stock as reported
on The Nasdaq Smallcap Market if traded thereon,  or if not traded thereon,  the
closing sale price if listed on a national or regional  securities  exchange (or
the Nasdaq  National  Market other  reporting  system that  provides  last sales
prices),  shall have been at least ____% of the then  current  Warrant  exercise
price  (initially $____ per share,  subject to adjustment),  for 20 trading days
during the 30 trading  day period  ending 15 days prior to the date on which the
Company  gives  notice of  redemption,  subject  to the  right of the  holder to
exercise such Warrants prior to redemption.

     1.  Representations  and Warranties of the Company.  The Company represents
and warrants to, and agrees with, the Underwriters that:

          (a) A  registration  statement  on Form SB-2 (File No.  333-[ ]), with
respect  to  the  Securities  and  the  Underwriters'   Warrant  Securities  (as
hereinafter  defined),  including a prospectus  subject to completion,  has been
filed  by  the  Company  with  the  Securities  and  Exchange   Commission  (the
"Commission") under the Securities Act of 1933, as amended (the "Act "), and one
or more amendments to that registration statement may have been so filed. Copies
of such  registration  statement and of each amendment  heretofore  filed by the
Company with the Commission  have been delivered to the  Underwriter.  After the
execution of this  Agreement,  the Company will file with the Commission  either
(i) if the  registration  statement,  as it may  have  been  amended,  has  been
declared by the  Commission  to be effective  under the Act, a prospectus in the
form most recently included in that registration  statement (or, if an amendment
thereto  shall  have  been  filed,  in such  amendment),  with such  changes  or
insertions  as are  required  by Rule 430A  under the Act or  permitted  by Rule
424(b)  under  the  Act  and  as  have  been  provided  to and  approved  by the
Underwriters  prior  to the  execution  of  this  Agreement,  or  (ii)  if  that
registration  statement,  as it may have been amended,  has not been declared by
the Commission to be effective under the Act, an amendment to that  registration
statement,  including a form of prospectus,  a copy of which  amendment has been
furnished to and  approved by the  Underwriters  prior to the  execution of this
Agreement.  The Company also may file a related registration  statement with the
Commission  pursuant to Rule 462(b)  under the Act for  purposes of  registering
certain  additional  Securities,   which  registration  statement  shall  become
effective  upon  filing  with the  Commission  (the  "Rule  462(b)  Registration


                                        2

<PAGE>



Statement).  As used in this Agreement,  the term "Registration Statement" means
that  registration  statement,  as  amended  at the  time it was or is  declared
effective,  and  any  amendment  thereto  that  was  or is  thereafter  declared
effective,  including  all  financial  schedules  and  exhibits  thereto and any
information  omitted therefrom  pursuant to Rule 430A under the Act and included
in the  Prospectus  (as  hereinafter  defined),  together  with any Rule  462(b)
Registration Statement;  the term "Preliminary Prospectus" means each prospectus
subject to completion  filed with that  registration  statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration  Statement  at the time it was or is declared  effective);  and the
term "Prospectus" means the prospectus first filed with the Commission  pursuant
to Rule 424(b) under the Act or, if no prospectus  is so filed  pursuant to Rule
424(b), the prospectus included in the Registration  Statement.  The Company has
caused to be delivered to the Underwriters copies of each Preliminary Prospectus
and has  consented to the use of those copies for the purposes  permitted by the
Act.  If the  Company  has  elected to rely on Rule  462(b) and the Rule  462(b)
Registration Statement has not been declared effective, then (i) the Company has
filed a Rule  462(b)  Registration  Statement  in  compliance  with  and that is
effective upon filing  pursuant to Rule 462(b) and has received  confirmation of
its  receipt  and  (ii) the  Company  has  given  irrevocable  instructions  for
transmission  of the applicable  filing fee in connection with the filing of the
Rule 462(b)  Registration  Statement,  in compliance  with Rule 111  promulgated
under the Act or the Commission has received payment of such filing fee.

          (b) The Commission  has not issued any order  preventing or suspending
the use of any Preliminary Prospectus. When each Preliminary Prospectus and each
amendment  and each  supplement  thereto  was filed with the  Commission  it (i)
contained all statements  required to be stated therein, in accordance with, and
complied with the  requirements of, the Act and the rules and regulations of the
Commission  thereunder  and (ii)  did not  include  any  untrue  statement  of a
material fact or omit to state any material fact  necessary in order to make the
statements  therein,  in the light of the  circumstances  under  which they were
made,  not  misleading.  When  the  Registration  Statement  was or is  declared
effective, it (i) contained or will contain all statements required to be stated
therein in accordance  with,  and complied or will comply with the  requirements
of, the Act and the rules and regulations of the Commission  thereunder and (ii)
did not or will not include any untrue  statement of a material  fact or omit to
state any material fact necessary to make the statements therein not misleading.
When the Prospectus  and each amendment or supplement  thereto is filed with the
Commission  pursuant to Rule 424(b) (or, if the  Prospectus or such amendment or
supplement  is not  required  so to be filed,  when the  Registration  Statement
containing such Prospectus or amendment or supplement thereto was or is declared
effective)  and on the Firm  Closing  Date and any Option  Closing Date (as each
such term is hereinafter defined), the Prospectus, as amended or supplemented at
any such time,  (i)  contained  or will  contain all  statements  required to be
stated  therein  in  accordance  with,  and  complied  or will  comply  with the
requirements  of,  the Act and  the  rules  and  regulations  of the  Commission
thereunder  and (ii) did not or will  not  include  any  untrue  statement  of a
material fact or omit to state any material fact  necessary in order to make the
statements  therein,  in the light of the  circumstances  under  which they were
made,  not  misleading.  The foregoing  provisions of this  paragraph (b) do not
apply  to  statements  or  omissions  made in any  Preliminary  Prospectus,  the
Registration Statement or the Prospectus or any  amendment or supplement thereto

                                        3

<PAGE>



in reliance upon and in  conformity  with written  information  furnished to the
Company by the Underwriter specifically for use therein.

          (c) The Company has been duly  incorporated and is validly existing as
a corporation  in good standing under the laws of the State of California and is
duly qualified or authorized to transact  business as a foreign  corporation and
is in good standing in each  jurisdiction  where the ownership or leasing of its
property  or  the  conduct  of  its  business  requires  such  qualification  or
authorization,  except  where the  failure to be so  qualified  would not have a
material adverse effect upon the condition  (financial or otherwise),  business,
prospects,   net  worth  or  results  of  operations  of  the  Company  and  its
Subsidiaries, taken as a whole.

          (d) The  Company  has full  corporate  power  and  authority,  and all
necessary material authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory authorities, to own or lease its
property and conduct its business as now being  conducted  and as proposed to be
conducted as described in the Registration Statement and the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).

          (e) Except for the subsidiaries listed on Schedule 2 to this Agreement
(the  "Subsidiaries"),  the Company  does not own,  directly or  indirectly,  an
interest in any  corporation,  partnership,  limited  liability  company,  joint
venture,  trust or other business entity.  Each Subsidiary is duly  incorporated
and is validly  existing as a corporation in good standing under the laws of its
jurisdiction  of  incorporation  and is duly qualified or authorized to transact
business as a foreign  corporation and is in good standing in each  jurisdiction
where the  ownership  or leasing of its  property or the conduct of its business
requires  such  qualification  or  licensing,  except where the failure to be so
qualified would not have a material adverse effect upon the condition (financial
or otherwise),  business,  prospects,  net worth or results of operations of the
Company  and its  Subsidiaries,  taken  as a  whole.  Each  Subsidiary  has full
corporate  power  and  authority,  and all  necessary  material  authorizations,
approvals,   orders,  licenses,   certificates  and  permits  of  and  from  all
governmental regulatory authorities,  to own or lease its properties and conduct
its business as now being conducted and as proposed to be conducted as described
in the Prospectus  (and, if the Prospectus is not in existence,  the most recent
Preliminary Prospectus).

          (f)  The   Company   has  an   authorized,   issued  and   outstanding
capitalization  as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).  All of the issued shares of
capital stock of the Company have been duly  authorized  and validly  issued and
are  fully  paid,  nonassessable  and free of  preemptive  rights.  There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other  securities,  other than as described in the
Prospectus  (and,  if the  Prospectus  is  not in  existence,  the  most  recent
Preliminary  Prospectus).  The  Shares  and the  Warrant  Shares  have been duly
authorized,  and the Warrant Shares have been duly reserved for issuance, by all
necessary  corporate  action on the part of the Company and, when the Shares are
issued  and  delivered  to and paid for by the  Underwriters,  pursuant  to this
Agreement and the Warrant Shares are issued and delivered to and paid for by the
holders of Warrants upon exercise of the  Warrants in accordance  with the terms

                                        4

<PAGE>



thereof,  the Shares and the Warrant Shares will be validly issued,  fully paid,
nonassessable  and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence,  the most
recent  Preliminary  Prospectus).  No holder of  outstanding  securities  of the
Company is entitled as such to any  preemptive  or other right to subscribe  for
any of the Securities,  and no person is entitled to have securities  registered
by the Company under the Registration Statement or otherwise under the Act other
than as described in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).

          (g) The  capital  stock of the  Company  conforms  to the  description
thereof contained in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).

          (h) All  issuances of  securities  of the Company  have been  effected
pursuant to an exemption from the  registration  requirements of the Act. Except
as previously  disclosed in writing to the  Representative,  no compensation was
paid to or on behalf of any member of the  National  Association  of  Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.

          (i) The consolidated  financial  statements of the Company included in
the Registration  Statement and the Prospectus (and, if the Prospectus is not in
existence,  the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its  subsidiaries  as of the dates indicated and the
results of  operations  of the  Company  and its  subsidiaries  for the  periods
specified.   Such  consolidated  financial  statements  have  been  prepared  in
accordance with generally accepted accounting principles,  consistently applied,
except to the extent that (A) certain footnote  disclosures  regarding unaudited
interim periods may have been omitted in accordance with the applicable rules of
the Commission under the Securities  Exchange Act of 1934, as amended (the "1934
Act") and (B) the interim consolidated  financial statements are subject to year
end  adjustments.  The  consolidated  financial data set forth under the caption
"Summary Financial Information" in the Prospectus (and, if the Prospectus is not
in existence,  the most recent Preliminary  Prospectus)  fairly present,  on the
basis stated in the Prospectus (or such Preliminary Prospectus), the information
included therein.

          (j) Angell & Deering, who have audited certain financial statements of
the  Company  and  delivered  their  report  with  respect  to the  consolidated
financial  statements included in the Registration  Statement and the Prospectus
(and,  if the  Prospectus  is not in  existence,  the  most  recent  Preliminary
Prospectus),  are independent  public accountants with respect to the Company as
required by the Act and the applicable rules and regulations thereunder.

          (k) Since the respective dates as of which information is given in the
Registration  Statement and the  Prospectus  (and,  if the  Prospectus is not in
existence,  the most recent  Preliminary  Prospectus),  (i) except as  otherwise
contemplated therein, there has been no material adverse change in the business,
operations,  condition  (financial or  otherwise),  earnings or prospects of the
Company and the  Subsidiaries,  taken as a whole,  whether or not arising in the
ordinary course of business, (ii) except as otherwise stated therein, there have

                                        5

<PAGE>



been no  transactions  entered  into by the Company or the  Subsidiaries  and no
commitments made by the Company or the Subsidiaries that, individually or in the
aggregate, are material with respect to the Company and the Subsidiaries,  taken
as a whole,  (iii)  there  has not  been  any  change  in the  capital  stock or
indebtedness  of the  Company and the  Subsidiaries,  and (iv) there has been no
dividend or  distribution  of any kind declared,  paid or made by the Company in
respect of any class of its capital stock.

          (l) The Company has full  corporate  power and authority to enter into
and perform its obligations under this Agreement,  the Warrant Agreement and the
Underwriters'  Warrant  Agreement (as  hereinafter  defined).  The execution and
delivery of this Agreement, the Warrant Agreement, and the Underwriters' Warrant
Agreement  have been duly  authorized by all necessary  corporate  action on the
part  of  the  Company  and  this  Agreement,  the  Warrant  Agreement  and  the
Underwriters'  Warrant  Agreement  have each been duly executed and delivered by
the  Company  and  each  is a  valid  and  binding  agreement  of  the  Company,
enforceable  against the  Company in  accordance  with its terms,  except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent  conveyance,  moratorium and other similar laws affecting  creditors'
rights  generally  and by general  principles of equity  (regardless  of whether
enforcement  is considered  in a proceeding in equity or at law),  and except as
rights to indemnity  and  contribution  under this  Agreement  may be limited by
applicable  law.  The  issuance,  offering  and  sale  by  the  Company  to  the
Underwriters of the Securities  pursuant to this Agreement or the  Underwriters'
Securities  pursuant to the Underwriters'  Warrant Agreement,  the compliance by
the Company with the provisions of this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement,  and the consummation of the other transactions
contemplated  by this  Agreement,  the Warrant  Agreement and the  Underwriters'
Warrant  Agreement  do not (i) require  the  consent,  approval,  authorization,
registration or qualification of or with any court or governmental or regulatory
authority,  except such as have been  obtained  or may be  required  under state
securities  or blue sky laws  and,  if the  registration  statement  filed  with
respect to the Securities (as amended) is not effective  under the Act as of the
time of  execution  hereof,  such as may be  required  (and shall be obtained as
provided in this Agreement)  under the Act, or (ii) conflict with or result in a
breach or violation of, or constitute a default  under,  any material  contract,
indenture,  mortgage,  deed of  trust,  loan  agreement,  note,  lease  or other
material  agreement or  instrument  to which the Company or any  Subsidiary is a
party or by which the Company or any  Subsidiary or any of its property is bound
or subject, or the certificate of incorporation or by-laws of the Company or any
Subsidiary, or any statute or any rule, regulation, judgment, decree or order of
any  court or other  governmental  or  regulatory  authority  or any  arbitrator
applicable to the Company or any Subsidiary.

          (m) No legal or  governmental  proceedings  are  pending  to which the
Company or any  Subsidiary is a party or to which the property of the Company or
any Subsidiary is subject,  and no such proceedings have been threatened against
the Company or any  Subsidiary  or with respect to any of its  property,  except
such as are  described  in the  Prospectus  (and,  if the  Prospectus  is not in
existence,  the  most  recent  Preliminary  Prospectus).  No  contract  or other
document  is required  to be  described  in the  Registration  Statement  or the
Prospectus or to be filed as an exhibit to the  Registration  Statement  that is
not described  therein (and, if the Prospectus is not in existence,  in the most
recent Preliminary Prospectus) or filed as required.

                                        6

<PAGE>


          (n) Neither the Company nor any  Subsidiary is in (i) violation of its
certificate of incorporation or by-laws,  (ii) violation in any material respect
of any law, statute,  regulation,  ordinance, rule, order, judgment or decree of
any court or any governmental or regulatory authority applicable to it, or (iii)
default  in  any  material  respect  in the  performance  or  observance  of any
obligation, agreement, covenant or condition contained in any material contract,
indenture,  mortgage,  deed of  trust,  loan  agreement,  note,  lease  or other
material agreement or instrument to which it is a party or by which it or any of
its  property  may be bound or  subject,  and no event has  occurred  which with
notice or lapse of time or both would constitute such a default.

          (o) The Company and the Subsidiaries currently own or possess adequate
rights to use all  intellectual  property,  including  all  trademarks,  service
marks, trade names, copyrights, inventions, know-how, trade secrets, proprietary
technologies,  processes and substances,  or applications or licenses  therefor,
that are described in the Prospectus (and if the Prospectus is not in existence,
the most recent  Preliminary  Prospectus),  and any other rights or interests in
items of intellectual  property as are necessary for the conduct of the business
now conducted or proposed to be conducted by them as described in the Prospectus
(or, such  Preliminary  Prospectus),  and, except as disclosed in the Prospectus
(and such Preliminary  Prospectus),  the Company is not aware of the granting of
any patent rights to, or the filing of applications  therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict  with asserted  rights of others with respect to any of the  foregoing.
All  such  intellectual   property  rights  and  interests  are  (i)  valid  and
enforceable  and (ii) to the best knowledge of the Company,  not being infringed
by any third parties.

          (p) The  Company  and each  Subsidiary  possesses  adequate  licenses,
orders,  authorizations,  approvals,  certificates  or  permits  issued  by  the
appropriate federal, state or foreign regulatory agencies or bodies necessary to
conduct  its  business  as  described  in the  Registration  Statement  and  the
Prospectus  (and,  if the  Prospectus  is  not in  existence,  the  most  recent
Preliminary Prospectus), and, except as disclosed in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary  Prospectus),  there
are no pending or, to the best knowledge of the Company, threatened, proceedings
relating  to  the  revocation  or  modification  of  any  such  license,  order,
authorization, approval, certificate or permit.

          (q) The Company and each  Subsidiary has good and marketable  title to
all of the  properties  and  assets  reflected  in  the  Company's  consolidated
financial  statements  or as described  in the  Registration  Statement  and the
Prospectus  (and,  if the  Prospectus  is  not in  existence,  the  most  recent
Preliminary  Prospectus),  as  being  owned by any of them  subject  to no lien,
mortgage,  pledge,  charge or encumbrance of any kind, except those reflected in
such  consolidated  financial  statements  or as described  in the  Registration
Statement  and the  Prospectus  (and  such  Preliminary  Prospectus).  Except as
disclosed in the Prospectus, the Company and each Subsidiary occupies its leased

                                        7

<PAGE>



properties  under valid and  enforceable  leases  conforming to the  description
thereof set forth in the  Registration  Statement and the  Prospectus  (and such
Preliminary Prospectus).

          (r) The Company is not conducting and does not intend to conduct,  its
business in a manner in which it would be an "investment  company" as defined in
Section  3(a) of the  Investment  Company Act of 1940 (the  "Investment  Company
Act").

          (s) Except as listed on Schedule 3 hereto,  the  Company has  obtained
and delivered to the  Representative  the agreements (the "Lock-up  Agreements")
with the officers,  directors and other security holders owning or having rights
to acquire shares of Common Stock or preferred  stock to the effect that,  among
other things,  each such person (i) will not,  commencing on the Effective  Date
and  continuing  for the period  thereafter  set forth  opposite  their names on
Schedule 3, directly or indirectly, sell, offer or contract to sell or grant any
option to  purchase,  transfer,  assign or pledge,  or  otherwise  encumber,  or
dispose  of any  shares of Common  Stock or  preferred  stock or any  securities
convertible  into or  exercisable  for Common  Stock or  preferred  stock now or
hereafter  owned  by such  person  without  the  prior  written  consent  of the
Underwriter,  and (ii) will comply with any additional  restriction or condition
on the disposition of such Common Stock or preferred stock which may be required
to qualify the offering of the  Securities in any state in  accordance  with the
blue sky or securities laws of such state.

          (t)  No  labor  dispute  with  the  employees  of the  Company  or any
Subsidiary exists, or, to the best of the Company's knowledge,  is threatened or
is imminent  that could  result in a material  adverse  change in the  condition
(financial  or  otherwise),   business,  prospects,  net  worth  or  results  of
operations  of the Company  and the  Subsidiaries,  taken as a whole,  except as
described in or contemplated by the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).

          (u) The  Company  and the  Subsidiaries  are  insured by  insurers  of
recognized  financial  responsibility  against such losses and risks and in such
amounts  as are  prudent  and  customary  in the  businesses  in which  they are
engaged;  neither the Company nor any  Subsidiary has been refused any insurance
coverage  sought or applied for; and neither the Company nor any  Subsidiary has
reason  to  believe  that it will not be able to renew  its  existing  insurance
coverage as and when such coverage  expires or to obtain  similar  coverage from
similar  insurers as may be  necessary  to continue  its business at a cost that
would  not  materially  and  adversely   affect  the  condition   (financial  or
otherwise),  business,  prospects,  net worth or  results of  operations  of the
Company  and the  Subsidiaries,  taken as a whole,  except  as  described  in or
contemplated by the Prospectus (and, if the Prospectus is not in existence,  the
most recent Preliminary Prospectus).

          (v) The Underwriters'  Warrants (as hereinafter  defined) will conform
to the description  thereof in the Registration  Statement and in the Prospectus
(and,  if the  Prospectus  is not in  existence,  the  most  recent  Preliminary
Prospectus) and, when sold to and paid for by the Underwriter in accordance with
the Underwriters' Warrant Agreement,  will have been duly authorized and validly
issued and will constitute valid and binding obligations of the Company entitled

                                        8

<PAGE>



to the benefits of the  Underwriters'  Warrant  Agreement.  The shares of Common
Stock  issuable  upon  exercise of the  Underwriters'  Warrants and the Warrants
issuable upon exercise  thereof (the  "Underwriters'  Warrant Shares") have been
duly  authorized  and reserved for issuance upon  exercise of the  Underwriters'
Warrants  and the  Warrants  issuable  upon  exercise  thereof by all  necessary
corporate  action on the part of the Company and,  when issued and delivered and
paid for upon such  exercise in accordance  with the terms of the  Underwriters'
Warrant Agreement,  the Underwriters'  Warrants,  and the Warrants issuable upon
exercise   thereof,   respectively,   will  be  validly   issued,   fully  paid,
nonassessable  and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence,  the most
recent Preliminary Prospectus).

          (w) No person has acted as a finder in connection with, or is entitled
to any commission, fee or other compensation or payment for services as a finder
for  or for  originating,  or  introducing  the  parties  to,  the  transactions
contemplated  herein and the Company will indemnify the Underwriter with respect
to any claim for finder's  fees in connection  herewith.  Except as set forth in
the Registration  Statement and the Prospectus (and, if the Prospectus is not in
existence,  the  most  recent  Preliminary  Prospectus),   the  Company  has  no
management or financial  consulting agreement with anyone. To the best knowledge
of the Company, no promoter, officer, director or stockholder of the Company is,
directly or  indirectly,  affiliated  or  associated  with an NASD member and no
securities  of the  Company  have been  acquired  by an NASD  member,  except as
previously disclosed in writing to the Representative.

          (x) The  Company and each  Subsidiary  has filed all  federal,  state,
local and foreign tax returns  which are  required to be filed  through the date
hereof, or has received extensions thereof, and has paid all taxes shown on such
returns  and all  assessments  received  by it to the  extent  that the same are
material and have become due.

          (y) Neither the Company nor any director,  officer, agent, employee or
other person associated with or acting on behalf of the Company has, directly or
indirectly:  used  any  corporate  funds  for  unlawful  contributions,   gifts,
entertainment,  or other unlawful expenses relating to political activity;  made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic  political  parties or campaigns  from  corporate  funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made  any  bribe,  rebate,  payoff,  influence  payment,  kickback,  or other
unlawful  payment.  No transaction has occurred between or among the Company and
any of its  officers  or  directors  or any  affiliates  of any such  officer or
director,  that is  required  to be  described  in and is not  described  in the
Registration Statement and the Prospectus.

          (z)  Neither  the  Company  nor  any of  its  officers,  directors  or
affiliates (as defined in the Regulations),  has taken or will take, directly or
indirectly,  prior to the  completion  of the Offering,  any action  designed to
stabilize or manipulate  the price of any security of the Company,  or which has
caused or resulted  in, or which might in the future  reasonably  be expected to
cause or result in,  stabilization  or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.

                                        9

<PAGE>



     2.  Purchase,   Sale  and  Delivery  of  the  Securities  and  the  Warrant
Securities.

          (a) On the basis of the  representations,  warranties,  agreements and
covenants  herein  contained and subject to the terms and conditions  herein set
forth,  the  Company  agrees  to issue  and sell to each  Underwriter,  and each
Underwriter agrees to purchase from the Company,  severally and not jointly, the
number of Firm Shares set opposite its name on Schedule 1 at a purchase price of
$[ ] per share and the number of Firm Warrants set opposite its name on Schedule
1 at a purchase  price of $[____] per Warrant,  in units  consisting of one Firm
Share and one Firm Warrant.

          (b)  Certificates  in definitive form for the Firm Securities that the
Underwriters  have agreed to purchase  hereunder,  and in such  denomination  or
denominations  and registered in such name or names as the Underwriters  request
upon  notice to the Company at least 48 hours  prior to the Firm  Closing  Date,
shall be delivered by or on behalf of the Company to the  Underwriters,  against
payment by or on behalf of the  Underwriters  of the purchase prices therefor by
certified or official  bank check or checks drawn upon or by a New York Clearing
House bank or wire  transfer  and payable in next-day  funds to the order of the
Company.  Such delivery of and payment for the Firm Securities  shall be made at
the offices of Counsel for the  Representative,  605 Third Avenue, New York, New
York 10158 at 9:30 A.M., New York City time on  _____________,  1998, or at such
other place,  time or date as the  Underwriters  and the Company may agree upon,
such time and date of delivery  against  payment being herein referred to as the
"Firm  Closing  Date.  The  Company  will  make such  certificates  for the Firm
Securities  available  for checking and packaging by the  Underwriters,  at such
offices as may be designated by the  Representative,  at least 24 hours prior to
the Firm Closing  Date. In lieu of physical  delivery,  the closing may occur by
"DTC" delivery.

          (c) For the purpose of covering any over-allotments in connection with
the  distribution  and  sale  of the  Firm  Securities  as  contemplated  by the
Prospectus,  the Company hereby grants to the Underwriters an option to purchase
any or all of the Option  Securities in units consisting of one Option Share and
one Option Warrant,  exercisable by the  Representative on behalf of and for the
account of the Underwriters. The purchase price to be paid for any of the Option
Securities  shall be the same  price per share or warrant as the price per share
or warrant  for the Firm  Securities  set forth above in  paragraph  (a) of this
section 2. The option  granted  hereby may be exercised as to all or any part of
the Option  Securities  from time to time within 45 calendar days after the Firm
Closing Date. The Underwriters shall not be under any obligation to purchase any
of  the  Option   Securities   prior  to  the  exercise  of  such  option.   The
Representative  may from time to time  exercise  the  option  granted  hereby by
giving  notice in writing or by telephone  (confirmed in writing) to the Company
setting  forth  the  aggregate  number  of  Option  Securities  as to which  the
Underwriters  are then  exercising the option and the date and time for delivery
of and payment for such Option  Securities.  Any such date of delivery  shall be
determined by the Representative but shall not be earlier than two business days
or later than three  business days after such exercise of the option and, in any
event,  shall not be earlier than the Firm Closing  Date.  The time and date set
forth  in  such  notice,   or  such  other  time  on  such  other  date  as  the
Representative  and the  Company may agree  upon,  is herein  called the "Option
Closing  Date" with  respect to such  Option  Securities.  Upon  exercise of the
option as provided  herein,  the Company  shall become  obligated to sell to the
Underwriters, and, subject to  the terms and conditions  herein set forth,  each

                                       10

<PAGE>



Underwriter  shall  become  obligated to purchase  from the Company,  the Option
Securities as to which the  Underwriter is then  exercising  its option.  If the
option  is  exercised  as to all  or  any  portion  of  the  Option  Securities,
certificates  in  definitive  form  for  such  Option  Securities,  and  payment
therefor,  shall be delivered on the related  Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (b) of this section 2,
except that reference  therein to the Firm  Securities and the Firm Closing Date
shall be deemed,  for  purposes of this  paragraph  (c), to refer to such Option
Securities and Option Closing Date, respectively.

          (d) On the Firm Closing Date,  the Company will further issue and sell
to the  Underwriters  or, at the  direction  of the  Underwriters,  to bona fide
officers of the Underwriters,  for an aggregate  purchase price of $10, warrants
to purchase  Common Stock and redeemable  warrants to purchase Common Stock (the
"Underwriters' Warrants") entitling the holders thereof to purchase an aggregate
of 90,000  shares of Common  Stock and 90,000  redeemable  warrants  to purchase
Common  Stock for a period of four  years,  such period to commence on the first
anniversary  of  the  Effective  Date.  The  Underwriters'   Warrants  shall  be
exercisable at a price equal to 120% of the initial public offering price of the
Common Stock and Warrants,  respectively, and shall contain terms and provisions
more fully  described  herein  below and as set forth more  particularly  in the
warrant agreement  relating to the Underwriters'  Warrants to be executed by the
Company  on  the  Effective  Date  (the  "Underwriters'   Warrant   Agreement"),
including,  but not limited to, (i)  customary  anti-dilution  provisions in the
event of stock dividends,  stock splits,  mergers, sales of all or substantially
all of the  Company's  assets,  sales of stock below then  prevailing  market or
exercise   prices  and  other  events,   and  (ii)   prohibitions   of  mergers,
consolidations  or other  reorganizations  of or by the Company or the taking by
the Company of other action during the five-year  period following the Effective
Date unless adequate provision is made to preserve, in substance, the rights and
powers   incidental  to  the   Underwriters'   Warrants.   As  provided  in  the
Underwriters'  Warrant  Agreement,  the  Underwriters  may  designate  that  the
Underwriters'  Warrants  be  issued in  varying  amounts  directly  to bona fide
officers  of  the  Underwriters.   As  further  provided,   no  sale,  transfer,
assignment,  pledge or hypothecation of the Underwriters' Warrants shall be made
for a period of 12 months from the  Effective  Date,  except (i) by operation of
law or reorganization of the Company,  or (ii) to the Underwriters and bona fide
partners or officers of the Underwriters  and selling group members.  The shares
of Common Stock  issuable  upon exercise of the  Underwriters'  Warrants and the
Warrants   issuable  upon  exercise  thereof  are  referred  to  herein  as  the
"Underwriters'  Warrant Shares";  and the Underwriters'  Warrants,  the Warrants
issuable  upon  exercise  thereof,  and the  Underwriters'  Warrant  Shares  are
collectively referred to herein as the "Underwriters' Securities."

     3. Offering by the Underwriters. The Underwriters propose to offer the Firm
Securities  for sale to the  public  upon the terms set forth in the  Prospectus
(the "Offering").

     4.  Covenants of the  Company.  The Company  covenants  and agrees with the
Underwriters that:

          (a) The Company  will use its best  efforts to cause the  Registration
Statement,  if not  effective  at the time of execution  of this  Agreement,  to
become effective as promptly as possible.

                                       11

<PAGE>



If  required,  the  Company  will  file  the  Prospectus  and any  amendment  or
supplement  thereto with the Commission in the manner and within the time period
required  by Rule  424(b)  under  the Act.  During  any time  when a  prospectus
relating  to the  Securities  is  required to be  delivered  under the Act,  the
Company (i) will comply with all requirements imposed upon it by the Act and the
rules and  regulations of the Commission  thereunder to the extent  necessary to
permit the  continuance  of sales of or dealings in the Securities in accordance
with  the  provisions  hereof  and  of  the  Prospectus,   as  then  amended  or
supplemented,  and (ii)  will not file with the  Commission  any  prospectus  or
amendment  referred to in the first  sentence  of section  (a) (i)  hereof,  any
amendment or supplement to such prospectus or any amendment to the  Registration
Statement as to which the  Underwriters  shall not previously  have been advised
and furnished with a copy for a reasonable  period of time prior to the proposed
filing and as to which filing the Underwriters shall not have given its consent.
The Company will prepare and file with the  Commission,  in accordance  with the
rules  and  regulations  of  the  Commission,   promptly  upon  request  by  the
Underwriters or counsel to the Underwriters,  any amendments to the Registration
Statement or amendments or supplements  to the Prospectus  that may be necessary
or  advisable in  connection  with the  distribution  of the  Securities  by the
Underwriters,  and will use its best efforts to cause any such  amendment to the
Registration Statement to be declared effective by the Commission as promptly as
possible.  The Company will advise the  Underwriters,  promptly after  receiving
notice  thereof,  of the time when the  Registration  Statement or any amendment
thereto has been filed or declared  effective or the Prospectus or any amendment
or supplement  thereto has been filed and will provide evidence  satisfactory to
the Underwriters of each such filing or effectiveness.

          (b) The Company will advise the Underwriters, promptly after receiving
notice or obtaining  knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
order  preventing or  suspending  the use of any  Preliminary  Prospectus or the
Prospectus or any amendment or supplement  thereto,  (ii) the  suspension of the
qualification of any Securities for offering or sale in any jurisdiction,  (iii)
the institution,  threat or contemplation of any proceeding for any such purpose
or (iv)  any  request  made by the  Commission  for  amending  the  Registration
Statement,  for  amending or  supplementing  the  Prospectus  or for  additional
information.  The Company  will use its best  efforts to prevent the issuance of
any such  stop  order  and,  if any such stop  order is  issued,  to obtain  the
withdrawal thereof as promptly as possible.

          (c) The Company will, in cooperation with counsel to the Underwriters,
arrange for the  qualification of the Securities for offering and sale under the
blue  sky or  securities  laws of such  jurisdictions  as the  Underwriters  may
designate and will continue such  qualifications in effect for as long as may be
necessary to complete the distribution of the Securities.

          (d) If, at any time when a prospectus  relating to the  Securities  is
required to be  delivered  under the Act,  any event occurs as a result of which
the  Prospectus,  as then  amended or  supplemented,  would  include  any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements  therein,  in the light of the circumstances  under which
they were made,  not  misleading,  or if for any other reason it is necessary at
any time to amend or  supplement  the  Prospectus  to comply with the Act or the


                                       12

<PAGE>



rules or  regulations of the  Commission  thereunder,  the Company will promptly
notify the  Underwriters  thereof  and,  subject to section  4(a)  hereof,  will
prepare and file with the Commission,  at the Company's expense, an amendment to
the Registration  Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.

          (e) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become  effective  in  compliance  with the Act and  without  any  lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant  and to furnish to the  Underwriters  and any dealer as many copies of
each such Prospectus as the Underwriters or dealer may reasonably  request.  The
Company  shall not call for  redemption  of the Warrants  unless a  registration
statement  covering the  securities  underlying  the Warrants has been  declared
effective by the  Commission  and remains  current at least until the date fixed
for  redemption.  In addition,  for so long as any Warrant is  outstanding,  the
Company will promptly  notify the  Representative  of any material change in the
business, financial condition or prospects of the Company. So long as any of the
Warrants remain  outstanding,  the Company will timely deliver and supply to its
Warrant Agent sufficient  copies of the Company's  current  Prospectus,  as will
enable such Warrant agent to deliver a copy of such Prospectus to any Warrant or
other holder where such Prospectus delivery is by law required to be made.

          (f) The Company will, without charge,  provide to the Underwriters and
to counsel for the  Underwriters  (i) as many signed copies of the  registration
statement  originally  filed with respect to the  Securities  and each amendment
thereto  (in each case  including  exhibits  thereto)  as the  Underwriters  may
reasonably request, (ii) as many conformed copies of such registration statement
and each  amendment  thereto  (in each case  without  exhibits  thereto)  as the
Underwriters may reasonably  request and (iii) so long as a prospectus  relating
to the  Securities is required to be delivered  under the Act, as many copies of
each  Preliminary  Prospectus  or the  Prospectus or any amendment or supplement
thereto as the Underwriters may reasonably request.

          (g) The Company, as soon as practicable, will make generally available
to its security  holders and to the  Underwriters  an earnings  statement of the
Company that  satisfies the provisions of section 11 (a) of the Act and Rule 158
thereunder.

          (h) The Company will  reserve and keep  available  for  issuance  that
maximum  number of  authorized  but  unissued  shares of Common  Stock which are
issuable upon exercise of the Warrants and the Underwriters' Warrants (including
the underlying securities) outstanding from time to time.

          (i) The  Company  will  apply  the net  proceeds  from the sale of the
Securities as set forth under "Use of Proceeds" in the  Prospectus.  The Company
will timely file,  and will provide or cause to be provided to the  Underwriters
and counsel to the  Underwriters a copy of the report on Form 10Q required to be
filed by the Company pursuant to Rule 463 under the Act.

                                       13

<PAGE>



          (j) The Company  will not,  without the prior  written  consent of the
Representative,  directly or indirectly  offer,  agree to sell,  sell, grant any
option to purchase or otherwise  dispose (or  announce  any offer,  agreement to
sell, sales grant of any option to purchase or other  disposition) of any shares
of  Common  Stock,  preferred  stock  or any  securities  convertible  into,  or
exchangeable or exercisable for, shares of Common Stock or preferred stock for a
period of 36 months after the Effective Date, except (i) the Shares and Warrants
issued  pursuant  to this  Agreement,  (ii) the  Warrant  Shares  issuable  upon
exercise of the Warrants,  (iii) the Warrants,  (iv) the  Underwriters'  Warrant
Shares and Warrants  issuable upon the exercise of the  Underwriters'  Warrants,
(v) shares of Common Stock issuable upon the exercise of options  granted and to
be granted  under the  Company's  Stock  Option Plan as in effect as of the date
hereof,  and (vi) in connection with any merger or acquisition of another entity
or the  business  thereof.  The Company  also will not for a period of 36 months
following  the  Effective  Date,  without  the  prior  written  consent  of  the
Representative, (i) issue or sell any of its securities pursuant to Regulation S
promulgated  under the Act or (ii) file a registration  on Form S-8 for the sale
of securities by a person other than an employee of the Company or a Subsidiary.

          (k) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not,  directly or indirectly,  without prior written consent of the
Representative, issue any press release or other public announcement or hold any
press  conference  with respect to the Company or its activities with respect to
the Offering  (other than trade  releases  issued in the ordinary  course of the
Company's business  consistent with past practices with respect to the Company's
operations).

          (l) If, at the time that the Registration Statement becomes effective,
any  information  shall have been omitted  therefrom in reliance  upon Rule 430A
under the Act, then immediately  following the execution of this Agreement,  the
Company will  prepare,  and file or transmit for filing with the  Commission  in
accordance  with  Rule  430A and  Rule  424(b)  under  the  Act,  copies  of the
Prospectus  including the  information  omitted in reliance on Rule 430A, or, if
required  by such Rule 430A,  a  post-effective  amendment  to the  Registration
Statement  (including an amended  Prospectus),  containing  all  information  so
omitted.

          (m) The Company will cause the Securities to be included in The Nasdaq
Small Cap Market on the  Effective  Date and to use its best efforts to maintain
such listing  thereafter.  The Company will file with The Nasdaq SmallCap Market
and all  documents  and notices that are required by companies  with  securities
that are traded on The Nasdaq SmallCap Market.

          (n) During the period of five years from the Firm  Closing  Date,  the
Company will, as promptly as possible, not to exceed 135 days, after each annual
fiscal  period  render and  distribute  reports to its  stockholders  which will
include audited  statements of its operations and changes of financial  position
during such period and its audited  balance  sheet as of the end of such period,
as to which statements the Company's  independent  certified public  accountants
shall have rendered an opinion.


                                       14

<PAGE>



          (o) During a period of three years  commencing  with the Firm  Closing
Date, the Company will furnish to the Representative,  at the Company's expense,
copies of all periodic and special  reports  furnished  to  stockholders  of the
Company and of all information, documents and reports filed with the Commission.

          (p) The  Company  has  appointed  Corporate  Stock  Transfer,  Inc. as
transfer agent for the Common Stock and warrant agent for the Warrants,  subject
to the Closing.  The Company will not change or terminate such appointment for a
period of three years from the Firm  Closing Date without  first  obtaining  the
written  consent  of  the  Representative,   which  such  consent  will  not  be
unreasonably  denied or unduly  delayed.  For a period of three  years after the
Effective  Date, the Company shall cause the transfer agent and warrant agent to
deliver  promptly to the  Underwriters a duplicate  copy of the weekly  transfer
sheets relating to trading of the Securities.  The Company shall also provide to
the  Representative,  promptly  upon  their  request,  up to four  times  in any
calendar year, copies of DTC or equivalent transfer sheets.

          (q) During  the  period of 180 days after the date of this  Agreement,
the  Company  will not at any time,  directly  or  indirectly,  take any  action
designed to or that will  constitute,  or that might  reasonably  be expected to
cause or result in, the  stabilization  of the price of the Common  Stock or the
Warrants to facilitate the sale or resale of any of the Securities.

          (r) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.

          (s) Prior to the 120th day after the Firm  Closing  Date,  the Company
will provide the  Representative  and its designees  with three bound volumes of
the  transaction  documents  relating  to the  Registration  Statement  and  the
closing(s) hereunder.

          (t) The Company  shall  consult with the  Representative  prior to the
distribution  to third  parties of any  financial  information  news releases or
other  publicity  regarding  the  Company,  its  business,  or any terms of this
offering  and the  Underwriters  will  consult  with  the  Company  prior to the
issuance of any  research  report or  recommendation  concerning  the  Company's
securities.  Copies of all  documents  that the Company or its public  relations
firm intend to  distribute  will be provided  to the  Representative  for review
prior to such distribution.

          (u)  The  Company  and  the   Underwriters   will  advise  each  other
immediately  in writing as to any  investigation,  proceeding,  order,  event or
other  circumstance,  or any threat thereof, by or relating to the Commission or
any other  governmental  authority,  that could impair or prevent this Offering.
Except as required by law or as otherwise  mutually  agreed in writing,  neither
the Company nor the Underwriters  will acquiesce in such  circumstances and each
will actively defend any proceedings or orders in that connection.


                                       15

<PAGE>



          (v) The  Company  will,  for a  period  of no less  than  three  years
commencing  immediately  after the  Effective  Date,  engage a  designee  of the
Representative  as  an  advisor  (the  "Advisor")  to  the  Company's  Board  of
Directors, who shall attend meetings of the Board, receive all notices and other
correspondence and communications  sent by the Company to its Board of Directors
and receive cash  compensation  equal to that of the cash  compensation  paid to
other non-employee  directors;  provided,  that in lieu of the  Representative's
right to designate an Advisor,  the  Representative  shall have the right during
such  three-year  period,  in its sole  discretion,  to designate one person for
election as a director of the  Company  and the  Company  will  utilize its best
efforts to obtain the  election  of such person who shall be entitled to receive
the same cash  compensation,  expense  reimbursements  and other benefits as set
forth  above.   In  addition,   such  Advisor   shall  be  entitled  to  receive
reimbursement for all costs incurred in attending such meetings  including,  but
not limited to, food, lodging and  transportation  consistent with reimbursement
made to other  non-employee  directors.  The  Company,  during  said  three-year
period,  shall schedule no less than four formal meetings (at least one of which
shall be "in person" and the others may be held  telephonically) of its Board of
Directors in each such year at which meetings such Advisor shall be permitted to
attend (in person, for each meeting held "in person") as set forth herein;  said
meetings  shall be held  quarterly each year and advance notice of such meetings
identical to the notice given to  directors  shall be given to the Advisor.  The
Company and its  principal  stockholders  shall,  during such three year period,
give  the   Representative   timely  prior   written   notice  of  any  proposed
acquisitions,  mergers,  reorganizations  or  other  similar  transactions.  The
Company shall indemnify and hold the Representative and such Advisor or director
harmless against any and all claims,  actions,  damages, costs and expenses, and
judgments arising solely out of the attendance and participation of such Advisor
or director at any such meeting described herein,  and, if the Company maintains
a liability insurance policy affording coverage for the acts of its officers and
directors, it shall, if possible, include such Advisor or director as an insured
under such policy.

          (w) The Company shall first submit to the Representative  certificates
representing  the  Securities  for  approval  prior to printing,  and shall,  as
promptly  as  possible,   after  filing  the  Registration  Statement  with  the
Commission, obtain CUSIP numbers for the Securities.

          (x) The Company shall engage the Underwriters'  counsel to provide the
Underwriters,  at the closing of any sale of Securities  hereunder and quarterly
thereafter,  with an opinion,  setting  forth  those  states in which the Common
Stock and Warrants may be traded in non-issuer  transactions  under the blue sky
or  securities  laws of the 50  states.  The  Company  shall pay such  counsel a
one-time fee of $10,000 for such opinions at the closing of the sale of the Firm
Securities.

          (y) The Company will prepare and file a  registration  statement  with
the  Commission  pursuant  to section 12 of the 1934 Act,  and will use its best
efforts to have such registration statement declared effective by the Commission
on an  accelerated  basis on the day after the Effective  Date. For this purpose
the  Company  shall  prepare  and file with the  Commission  a  General  Form of
Registration of Securities (Form 8-A or Form 10).


                                       16

<PAGE>



          (z) For so long as the Securities  are registered  under the 1934 Act,
the Company  will hold an annual  meeting of  stockholders  for the  election of
directors  within 180 days after the end of each of the  Company's  fiscal years
and  within 135 days after the end of each of the  Company's  fiscal  years will
provide  the  Company's  stockholders  with the audited  consolidated  financial
statements of the Company as of the end of the fiscal year just completed  prior
thereto. Such consolidated  financial statements shall be those required by Rule
14a-3 under the 1934 Act and shall be included in an annual  report  pursuant to
the requirements of such Rule.

          (aa) The  Company  shall  retain  the  Representative  as a  financial
advisor at an annual fee of $60,000  for a  36-month  period  commencing  on the
Closing Date. The entire fee of $180,000 shall be payable on the Closing Date.

          (bb)  The  Company  will  engage a  financial  public  relations  firm
reasonably  satisfactory  to the  Representative  on or before the Firm  Closing
Date,  and  continuously  engage  such firm,  or a  substitute  firm  reasonably
acceptable to the  Representative,  for a period of twelve (12) months following
the Firm Closing Date.

          (cc) The Company will take all necessary and appropriate actions to be
included in Standard and Poor's  Corporation  Descriptions  or other  equivalent
manual and to maintain  its listing  therein for a period of five (5) years from
the Effective Date.

          (dd) On or prior to the Effective  Date, the Company will give written
instructions  to the transfer agent for the Common Stock directing said transfer
agent to place stop-order restrictions against, and appropriate legends advising
of the Lock-up  Agreements on, the  certificates  representing the securities of
the Company owned by the persons who have entered into the Lock-up Agreements.

          (ee) The  Company  will  obtain and keep in effect for the  shorter of
five (5) years or the period  during which  Raymond J. Meyers is employed as its
Chief  Executive  Officer,  a policy  on his life in the  amount  of $1  million
payable to the Company.

     5. Expenses

          (a) The  Company  shall  pay all costs and  expenses  incident  to the
performance  of its  obligations  under  this  Agreement,  whether  or  not  the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to section 10 hereof,  including all costs and expenses incident to (i)
the  preparation,  printing and filing or other  production  of  documents  with
respect to the  transactions,  including any costs of printing the  registration
statement  originally  filed with respect to the  Securities  and any  amendment
thereto,  any  Preliminary  Prospectus  and the  Prospectus and any amendment or
supplement  thereto,  this  Agreement,  the Agreement  Among  Underwriters,  the
selected dealer agreement and the other  agreements and documents  governing the
underwriting  arrangements  and any blue sky memoranda,  (ii) all reasonable and
necessary arrangements relating to the delivery to the Underwriters of copies of
the foregoing  documents,  (iii) the fees and disbursements of the counsel,  the


                                       17

<PAGE>


accountants and any other experts or advisors retained by the Company,  (iv) the
preparation,  issuance  and  delivery to the  Underwriters  of any  certificates
evidencing the  Securities,  including  transfer  agent's,  warrant  agent's and
registrar's  fees or any  transfer  or  other  taxes  payable  thereon,  (v) the
qualification  of the  Securities  under  state  blue  sky or  securities  laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating  thereto  (such counsel fees not to exceed  $________,  of which $7,500
shall be due and payable upon the commencement of blue sky filing, together with
the related filing fees) and any fees and  disbursements  of local  counsel,  if
any,  retained for such purpose,  (vi) the filing fees of the Commission and the
NASD relating to the  Securities,  (vii) the inclusion of the  Securities on The
Nasdaq SmallCap Market and in the Standard and Poor's  Corporation  Descriptions
Manual,  (viii) any "road shows" or other meetings with prospective investors in
the Securities, including transportation,  accommodation, meal, conference room,
audio-visual  presentation  and  similar  expenses  of the  Underwriters  or its
representatives  or  designees  (other  than as  shall  have  been  specifically
approved by the  Representative to be paid for by the Underwriters) and (ix) the
publication of "tombstone  advertisements"  in newspapers or other  publications
selected by the Representative and the manufacture of prospectus memorabilia. In
addition to the foregoing,  the Company shall reimburse the  Representative  for
its expenses on the basis of a  non-accountable  expense allowance in the amount
of 3.00% of the gross  offering  proceeds  to be received  by the  Company.  The
unpaid  portion of the expense  allowance,  based on the gross proceeds from the
sale of the Firm Securities,  shall be deducted from the funds to be paid by the
Representative in payment for the Firm Securities, pursuant to section 2 of this
Agreement,  on the Firm Closing  Date. To the extent any Option  Securities  are
sold,  any  remaining  non-accountable  expense  allowance  based  on the  gross
proceeds from the sale of the Option Securities shall be deducted from the funds
to be paid by the Representative in payment for the Option Securities,  pursuant
to  section  2 of this  Agreement,  on the  Option  Closing  Date.  The  Company
warrants,  represents and agrees that all such payments and reimbursements  will
be promptly and fully made.

          (b)  Notwithstanding  any other  provision of this  Agreement,  if the
offering of the Securities contemplated hereby is terminated for any reason, the
Company  agrees  that,  in addition to the  Company  paying its own  expenses as
described  in  subparagraph  (a) above,  (i) the  Company  shall  reimburse  the
Underwriters  only for  their  actual  accountable  out-of-pocket  expenses  (in
addition to blue sky legal fees and  expenses  referred to in  subparagraph  (a)
above), and (ii) the Representative shall be entitled to retain amounts advanced
by the Company (if any) against the  non-accountable  expense allowance referred
to in  subparagraph  (a) above;  provided,  however,  that the  amount  retained
pursuant to this clause (ii) shall not exceed the  Representative's  expenses on
an accountable  basis to the date of such  cancellation and that all unaccounted
for amounts shall be refunded to the Company.  Such expenses shall include,  but
are not to be limited  to,  fees for the  services  and time of counsel  for the
Underwriters to the extent not covered by clause (i) above,  plus any additional
expenses  and fees,  including,  but not limited to,  travel  expenses,  postage
expenses,  duplication  expenses,  long-distance  telephone expenses,  and other
expenses  incurred  by  the  Representative  in  connection  with  the  proposed
offering.


                                       18

<PAGE>



     6. Warrant Solicitation Fee. The Company agrees to pay the Representative a
fee of five percent (5%) of the aggregate  exercise price of the Warrants if (i)
the market price of the Common stock is not less than the exercise  price of the
Warrants on the date of exercise; (ii) the exercise of the Warrants is solicited
by  the  Representative  at  such  as  it  is a  member  of  the  NASD  and  the
Representative  is  designated  in writing by the holder of the  Warrants as the
NASD  member  soliciting  the  exercise;  (iii) the  Warrants  are not held in a
discretionary account; (iv) the disclosure of compensation  arrangements is made
both at the time of the  Offering and at the time of the  exercise;  and (v) the
solicitation  of the  Warrant  exercise  is  not in  violation  of  Rule  101 of
Regulation  M  promulgated  under the 1934 Act;  and (vi)  such  payment  is not
otherwise in violation of then applicable NASD rules.  The Company agrees not to
solicit the exercise of any Warrant  other than through the  Representative  and
will not authorize any other dealer to engage in such  solicitation  without the
prior  written  consent of the  Representative,  which will not be  unreasonably
withheld.  The  Warrant  solicitation  fee will  not be paid in a  non-solicited
transaction.  Any request for exercise will be presumed to be unsolicited unless
the customer states in writing that the transaction was solicited and designates
in  writing  that  the  Representative   solicited  the  exercise.   No  Warrant
solicitation  by the  Representative  will occur for a period of 12 months after
the Effective Date.

     7.  Conditions of the  Underwriters'  Obligations.  The  obligations of the
Underwriters  to purchase and pay for the Firm Shares  shall be subject,  in the
Underwriters'  sole  discretion,  to the  accuracy  of the  representations  and
warranties of the Company  contained  herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the  statements  of the Company's  officers  made pursuant to the  provisions
hereof,  to the  performance  by the  Company of its  covenants  and  agreements
hereunder and to the following additional conditions:

          (a) If the registration statement, as heretofore amended, has not been
declared  effective  as of  the  time  of  execution  hereof,  the  registration
statement,  as  heretofore  amended or as amended by an amendment  thereto to be
filed prior to the Firm Closing  Date,  shall have been  declared  effective not
later than 5:30 P.M.,  New York City time, on the date on which the amendment to
such registration  statement containing information regarding the initial public
offering  price of the Securities  has been filed with the  Commission,  or such
later  time and date as shall have been  consented  to by the  Underwriters;  if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the  Commission in the manner and within the time period  required by
Rule 424(b) under the Act, no stop order  suspending  the  effectiveness  of the
Registration  Statement  shall have been  issued,  and no  proceedings  for that
purpose shall have been  instituted  or  threatened  or, to the knowledge of the
Company or the  Underwriters,  shall be contemplated by the Commission;  and the
Company shall have complied with any request of the  Commission  for  additional
information (to be included in the  Registration  Statement or the Prospectus or
otherwise).

          (b) The  Underwriters  shall have received an opinion,  dated the Firm
Closing Date, of Gary Agron, Esq., counsel to the Company, to the effect that:

               (1) the Company and each  Subsidiary  has been duly  incorporated
and is validly  existing as a corporation in good standing under the laws of the
state of its incorporation and  is  duly qualified to  transact  business  as  a

                                       19

<PAGE>



foreign  corporation  and is in good  standing  under  the  laws  of each  other
jurisdiction  in which its ownership or leasing of any properties or the conduct
of its  business  requires  such  qualification,  except where the failure to so
qualify  would not have a  materially  adverse  effect  upon the Company and its
subsidiaries, taken as a whole.

               (2) the Company and each  Subsidiary has full corporate power and
authority  to own or lease its  property  and conduct its  business as now being
conducted  and as proposed to be  conducted,  as described  in the  Registration
Statement  and the  Prospectus,  and the  Company has full  corporate  power and
authority  to  enter  into  this  Agreement,   the  Warrant  Agreement  and  the
Underwriters'  Warrant  Agreement and to carry out all the terms and  provisions
hereof and thereof to be carried out by it;

               (3) to the  knowledge of such counsel,  there are no  outstanding
options,  warrants or other rights granted by the Company to purchase  shares of
its Common Stock, preferred stock or other securities other than as described in
the Prospectus;  the Shares have been duly authorized and the Warrant Shares and
the  Underwriters'  Warrant  Shares have been duly  reserved for issuance by all
necessary  corporate  action on the part of the  Company  and,  the Shares  when
issued  and  delivered  to and paid  for by the  Underwriters  pursuant  to this
Agreement,  the Warrant  Shares when issued upon payment of the  exercise  price
specified in the Warrants,  Underwriters' Warrants when issued and delivered and
paid  for in  accordance  with  this  Agreement  and the  Underwriters'  Warrant
Agreement by the Underwriters and the Warrant Shares when issued upon payment of
the exercise  price  specified in the  Underwriters'  Warrants,  will be validly
issued, fully paid, nonassessable and free of preemptive rights and will conform
to the description thereof in the Prospectus;  to the knowledge of such counsel,
no holder of  outstanding  securities  of the Company is entitled as such to any
preemptive  or other  right to  subscribe  for any of the  Shares,  the  Warrant
Shares,  or the  Underwriters'  Warrant  Shares;  and to the  knowledge  of such
counsel,  no person is entitled  to have  securities  registered  by the Company
under the  Registration  Statement  or  otherwise  under  the Act other  than as
described in the Prospectus;

               (4) the Shares have been  approved  for  inclusion  on The Nasdaq
SmallCap Market;

               (5) the  execution  and delivery of this  Agreement,  the Warrant
Agreement,  the Underwriters'  Warrant Agreement and the Financial  Advisory and
Investment  Banking  Agreement  have  been  duly  authorized  by  all  necessary
corporate  action on the part of the  Company  and this  Agreement,  the Warrant
Agreement,  the Underwriters'  Warrant Agreement and the Financial  Advisory and
Investment  Banking  Agreement  have been duly  executed  and  delivered  by the
Company,  and each is a valid and binding agreement of the Company,  enforceable
against the Company in accordance with its terms,  except as enforceability  may
be limited by bankruptcy,  insolvency,  reorganization,  fraudulent  conveyance,
moratorium and other similar laws affecting  creditors'  rights generally and to
general principles of equity (regardless of whether enforcement is considered in
a  proceeding  in equity  or at law) and  except  as  rights  to  indemnity  and
contribution  under this Agreement,  the Warrant Agreement and the Underwriters'
Warrant Agreement may be limited by applicable law;

                                       20

<PAGE>


               (6) the Underwriters' Warrants conform to the description thereof
in the Registration  Statement and in the Prospectus and are duly authorized and
upon payment of the purchase price  therefore  specified in section 2(d) of this
Agreement are validly issued and constitute valid and binding obligations of the
Company entitled to the benefits of the Underwriters' Warrant Agreement;

               (7) the statements set forth in the Prospectus  under the caption
"Description  of  Securities"  in the  Prospectus,  insofar as those  statements
purport to summarize the terms of the capital stock and warrants of the Company,
provide a fair summary of such terms; the statements in the Prospectus,  insofar
as those statements constitute matters of law or legal conclusions, or summaries
of the contracts, agreement instruments, leases or licenses referred to therein,
constitute  a fair  summary  of those  matters,  legal  conclusions,  contracts,
agreement  instruments,  leases or  licenses  and  include  all  material  terms
thereof, as applicable;

               (8) none of (A) the execution and delivery of this Agreement, the
Warrant Agreement and the  Underwriters'  Warrant  Agreement,  (B) the issuance,
offering and sale by the Company to the Underwriters of the Securities  pursuant
to this  Agreement  and the  Underwriters'  Warrant  Securities  pursuant to the
Underwriters' Warrant Agreement,  nor (C) the compliance by the Company with the
other provisions of this Agreement,  the Warrant Agreement and the Underwriters'
Warrant Agreement and the consummation of the transactions  contemplated  hereby
and thereby, (1) requires the consent, approval, authorization,  registration or
qualification of or with any court or governmental authority known to us, except
such as have been  obtained and such as may be required  under state blue sky or
securities  laws, or (2) conflicts  with or results in a breach or violation of,
or constitutes a default under, any material contract, indenture, mortgage, deed
of trust, loan agreement,  note, lease or other material agreement or instrument
known to such counsel to which the Company is a party or by which the Company or
any of its property is bound or subject,  or the certificate of incorporation or
by-laws of the Company, or any material statute or any judgment,  decree, order,
rule or regulation of any court or other  governmental  or regulatory  authority
known to such counsel applicable to the Company;

               (9)  to  the  knowledge  of  such   counsel,   (A)  no  legal  or
governmental  proceedings  are pending to which the Company or a Subsidiary is a
party or to which the property of the Company or a Subsidiary is subject and (B)
no contract or other  document is required to be described  in the  Registration
Statement  or the  Prospectus  or to be filed as an exhibit to the  Registration
Statement that is not described therein or filed as required;

               (10) the Company and each of the Subsidiaries  possesses adequate
licenses, orders, authorizations,  approvals,  certificates or permits issued by
the  appropriate  federal or state  regulatory  agencies or bodies  necessary to
conduct  its  business  as  described  in the  Registration  Statement  and  the
Prospectus, and, to  the  knowledge  of  such counsel, there  are  no pending or

                                       21

<PAGE>



threatened  proceedings  relating to the revocation or  modification of any such
license,  order,  authorization,  approval,  certificate  or  permit,  except as
disclosed in the Registration Statement and the Prospectus;

               (11)  neither the Company nor the  Subsidiary  is in violation or
breach  of, or in  default  with  respect  to,  any term of its  certificate  of
incorporation  or by-laws,  and to the  knowledge of such  counsel,  neither the
Company nor any  Subsidiary is in (i)  violation in any material  respect of any
law, statute,  regulation,  ordinance,  rule,  order,  judgment or decree of any
court or any  governmental  or  regulatory  authority  applicable to it, or (ii)
default  in  any  material  respect  in the  performance  or  observance  of any
obligation, agreement, covenant or condition contained in any material contract,
indenture,  mortgage,  deed of  trust,  loan  agreement,  note,  lease  or other
material agreement or instrument to which it is a party or by which it or any of
its  property  may be bound or  subject,  and no event has  occurred  which with
notice, lapse of time or both would constitute such a default.

               (12) the  Registration  Statement is effective under the Act; any
required  filing of the Prospectus  pursuant to Rule 424(b) has been made in the
manner  and  within  the time  period  required  by Rule  424(b);  and,  to such
counsel's  knowledge,   no  stop  order  suspending  the  effectiveness  of  the
Registration  Statement  or  any  amendment  thereto  has  been  issued,  and no
proceedings  for that purpose have been instituted or threatened or, to the best
knowledge of such counsel, are contemplated by the Commission;

               (13) the registration  statement originally filed with respect to
the  Securities  and each  amendment  thereto and the  Prospectus (in each case,
other than the  financial  statements  and  schedules  and other  financial  and
statistical information contained therein, as to which such counsel need express
no  opinion)  comply as to form in all  material  respects  with the  applicable
requirements  of the  Act  and  the  rules  and  regulations  of the  Commission
thereunder; and

               (14) the  Company is not an  "investment  company"  as defined in
section  3(a) of the  Investment  Company Act and, if the Company  conducts  its
business  as set forth in the  Prospectus,  it will not  become  an  "investment
company" and will not be required to register under the Investment Company Act.

     Counsel  also shall state in its opinion  that it has  participated  in the
preparation  of the  Registration  Statement and the Prospectus and that nothing
has come to its attention that has caused them to believe that the  Registration
Statement,  at the time it became effective (including the information deemed to
be a part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b),  if applicable),  contained an untrue statement of a material fact
or omitted to state a material fact  required to be stated  therein or necessary
to make the statements therein not misleading or that the Prospectus,  as of its
date or as of the Firm Closing Date,  contained an untrue  statement of material
fact or  omitted  to  state a  material  fact  necessary  in  order  to make the
statements  therein,  in the light of the  circumstances  under  which they were
made, not misleading.


                                       22

<PAGE>



     In rendering  any such  opinion,  such  counsel may rely,  as to matters of
fact, to the extent such counsel deems proper,  on  certificates  of responsible
officers of the Company and public officials,  copies of which certificates will
be  provided  to the  Underwriters,  and,  as to  matters of the laws of certain
jurisdictions,  on the opinions of other counsel to the Company,  which opinions
shall also be delivered to the Underwriters, in form and substance acceptable to
the Underwriters,  if such other counsel  expressly  authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriters' reliance upon such opinion is justified.

     References  to the  Registration  Statement  and  the  Prospectus  in  this
paragraph (b) shall  include any amendment or supplement  thereto at the date of
such opinion.

          (c) The  Underwriters  shall have  received  from Angell & Deering,  a
letter  dated the Firm  Closing  Date and dated  each  Option  Closing  Date (as
defined  below),  if  applicable,  in form  and  substance  satisfactory  to the
Underwriters,  to the effect that (i) they are  independent  public  accountants
with  respect to the Company  within the  meaning of the Act and the  applicable
rules  and  regulations  thereunder;  (ii) in their  opinion,  the  consolidated
financial statements audited by them and included in the Registration  Statement
and  the  Prospectus  comply  as to  form  in all  material  respects  with  the
applicable  accounting  requirements of the Act and the related  published rules
and regulations  thereunder;  (iii) based upon procedures set forth in detail in
such letter,  nothing has come to their  attention  which causes them to believe
that (A) the unaudited financial statements as of ___________,  1997 included in
the  Registration   Statement  was  not  determined  on  a  basis  substantially
consistent  with that  used in  determining  the  corresponding  amounts  in the
audited financial statements as of [ ] included in the Registration Statement or
(B) at a  specified  date  not more  than  five  days  prior to the date of this
Agreement,  there has been any change in the capital  stock of the Company,  any
increase in the  long-term  debt or decrease in net sales of the Company and its
Subsidiaries,  as  compared  with the  amounts  shown in the [ ]  balance  sheet
included  in the  Registration  Statement  or as of the date of the most  recent
financial  statements made available by the Company there has been any change in
the capital  stock of the  Company,  any increase in the  long-term  debt or any
decrease  in net sales,  working  capital or net assets of the  Company  and its
Subsidiaries  as  compared  with  the  amounts  shown in the [ ]  balance  sheet
included in the  Registration  Statement  or, during the period from [ ] through
date of the most recent  financial  statement  made available by the Company and
its Subsidiaries,  there were any decreases,  as compared with the corresponding
period in the preceding  year,  in revenues,  or any increase in net loss of the
Company,  except in all instances for changes,  increases or decreases which the
Registration  Statement and the Prospectus  disclose have occurred or may occur;
and (iv) in addition to the audit  referred to in their  opinion and the limited
procedures  referred to in clause  (iii)  above,  they have  carried out certain
specified  procedures,  not  constituting  an audit,  with  respect  to  certain
amounts,  percentages  and  financial  information  (including  the  summary  of
consolidated  financial information and secured financial information) which are
included in the Registration Statement and Prospectus and which are specified by
the  Underwriters,  and have  found  such  amounts,  percentages  and  financial
information to be in agreement with the relevant accounting, financial and other
records of the Company identified in such letter. References to the Registration

                                       23

<PAGE>



Statement and the  Prospectus  in this  paragraph (c) with respect to the letter
referred to above shall include any amendment or supplement  thereto at the date
of such letter.

          (d) The  representations  and  warranties of the Company  contained in
this  Agreement  shall  be true  and  correct  as if made on and as of the  Firm
Closing Date; the Registration  Statement shall not include any untrue statement
of a material  fact or omit to state any  material  fact  required  to be stated
therein  necessary  to make  the  statements  therein  not  misleading,  and the
Prospectus,  as amended or supplemented  as of the Firm Closing Date,  shall not
include any untrue  statement  of a material  fact or omit to state any material
fact  necessary  in order to make the  statements  therein,  in the light of the
circumstances under which they were made, not misleading;  and the Company shall
have  performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.

          (e) No stop order  suspending the  effectiveness  of the  Registration
Statement or any amendment  thereto shall have been issued,  and no  proceedings
for that purpose shall have been instituted or threatened or contemplated by the
Commission.

          (f)  Subsequent to the  respective  dates as of which  information  is
given in the  Registration  Statement and the  Prospectus,  there shall not have
been any material  adverse change,  or any  development  involving a prospective
material adverse change, in the business,  operations,  condition  (financial or
otherwise), earnings or prospects of the Company and the Subsidiaries,  taken as
a whole,  except in each case as described in or  contemplated by the Prospectus
(exclusive of any amendment or supplement thereto).

          (g) The Underwriters shall have received a certificate, dated the Firm
Closing Date, of the Chief Executive Officer and the Secretary of the Company to
the effect set forth in subparagraphs (d) through (f) above.

          (h)  The  Common  Stock  and  Warrants  shall  be  qualified  in  such
jurisdictions  as the  Underwriters  may reasonably  request pursuant to section
4(c), and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Firm Closing Date.

          (i) The Company shall have executed and delivered to the  Underwriters
the Underwriters' Warrant Agreement and a certificate or certificates evidencing
the  Underwriters'   Warrants,  in  each  case  in  a  form  acceptable  to  the
Underwriters.

          (j) The Representative shall have received Lock-up Agreements executed
by the persons listed on Schedule 3 annexed hereto,  or the same has been waived
in writing.

          (j) On or before the Firm Closing Date, the  Underwriters  and counsel
for the Underwriters shall have received such further  certificates,  documents,
letters or other  information  as they may have  reasonably  requested  from the
Company.


                                       24

<PAGE>



     All opinions,  certificates,  letters and documents  delivered  pursuant to
this  Agreement  will  comply  with  the  provisions  hereof  only if  they  are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the  Underwriters.  The  Company  shall  furnish  to the  Underwriters  such
conformed copies of such opinions,  certificates,  letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.

     The  obligation  of the  Underwriters  to  purchase  and pay for any Option
Securities  shall  be  subject,  in its  discretion,  to each  of the  foregoing
conditions to purchase the Firm  Securities,  except that all  references to the
Firm  Securities  and the Firm  Closing  Date  shall be  deemed to refer to such
Option Securities and the related Option Closing Date, respectively.

     8. Indemnification and Contribution.

          (a) The Company agrees to indemnify and hold harmless the Underwriters
and each person,  if any, who  controls  any  Underwriter  within the meaning of
section 15 of the Act or section 20 of the 1934 Act against any losses,  claims,
damages,  amounts paid in settlement or liabilities,  joint or several, to which
the Underwriters or such controlling  person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof arise out of or are based upon:

               (1) any untrue  statement  or  alleged  untrue  statement  of any
material  fact  contained in (A) the  Registration  Statement  or any  amendment
thereto,  any  Preliminary  Prospectus  or the  Prospectus  or any  amendment or
supplement thereto or (B) any application or other document, or any amendment or
supplement  thereto,  executed by the Company or based upon written  information
furnished by or on behalf of the Company filed in any  jurisdiction  in order to
qualify the  Securities  under the Blue Sky or securities  laws thereof or filed
with the Commission or any securities  association or securities  exchange (each
an "Application"), or

               (2)  the   omission   or  alleged   omission  to  state  in  such
Registration  Statement or any amendment thereto, any Preliminary  Prospectus or
the  Prospectus  or any amendment or supplement  thereto,  or any  Application a
material fact required to be stated  therein or necessary to make the statements
therein not misleading,  and will reimburse,  as incurred,  the Underwriters and
such controlling person for any legal or other expenses  reasonably  incurred by
the  Underwriters or such controlling  person in connection with  investigating,
defending  against or appearing as a third-party  witness in connection with any
loss, claim, damage, liability, action, investigation, litigation or proceeding;
provided,  however,  that the Company will not be liable in any such case to the
extent that any such loss, claim,  damage or liability arises out of or is based
upon any untrue  statement  or alleged  untrue  statement or omission or alleged
omission  made in such  registration  statement or any  amendment  thereto,  any
Preliminary  Prospectus,  the Prospectus or any amendment or supplement thereto,
or any Application in reliance upon and in conformity  with written  information
furnished to the Company by the Underwriters  specifically for use therein. This
indemnity  agreement will be in addition to any liability  which the Company may
otherwise  have. The Company will not,  without the prior written consent of the
Underwriters,  settle or  compromise  or consent to the entry of any judgment in


                                       25

<PAGE>



any pending or threatened claim,  action, suit or proceeding in respect of which
indemnification  may be sought hereunder (whether or not the Underwriters or any
person who controls any Underwriter  within the meaning of section 15 of the Act
or  section  20 of the  1934  Act is a party  to  such  claim,  action,  suit or
proceeding),   unless  such  settlement,   compromise  or  consent  includes  an
unconditional  release of the Underwriters and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.

          (b) The  Underwriters,  severally but not jointly,  will indemnify and
hold  harmless  the  Company,  each of its  directors,  each of its officers who
signed the  Registration  Statement  and each  person,  if any, who controls the
Company  within  the  meaning  of  section  15 of the Act or  section  20 of the
Exchange Act against,  any losses,  claims,  damages or liabilities to which the
Company or any such director,  officer or controlling  person may become subject
under the Act or otherwise,  but only insofar as such losses, claims, damages or
liabilities  (or actions in respect  thereof) arise out of or are based upon (i)
any untrue  statement or alleged untrue statement of any material fact contained
in  the  Registration  Statement  or  any  amendment  thereto,  any  Preliminary
Prospectus or the  Prospectus or any  amendment or  supplement  thereto,  or any
Application,  or (ii) the  omission or the alleged  omission to state  therein a
material  fact  required  to be  stated  in the  Registration  Statement  or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto,  or any Application,  or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such  untrue  statement  or alleged  untrue  statement  or  omission  or alleged
omission was made in reliance  upon and in conformity  with written  information
furnished to the Company by any Underwriters  specifically for use therein; and,
subject to the limitation  set forth  immediately  preceding  this clause,  will
reimburse,  as incurred,  any legal or other expenses reasonably incurred by the
Company or any such director,  officer or controlling  person in collection with
investigating or defending any such loss, claim, damage, liability or any action
in  respect  thereof.  This  indemnity  agreement  will  be in  addition  to any
liability which the Underwriters may otherwise have.

          (c) Promptly after receipt by an indemnified  party under this section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
section 8, notify the indemnifying  party of the commencement  thereof;  but the
omission  so to notify  the  indemnifying  party  will not  relieve  it from any
liability which it may have to any  indemnified  party otherwise than under this
section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled  to  participate  therein  and, to the extent that it may
wish, jointly with any other indemnifying  party similarly  notified,  to assume
the defense  thereof,  with  counsel  satisfactory  to such  indemnified  party;
provided,  however,  that if the  defendants in any such action include both the
indemnified  party and the  indemnifying  party and the indemnified  party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct  the  defense of such  action on behalf of such  indemnified
party or parties and such  indemnified  party or parties shall have the right to
select  separate  counsel to defend  such  action on behalf of such  indemnified


                                       26

<PAGE>


party or parties.  After notice from the indemnifying  party to such indemnified
party of its  election  so to assume the defense  thereof  and  approval by such
indemnified party of counsel  appointed to defend such action,  the indemnifying
party will not be liable to such indemnified  party under this section 8 for any
legal  or  other  expenses,   other  than  reasonable  costs  of  investigation,
subsequently  incurred by such indemnified  party in connection with the defense
thereof,  unless (i) the indemnified  party shall have employed separate counsel
in  accordance  with the  proviso  to the next  preceding  sentence  or (ii) the
indemnifying  party has authorized the employment of counsel for the indemnified
party at the  expense of the  indemnifying  party.  After such  notice  from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any  settlement of such action  effected by
such indemnified party without the consent of the indemnifying party.

          (d) In circumstances in which the indemnity  agreement provided for in
the preceding  paragraphs of this section 8 is  unavailable or  insufficient  to
hold harmless an indemnified party in respect of any losses,  claims, damages or
liabilities (or actions in respect thereof),  each indemnifying  party, in order
to provide for just and equitable  contribution,  shall contribute to the amount
paid or payable by such  indemnified  party as a result of such losses,  claims,
damages or liabilities (or actions in respect  thereof) in such proportion as is
appropriate to reflect (i) the relative  benefits  received by the  indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the  allocation  provided by the foregoing
clause (i) is not permitted by applicable  law, not only such relative  benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the  indemnified  party on the other in  connection  with the  statements or
omissions  or alleged  statements  or  omissions  that  resulted in such losses,
claims,  damages or liabilities  (or actions in respect  thereof).  The relative
benefits  received  by the  Company on the one hand and the  Underwriter  on the
other shall be deemed to be in the same  proportion  as the total  proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bear to the total  underwriting  discounts and
commissions received by the Underwriter. The relative fault of the parties shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a  material  fact  relates  to  information  supplied  by  the  Company  or  the
Underwriter,  the parties' relative intent, knowledge, access to information and
opportunity  to correct or prevent such  statement  or  omission,  and the other
equitable considerations  appropriate in the circumstances.  The Company and the
Underwriter  agree  that  it  would  not be  equitable  if the  amount  of  such
contribution  were  determined  by pro rata or per capita  allocation  or by any
other  method  of  allocation  that  does not take into  account  the  equitable
considerations  referred  to in  the  first  sentence  of  this  paragraph  (d).
Notwithstanding any other provision of this paragraph (d), the Underwriter shall
not be obligated to make  contributions  hereunder that in the aggregate  exceed
the total public  offering price of the Securities  purchased by the Underwriter
under  this  Agreement,  less  the  aggregate  amount  of any  damages  that the
Underwriter  has  otherwise  been  required to pay in respect of the same or any
substantially    similar   claim,   and   no   person   guilty   of   fraudulent
misrepresentation  (within  the  meaning  of section 11 (f) of the Act) shall be
entitled to  contribution  from any person who is not guilty of such  fraudulent
misrepresentation.  For purposes of this paragraph (d), each person, if any, who
controls an  Underwriter  within the meaning of section 15 of the Act or section
20 of  the  1934  Act  shall  have  the  same  rights  to  contribution  as  the


                                       27

<PAGE>



Underwriter,  and each director of the Company,  each officer of the Company who
signed the  Registration  Statement  and each  person,  if any, who controls the
Company  within  the  meaning of section 15 of the Act or section 20 of the 1934
Act, shall have the same rights to contribution as the Company.

     9. Substitution of Underwriters.

     If any Underwriter shall for any reason not permitted  hereunder cancel its
obligations to purchase the Firm Securities hereunder,  or shall fail to take up
and pay for the  number  of Firm  Securities  set  forth  opposite  its  name on
Schedule 1 hereto upon tender of such Firm  Securities  in  accordance  with the
terms hereof, then:

          (a) If the aggregate  number of Firm Securities which such Underwriter
or  Underwriters  agreed but failed to purchase does not exceed 10% of the total
number of Firm Securities,  the other Underwriter shall be obligated to purchase
the Firm  Securities  which  such  defaulting  Underwriter  agreed but failed to
purchase.

          (b) If any  Underwriter  so  defaults  and the  agreed  number of Firm
Securities  with respect to which such  default or defaults  occurs is more than
10% of the total number of Firm  Securities,  the remaining  Underwriters  shall
have the right to take up and pay for the Firm  Securities  which the defaulting
Underwriter  agreed but failed to purchase.  If such remaining  Underwriters  do
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting  Underwriter agreed but failed to purchase,  the time for delivery of
the Firm  Securities  shall be  extended to the next  business  day to allow the
remaining  Underwriters the privilege of substituting  within  twenty-four hours
(including  nonbusiness hours) another underwriter or underwriters  satisfactory
to  the  Company.  If no  such  underwriter  or  underwriters  shall  have  been
substituted  as  aforesaid,  within such  twenty-four  hour period,  the time of
delivery  of the Firm  Securities  may, at the option of the  Company,  be again
extended to the next following business day, if necessary,  to allow the Company
the privilege of finding within twenty-four hours (including  nonbusiness hours)
another  underwriter or underwriters  to purchase the Firm Securities  which the
defaulting  Underwriter  or  Underwriters  agreed but failed to purchase.  If it
shall be arranged for the remaining Underwriters or substituted  Underwriters to
take up the Firm  Securities of the  defaulting  Underwriter as provided in this
section, (i) the Company or the underwriter shall have the right to postpone the
time of delivery for a period of not more than seven  business days, in order to
effect  whatever  changes  may  thereby be made  necessary  in the  Registration
Statement or the Prospectus,  or in any other document or arrangements,  and the
Company agrees promptly to file any amendments to the Registration  Statement or
supplements to the Prospectus which may thereby be made necessary,  and (ii) the
respective  numbers  of  Firm  Securities  to  be  purchased  by  the  remaining
Underwriters  or  substituted  Underwriters  shall be taken as the  basis of the
underwriting obligation for all purposes of this agreement.

     If in  the  event  of a  default  by  any  Underwriter  and  the  remaining
Underwriters  shall not take up and pay for all the Firm Securities agreed to be
purchased by the  defaulting  Underwriter or substitute  another  underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Securities as aforesaid,  then
this Agreement shall terminate.


                                       28

<PAGE>


     If, following  exercise of the option provided in section 2(c) hereof,  any
Underwriter or Underwriters shall for any reason not permitted  hereunder cancel
their  obligations to purchase Option  Securities at the Option Closing Date, or
shall  fail to take up and pay for the  number  of Option  Securities,  which it
became  obligated  to  purchase at the Option  Closing  Date upon tender of such
Option  Securities  in  accordance  with the terms  hereof,  then the  remaining
Underwriters  or  substituted  Underwriters  may take up and pay for the  Option
Units of the  defaulting  Underwriters  in the manner  provided in section  9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Securities, the Underwriters shall be entitled to
purchase  the number of Option  Securities  for which there is no default or, at
their election, the option shall terminate,  the exercise thereof shall be of no
effect.

     As used in this  Agreement,  the term  "Underwriter"  includes  any  person
substituted for an Underwriter under this section.  In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company,  provided that the  provisions of this section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.

     10.  Survival.  The  respective  representations,  warranties,  agreements,
covenants,  indemnities and other statements of the Company, any of its officers
or directors and the  Underwriters  set forth in this Agreement or made by or on
behalf of them,  respectively,  pursuant to this Agreement  shall remain in full
force and effect,  regardless of (i) any  investigation  made by or on behalf of
the  Company,  any  of  its  officers  or  directors,  the  Underwriters  or any
controlling  person  referred  to in section 8 hereof and (ii)  delivery  of and
payment for the Securities.  The respective agreements,  covenants,  indemnities
and other  statements  set forth in sections 5 and 8 hereof shall remain in full
force  and  effect,  regardless  of any  termination  or  cancellation  of  this
Agreement.

     11. Termination.

          (a)  This  Agreement  may be  terminated  with  respect  to  the  Firm
Securities or any Option  Securities in the sole discretion of the  Underwriters
by notice to the  Company  given prior to the Firm  Closing  Date or the related
Option  Closing  Date,  respectively,  in the event that the Company  shall have
failed,  refused or been  unable to perform  all  obligations  and  satisfy  all
conditions on its part to be performed or satisfied under section 7 hereunder at
or prior  thereto  or if at or prior to the  Firm  Closing  Date or such  Option
Closing Date, respectively.

               (1) the  Company  sustains a loss by reason of  explosion,  fire,
flood,  accident or other calamity,  which, in the opinion of the  Underwriters,
substantially  affects  the  value of the  properties  of the  Company  or which
materially  interferes  with  the  operation  of the  business  of  the  Company
regardless of whether such loss shall have been  insured;  there shall have been


                                       29

<PAGE>


any material adverse change, or any development involving a prospective material
adverse change (including, without limitation, a change in management or control
of  the  Company),  in  the  business,   operations,   condition  (financial  or
otherwise),  earnings  or  prospects  of the  Company,  except  in each  case as
described in or  contemplated  by the Prospectus  (exclusive of any amendment or
supplement thereto);

               (2)  any  action,   suit  or  proceeding   shall  be  threatened,
instituted or pending,  at law or in equity,  against the Company, by any person
or  by  any  federal,   state,  foreign  or  other  governmental  or  regulatory
commission,  board or agency  wherein any  unfavorable  result or decision could
materially  adversely affect the business,  operations,  condition (financial or
otherwise), earnings or prospects of the Company;

               (3)  trading  in the  Common  Stock or  Warrants  shall have been
suspended by the  Commission or the NASD, or trading in securities  generally on
the New York  Stock  Exchange  shall have been  suspended  or minimum or maximum
prices shall have been established on either such exchange or quotation system;

               (4) a banking  moratorium shall have been declared by New York or
United States authorities;

               (5) there shall have been (A) an outbreak of hostilities  between
the  United  States  and any  foreign  power  (or,  in the  case of any  ongoing
hostilities,  a  material  escalation  thereof),  (B) an  outbreak  of any other
insurrection  or armed  conflict  involving  the United  States or (C) any other
calamity  or crisis or  material  change in  financial,  political  or  economic
conditions, having an effect on the financial markets that, in any case referred
to in this  clause  (5),  in the  sole  judgment  of the  Underwriters  makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement;

               (6)  termination  of this  Agreement  pursuant to this section 11
shall be without  liability of any party to any other party,  except as provided
in section 5(b) and section 8 hereof.

     12. Information  Supplied by the Underwriters.  The statements set forth in
the first  paragraph on page 3, in the second,  third,  eighth  (first and third
sentences only) and sixteenth paragraphs under the heading "Underwriting" in the
Preliminary  Prospectus dated ____________ or the Prospectus (to the extent such
statements relate to the Underwriters) constitute the only information furnished
by the  Underwriters  to the Company for the purposes of sections 1 (b) and 8(b)
hereof.  The  Underwriters  confirm  that such  statements  (to such extent) are
correct.

     13. Notices.  All notices hereunder to or upon either party hereto shall be
deemed to have been duly given for all purposes if in writing and (i)  delivered
in person or by messenger or an overnight  courier service against  receipt,  or
(ii)  send by  certified  or  registered  mail,  postage  paid,  return  receipt
requested,  or  (iii)  sent by  telegram,  facsimile,  telex or  similar  means,


                                       30

<PAGE>


provided  that a written  copy  thereof is sent on the same day by postage  paid
first-class mail, to such party at the following address:

To the Company:                     ProtoSource Corporation
                                    2300 Tulare Street
                                    Suite 210
                                    Fresno, CA 93721
                                    (209) 486-8638
                                    Fax: (209) 490-8630

To the Underwriters:                Andrew Alexander Wise & Company
                                    17 State Street
                                    4th Floor
                                    New York, New York 10004
                                    Attn: Andreas Zigouras
                                    (212) 809-7300
                                    Fax: (212) 809-7383

or such other  address as either party  hereto may at any time,  or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice  shall be, in the case of clause (i),  the
date of the receipt;  in the case of clause (ii),  five business days after such
notice or demand is sent;  and, in the case of clause  (iii),  the  business day
next following the date such notice is sent.

     14.  Amendment.  Except as otherwise  provided herein, no amendment of this
Agreement  shall be valid or  effective,  unless in writing  and signed by or on
behalf of the parties hereto.

     15. Waiver. No course of dealing or omission or delay on the part of either
party hereto in asserting or exercising any right hereunder shall  constitute or
operate as a waiver of any such right.  No waiver of any provision  hereof shall
be  effective,  unless in writing  and signed by or on behalf of the party to be
charged  therewith.  No waiver shall be deemed a continuing  waiver or waiver in
respect of any other or subsequent breach or default, unless expressly so stated
in writing.

     16.  Applicable  Law. This agreement  shall be governed by, and interpreted
and  enforced  in  accordance  with,  the laws of the State of New York  without
regard to principles of choice of law or conflict of laws.

     17.  Jurisdiction.  Each of the parties hereto hereby irrevocably  consents
and submits to the exclusive  jurisdiction  of the Supreme Court of the State of
New York and the United States  District Court for the Southern  District of New
York in connection with any suit,  action or other proceeding  arising out of or
relating to this Agreement or the transactions  contemplated hereby,  waives any
objection  to venue in the  County  of New  York,  State  of New  York,  or such
District  and agrees that  service of any  summons,  complaint,  notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of section 13.


                                       31

<PAGE>



     18. Remedies.  In the event of any actual or prospective  breach or default
by either party hereto,  the other party shall be entitled to equitable  relief,
including  remedies  in  the  nature  of  rescission,  injunction  and  specific
performance.  All remedies  hereunder  are  cumulative  and not  exclusive,  and
nothing  herein shall be deemed to prohibit or limit either party from  pursuing
any other  remedy or relief  available  at law or in equity  for such  actual or
prospective breach or default, including the recovery of damages.

     19.  Attorneys'  Fees.  The prevailing  party in any suit,  action or other
proceeding  arising  out of or relating to this  Agreement  or the  transactions
contemplated  hereby,  shall be  entitled  to recover  its costs and  reasonable
attorneys' fees.

     20. Severability. The provisions hereof are severable and in the event
that any  provision  of this  Agreement  shall be  determined  to be  invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court,  remain in full force and effect,  and any invalid or  unenforceable
provision  shall be deemed,  without  further  action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.

     21. Counterparts.  This agreement may be executed in counterparts,  each of
which shall be deemed an original and which  together  shall  constitute one and
the same agreement.

     22. Successors. This agreement shall inure to the benefit of and be binding
upon the Underwriters,  the Company and their respective successors and assigns.
Nothing  expressed  or  mentioned  in this  Agreement  is  intended  or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein  contained,  this
Agreement and all  conditions  and  provisions  hereof being  intended to be and
being for the sole and exclusive  benefit of such persons and for the benefit of
no other  person  except that (i) the  indemnities  of the Company  contained in
section 8 of this  Agreement  shall  also be for the  benefit  of any  person or
persons who control any Underwriter  within the meaning of section 15 of the Act
or section 20 of the Exchange Act and (ii) the  indemnities of the  Underwriters
contained  in section 8 of this  Agreement  shall also be for the benefit of the
directors  of the  Company,  the  officers  of the  Company  who have signed the
Registration  Statement and any person or persons who control the Company within
the  meaning of section 15 of the Act or  section  20 of the  Exchange  Act.  No
purchaser  of  Securities  from the  Underwriters  shall be  deemed a  successor
because of such purchase.

     23.  Titles and  Captions.  The titles and  captions  of the  articles  and
sections of this  Agreement are for  convenience of reference only and do not in
any way define or  interpret  the intent of the  parties or modify or  otherwise
affect any of the provisions hereof.

     24. Grammatical Conventions. Whenever the context so requires, each pronoun
or verb used herein  shall be  construed in the singular or the plural sense and
each  capitalized  term  defined  herein and each  pronoun  used herein shall be
construed in the masculine, feminine or neuter sense.

     25.  References.  The terms  "herein,"  "hereto,"  "hereof,"  "hereby," and
"hereafter,"  and other terms of similar  import,  refer to this  Agreement as a
whole, and not to any Article, Section or other part hereof.

                                       32

<PAGE>



     26. Entire Agreement.  This Agreement  embodies the entire agreement of the
parties  hereto with respect to the subject  matter  hereof and  supersedes  any
prior agreement, commitment or arrangement relating thereto.

     If the foregoing  correctly sets forth our  understanding,  please indicate
your acceptance thereof in the space provided below for that purpose,  whereupon
this  letter  shall  constitute  an  agreement   binding  the  Company  and  the
Underwriters.

                                            Very truly yours,

                                            PROTOSOURCE


                                            By:
                                                --------------------------------
                                            Name:    Raymond J. Meyers
                                            Title:   Chief Executive Officer

The  foregoing  agreement is hereby  confirmed and accepted as of the date first
above written.

ANDREW ALEXANDER WISE & COMPANY, INC.
As representative of the several Underwriters
listed in  Schedule 1 annexed hereto.

By:
   ------------------------------------------
      Name:    Andreas Zigouras
      Title:   President


                                       33
<PAGE>

                                                                      Schedule 1

                                  UNDERWRITERS

- --------------------------------------------------------------------------------
Name                        Shares of Common Stock               Warrants
- --------------------------------------------------------------------------------
Andrew Alexander Wise &
Company, Inc.
- --------------------------------------------------------------------------------
[
             ]
- --------------------------------------------------------------------------------
[
             ]
- --------------------------------------------------------------------------------
[
             ]
- --------------------------------------------------------------------------------
                                   900,000                       900,000
                                   =======                      =========

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

                                       34

<PAGE>

                                                                      Schedule 2

                                  SUBSIDIARIES






                                       35

<PAGE>



                                                                      Schedule 3

                                STOCKHOLDERS LIST



















                                       36





                                   PROTOSOURCE

                                       AND

                      ANDREW ALEXANDER WISE & COMPANY, INC.

                                  UNDERWRITER'S
                                WARRANT AGREEMENT


<PAGE>



     Underwriter's WARRANT AGREEMENT dated as of _________________by and between
ProtoSource  (the  "Company")  and Andrew  Alexander  Wise & Company,  Inc. (the
"Underwriter").

                              Preliminary Statement
                              ---------------------

     The  Underwriter  has agreed,  pursuant to an  underwriting  agreement (the
"Underwriting   Agreement")  dated   ____________________,   1997,  between  the
Underwriter  and the Company,  to act as the  Underwriter in connection with the
Company's  proposed  initial public  offering of 900,000 shares of the Company's
common  stock,  par value  $0.001 per share (the  "Common  Stock")  and  900,000
Redeemable Common Stock Purchase Warrants (the "Warrants"), at an initial public
offering  price of $_______ per share of Common Stock and $____ per Warrant (the
"Initial Public Offering").  The Company proposes to issue to the Underwriter at
the  closing  of the  Initial  Public  Offering  as  part  of the  Underwriter's
compensation in connection therewith, warrants (the "Underwriter's Warrants") to
purchase an aggregate of 90,000 shares of Common Stock and/or  90,000  Warrants.
The  Warrants  being  offered in the Initial  Public  Offering  and the Warrants
purchasable upon exercise of the Underwriter's Warrants will be identical in all
respects and will be issued  pursuant to, and governed by, the  provisions  of a
Warrant  Agreement  among the  Company,  the  Underwriter  and  Corporate  Stock
Transfer Co., as Warrant Agent (the "Warrant  Agreement").  NOW,  THEREFORE,  in
consideration of the premises,  the payment by the Underwriter to the Company of
Ten  Dollars  ($10.00),  the  agreements  herein  set forth  and other  good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged, the parties hereto agree as follows:


<PAGE>



     1. Grant.  The  Holders (as defined in Section 3 below) are hereby  granted
the right to purchase,  at any time from  ______________,  1998 until 5:00 p.m.,
New York City time,  on  _____________,  2003 an aggregate  of 90,000  shares of
Common Stock and/or 90,000  Warrants,  at an initial  purchase price of $_______
per share of Common  Stock  (subject  to  adjustment  as  provided  in Section 6
hereof) and $_____ per Warrant (120% of the Initial Public Offering price of the
Common Stock and Warrants, respectively), subject to the terms and conditions of
this Agreement.

     2.  Warrant  Certificates.  The warrant  certificates  (the  "Underwriter's
Warrant  Certificates")  to be delivered  pursuant to this Agreement shall be in
the form set forth in Exhibit A attached  hereto  and made a part  hereof,  with
such appropriate  insertions,  omissions,  substitutions and other variations as
required or permitted by this Agreement.

     3.  Exercise of  Underwriter's  Warrants.  The  Underwriter's  Warrants are
exercisable during the term set forth in Section 1 hereof and the Purchase Price
(as  hereinafter  defined) is payable by certified  or cashier's  check or money
order  payable  in lawful  money of the  United  States.  Upon  surrender  of an
Underwriter's  Warrant Certificate with the annexed Form of Election to Purchase
duly  executed,  together  with payment of the Purchase  Price for the shares of
Common Stock or Warrants issuable upon exercise thereof (and such other amounts,
if any, arising pursuant to Section 4 hereof) at the Company's  principal office
in New York  (presently  located  at 2300  Tulare  Street,  Suite  210,  Fresno,
California 93721), the registered holder of an Underwriter's Warrant Certificate
("Holders"  or  "Holders")  shall  be  entitled  to  receive  a  certificate  or
certificates  for the  shares of Common  Stock or  Warrants  so  purchased.  The
purchase  rights  represented  by each  Underwriter's  Warrant  Certificate  are
exercisable at the option of the Holders thereof, in whole or in part, as to the

                                        2

<PAGE>



whole number of shares of Common Stock or Warrants  purchasable  therewith  (but
not as to fractions  thereof).  In the case of the purchase of less than all the
shares  of  Common  Stock  or  Warrants  purchasable  upon the  exercise  of the
Underwriter's Warrants represented by an Underwriter's Warrant Certificate,  the
Company shall cancel the Underwriter's  Warrant Certificate  represented thereby
upon the  surrender  thereof and shall  execute and deliver a new  Underwriter's
Warrant Certificate of like tenor for the number of Underwriter's Warrants which
have not been exercised.

     4.  Issuance  of  Certificates.  Upon  the  exercise  of the  Underwriter's
Warrants  and  payment  of  the  Purchase  Price   therefor,   the  issuance  of
certificates  representing the shares of Common Stock or Warrants  issuable upon
exercise  thereof,  shall be made  forthwith  (and in any event  within five (5)
business days thereafter) without further charge to the Holder thereof, and such
certificates  shall  (subject to the  provisions  of Sections 5 and 7 hereof) be
issued  in the name of,  or in such  names as may be  directed  by,  the  Holder
thereof;  provided,  however,  that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such  certificates in a name other than that of the Holder,  and
the Company shall not be required to issue or deliver such  certificates  unless
or until the person or persons  requesting the issuance  thereof shall have paid
to the  Company  the  amount  of  such  tax or  shall  have  established  to the
satisfaction  of the  Company  that such tax has been  paid.  The  Underwriter's
Warrant  Certificates  and the  certificates  representing  the shares of Common
Stock or  Warrants  (and such  other  securities,  property  or rights as may be
represented by certificates) issuable upon exercise thereof shall be executed on
behalf of the Company by the manual or facsimile  signature of the then Chairman
or Vice Chairman of the  Board of Directors, Chief  Executive Officer, President

                                        3

<PAGE>



or Vice  President of the Company under its corporate seal  reproduced  thereon,
attested  to by the  manual or  facsimile  signature  of the then  Secretary  or
Assistant  Secretary  or  Treasurer  or  Assistant  Treasurer  of  the  Company.
Underwriter's  Warrant  Certificates shall be dated the date of issuance thereof
by the  Company  upon  initial  issuance,  transfer or  exchange,  or in lieu of
mutilated, lost, stolen or destroyed Underwriter's Warrant Certificates.

     5.  Restriction  On Transfer of  Underwriter's  Warrants.  The Holder of an
Underwriter's  Warrant  Certificate (and its Permitted  Transferees,  as defined
below), by its acceptance  thereof,  covenants and agrees that the Underwriter's
Warrants  are  being  acquired  as an  investment  and  not  with a view  to the
distribution thereof; that the Underwriter's Warrants may be sold,  transferred,
assigned,  hypothecated  or otherwise  disposed of, in whole or in part,  to any
person  (a  "Permitted   Transferee"),   provided  such  transfer,   assignment,
hypothecation or other  disposition is made in accordance with the provisions of
the Securities Act of 1933, as amended (the "Act"); and provided,  further, that
until  ____________,  1999 [one year following the effective date of the Initial
Public Offering] only officers and partners of the  Underwriter,  or any selling
group member in the Initial Public  Offering and their  respective  officers and
partners, shall be Permitted Transferees.

     6. Purchase Price. The initial purchase price of the Underwriter's Warrants
shall be $_____ per share of Common Stock (the "Common  Stock  Purchase  Price")
and $_____ per  Warrant.  The Common  Stock  Purchase  Price shall be subject to
adjustment  in  accordance  with the  provisions  of  Section  9 of the  Warrant
Agreement, which provisions are hereby incorporated by reference herein and made
a part hereof.

                                        4

<PAGE>



     7. Registration Rights.

     (a)  Registration  Under  the  Securities  Act of 1933.  The  Underwriter's
Warrants  have not been  registered  under the Act.  The  Underwriter's  Warrant
Certificates shall bear the following legend:

          The securities represented by this certificate have not been
          registered under the Securities Act of 1933 (the "Act"), and
          may not be offered for sale or sold  except  pursuant to (i)
          an effective  registration  statement under the Act, or (ii)
          an opinion of counsel,  if such opinion  shall be reasonably
          satisfactory  to counsel to the  issuer,  that an  exemption
          from registration under such Act is available.

     (b)  Demand  Registration.  (i) At any  time  commencing  one (1)  year and
expiring seven (7) years after the effective date of the Company's  Registration
Statement  relating to the Initial Public Offering (the "Effective  Date"),  the
Holders of a majority  (as  hereinafter  defined) of the shares of Common  Stock
purchased and purchasable  upon exercise of the  Underwriter's  Warrants and the
Warrants  purchasable  therewith  shall have the right,  exercisable  by written
notice to the Company,  to have the Company prepare and file with the Securities
and  Exchange  Commission  (the  "Commission"),  solely on one (1)  occasion,  a
registration  statement on Form SB-2 (or other appropriate form), and such other
documents,  including a  prospectus,  as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Securities Act, so as to permit a public offering and sale for
a period of nine (9) months of the shares of Common Stock and Warrants purchased
or  purchasable  by such  Holders  and any other  Holders  of the  Underwriter's
Warrants  upon  exercise  of  the   Underwriter's   Warrants  and  the  Warrants
purchasable  therewith  (  such  shares  of  Common  Stock  and  Warrants  being


                                        5

<PAGE>


hereinafter  referred to as the  "Registrable  Securities").  The Holders of the
Underwriter's   Warrants  may  demand   registration   without   exercising  the
Underwriter's  Warrants,  and are never  required to exercise  same. The Company
covenants and agrees to give written  notice of any  registration  request under
this Section 7(b) to all other registered Holders of the Underwriter's  Warrants
and the Registrable Securities within ten (10) days from the date of the receipt
of any such  registration  request  and upon the  written  request of any Holder
within  fifteen  (15) days  after  receipt  of such  notice to  include  in such
registration  statement,  the  Registrable  Securities  of such Holder.  As used
herein,  the term  "Majority"  in reference to the Holders of the  Underwriter's
Warrants  shall  mean in excess of fifty  percent  (50%) of the shares of Common
Stock issued or issuable  upon  exercise of the  Underwriter's  Warrants and the
Warrants  purchasable  therewith  that  (i) are  not  held  by the  Company,  an
affiliate,  officer,  creditor,  employee  or  agent  thereof  or any  of  their
respective affiliates, members of their family, persons acting as nominees or in
conjunction therewith,  or (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.

     (c) Piggyback  Registration.  If, at any time within the period  commencing
one (1) year and expiring five (5) years after the Effective  Date,  the Company
should file a registration  statement  with the Commission  under the Securities
Act  (other  than in  connection  with a merger  or other  business  combination
transaction  or pursuant to Form S-8) it will give written  notice by registered
mail,  at least  thirty  (30)  calendar  days  prior to the  filing of each such
registration  statement,  to the  Underwriter  and to all other  Holders  of the
Underwriter's  Warrants and the shares of Common Stock and Warrants purchased or
purchasable  upon exercise  thereof of its intention to do so. If the Holders of
the Registrable  Securities  notify the Company within twenty (20) calendar days
after  receipt  of any  such  notice  of its or  their  desire  to  include  any
Registrable Securities in such proposed

                                        6

<PAGE>



registration statement,  the Company shall afford the Holders of the Registrable
Securities the opportunity to have such Registrable  Securities included in such
registration statement,  unless the Underwriter for each proposed objects to the
inclusion of the Registrable Securities in such registration statement. However,
in such event,  the Company  will,  within six (6) months of  completion of such
underwritten  offering,  file at the  expense  of the  Company,  a  registration
statement  so as to  permit  a  public  offering  and  sale  of the  Registrable
Securities  so  excluded  for a period  of nine (9)  months,  which  shall be in
addition to any registration  statement required to be filed pursuant to Section
7(b).  Notwithstanding the provisions of this Section 7(c) and the provisions of
Section  7(d),  the Company shall have the right at any time after it shall have
given written notice  pursuant to this Section 7(c)  (irrespective  of whether a
written  request for inclusion of any such  securities  shall have been made) to
elect not to file any such proposed registration  statement,  or to withdraw the
same after the filing but prior to the effective date thereof.

     (d)  Covenants of the Company With Respect to  Registration.  In connection
with  any  registrations  under  Sections  7(b)  and 7(c)  hereof,  the  Company
covenants and agrees as follows:

          (1) The  Company  shall use its best  efforts  to file a  registration
statement within forty-five (45) calendar days of receipt of any demand therefor
pursuant to section  7(b);  provided,  however,  that the  Company  shall not be
required to produce  audited or unaudited  financial  statements  for any period
prior to the date such financial statements are required to be filed in a report
on Form 10-KSB or Form  10-QSB,  as the case may be. The  Company  shall use its
best  efforts  to have any  registration  statement  declared  effective  at the
earliest  possible  time,  and  shall  furnish  each  Holder  desiring  to  sell
Registrable  Securities  such  number of  prospectuses  as shall  reasonably  be
requested.

                                        7

<PAGE>



          (2) The Company  shall pay all costs  (excluding  fees and expenses of
Holders'  counsel and any  underwriting  discounts or selling fees,  expenses or
commissions),  fees and expenses in connection with any  registration  statement
filed pursuant to Sections 7(b) and 7(c) hereof including,  without  limitation,
the Company's legal and accounting fees,  printing  expenses,  blue sky fees and
expenses.  If the Company  shall fail to comply with the  provisions  of Section
7(d),  the Company  shall,  in addition to any other  equitable  or other relief
available  to the  Holders,  be liable  for any or all  incidental  and  special
damages and damages due to loss of profit  sustained  by the Holders  requesting
registration of their Registrable Securities.

          (3) The Company will take all  necessary  action which may be required
to qualify or register the  Registrable  Securities  included in a  registration
statement  for offering and sale under the  securities  or blue sky laws of such
states as  reasonably  are  requested by the Holders,  provided that the Company
shall not be  obligated  to  execute or file any  general  consent to service of
process or to qualify as a foreign  corporation to do business under the laws of
any such jurisdiction.

          (4)  The  Company  shall  indemnify  the  Holders  of the  Registrable
Securities to be sold pursuant to any registration statement and each person, if
any,  who  controls  such  Holders  within  the  meaning  of  Section  15 of the
Securities  Act or Section  20(a) of the  Securities  Exchange  Act of 1934,  as
amended  (the  "Exchange  Act"),  against all loss,  claim,  damage,  expense or
liability   (including  all  expenses   reasonably  incurred  in  investigating,
preparing or defending  against any claim  whatsoever)  to which any of them may
become subject under the Securities Act, the Exchange Act or otherwise,  arising
from such registration statement,  but only to the same extent and with the same
effect as the  provisions  pursuant to which the Company has agreed to indemnify
the Underwriter  contained in Section 8 of the Underwriting  Agreement,  and the
Holders shall  indemnify the Company to the same extent and with the same effect


                                        8

<PAGE>


as the provisions pursuant to which the Underwriter have agreed to indemnify the
Company contained in Section 8 of the Underwriting Agreement.

          (5) The Holders of the Registrable Securities to be sold pursuant to a
registration  statement,  and their successors and assigns,  shall indemnify the
Company,  its officers and directors  and each person,  if any, who controls the
Company  within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, against all loss, claim,  damage or expense or liability to
which they may become  subject  under the  Securities  Act,  the Exchange Act or
otherwise,  arising from information  furnished by or on behalf of such Holders,
or their  successors  or assigns,  for specific  inclusion in such  registration
statement  to the  same  extent  and  with the  same  effect  as the  provisions
contained  in  Section 8 of the  Underwriting  Agreement  pursuant  to which the
Underwriter have agreed to indemnify the Company.

          (6)  Nothing  contained  in  this  Agreement  shall  be  construed  as
requiring the Holders to exercise their Underwriter's  Warrants (or the Warrants
purchasable  upon  exercise   thereof)  prior  to  the  initial  filing  of  any
registration statement or the effectiveness thereof.

          (7) The Company shall not be entitled to include any securities  other
than the Registrable  Securities in any registration statement filed pursuant to
Section  7(b)  hereof  without  the prior  written  consent of the  Holders of a
Majority of the Registrable Securities.

          (8) The  Company  shall  furnish to a  designated  Underwriter  of the
Holders participating in the offering and to each Underwriter,  if any, a signed
counterpart,  addressed  to such  Holder or  Underwriter  of (i) an  opinion  of
counsel to the Company,  dated the effective date of such registration statement
(and if such registration relates to an underwritten public offering, an opinion
dated the date of the  closing  under the  underwriting  agreement),  and (ii) a
"cold comfort"  letter dated the effective date of such  registration  statement


                                        9

<PAGE>



(and, if such registration  relates to an underwritten public offering, a letter
dated the date of the closing under the  underwriting  agreement)  signed by the
independent  public  accountants  who  have  issued a  report  on the  Company's
financial   statements   included   in   such   registration    statement   (the
"Accountants"),  in each  case  covering  substantially  the same  matters  with
respect to such  registration  statement (and the prospectus  included  therein)
and, in the case of the  accountants'  "cold  comfort"  letter,  with respect to
events subsequent to the date of such financial  statements,  as are customarily
covered in opinions of issuer's  counsel  and in "cold  comfort"  letters,  with
respect to events  subsequent to the date of such financial  statements,  as are
customarily  covered in  opinions  of  issuer's  counsel  and in "cold  comfort"
letters delivered to Underwriter in underwritten public offerings of securities.

          (9) The Company shall as soon as practicable  after the effective date
of the registration statement make "generally available to its security holders"
(within the meaning of Rule 158 under the Act) an earnings statement (which need
not be audited)  complying with Section ll(a) of the Securities Act and covering
a period of at least 12 consecutive months beginning after the effective date of
the registration statement.


          (10) The Company shall deliver  promptly to each Holder  participating
in the offering  requesting the correspondence  described below and any managing
Underwriter copies of all correspondence between the Commission and the Company,
its counsel or Accountants with respect to the registration statement and permit
each Holder and Underwriter to do such  investigation,  upon reasonable  advance
notice,   with  respect  to  information   contained  in  or  omitted  from  the
registration   statement  as  it  deems  reasonably  necessary  to  comply  with
applicable  securities  laws or rules of the National  Association of Securities
Dealers,  Inc.  ("NASD").  Such  investigation  shall  include  access to books,



                                       10

<PAGE>


records and properties and  opportunities to discuss the business of the Company
with its officers and  Underwriters of the  Accountants,  all to such reasonable
extent  and at such  reasonable  times  and as often as any  such  Holder  shall
reasonably request.


          (11) The Company shall enter into an  underwriting  agreement with the
managing  Underwriter  selected  for such  underwriting  by  Holders  holding  a
Majority  of  the  Registrable  Securities  requested  to be  included  in  such
underwriting;  provided,  however,  that (i) such managing  Underwriter shall be
reasonably acceptable to the Company, except that in connection with an offering
for which the Holders have  piggyback  rights,  the Company  shall have the sole
right  to  select  the  managing  Underwriter,  and (ii)  the  Holders  shall be
responsible  for any  selling  fees  or  commissions  in  connection  with  such
underwriting.  Such  underwriting  agreement  shall be  satisfactory in form and
substance  to the  Company,  a  Majority  of  such  Holders  and  such  managing
Underwriter, and shall contain such representations, warranties and covenants by
the Company and such other terms as are  customarily  contained in agreements of
that type used by the managing Underwriter.  The Holders shall be parties to any
underwriting  agreement  relating to an underwritten  sale of their  Registrable
Securities   and  may,   at  their   option,   require   that  any  or  all  the
representations,  warranties  and covenants of the Company to or for the benefit
of such  Underwriter  shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any  representations or warranties to
or agreements with the Company or the  Underwriter  except as they may relate to
such Holders and their intended methods of distribution.

     (e) Further  Registrations.  The Company will cooperate with the Holders of
the Registrable Securities in preparing and signing any registration  statement,
in addition to the registration statements discussed above, required in order to
sell or transfer the Underwriter's Securities  and will  supply  all information

                                       11

<PAGE>



required  therefor,  but such  additional  registration  statement  expenses  or
offering statement expenses will be prorated between the Company and the Holders
of the  Registrable  Securities  according to the  aggregate  sales price of the
securities being issued.  The provisions of Section 7(d) shall apply to any such
registration statement.

          8.   Exchange   and   Replacement   of  Warrant   Certificates.   Each
Underwriter's  Warrant  Certificate is exchangeable  without  expense,  upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Underwriter's  Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of shares of
Common Stock and/or Warrants in such denominations as shall be designated by the
Holders  thereof at the time of such  surrender.  Upon receipt by the Company of
evidence  reasonably  satisfactory  to it of the  loss,  theft,  destruction  or
mutilation of any Underwriter's Warrant Certificate, and, in case of loss, theft
or  destruction,  of indemnity or security  reasonably  satisfactory  to it, and
reimbursement to the Company of all reasonable expenses incidental thereto,  and
upon surrender and cancellation of the Underwriter's  Warrant  Certificates,  if
mutilated,  the  Company  will  make and  deliver  a new  Underwriter's  Warrant
Certificate of like tenor, in lieu thereof.

          9.  Elimination  of  Fractional  Interests.  The Company  shall not be
required to issue certificates  representing fractions of shares of Common Stock
upon the  exercise of the  Underwriter's  Warrants,  nor shall it be required to
issue scrip or pay cash in lieu of fractional interests; provided, however, that
if a Holder exercises all Underwriter's  Warrants held of record by such Holder,
the fractional  interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock.

                                       12

<PAGE>



          10.  Reservation  and Listing of Securities.  The Company shall at all
times reserve and keep available out of its  authorized  shares of Common Stock,
solely for the  purpose  of  issuance  upon the  exercise  of the  Underwriter's
Warrants, such number of shares of Common Stock or other securities,  properties
or rights as shall be issuable upon the exercise thereof.  The Company covenants
and agrees  that,  upon  exercise of  Underwriter's  Warrants and payment of the
Purchase  Price  therefor,  all the shares of Common Stock and other  securities
issuable  upon such  exercise  shall be duly and  validly  issued,  fully  paid,
non-assessable and not subject to the preemptive rights of any stockholder.  The
Company further covenants and agrees that as long as the Underwriter's  Warrants
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock and Warrants to be listed  (subject to official notice of issuance) on all
securities  exchanges on which the Common  Stock and the Warrants  issued in the
Initial Public Offering may then be listed or quoted.

          11. Notices to  Underwriter's  Warrant Holders.  Nothing  contained in
this  Agreement  shall be construed as conferring  upon the Holders the right to
vote or to  consent  or to  receive  notice as a  stockholder  in respect of any
meetings of stockholders  for the election of directors or any other matter,  or
as having any rights whatsoever as a stockholder of the Company. If, however, at
any  time  prior to the  expiration  of the  Underwriter's  Warrants  and  their
exercise, any of the following events shall occur:

     (a) the Company  shall take a record of the holders of its shares of Common
Stock for the purpose of  entitling  them to receive a dividend or  distribution
payable  otherwise  than in cash,  or a cash  dividend or  distribution  payable
otherwise  than  out of  current  or  retained  earnings,  as  indicated  by the
accounting  treatment  of such  dividend  or  distribution  on the  books of the
Company; or

                                       13

<PAGE>



     (b) the  Company  shall  offer to all the  holders of its Common  Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or

     (c) a dissolution,  liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property,  assets and business as an entirety shall be proposed; then, in
any one or more of said events,  the Company  shall give written  notice of such
event at least fifteen (15) days prior to the date fixed as a record date or the
date of closing the transfer  books for the  determination  of the  stockholders
entitled to such dividend, distribution,  convertible or exchangeable securities
or  subscription  rights,  or  entitled  to vote on such  proposed  dissolution,
liquidation,  winding up or sale.  Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect  therein  shall not affect the validity of any action taken
in  connection  with the  declaration  or payment of any such  dividend,  or the
issuance of any convertible or exchangeable securities,  or subscription rights,
options or warrants,  or any proposed  dissolution,  liquidation,  winding up or
sale.

     12.  Notices.  All notices,  requests,  consents  and other  communications
hereunder  shall be in  writing  and shall be deemed to have been duly made when
delivered,  or mailed by registered or certified mail, return receipt requested:


          (a) If to the registered Holders of the Underwriter's Warrants, to the
address of such Holders as shown on the books of the Company; or

          (b) If to the  Company to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.

                                       14

<PAGE>


     13.  Supplements and  Amendments.  The Company and the Underwriter may from
time to time  supplement  or amend this  Agreement  without the  approval of any
Holders of Underwriter's  Warrant  Certificates  (other than the Underwriter) in
order to cure any ambiguity,  to correct or supplement  any provision  contained
herein which may be defective or inconsistent with any provisions  herein, or to
make any other  provisions in regard to matters or questions  arising  hereunder
which the Company and the  Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Underwriter's Warrant Certificates.

     14. Successors. All the covenants and provisions of this Agreement shall be
binding  upon and inure to the  benefit of the  Company,  the  Underwriter,  the
Holders and their respective successors and assigns hereunder.

     15. Termination. This Agreement shall terminate at the close of business on
__________________,  2005.  Notwithstanding  the foregoing,  the indemnification
provisions  of  Section  7 shall  survive  such  termination  until the close of
business on the expiration of any applicable statute of limitations.

     16.  Governing  Law:  Submission to  Jurisdiction.  This Agreement and each
Underwriter's  Warrant  Certificate  issued  hereunder  shall be  deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be construed in accordance  with the laws of said state without giving effect to
the rules of said state  governing  the  conflicts  of laws.  The  Company,  the
Underwriter  and the Holders  hereby agree that any action,  proceeding or claim
against it arising out of, or relating  in any way to, this  Agreement  shall be
brought  and  enforced  in the  courts of the State of New York or of the United
States of America for the Southern District of New York, and irrevocably submits


                                       15

<PAGE>



to such jurisdiction,  which jurisdiction shall be exclusive.  The Company,  the
Underwriter  and the Holders  hereby  irrevocably  waive any  objection  to such
exclusive  jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company,  the  Underwriter and the Holders (at the option
of the  party  bringing  such  action,  proceeding  or  claim)  may be served by
transmitting  a copy thereof,  by registered or certified  mail,  return receipt
requested,  postage prepaid, addressed to it at the address set forth in Section
12 hereof.  Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim.

     17.  Entire  Agreement;   Modification.   This  Agreement   (including  the
Underwriting  Agreement,  to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. Subject to Section 13, this Agreement may not
be  modified or amended  except by a writing  duly signed by the Company and the
Holders of a Majority of the Registrable Securities.

     18.  Severability.  If any provision of this Agreement  shall be held to be
invalid or unenforceable,  such invalidity or unenforceability  shall not affect
any other provision of this Agreement.

     19.  Captions.  The caption  headings of the Sections of this Agreement are
for  convenience  of  reference  only and are not  intended,  nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.

     20.  Benefits  of this  Agreement.  Nothing  in  this  Agreement  shall  be
construed  to give to any person or  corporation  other than the Company and the
Underwriter  and any  other  registered  Holders  of the  Underwriter's  Warrant
Certificates or Registrable  Securities any legal or equitable right,  remedy or


                                       16

<PAGE>


claim  under  this  Agreement,  and  this  Agreement  shall  be for the sole and
exclusive  benefit of the Company and the  Underwriter  and any other Holders of
the Underwriter's Warrant Certificates or Registrable Securities.

     21.  Counterparts.  This  Agreement  may  be  executed  in  any  number  of
counterparts and each of such  counterparts  shall for all purposes be deemed to
be an original,  and such counterparts shall together constitute but one and the
same instrument.

     22. Binding  Effect.  This Agreement shall be binding upon and inure to the
benefit of the Company,  the  Underwriter  and their  respective  successors and
assigns  and  the  Holders  from  time  to  time  of the  Underwriters'  Warrant
Certificates.

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed, as of the day and year first above written. 


PROTOSOURCE


                                            By:
                                                -------------------------------
                                                 Raymond J. Meyers,
                                                 Chief Executive Officer


                                            ANDREW ALEXANDER WISE & CO.

                                            By:
                                                -------------------------------
                                                 Name:   Andreas Zigouras
                                                 Title:  President

                                       17

<PAGE>

                                    EXHIBIT A
                                    ---------


                                   PROTOSOURCE
                                   -----------

                               WARRANT CERTIFICATE



THE  SECURITIES  ISSUABLE  UPON  EXERCISE OF THE  WARRANTS  REPRESENTED  BY THIS
CERTIFICATE  MAY NOT BE  OFFERED OR SOLD  EXCEPT  PURSUANT  TO (i) AN  EFFECTIVE
REGISTRATION  STATEMENT  UNDER THE  SECURITIES  ACT OF 1933,  (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE  DISPOSITION  OF  SECURITIES),  OR (iii) AN OPINION OF  COUNSEL,  IF SUCH
OPINION  SHALL BE  REASONABLY  SATISFACTORY  TO COUNSEL FOR THE ISSUER,  THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.

THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.

             EXERCISABLE COMMENCING __________________, 1999 THROUGH
              5:00 P.M., NEW YORK CITY TIME ON _____________, 2003

                            No. UW-1 90,000 Warrants

     This Warrant  Certificate  certifies that Andrew  Alexander Wise & Company,
Inc., or registered  assigns,  is the  registered  holder of 90,000  Warrants to
purchase initially, at any time from  __________________,  1998 until 5:00 p.m.,
New York City time on  __________________  (the "Expiration Date"), 90,000 fully
paid and  non-assessable  shares of Common  Stock,  $.001 par value (the "Common
Stock"), of ProtoSource,  a California corporation (the "Company") at a purchase
price of $_____ per share (the "Common  Stock  Purchase  Price"),  and/or 90,000
Redeemable  Common Stock Purchase  Warrants  ("Warrants")  of the Company at the
purchase price of $_____ per Warrant (the "Warrant  Purchase  Price"),  upon the
surrender of this Warrant  Certificate  and payment of the  applicable  Purchase
Price at an office or agency of the Company,  but subject to the  conditions set
forth herein and in the warrant agreement dated as of  _____________,  1997 (the
"Warrant  Agreement")  between the Company and Andrew  Alexander Wise & Company,
Inc. (the "Underwriter"). Payment of the applicable Purchase Price shall be made
by  certified  or  cashier's  check or money  order  payable to the order of the
Company.

     No Warrant may be  exercised  after 5:00 p.m.,  New York City time,  on the
Expiration Date, at which time all Warrants  evidenced hereby,  unless exercised
prior thereto, shall thereafter be void.

                                       A-1

<PAGE>



     The  Warrants  evidenced  by this  Warrant  Certificate  are part of a duly
authorized  issue of Warrants issued pursuant to the Warrant  Agreement  between
the Company and the Underwriter,  which Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to for
a  description  of the rights,  limitation  of rights,  obligations,  duties and
immunities  thereunder  of the Company and the holders  (the words  "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.

     The Warrant  Agreement  provides that upon the occurrence of certain events
the  respective  Purchase  Prices and the type  and/or  number of the  Company's
securities  issuable upon the exercise of this Warrant,  may, subject to certain
conditions,  be adjusted. In such event, the Company will, at the request of the
holder,  issue  a new  Warrant  Certificate  evidencing  the  adjustment  in the
Purchase  Price and the  number  and/or  type of  securities  issuable  upon the
exercise of the Warrants;  provided, however, that the failure of the Company to
issue such new  Warrant  Certificates  shall not in any way  change,  alter,  or
otherwise  impair,  the  rights  of the  holder  as  set  forth  in the  Warrant
Agreement.

     Upon  due  presentment  for   registration  of  transfer  of  this  Warrant
Certificate at an office or agency of the Company, a new Warrant  Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other  governmental  charge  imposed in
connection with such transfer.

     Upon the  exercise  of less  than  all of the  Warrants  evidenced  by this
Certificate,  the  Company  shall  forthwith  issue to the  holder  hereof a new
Warrant Certificate representing such number of unexercised Warrants.

     The  Company  may deem and treat  the  registered  holder(s)  hereof as the
absolute owner(s) of this Warrant Certificate  (notwithstanding  any notation of
ownership  or other  writing  hereon  made by  anyone),  for the  purpose of any
exercise hereof,  and of any distribution to the holder(s)  hereof,  and for all
other  purposes,  and the  Company  shall not be  affected  by any notice to the
contrary.

     All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.

     IN WITNESS WHEREOF, the undersigned has executed this certificate this ____
day of __________________, 1997.

                                          PROTOSOURCE

                                          By:
                                              ----------------------------------
                                               Raymond J. Meyers
                                               Chief Executive Officer

ATTEST

By:
   ---------------------------
            Secretary

                                       A-2

<PAGE>



                               FORM OF ASSIGNMENT

             (To be executed by the registered holder if such holder
                  desires to transfer the Warrant Certificate.)

     FOR VALUE RECEIVED hereby sells, assigns and transfers unto

                  (Please print name and address of transferee)



this Warrant  Certificate,  together with all right, title and interest therein,
and does hereby irrevocably  constitute and appoint his or its  attorney-in-fact
to transfer the within  Warrant  Certificate on the books of  ProtoSource,  with
full power of substitution.

Dated:

                                                Signature
                                                          ----------------------

                                                (Signature  must  conform in all
                                                respects  to the name of  holder
                                                as  specified on the face of the
                                                Warrant Certificate.)


                                                --------------------------------
                                                (Insert Social Security or Other
                                                 Identifying Number of Holder)



<PAGE>


                          FORM OF ELECTION TO PURCHASE

The undersigned  hereby  irrevocably elects to exercise the right represented by
this Warrant Certificate to purchase:

                   ___________shares of Common Stock

                   ___________Redeemable Common Stock Warrants

and  herewith  tenders in payment for such  securities  a certified or cashier's
check or money order  payable to the order of  ProtoSource  in the amount of $ ,
all  in  accordance  with  the  terms  hereof.  The  undersigned  requests  that
certificates  for such  securities be registered in the name of whose address is
and that such certificates be delivered to
                                                                whose address is
- --------------------------------------------------------.


Dated:


                                    Signature
                                               ---------------------------------
                                                (Signature  must  conform in all
                                                respects  to the name of  holder
                                                as  specified on the face of the
                                                Warrant Certificate.)



                                                --------------------------------
                                                (Insert Social Security or Other
                                                Identifying Number of Holder)








                                WARRANT AGREEMENT

                                      AMONG

                                   PROTOSOURCE
                            a California corporation,

                      ANDREW ALEXANDER WISE & COMPANY, INC.

                                       and

                         CORPORATE STOCK TRANSFER, INC.










<PAGE>


                                TABLE OF CONTENTS

Section                                                                  Page
- -------                                                                  ----

1.       APPOINTMENT OF WARRANT AGENT......................................1
2.       FORM OF WARRANT...................................................2
3.       COUNTERSIGNATURE AND REGISTRATION.................................3
4.       TRANSFERS AND EXCHANGES...........................................3
5.       EXERCISE OF WARRANTS; PAYMENT OF WARRANT
         SOLICITATION FEE..................................................4
6.       PAYMENT OF TAXES..................................................8
7.       MUTILATED OR MISSING WARRANTS.....................................8
8.       RESERVATION OF COMMON STOCK.......................................9
9.       ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES............10
10.      FRACTIONAL INTERESTS.............................................19
11.      NOTICES TO WARRANTHOLDERS........................................19
12.      DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS..................21
13.      REDEMPTION OF WARRANTS...........................................21
14.      MERGER OR CONSOLIDATION OR CHANGE OF NAME OF
         WARRANT AGENT....................................................22
15.      DUTIES OF WARRANT AGENT..........................................23
16.      CHANGE OF WARRANT AGENT..........................................25
17.      IDENTITY OF TRANSFER AGENT.......................................26
18.      NOTICES..........................................................27
19.      SUPPLEMENTS AND AMENDMENTS.......................................28
20.      NEW YORK CONTRACT................................................28
21.      BENEFITS OF THIS AGREEMENT.......................................28
22.      SUCCESSORS.......................................................29

                                        i

<PAGE>



     WARRANT  AGREEMENT,  dated  as of  July  30,  1997,  among  ProtoSource,  a
California  corporation (the "Company"),  (the  "Representative")  and Corporate
Stock Transfer, Inc., as warrant agent (the "Warrant Agent").

     The Company proposes to issue and sell through a public offering (the
"PO") underwritten by a group of underwriters (the  "Underwriters") for whom the
Representative is acting as the  representative,  an aggregate of 900,000 shares
of common stock,  $.001 par value (the "Common Stock"),  and 900,000  redeemable
Common Stock purchase  warrants  ("Warrants") and, pursuant to the Underwriters'
over-allotment  option (the  "Over-allotment  Option"),  an  additional  135,000
shares of Common Stock and 135,000 Warrants.

     In connection with the PO the Company  proposes to sell to the Underwriters
warrants  (the  "Underwriters'  Warrants")  to purchase  90,000 shares of Common
Stock and 90,000 Warrants.

     Each Warrant will entitle the holder to purchase one share of Common Stock.

     The Company desires the Warrant Agent to act on behalf of the Company,  and
the  Warrant  Agent is  willing  so to act,  in  connection  with the  issuance,
registration,  transfer,  exchange and exercise of the Warrants.  THEREFORE, the
parties hereto agree as follows:  Section 1.  APPOINTMENT OF WARRANT AGENT.  The
Company  hereby  appoints  the  Warrant  Agent to act as  Warrant  Agent for the
Company  in  accordance  with the  instructions  hereinafter  set  forth in this
Agreement,  and the Warrant  Agent  hereby  accepts such  appointment.  Upon the
execution  of this  Agreement,  certificates  representing  900,000  Warrants to
purchase an aggregate of 900,000 shares of Common Stock (subject to modification
and adjustment as provided in Section 9 hereof) shall be executed by the Company
and delivered to the Warrant Agent.

                                                         

<PAGE>



     Upon the exercise of the Over-allotment Option,  certificates  representing
up to 135,000  Warrants  to purchase an  aggregate  of 135,000  shares of Common
Stock  (subject to adjustment as provided in Section 9 hereof) shall be executed
by the Company and delivered to the Warrant Agent.

     Upon   exercise  of  the   Underwriters'   Warrant  as  provided   therein,
certificates  representing  90,000  Warrants to purchase an  aggregate of 90,000
shares of Common Stock  (subject to  adjustment as provided in Section 9 hereof)
shall be executed by the Company and delivered to the Warrant Agent.

     Section  2.  FORM OF  WARRANT.  The  text of the  Warrants  and the form of
election to purchase  Common Stock to be printed on the reverse thereof shall be
substantially as set forth in Exhibit A attached hereto (the provisions of which
are hereby  incorporated  herein).  All of the certificates for the Warrants may
have such letters,  numbers or other marks of  identification or designation and
such  legends,  summaries  or  endorsements  printed,  lithographed  or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions  of this  Agreement,  or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock  exchange  on which the  Warrants  may be listed,  or to conform to
usage.  Each Warrant shall  initially  entitle the registered  holder thereof to
purchase one share of Common Stock at a purchase price of four dollars and fifty
cents ($[ ]) (as adjusted as hereinafter provided,  the "Warrant Price"), at any
time during the period (the  "Exercise  Period")  commencing on July 1, 1999 and
expiring at 5:00 p.m. New York City time,  on July 29, 2003.  The Warrant  Price
and the number of shares of Common Stock  issuable upon exercise of the Warrants
are  subject  to  adjustment  upon the  occurrence  of  certain  events,  all as
hereinafter provided. The Warrants shall be executed on behalf of the Company by
the manual or facsimile  signature of the present or any future  Chairman of the
Board or Vice Chairman, Chief Executive Officer, President or  Vice President of

                                        2

<PAGE>



of the  Company,  and  attested to by the manual or  facsimile  signature of the
present or any future Secretary,  Treasurer, or Assistant Secretary or Assistant
Treasurer of the Company.

     Warrants  shall be dated as of the date of issuance  by the  Warrant  Agent
either upon initial issuance or upon transfer or exchange.

     In the event the aforesaid  expiration  date of the Warrants falls on a day
that is not a business day, then the Warrants shall expire at 5:00 p.m. New York
City time on the next  succeeding  business day. For purposes  hereof,  the term
"business  day"  shall mean any day other  than a  Saturday,  Sunday or a day on
which  banking  institutions  in New York  City,  New York,  are  authorized  or
obligated by law to be closed.

     Section 3.  COUNTERSIGNATURE  AND  REGISTRATION.  The  Warrant  Agent shall
maintain  books for the  transfer and  registration  of the  Warrants.  Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective  holders thereof.  The Warrants shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant  Agent then acting as warrant  agent  under this  Agreement)  and
shall not be valid for any purpose  unless so  countersigned.  The Warrants may,
however,  be so  countersigned  by the  Warrant  Agent (or by its  successor  as
Warrant Agent) and be delivered by the Warrant Agent,  notwithstanding  that the
persons whose manual or facsimile  signatures  appear thereon as proper officers
of the  Company  shall  have  ceased  to be such  officers  at the  time of such
countersignature or delivery.

     Section 4. TRANSFERS AND EXCHANGES.  The Warrant Agent shall transfer, from
time to time,  any  outstanding  Warrants upon the books to be maintained by the
Warrant Agent for that purpose,  upon  surrender  thereof for transfer  properly
endorsed or accompanied by appropriate  instructions for transfer. Upon any such
transfer, a  new Warrant shall be  issued to the transferee and  the surrendered

                                        3

<PAGE>



Warrant shall be canceled by the Warrant  Agent.  Warrants so canceled  shall be
delivered by the Warrant  Agent to the Company  from time to time upon  request.
Warrants may be exchanged at the option of the holder thereof,  when surrendered
at the office of the Warrant Agent,  for another  Warrant,  or other Warrants of
different  denominations  of like tenor and  representing  in the  aggregate the
right to purchase a like number of shares of Common Stock. No  certificates  for
Warrants shall be issued except for (i) Warrants  initially  issued hereunder in
accordance  with  Section 1 hereof,  (ii)  Warrants  issued upon any transfer or
exchange of Warrants,  (iii) Warrants  issued in  replacement  of lost,  stolen,
destroyed or mutilated  certificates for Warrants  pursuant to Section 7 hereof,
and (iv) at the option of the Board of  Directors  of the  Company,  Warrants in
such  form  as may be  approved  by its  Board  of  Directors,  to  reflect  any
adjustment  or change  in the  Warrant  Price or the  number of shares of Common
Stock  purchasable  upon  exercise of the  Warrants  made  pursuant to Section 9
hereof. 

     Section 5.  EXERCISE  OF  WARRANTS;  PAYMENT OF WARRANT  SOLICITATION  FEE.
Subject to the provisions of this Agreement,  each registered holder of Warrants
shall have the right, at any time during the Exercise  Period,  to exercise such
Warrants  and  purchase  the number of fully paid and  non-assessable  shares of
Common Stock specified in such Warrants upon  presentation and surrender of such
Warrants to the Company at the corporate  office of the Warrant Agent,  with the
exercise  form on the reverse  thereof  duly  executed,  and upon payment to the
Company of the Warrant  Price,  determined in accordance  with the provisions of
Sections 2, 9 and 10 of this Agreement, for the number of shares of Common Stock
in respect of which such  Warrants are then  exercised.  Payment of such Warrant
Price  shall  be made  in cash or by  certified  or bank  check  payable  to the
Company.  Subject to  Section 6 hereof,  upon such  surrender  of  Warrants  and
payment of the Warrant  Price,  the Warrant Agent on behalf of the Company shall


                                        4

<PAGE>


cause to be issued and  delivered  with all  reasonable  dispatch to or upon the
written  order of the  registered  holder of such  Warrants  and in such name or
names as such registered holder may designate, a certificate or certificates for
the number of full shares of Common Stock so purchased upon the exercise of such
Warrants.  Such certificate or certificates  shall be deemed to have been issued
and any person so  designated to be named therein shall be deemed to have become
a holder of record of such shares of Common Stock immediately prior to the close
of business on the date of the  surrender  of such  Warrants  and payment of the
Warrant Price as aforesaid.  The rights of purchase  represented by the Warrants
shall  be  exercisable  during  the  Exercise  Period,  at the  election  of the
registered  holders  thereof,  either as an  entirety or from time to time for a
portion of the shares  specified  therein  and, in the event that any Warrant is
exercised  in respect of less than all of the shares of Common  Stock  specified
therein  at any time  prior to the date of  expiration  of the  Warrants,  a new
Warrant or Warrants  will be issued to the  registered  holder for the remaining
number of shares of Common Stock  specified in the Warrant so  surrendered,  and
the Warrant Agent is hereby irrevocably authorized to countersign and to deliver
the  required  new Warrants  pursuant to the  provisions  of this Section and of
Section 3 of this Agreement and the Company,  whenever  requested by the Warrant
Agent,  will supply the Warrant  Agent with  Warrants duly executed on behalf of
the Company for such purpose. Upon the exercise of any one or more Warrants, the
Warrant Agent shall  promptly  notify the Company in writing of such fact and of
the  number of  securities  delivered  upon such  exercise  and,  subject to the
provisions  below,  shall cause all  payments of an amount,  in cash or by check
made payable to the order of the Company,  equal to the aggregate  Warrant Price
for such Warrants,  less any amounts payable to the Representative,  as provided
below, to be deposited  promptly in the Company's bank account.  The Company and
Warrant Agent shall determine, in their sole and absolute discretion,  whether a
Warrant  certificate has been properly  completed for exercise by the registered
holder thereof.

                                        5

<PAGE>


     Anything in the foregoing to the contrary notwithstanding,  no Warrant will
be exercisable  and the Company shall not be obligated to deliver any securities
pursuant  to the  exercise of any  warrant  unless at the time of  exercise  the
Company has filed with the  Securities  and Exchange  Commission a  registration
statement under the Securities Act of 1933, as amended (the "Act"), covering the
securities  issuable  upon  exercise  of  such  Warrant  and  such  registration
statement  shall have been  declared  and shall  remain  effective  and shall be
current,  and such shares have been  registered  or qualified or be exempt under
the  securities  laws of the state or other  jurisdiction  of  residence  of the
holder of such  Warrant and the  exercise  of such  Warrant in any such state or
other jurisdiction shall not otherwise be unlawful.  During the Exercise Period,
the Company shall use its best efforts to have a current registration  statement
on file with the  Securities  and Exchange  Commission  covering the issuance of
Common Stock  underlying  the Warrants so as to permit the Company to deliver to
each  person  exercising  a Warrant a  prospectus  meeting the  requirements  of
Section 10(a) (3) of the Act and otherwise complying therewith, and will deliver
such  prospectus to each such person.  During the Exercise  Period,  the Company
shall also use its best  efforts  to effect  appropriate  qualifications  of the
Common Stock  underlying  the  Warrants  under the laws and  regulations  of the
states and other  jurisdictions  in which the Common Stock and Warrants are sold
by the  Underwriters  in the PO in  order  to  comply  with  applicable  laws in
connection with the exercise of the Warrants.

          (a) If at the time of exercise of any Warrant (i) the market  price of
the Common Stock is not less than the then exercise  price of the Warrant,  (ii)
the exercise of the Warrant is solicited by the  Representative  at such time as
it is a member of the National Association of Securities Dealers,  Inc. ("NASD")
and  the Representative is designated in writing  by the holder  of the Warrants

                                        6

<PAGE>



as the NASD member  soliciting the exercise,  (iii) the Warrant is not held in a
discretionary account, (iv) disclosure of the compensation  arrangements is made
in documents  provided to the holders of the Warrants both at the time of the PO
and at the time of the exercise of the Warrants, and (v) the solicitation of the
exercise of the  Warrants is not in  violation  of Rule 101 of  Regulation M (as
such rule or any  successor  rule may be in effect as of such time of  exercise)
promulgated  under the  Securities  Exchange Act of 1934,  as amended,  then the
Representative  shall be entitled to receive from the Company following exercise
of each of the Warrants so exercised a fee of five percent (5%) of the aggregate
exercise price of the Warrants so exercised (the "Exercise  Fee") The procedures
for payment of the Exercise Fee are set forth in Section 5(b) below.

          (b) (i)  Within  five  (5)  days  after  the  last  day of each  month
commencing with _______,  1998, the Warrant Agent will notify the Representative
of each Warrant  certificate  which has been properly  completed for exercise by
holders of Warrants  during the last month.  The Warrant  Agent will provide the
Representative  with such  information,  in connection with the exercise of each
Warrant, as the Representative shall reasonably request.

               (ii) The Company  hereby  authorizes  and  instructs  the Warrant
Agent to deliver to the Representative the Exercise Fee, if payable,  in respect
of each exercise of Warrants,  promptly  after receipt by the Warrant Agent from
the Company of a check payable to the order of the  Representative in the amount
of  such  Exercise  Fee.  In the  event  that  an  Exercise  Fee is  paid to the
Representative  with respect to a Warrant which the Company or the Warrant Agent
determines  is not  properly  completed  for exercise or in respect of which the
Representative  is not  entitled to an Exercise  Fee,  the  Representative  will
return such Exercise Fee to the Warrant Agent which shall forthwith  return such
fee to the Company.

                                        7

<PAGE>



     The  Representative  and the Company may at any time during  business hours
examine  the  records of the  Warrant  Agent,  including  its ledger of original
Warrant  certificates  returned to the Warrant  Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of paragraph 5 (a)
and 5 (b) may not be  modified,  amended or deleted  without  the prior  written
consent of the Representative.

     Section 6.  PAYMENT OF TAXES.  The Company will pay any  documentary  stamp
taxes  attributable  to the initial  issuance of Common Stock  issuable upon the
exercise of Warrants;  provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any  transfer  involved in the
issuance or delivery of any  certificates  for shares of Common  Stock in a name
other than that of the  registered  holder of  Warrants in respect of which such
shares are issued,  and in such case  neither the Company nor the Warrant  Agent
shall be required to issue or deliver any certificate for shares of Common Stock
or any Warrant until the person  requesting the same has paid to the Company the
amount of such tax or has  established to the Company's  satisfaction  that such
tax has been paid or that no such tax is required to be paid.

     Section 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall
be mutilated,  lost,  stolen or destroyed,  the Company may, in its  discretion,
issue and the Warrant  Agent  shall  countersign  and  deliver in  exchange  and
substitution for and upon cancellation of the mutilated  Warrant,  or in lieu of
and in substitution for the Warrant lost, stolen or destroyed,  a new Warrant of
like tenor and  representing  an  equivalent  right or  interest,  but only upon
receipt of evidence  satisfactory  to the Company and the Warrant  Agent of such
loss, theft or destruction and, in case of a lost, stolen or destroyed  Warrant,
indemnity or bond, if requested,  also satisfactory to them. Applicants for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such reasonable charges as the Company or the Warrant Agent may prescribe.

                                        8

<PAGE>



     Section 8. RESERVATION OF COMMON STOCK.  There have been reserved,  and the
Company shall at all times keep reserved, out of its authorized shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase  represented  by the Warrants,  and the transfer agent
for the  shares of Common  Stock and  every  subsequent  transfer  agent for any
shares of Common Stock issuable upon the exercise of any of the aforesaid rights
of purchase are irrevocably authorized and directed at all times to reserve such
number  of  authorized  shares  of Common  Stock as shall be  required  for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the  certificates  for such
shares against payment of the Warrant Price therefor, validly issued, fully paid
and nonassessable and listed on any national  securities exchange or included in
any interdealer  automated quotation system upon or in which the other shares of
outstanding  Common Stock are then listed or  included.  The Company will keep a
copy of this  Agreement on file with the transfer agent for the shares of Common
Stock (which may be the Warrant Agent) and with every subsequent  transfer agent
for any  shares of Common  Stock  issuable  upon the  exercise  of the rights of
purchase  represented  by  the  Warrants.   The  Warrant  Agent  is  irrevocably
authorized  to  requisition  from time to time from such  transfer  agent  stock
certificates  required to honor  outstanding  Warrants.  The Company will supply
such transfer agent with duly executed stock certificates for that purpose.  All
Warrants  surrendered in the exercise of the rights thereby  evidenced  shall be
canceled by the Warrant Agent and shall  thereafter be delivered to the Company,
and such canceled Warrants shall constitute sufficient evidence of the number of
shares  of Common  Stock  which  have  been  issued  upon the  exercise  of such
Warrants.  Promptly  after the date of expiration  of the Warrants,  the Warrant
Agent shall certify to the Company the total  aggregate  amount of Warrants then
outstanding,  and  thereafter  no shares of Common  Stock  shall be  subject  to
reservation in respect of such Warrants which shall have expired.

                                        9

<PAGE>





     Section 9.  ADJUSTMENTS  OF WARRANT  PRICE AND  NUMBER OF  SECURITIES. 

          (a) Computation of Adjusted Price. Except as hereinafter  provided, in
case the  Company  shall,  at any time  after the date of closing of the sale of
securities pursuant to the PO (the "Closing Date"),  issue or sell any shares of
Common  Stock (other than the  issuances  or sales  referred to in Section 9 (f)
hereof),  including  shares held in the Company's  treasury and shares of Common
Stock issued upon the  exercise of any options,  rights or warrants to subscribe
for shares of Common  Stock  (other than the  issuances or sales of Common Stock
pursuant to rights to subscribe  for such Common Stock  distributed  pursuant to
Section  9(h)  hereof)  and  shares of Common  Stock  issued  upon the direct or
indirect  conversion or exchange of securities  for shares of Common Stock,  (i)
for a consideration per share less than the lesser of the (A) "Market Price" (as
defined in Section 9(a)(vi) hereof) per share of Common Stock on the trading day
immediately  preceding  such issuance or sale or (B) the Warrant Price in effect
immediately prior to such issuance or sale, or (ii) without consideration,  then
forthwith  upon such issuance or sale,  the Warrant  Price shall (until  another
such issuance or sale) be reduced to the price  (calculated  to the nearest full
cent) determined by multiplying the Warrant Price in effect immediately prior to
such issuance or sale by a fraction,  the numerator of which shall be the sum of
(1) the number of shares of Common Stock  outstanding  immediately prior to such
issuance or sale  multiplied  by the  Warrant  Price  immediately  prior to such
issuance or sale plus (2) the  consideration  received by the Company  upon such
issuance or sale,  and the  denominator of which shall be the product of (x) the
total  number of  shares of Common  Stock  outstanding  immediately  after  such
issuance or sale, multiplied by (y) the Warrant Price immediately prior to such

                                       10

<PAGE>



issuance or sale; provided, however, that in no event shall the Warrant Price be
adjusted  pursuant  to this  computation  to an amount in excess of the  Warrant
Price in effect  immediately prior to such computation,  except in the case of a
combination of outstanding  shares of Common Stock,  as provided by Section 9(c)
hereof.

     For the  purposes of any  computation  to be made in  accordance  with this
Section 9(a), the following provisions shall be applicable:

               (i) In case of the issuance or sale of shares of Common Stock for
a  consideration  part or all of which  shall be cash,  the  amount  of the cash
consideration  therefor shall be deemed to be the amount of cash received by the
Company  for such  shares  (or,  if shares of Common  Stock are  offered  by the
Company for subscription,  the subscription  price, or, if such securities shall
be sold to underwriters  or dealers for public  offering  without a subscription
offering, the public offering price) before deducting therefrom any compensation
paid or  discount  allowed  in the sale,  underwriting  or  purchase  thereof by
underwriters or dealers or others performing  similar services,  or any expenses
incurred in connection therewith.

               (ii)  In  case  of the  issuance  or  sale  (otherwise  than as a
dividend or other  distribution on any stock of the Company) of shares of Common
Stock for a  consideration  part or all of which  shall be other than cash,  the
amount of the  consideration  therefor other than cash shall be deemed to be the
value  of such  consideration  as  determined  in good  faith  by the  Board  of
Directors of the Company.

               (iii) Shares of Common Stock issuable by way of dividend or other
distribution  on any stock of the  Company  shall be deemed to have been  issued
immediately  after the opening of business on the day  following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.


                                       11

<PAGE>


               (iv) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed  to  involve  the   issuance  of  such  shares  of  Common  Stock  for  a
consideration  other than cash immediately prior to the close of business on the
date fixed for the  determination  of security  holders entitled to receive such
shares,  and the value of the  consideration  allocable to such shares of Common
Stock shall be determined as provided in subsection (ii) of this Section 9(a).

               (v) The  number  of  shares  of  Common  Stock  at any  one  time
outstanding shall include the aggregate number of shares issued or issuable upon
the exercise of options,  warrants or rights and upon the conversion or exchange
of convertible or exchangeable securities.

               (vi) As used herein,  the phrase "Market Price" at any date shall
be deemed to be the average of the last reported sale price, or, in case no such
reported  sale takes place on such day,  the average of the last  reported  sale
prices for the last three trading days, in either case as officially reported by
the  principal  securities  exchange  on which  the  Common  Stock is  listed or
admitted to trading or as reported by the Nasdaq Stock Market,  Inc.  ("Nasdaq")
or, if the Common  Stock is not listed or  admitted  to trading on any  national
securities  exchange or quoted on the Nasdaq  National  Market  ("NMS"),  but is
quoted on The Nasdaq  SmallCap Market or the NASD's  Electronic  Bulletin Board,
the closing bid  quotation as reported by Nasdaq the National  Quotation  Bureau
Incorporated or a similar organization,  or if the Common Stock is not quoted on
Nasdaq  or the  Electronic  Bulletin  Board,  as  determined  in good  faith  by
resolution  of  the  Board  of  Directors  of the  Company,  based  on the  best
information  available to it for the day immediately  preceding such issuance or
sale,  the day of such  issuance  or sale  and the day  immediately  after  such


                                       12

<PAGE>


issuance  or sale.  If the Common  Stock is listed or  admitted  to trading on a
national  securities exchange and also quoted on the Nasdaq National Market, the
Market Price shall be  determined  as herein above  provided by reference to the
prices reported in the Nasdaq National Market; provided that if the Common Stock
is listed or  admitted  to trading on the New York  Stock  Exchange,  the Market
Price shall be  determined  as herein above  provided by reference to the prices
reported by such exchange.  

          (b)  Options,   Rights,  Warrants  and  Convertible  and  Exchangeable
Securities.  Except in the case of the Company  issuing  rights to subscribe for
shares of Common  Stock  distributed  pursuant to Section  9(h)  hereof,  if the
Company  shall at any time  after the  Closing  Date  issue  options,  rights or
warrants  to  subscribe  for  shares of Common  Stock,  or issue any  securities
convertible  into or exchangeable for shares of Common Stock, in each case other
than the  issuances  or sales  referred  to in section 9 (f)  hereof,  (i) for a
consideration  per share less than the lesser of (a) the Warrant Price in effect
immediately prior to the issuance of such options,  rights or warrants,  or such
convertible or exchangeable  securities,  or (b) the Market Price on the trading
day  immediately  preceding such issuance,  or (ii) without  consideration,  the
Warrant  Price in effect  immediately  prior to the  issuance  of such  options,
rights or warrants, or such convertible or exchangeable securities,  as the case
may be,  shall be  reduced  to a price  determined  by making a  computation  in
accordance with the provisions of Section 9(a) hereof; provided that:

          (i) The aggregate  maximum  number of shares of Common  Stock,  as the
case may be,  issuable  under all the  outstanding  options,  rights or warrants
shall be deemed to be issued  and  outstanding  at the time all the  outstanding
options,  rights or warrants were issued,  and for a consideration  equal to the
minimum purchase price per share provided for in the options, rights or warrants
at the time of issuance,  plus the consideration  (determined in the same manner
as consideration  received on the issue or sale of shares in accordance with the
terms of Section 9(a)), if any, received by the Company for the options,  rights


                                       13

<PAGE>


of warrants, and if no minimum purchase price is provided in the options, rights
or warrants,  then the minimum purchase price shall be equal to zero;  provided,
however, that upon the expiration or other termination of the options, rights or
warrants, if any thereof shall not have been exercised,  the number of shares of
Common Stock deemed to be issued and outstanding pursuant to this subsection (b)
(and for the purposes of subsection (v) of Section 9(a) hereof) shall be reduced
by such  number of shares as to which  options,  warrants  or rights  shall have
expired or terminated unexercised,  and such number of shares shall no longer be
deemed to be issued and outstanding,  and the Warrant Price then in effect shall
forthwith be readjusted and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of shares actually issued
or issuable upon the exercise of those  options,  rights or warrants as to which
the exercise rights shall not have expired or terminated  unexercised.

               (ii) The  aggregate  maximum  number of  shares  of Common  Stock
issuable  upon  conversion  or  exchange  of  any  convertible  or  exchangeable
securities  shall be deemed to be issued and outstanding at the time of issuance
of  such  securities,  and  for  a  consideration  equal  to  the  consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Common Stock in  accordance  with the terms of Section 9 (a)) received
by the Company for such  securities,  plus the  minimum  consideration,  if any,
receivable  by the Company upon the  conversion or exchange  thereof;  provided,
however,  that upon the expiration or other  termination of the right to convert
or exchange such  convertible or exchangeable  securities  (whether by reason of
redemption  or  otherwise),  the  number  of  shares  deemed  to be  issued  and
outstanding  pursuant to this subsection (ii) (and for the purpose of subsection
(v) of Section  9(a)  hereof)  shall be  reduced by such  number of shares as to
which the  conversion  or  exchange  rights  shall have  expired  or  terminated
unexercised,  and such  number of shares  shall no longer be deemed to be issued
and  outstanding,  and the  Warrant  Price  then in effect  shall  forthwith  be


                                       14

<PAGE>



readjusted  and  thereafter be the price which it would have been had adjustment
been made on the basis of the  issuance  only of the shares  actually  issued or
issuable upon the conversion or exchange of those  convertible  or  exchangeable
securities as to which the conversion or exchange  rights shall not have expired
or  terminated  unexercised.  No  adjustment  will  be  made  pursuant  to  this
subsection  (ii)  upon  the  issuance  by  the  Company  of any  convertible  or
exchangeable securities pursuant to the exercise of any option, right or warrant
exercisable therefor, to the extent that adjustments in respect of such options,
rights or warrants were previously made pursuant to the provisions of subsection
(i) of this subsection 9 (b).

               (iii) If any change  shall occur in the price per share  provided
for in any of the options,  rights or warrants  referred to in subsection (i) of
this Section 9 (b), or in the price per share at which the  securities  referred
to in subsection (ii) of this Section 9(b) are convertible or  exchangeable,  or
if any such  options,  rights or warrants are  exercised at a price greater than
the minimum purchase price provided for in such options,  rights or warrants, or
any such  securities  are  converted  or  exercised  for more  than the  minimum
consideration  receivable by the Company upon such  conversion or exchange,  the
options,  rights or warrants or conversion or exchange  rights,  as the case may
be,  shall be deemed to have expired or  terminated  on the date when such price
change became effective in respect of shares not theretofore  issued pursuant to
the exercise or conversion or exchange thereof,  and the Company shall be deemed
to have issued upon such date new options,  rights or warrants or convertible or
exchangeable  securities  at the new price in  respect  of the  number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities;  provided,  however,
that no adjustment  shall be made pursuant to this subsection (iii) with respect
to any change in the price per share provided for in any of the options,  rights
or warrants  referred to in subsection  (b) (i) of this Section 9 (b), or in the


                                       15

<PAGE>


price per share at which the  securities  referred to in subsection  (b) (ii) of
this Section 9(b) are convertible or exchangeable, which change results from the
application of the anti-dilution  provisions thereof in connection with an event
for which, subject to subsection (iv) of this Section 9(f), an adjustment to the
Warrant  Price and the  number  of  securities  issuable  upon  exercise  of the
Warrants will be required to be made pursuant to this Section 9.

          (c) Subdivision and Combination. In case the Company shall at any time
after the Closing  Date  subdivide or combine the  outstanding  shares of Common
Stock,  the Warrant Price shall  forthwith be  proportionately  decreased in the
case of subdivision or increased in the case of combination.

          (d)  Adjustment  in Number of  Shares.  Upon  each  adjustment  of the
Warrant Price pursuant to the provisions of this Section 9, the number of shares
of Common Stock  issuable upon the exercise of the Warrants shall be adjusted to
the nearest full whole number by multiplying a number equal to the Warrant Price
in effect immediately prior to such adjustment by the number of shares of Common
Stock  issuable  upon  exercise  of  the  Warrants  immediately  prior  to  such
adjustment and dividing the product so obtained by the adjusted Warrant Price.

          (e)  Reclassification,  Consolidation,  Merger,  etc.  In  case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value,  or from no par value to par value, or as
a result of a subdivision or combination),  or in the case of any  consolidation
of the Company with, or merger of the Company into,  another  corporation (other
than a consolidation or merger which does not result in any  reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a  subdivision  or  combination  of such  shares  or a change in par  value,  as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an  entirety,  the Holder shall  thereafter  have the


                                       16

<PAGE>



right to  purchase  the kind and number of shares of stock and other  securities
and  property  receivable  upon such  reclassification,  change,  consolidation,
merger,  sale or  conveyance  as if the  Holder  were the owner of the shares of
Common Stock underlying the Warrants  immediately  prior to any such events at a
price equal to the product of (x) the number of shares issuable upon exercise of
the Warrants and (y) the Warrant Price in effect immediately prior to the record
date  for  such  reclassification,   change,  consolidation,   merger,  sale  or
conveyance as if such Holder had exercised the Warrant.

          (f) No Adjustment of Warrant Price in Certain  Cases.  Notwithstanding
anything  herein to the  contrary,  no  adjustment of the Warrant Price shall be
made:

               (i) Upon the issuance or sale of the Underwriters'  Warrants, the
shares  of  Common  Stock  or  Warrants   issuable  upon  the  exercise  of  the
Underwriters'  Warrants or the shares of Common Stock  issuable upon exercise of
the Warrants underlying the Underwriters' Warrants; or

               (ii) Upon the  issuance or sale of (A) the shares of Common Stock
or  Warrants  issued  by  the  Company  in  the PO  (including  pursuant  to the
Over-allotment Option) or other shares of Common Stock or warrants issued by the
Company upon consummation of the PO or, (B) the shares of Common Stock (or other
securities) issuable upon exercise of Warrants; or

               (iii) Upon (i) the issuance of options  pursuant to the Company's
stock  option  plan in effect  on the date  hereof or as  hereafter  amended  in
accordance  with the terms  thereof or any other  employee  or  executive  stock
option plan approved by  stockholders  of the Company or the sale by the Company
of any shares of Common Stock  pursuant to the exercise of any such options,  or
(ii) the sale by the  Company  of any  shares of Common  Stock  pursuant  to the
exercise  of any  options  or  warrants  issued and  outstanding  on the date of


                                       17

<PAGE>


closing of the sale of Common  Stock and  Warrants  pursuant to the PO; or (iii)
the issuance or sale by the Company of any shares of Common Stock in  connection
with any merger, acquisition or other business combination; or

               (iv) If the  amount  of said  adjustment  shall be less than five
cents (5(cent)) per share of Common Stock.

          (g)  Dividends  and Other  Distributions  with Respect to  Outstanding
Securities.  In the event that the  Company  shall at any time after the Closing
Date and prior to the exercise or expiration of all Warrants  declare a dividend
(other  than a dividend  consisting  solely of shares of Common  Stock or a cash
dividend  or  distribution  payable  out of current  or  retained  earnings)  or
otherwise  distribute  to the  holders  of  Common  Stock  any  monies,  assets,
property, rights, evidences of indebtedness,  securities (other than such a cash
dividend  or  distribution  or  dividend  consisting  solely of shares of Common
Stock),  whether  issued by the Company or by another  person or entity,  or any
other thing of value,  the Holders of the unexercised  Warrants shall thereafter
be  entitled,  in  addition  to the shares of Common  Stock or other  securities
receivable  upon the  exercise  thereof,  to receive,  upon the exercise of such
Warrants, the same monies, property,  assets, rights, evidences of indebtedness,
securities  or any other  thing of value that they would have been  entitled  to
receive at the time of such dividend or  distribution as if the Holders were the
owners of the shares of Common Stock  underlying  such Warrants.  At the time of
any such dividend or distribution,  the Company shall make appropriate  reserves
to ensure the timely performance of the provisions of this Section 9(g).

          (h)   Subscription   Rights  for  Shares  of  Common  Stock  or  Other
Securities.  In case the Company or an affiliate of the Company shall at anytime
after the date hereof and prior to the  exercise of all the  Warrants  issue any
rights to subscribe  for shares of Common Stock or any other  securities  of the
Company or of such affiliate to all the holders of Common Stock,  the Holders of
the unexercised Warrants shall be entitled,  in addition to the shares of Common


                                       18

<PAGE>


Stock or other  securities  receivable  upon the  exercise of the  Warrants,  to
receive  such  rights  at the time  such  rights  are  distributed  to the other
stockholders  of the  Company  but only to the extent of the number of shares of
Common Stock, if any, for which the Warrants remain exercisable.

          (i)  Notice  in  Event  of  Dissolution.  In case of the  dissolution,
liquidation  or winding-up of the Company,  all rights under the Warrants  shall
terminate  on a date fixed by the  Company,  such date to be no earlier than ten
(10)  days  prior  to the  effectiveness  of such  dissolution,  liquidation  or
winding-up and not later than five (5) days prior to such effectiveness.  Notice
of such termination of purchase rights shall be given to each registered  holder
of the Warrants, as the same shall appear on the books of the Company maintained
by the Warrant Agent, by registered mail at least thirty (30) days prior to such
termination date.

          (j) Computations.  The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section 9, and any certificate setting forth
such  computation  signed  by such  firm  shall be  conclusive  evidence  of the
correctness of any computation made under this Section 9.

     Section 10.  FRACTIONAL  INTERESTS.  The  Warrants may only be exercised to
purchase  full shares of Common  Stock and the Company  shall not be required to
issue fractions of shares of Common Stock on the exercise of Warrants.  However,
if a  Warrantholder  exercises all Warrants then owned of record by him and such
exercise  would result in the issuance of a fractional  share,  the Company will
pay to such  Warrantholder,  in lieu of the  issuance  of any  fractional  share
otherwise  issuable,  an amount of cash  based on the  Market  Price on the last
trading day prior to the exercise date.

     Section 11. NOTICES TO WARRANTHOLDERS.

                                       19

<PAGE>



          (a) Upon any  adjustment of the Warrant Price and the number of shares
of Common Stock issuable upon exercise of a Warrant, then and in each such case,
the Company shall give written notice thereof to the Warrant Agent, which notice
shall state the Warrant Price resulting from such adjustment and the increase or
decrease,  if any,  in the number of shares  purchasable  at such price upon the
exercise  of a  Warrant,  setting  forth in  reasonable  detail  the  method  of
calculation  and the facts upon which such  calculation  is based.  The  Company
shall also mail such notice to the holders of the  Warrants at their  respective
addresses  appearing  in the  Warrant  register.  Failure  to give or mail  such
notice, or any defect therein, shall not affect the validity of the adjustments.

          (b) In case at any time after the Closing Date:

               (i) the  Company  shall pay  dividends  payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to the
holders of Common Stock; or

               (ii) the Company shall offer for  subscription pro rata to all of
the holders of Common Stock any additional shares of stock of any class or other
rights; or

               (iii)   there   shall   be   any   capital    reorganization   or
reclassification of the capital stock of the Company, or consolidation or merger
of the  Company  with,  or sale of  substantially  all of its  assets to another
corporation; or

               (iv)  there  shall be a  voluntary  or  involuntary  dissolution,
liquidation or winding-up of the Company; then in any one or more of such cases,
the Company  shall give written  notice to the Warrant  Agent and the holders of
the Warrants in the manner set forth in Section 11(a) of the date on which (A) a
record shall be taken for such dividend, distribution or subscription rights, or
(B)  such  reorganization,   reclassification,   consolidation,   merger,  sale,
dissolution,  liquidation  or winding-up  shall take place,  as the case may be.
Such notice shall also specify the date as of which  the holders of Common Stock

                                       20

<PAGE>



of record shall  participate  in such  dividend,  distribution  or  subscription
rights,  or shall be entitled to exchange  their Common Stock for  securities or
other  property   deliverable   upon  such   reorganization,   reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. Such notice shall be given at least ten (10) days prior to the action in
question  and not less than ten (10) days  prior to the  record  date in respect
thereof.  Failure to give such notice,  or any defect therein,  shall not affect
the legality or validity of any of the matters set forth in this Section 11(b).

          (c) The Company  shall cause copies of all  financial  statements  and
reports,  proxy statements and other documents that are sent to its stockholders
to be sent by an  identical  class  of  mail,  postage  prepaid,  on the date of
mailing to such  stockholders,  to each  registered  holder of  Warrants  at his
address  appearing  in the  Warrant  register  as of the  record  date  for  the
determination of the stockholders entitled to such documents.

     Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.

          (a) The Warrant Agent shall promptly forward to the Company all monies
received by the Warrant Agent for the purchase of shares of Common Stock through
the exercise of these Warrants.

          (b) The Warrant  Agent shall keep copies of this  Agreement  available
for inspection by holders of Warrants during normal business hours.

     Section 13.  REDEMPTION  OF WARRANTS.  The Warrants are  redeemable  by the
Company  commencing on the second  anniversary of the date of the Prospectus (or
earlier with the consent of the  Underwriter),  in whole or in part, on not less

                                       21

<PAGE>



than thirty (30) days' prior  written  notice at a redemption  price of $.10 per
Warrant,  provided the closing bid  quotation of the Common Stock as reported on
The Nasdaq SmallCap  Market,  if traded thereon,  or if not traded thereon,  the
closing  sale price if listed on a national  securities  exchange  or the Nasdaq
National Market (or other reporting system that provides last sale prices),  has
been in excess  of ____% of the  Exercise  Price for a period of 20  consecutive
trading days in any 30 trading day period  ending not more than 15 days prior to
the date on which the Company gives notice of redemption. Any redemption in part
shall be made pro rata to all Warrant  holders.  The redemption  notice shall be
mailed to the holders of the Warrants at their respective addresses appearing in
the Warrant register. Any such notice mailed in the manner provided herein shall
be  conclusively  presumed  to have  been  duly  given in  accordance  with this
Agreement  whether or not the registered holder receives such notice. No failure
to mail such  notice nor any  defect  therein or in the  mailing  thereof  shall
affect  the  validity  of the  proceedings  for such  redemption  except as to a
registered  holder of a Warrant  (i) to whom notice was not mailed or (ii) whose
notice was  defective.  An  affidavit of the Warrant  Agent or the  Secretary or
Assistant  Secretary  of the Company that notice of  redemption  has been mailed
shall,  in the  absence of fraud,  be prima facie  evidence of the facts  stated
therein.  Holders of the Warrants will have  exercise  rights until the close of
business on the day immediately preceding the date fixed for redemption.

     Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any
corporation or company which may succeed to the corporate  trust business of the
Warrant Agent by any merger or consolidation or otherwise shall be the successor
to the Warrant Agent  hereunder  without the execution or filing of any paper or
any further act on the part of any of the parties  hereto;  provided,  that such
corporation would be eligible for appointment as a successor Warrant Agent under
the  provisions  of  Section  16 of this  Agreement.  In case at the  time  such


                                       22

<PAGE>



successor  to the  Warrant  Agent  shall  succeed to the agency  created by this
Agreement any of the Warrants shall have been  countersigned  but not delivered,
any such  successor to the Warrant Agent may adopt the  countersignature  of the
original Warrant Agent and deliver such Warrants so countersigned.

     In case at any time the name of the  Warrant  Agent shall be changed and at
such time any of the Warrants shall have been  countersigned  but not delivered,
the  Warrant  Agent  may  adopt the  countersignature  under its prior  name and
deliver  Warrants so  countersigned.  In all such cases such Warrants shall have
the full force provided in the Warrants and in this Agreement.

     Section 15.  DUTIES OF WARRANT  AGENT.  The Warrant  Agent  undertakes  the
duties and  obligations  imposed by this Agreement upon the following  terms and
conditions,  by all of which the Company and the holders of  Warrants,  by their
acceptance thereof, shall be bound:

          (a) The  statements of fact and recitals  contained  herein and in the
Warrants  shall be taken as  statements  of the Company,  and the Warrant  Agent
assumes no responsibility  for the correctness of any of the same except as such
describe  the  Warrant  Agent or action  taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrants
except as herein expressly provided.

          (b) The Warrant Agent shall not be responsible  for any failure of the
Company to comply with any of the covenants in this Agreement or in the Warrants
to be complied with by the Company.

          (c)  The  Warrant   Agent  may  consult  at  any  time  with   counsel
satisfactory  to it (who may be counsel for the Company)  and the Warrant  Agent
shall incur no  liability or  responsibility  to the Company or to any holder of
any Warrant in respect of any action taken,  suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.

                                       23

<PAGE>



          (d) The Warrant  Agent shall incur no liability or  responsibility  to
the Company or to any holder of any Warrant for any action  taken in reliance on
any notice, resolution,  waiver, consent, order, certificate or other instrument
believed by it to be genuine and to have been  signed,  sent or presented by the
proper party or parties.

          (e)  The  Company  agrees  to  pay  to the  Warrant  Agent  reasonable
compensation for all services  rendered by the Warrant Agent in the execution of
this  Agreement,  to reimburse  the Warrant  Agent for all  expenses,  taxes and
governmental  charges and other  charges  incurred  by the Warrant  Agent in the
execution  of this  Agreement  and to  indemnify  the Warrant  Agent and save it
harmless  against  any and  all  liabilities,  including  judgments,  costs  and
reasonable  counsel  fees,  for anything done or omitted by the Warrant Agent in
the  execution  of this  Agreement  except  as a result of the  Warrant  Agent's
negligence, willful misconduct or bad faith.

          (f) The Warrant  Agent shall be under no  obligation  to institute any
action,  suit or legal  proceeding or to take any other action likely to involve
expenses unless the Company or one or more registered  holders of Warrants shall
furnish the Warrant Agent with  reasonable  security and indemnity for any costs
and expenses  which may be  incurred,  but this  provision  shall not affect the
power of the Warrant Agent to take such action as the Warrant Agent may consider
proper,  whether with or without any such security or  indemnity.  All rights of
action under this  Agreement or under any of the Warrants may be enforced by the
Warrant  Agent without the  possession of any of the Warrants or the  production
thereof at any trial or other  proceeding.  Any such action,  suit or proceeding
instituted by the Warrant  Agent shall be brought in its name as Warrant  Agent,
and any recovery of judgment shall be for the ratable  benefit of the registered
holders of the Warrants, as their respective rights and interests may appear.

                                       24

<PAGE>


          (g) The Warrant Agent and any stockholder,  director, officer, partner
or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other  securities  of  the  Company  or  become  pecuniarily  interested  in any
transaction  in which the Company may be  interested,  or contract  with or lend
money to or otherwise  act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.

          (h) The  Warrant  Agent  shall act  hereunder  solely as agent and its
duties shall be determined solely by the provisions hereof.

          (i) The Warrant  Agent may execute and  exercise  any of the rights or
powers hereby vested in it or perform any duty hereunder  either itself or by or
through its attorneys,  agents or employees,  and the Warrant Agent shall not be
answerable or accountable for any such attorneys, agents or employees or for any
loss  to the  Company  resulting  from  such  neglect  or  misconduct,  provided
reasonable  care had been  exercised in the selection  and continued  employment
thereof.

          (j) Any request,  direction,  election, order or demand of the Company
shall be  sufficiently  evidenced  by an  instrument  signed  in the name of the
Company by its  President or a Vice  President or its  Secretary or an Assistant
Secretary or its Treasurer or an Assistant  Treasurer  (unless other evidence in
respect thereof be herein  specifically  prescribed);  and any resolution of the
Board of  Directors  may be  evidenced  to the Warrant  Agent by a copy  thereof
certified by the Secretary or an Assistant Secretary of the Company. Section 16.
CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be discharged from its
duties under this Agreement by giving to the Company  notice in writing,  and to
the  holders of the  Warrants  notice by mailing  such  notice to the holders at
their  respective   addresses  appearing  on  the  Warrant  register,   of  such
resignation,  specifying a date when such  resignation  shall take  effect.  The


                                       25

<PAGE>



Warrant  Agent may be  removed  by like  notice to the  Warrant  Agent  from the
Company and the like  mailing of notice to the holders of the  Warrants.  If the
Warrant Agent shall resign or be removed or shall otherwise  become incapable of
action,  the Company  shall  appoint a successor  to the Warrant  Agent.  If the
Company shall fail to make such appointment  within a period of thirty (30) days
after such removal or after it has been notified in writing of such  resignation
or  incapacity  by the  resigning or  incapacitated  Warrant  Agent or after the
Company has  received  such notice from a  registered  holder of a Warrant  (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the  registered  holder  of any  Warrant  may  apply to any  court of  competent
jurisdiction  for the  appointment  of a  successor  to the Warrant  Agent.  Any
successor  Warrant Agent,  whether  appointed by the Company or by such a court,
shall be a bank or trust company, in good standing,  incorporated under New York
or federal law. After  appointment,  the successor Warrant Agent shall be vested
with  the same  powers,  rights,  duties  and  responsibility  as if it had been
originally  named as Warrant  Agent  without  further act or deed and the former
Warrant  Agent shall  deliver and transfer to the  successor  Warrant  Agent all
canceled  Warrants,  records and property at the time held by it hereunder,  and
execute and  deliver any further  assurance  or  conveyance  necessary  for this
purpose.  Failure  to file or mail  any  notice  provided  for in this  Section,
however, or any defect therein, shall not affect the validity of the resignation
or removal of the Warrant  Agent or the  appointment  of the  successor  Warrant
Agent, as the case may be.

     Section 17. IDENTITY OF TRANSFER  AGENT.  Forthwith upon the appointment of
any transfer agent (other than Continental Stock Transfer and Trust Company) for
the shares of Common Stock or of any subsequent transfer agent for the shares of
Common Stock,  the Company will file with the Warrant Agent a statement  setting
forth the name and address of such transfer agent.

                                       26

<PAGE>



     Section 18.  NOTICES.  Any notice pursuant to this Agreement to be given by
the Warrant Agent or the registered holder of any Warrant to the Company,  shall
be sufficiently  given if sent by first-class mail,  postage prepaid,  addressed
(until  another is filed in writing by the Company  with the  Warrant  Agent) as
follows:

                              PROTOSOURCE
                              2300 Tulare Street
                              Suite 210
                              Fresno, CA 93721

         with a copy to:      Gary Agron, Esq.
                              5445 DTC Parkway
                              Denver, Colorado 80111

     Any notice  pursuant  to this  Agreement  to be given by the Company or the
registered  holder of any  Warrant to the Warrant  Agent  shall be  sufficiently
given if sent by first-class  mail,  postage  prepaid,  addressed (until another
address is filed in writing by the Warrant  Agent with the  Company) as follows:


                              Corporate Stock Transfer, Inc.
                              370 Seventeenth Street Suite 2350
                              Denver,  CO 80202

     Any notice  pursuant to this  Agreement to be given by the Warrant Agent or
the  Company  to the  Representative  shall  be  sufficiently  given  if sent by
first-class mail, postage prepaid,  addressed (until another address is filed in
writing with the Warrant Agent) as follows:

                                       27

<PAGE>
                              Andrew Alexander Wise & Company
                              17 State Street
                              4th Floor
                              New York, New York 10004
                              Attn: Andreas Zigouras
                              (212) 809-7300
                              Fax: (212) 809-7383

         with a copy to:      Snow Becker Krauss P.C.
                              605 Third Avenue
                              New York, New York 10158
                              Attn: Charles Snow
                              (212) 687-3860
                              Fax: (212) 949-7052

     Section 19.  SUPPLEMENTS AND AMENDMENTS.  The Company and the Warrant Agent
may from time to time  supplement  or amend this  Agreement in order to cure any
ambiguity or to correct or supplement any provision  contained  herein which may
be defective or  inconsistent  with any other provision  herein,  or to make any
other provisions in regard to matters or questions  arising  hereunder which the
Company and the Warrant  Agent may deem  necessary or desirable  and which shall
not be  inconsistent  with the  provisions  of the  Warrants and which shall not
materially  adversely  affect the  interest of the holders of  Warrants;  and in
addition the Company and the Warrant Agent may modify,  supplement or alter this
Agreement with the consent in writing of the registered  holders of the Warrants
representing not less than a majority of the Warrants then outstanding.

     Section 20. NEW YORK  CONTRACT.  This  Agreement  and each  Warrant  issued
hereunder  shall be deemed to be a contract  made under the laws of the State of
New York and shall be construed in accordance  with the laws of New York without
regard to the conflicts of law principles thereof.

     Section 21. BENEFITS OF THIS AGREEMENT.  Nothing in this Agreement shall be
construed  to give to any  person or  corporation  other than the  Company,  the
Warrant Agent and the registered  holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company,  the Warrant Agent and the registered
holders of the Warrants.

                                       28

<PAGE>



     Section 22. SUCCESSORS.  All the covenants and provisions of this Agreement
by or for the benefit of the  Company or the Warrant  Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.

     IN WITNESS  WHEREOF,  the parties have  entered into this  Agreement on the
date first above written.

                                          PROTOSOURCE

                                          By:
                                             -----------------------------------
                                                   Raymond J. Meyers
                                                   Chief Executive Officer

                                          CORPORATE STOCK TRANSFER, INC.

                                          By:
                                             -----------------------------------
                                                   Name:
                                                   Title: Principal

                                          ANDREW ALEXANDER WISE & CO.

                                          By:
                                              ----------------------------------
                                                   Andreas Zigouras
                                                   President

                                       29

<PAGE>



No. W_______________________                         VOID AFTER __________, 2002

         WARRANTS


                        REDEEMABLE WARRANT CERTIFICATE TO
                       PURCHASE ONE SHARE OF COMMON STOCK



                                   PROTOSOURCE



                                                                           CUSIP

     THIS CERTIFIES THAT, FOR VALUE RECEIVED

     or registered assigns (the "Registered  Holder") is the owner of the number
of Redeemable Warrants (the "Warrants")  specified above. Each Warrant initially
entitles the Registered Holder to purchase,  subject to the terms and conditions
set  forth  in  this  Certificate  and the  Warrant  Agreement  (as  hereinafter
defined),  one fully paid and nonassessable  share of Common Stock, (the "Common
Stock"), of ProtoSource,  a California corporation (the "Company"),  at any time
from _________,  1999 (the "Initial  Warrant  Exercise Date") , and prior to the
Expiration Date (as hereinafter  defined) upon the presentation and surrender of
this  Warrant  Certificate  with the  Exercise  Form on the reverse  hereof duly
executed, at the corporate office of Corporate Stock Transfer,  Inc., as Warrant
Agent,  or its  successor  (the  "Warrant  Agent"),  accompanied  by  payment of
$[____],  subject to adjustment (the "Exercise  Price"),  in lawful money of the
United  States of America in cash or by  certified or bank check made payable to
the Company.

     This Warrant  Certificate  and each Warrant  represented  hereby are issued
pursuant to and are  subject in all  respects  to the terms and  conditions  set
forth in the Warrant  Agreement,  dated as of _____________,  1998 (the "Warrant
Agreement"),   among  the  Company,   Andrew   Alexander  Wise  &  Company  (the
"Representative") and the Warrant Agent.

     In  the  event  of  certain  contingencies  provided  for  in  the  Warrant
Agreement,  the Exercise  Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant  represented hereby are subject to
modification or adjustment.

     Each  Warrant  represented  hereby  is  exercisable  at the  option  of the
Registered  Holder,  but no fractional shares will be issued. In the case of the
exercise of less than all the Warrants  represented  hereby,  the Company  shall
cancel this Warrant  Certificate upon the surrender hereof and shall execute and
deliver a new Warrant  Certificate or Warrant  Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.

     The term  "Expiration  Date"  shall mean 5:00 p.m.  (New York City time) on
July 29, 2003; provided,  that if such date is not a business day, it shall mean
5:00 p.m., New York City time, on the next following  business day. For purposes
hereof, the term "business day" shall mean any day other than a Saturday, Sunday
or a day on  which  banking  institutions  in  New  York  City,  New  York,  are
authorized or obligated by law to be closed.

                                                         

<PAGE>

     The Company  shall not be obligated to deliver any  securities  pursuant to
the exercise of the Warrants  represented  hereby unless at the time of exercise
the Company has filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended (the "Act"), covering the
securities  issuable upon exercise of the Warrants  represented  hereby and such
registration statement has been declared and shall remain effective and shall be
current,  and such  securities  have been  registered  or qualified or be exempt
under the securities laws of the state or other jurisdiction of residence of the
Registered  Holder and the  exercise of the Warrants  represented  hereby in any
such state or other jurisdiction shall not otherwise be unlawful.

     This Warrant Certificate is exchangeable,  upon the surrender hereof by the
Registered  Holder at the  corporate  office  of the  Warrant  Agent,  for a new
Warrant Certificate or Warrant  Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered  Holder at the
time of such  surrender.  Upon the  presentment  and payment of any tax or other
charge imposed in connection  therewith or incident  thereto for registration of
transfer of this Warrant  Certificate at such office, a new Warrant  Certificate
or Warrant Certificates  representing an equal aggregate number of Warrants will
be issued to the  transferee in exchange  therefor,  subject to the  limitations
provided in the Warrant Agreement.

     Prior to the exercise of any Warrant  represented  hereby,  the  Registered
Holder,  as such,  shall not be entitled to any rights of a  stockholder  of the
Company,  including,  without  limitation,  the  right  to  vote  or to  receive
dividends  or other  distributions,  and shall not be  entitled  to receive  any
notice of any  proceedings  of the  Company,  except as  provided in the Warrant
Agreement.

     Subject to the  provisions  of the Warrant  Agreement,  this Warrant may be
redeemed  at the  option  of the  Company,  at a  redemption  price  of $.10 per
Warrant,  at any time  commencing  July 30, 1998,  provided that the closing bid
quotation  of the Common  Stock as reported on The Nasdaq  SmallCap  Market,  if
traded thereon, or if not traded thereon,  the closing sale price if listed on a
national  exchange or the Nasdaq National Market (or other reporting system that
provides last sale prices),  shall have for a period of 20  consecutive  trading
days in any 30 day  period  ending  nor more  than 15 days  prior to the date on
which the Company gives the Notice of  Redemption  (as defined  below)  exceeded
150%  of  the  then  Exercise  Price.  Notice  of  redemption  (the  "Notice  of
Redemption")  shall be given by the  Company no less than thirty days before the
date fixed for  redemption,  all as provided in the  Warrant  Agreement.  On and
after the date fixed for redemption,  the Registered  Holder shall have no right
with  respect to this  Warrant  except to  receive  the $0.10 per  Warrant  upon
surrender of this Certificate.

     Under  certain  circumstances  described  in  the  Warrant  Agreement,  the
Representative  shall be entitled to receive as a solicitation  fee an aggregate
of five percent (5%) of the Exercise Price of the Warrants represented hereby.

     Prior to due presentment for registration of transfer  hereof,  the Company
and the Warrant Agent may deem and treat the  Registered  Holder as the absolute
owner  hereof  and of  each  Warrant  represented  hereby  (notwithstanding  any


                                        2

<PAGE>


notations  of  ownership  or  writing  hereon  made by anyone  other than a duly
authorized  officer of the Company or the Warrant  Agent) for all  purposes  and
shall not be affected by any notice to the  contrary,  except as provided in the
Warrant Agreement.

     This Warrant  Certificate  shall be governed by and construed in accordance
with the laws of the State of New York  without  regard to the  conflicts of law
principles thereof.

     This Warrant  Certificate is not valid unless  countersigned by the Warrant
Agent.

     IN WITNESS WHEREOF,  the Company has caused this Warrant  Certificate to be
duly  executed,  manually or in facsimile by two of its officers  thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.

     Dated _________, 1998

SEAL                                            PROTOSOURCE

                                                By:
                                                   -----------------------------
                                                     Raymond J. Meyers
                                                     Chief Executive Officer

                                                By:
                                                    ----------------------------
                                                     Secretary



COUNTERSIGNED:

CORPORATE STOCK TRANSFER, INC.
as Warrant Agent

By:
   ---------------------------

      Authorized Officer


                                        3

<PAGE>



                                  EXERCISE FORM
                                  -------------


                     To Be Executed by the Registered Holder
                          in order to Exercise Warrant


     The undersigned  Registered  Holder hereby  irrevocably  elects to exercise
_________ Warrants represented by this Warrant Certificate,  and to purchase the
securities  issuable  upon the  exercise of such  Warrants,  and  requests  that
certificates for such securities shall be issued in name of


                          PLEASE INSERT SOCIAL SECURITY
                           OR OTHER IDENTIFYING NUMBER

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

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

                           --------------------------
                     (please print or type name and address)

and be delivered to
                           --------------------------

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

                           --------------------------
                     (please print or type name and address)

and if such number of Warrants  shall not be all the Warrants  evidenced by this
Warrant  Certificate,  that a new  Warrant  Certificate  for the balance of such
Warrants be registered in the name of, and delivered to, the  Registered  Holder
at the address stated below.

                    IMPORTANT: PLEASE COMPLETE THE FOLLOWING:

          1.   If the exercise of this Warrant was solicited by Andrew Alexander
               Wise & Company, please check the following box. |_|

          2.   The exercise of this Warrant was solicited by

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

          3.   If the exercise of this Warrant was not  solicited,  please check
               the following box. |_|


                                        4

<PAGE>



Dated:                                        X
       ---------------------------              --------------------------------

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

- ----------------------------------
                Address


- -----------------------------------
Social Security or Taxpayer
Identification Number


- -----------------------------------
Signature Guaranteed




                                        5

<PAGE>


                                   ASSIGNMENT
                                   ----------


                     To be Executed by the Registered Holder
                           in Order to Assign Warrants

FOR VALUE RECEIVED, ____________________________, hereby sells, assigns and
transfers unto

                          PLEASE INSERT SOCIAL SECURITY
                           OR OTHER IDENTIFYING NUMBER

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

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

                            -------------------------
                     (please print or type name and address)


________________________   of  the   Warrants   represented   by  this   Warrant
Certificate,     and    hereby    irrevocably     constitutes    and    appoints
______________________________________   as  its/his/her   attorney-in-fact   to
transfer this Warrant  Certificate on the books of the Company,  with full power
of substitution in the premises.

Dated:   ______________________                 x_______________________________
                                                     Signature Guaranteed

THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS  WRITTEN  UPON  THE FACE OF THIS  WARRANT  CERTIFICATE  IN EVERY  PARTICULAR,
WITHOUT  ALTERATION  OR  ENLARGEMENT  OR  ANY  CHANGE  WHATSOEVER  AND  MUST  BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY  WHICH IS A MEMBER IN GOOD  STANDING OF THE  SECURITIES  TRANSFER  AGENTS
MEDALLION PROGRAM.









                                        6







               FINANCIAL ADVISORY AND INVESTMENT BANKING AGREEMENT
               ---------------------------------------------------

     This  Agreement  is made and entered  into as of the day of , 1997  between
Andrew Alexander Wise & Company,  Inc., a New York  corporation  ("Consultant"),
and ProtoSource, a corporation organized under the laws of the (the "Company").

     In  consideration of the mutual promises made herein and for other good and
valuable  consideration,   the  receipt  and  sufficiency  of  which  is  hereby
acknowledged, the parties hereto agree as follows:

     1. Purpose: The Company hereby engages Consultant for the term specified in
Paragraph  2 hereof to render  advice to the  Company  as an  investment  banker
relating to  financial  and similar  matters upon the terms and  conditions  set
forth herein.

     2.  Term:  Except as  otherwise  specified  in  Paragraph  4  hereof,  this
Agreement shall be effective from _________, 1998 to _________________, 2000. 3.
Duties of Consultant: During the term of this Agreement,  Consultant shall, upon
the  request of the  Company,  provide the Company  with  corporate  finance and
related  financial   advisory   services,   advice  with  respect  to  potential
acquisitions  and  other  business  transactions  and  advice  with  respect  to
stockholder  relations  matters.  All  obligations of the  Consultant  contained
herein  shall be  subject  to the  Consultant's  availability  to  perform  such
services  and the amount of notice  received  from the Company.  The  Consultant
shall devote such time and effort to the performance of its duties  hereunder as
the Consultant shall determine is reasonably necessary.  The Consultant may look
to  such  others  for  such  factual  information,  investment  recommendations,
economic  advice and/or  research,  upon which to base its advice to the Company
hereunder, as it shall deem appropriate.  The Company recognizes that Consultant


                                                   

<PAGE>



now renders and may continue to render financial and other advisory  services to
other  companies  which  may or may not have  policies  and  conduct  activities
similar to those of the Company,  and acknowledges that Consultant shall be free
to render advice and to perform those services for such other companies.

     4.  Compensation:  In consideration for the services rendered by Consultant
to the Company  pursuant  to this  Agreement  (and in  addition to the  expenses
provided  for in  Paragraph  5  hereof),  the  Company  shall pay  Consultant  a
non-refundable fee of $180,000,  payable in advance,  upon the execution of this
Agreement.  In addition, if any Transaction (as defined below) occurs during the
term of this Agreement or within twelve months thereafter, the Company shall pay
fees to Consultant as follows:

          Consideration                               Fee

       First $1,000,000                       5% of First $1,000,000
       Second $1,000,000                      4% of Second $1,000,000
       Third $1,000,000                       3% of Third $1,000,000
       Fourth $1,000,000                      2% of Fourth $1,000,000
       Consideration in excess of
       the fourth $1,000,000                  1% of Consideration in excess
                                              of the fourth $1,000,000

For  the  purposes  of  this  Agreement,  a  "Transaction"  shall  mean  (i) any
transaction originated by Consultant, other than in the ordinary course of trade
or business of the Company,  whereby,  directly or indirectly,  control of, or a
material interest in, the Company and its subsidiaries or the business or assets
of the Company and its subsidiaries,  is transferred for Consideration,  or (ii)
any transaction  originated by Consultant whereby the Company acquires any other
company, or the assets of any other company or an interest in any other company;

                                        2

<PAGE>


and "Consideration"  shall mean the total market value on the day of the closing
of stock,  cash,  assets and all other property (real or personal)  exchanged or
received,  directly or indirectly by the Company or any of its security  holders
in connection with any Transaction.  Any co-broker  retained by Consultant shall
be  paid by  Consultant.  All  Transaction  fees  to be  paid  pursuant  to this
Agreement,  except as otherwise specified,  are due and payable to Consultant in
cash at the  closing  or  closings  of a  Transaction.  In the  event  that this
Agreement shall not be renewed or is terminated for any reason,  notwithstanding
any such non-renewal or termination,  Consultant shall be entitled to the entire
fee provided in this Paragraph 4, for any  Transaction for which the discussions
were initiated during the term of this Agreement and which is consummated within
a period of twelve months after  non-renewal or  termination of this  Agreement.
Nothing  herein shall impose any  obligation on the part of the Company to enter
into any Transaction.

     5. Expenses of  Consultant:  In addition to the fees payable  hereunder and
regardless of whether any  Transaction is proposed or  consummated,  the Company
shall  reimburse  Consultant  for  the  reasonable  fees  and  disbursements  of
Consultant's  counsel  and  Consultant's  reasonable  travel  and  out-of-pocket
expenses  incurred in  connection  with the  services  performed  by  Consultant
pursuant to this Agreement and at the request of the Company,  including without
limitation,  hotels,  food and associated  expenses and long-distance  telephone
calls.

     6. Liability of Consultant:

          (a) In furnishing the Company with advice and other services as herein
provided, neither Consultant nor any officer, director or agent thereof shall be
liable to the Company or its  creditors  for errors of judgment or for anything,
except for the Consultant's intentional or willful misconduct in the performance
of its duties under this Agreement.

                                        3

<PAGE>

          (b) It is further  understood and agreed that Consultant may rely upon
information  furnished to it reasonably believed to be accurate and reliable and
that,  except as herein  provided,  Consultant  shall not be accountable for any
loss  suffered by the Company by reason of the  Company's  action or inaction on
the basis of any advice, recommendation or approval of Consultant, its partners,
employees or agents. 

          (c) The Company  acknowledges that all opinions and advice (written or
oral)  given by  Consultant  to the  Company  in  connection  with  Consultant's
engagement  are  intended  solely  for the  benefit  and use of the  Company  in
considering the transaction to which they relate, and the Company agrees that no
person or entity other than the Company shall be entitled to make use of or rely
upon the advice of  Consultant  to be given  hereunder,  and no such  opinion or
advice shall be used for any other purpose or reproduced,  disseminated,  quoted
or  referred  to at any  time,  in any  manner or for any  purpose,  nor may the
Company make any public  references to Consultant,  or use Consultant's  name in
any annual  reports or any other  reports or  releases  of the  Company  without
Consultant's prior written consent.

          (d) The  Company  acknowledges  that  Consultant  makes no  commitment
whatsoever as to making a market in the Company's  securities or to recommending
or advising its clients to purchase the Company's  securities.  Research reports
or corporate  finance reports that may be prepared by Consultant  will, when and
if prepared,  be done solely on the merits  based upon an analysis  performed by
Consultant and its corporate finance personnel.

     7. Company Information:

                                        4

<PAGE>


     (a) The Company  shall  furnish to the  Consultant  all data,  material and
other  information  relevant  to  the  performance  by  the  Consultant  of  its
obligations  under  this  Agreement,  or  particular  projects  as to which  the
Consultant  is acting as advisor,  which will permit the  Consultant to know all
facts  material to the advice to be rendered,  and all  material or  information
reasonably requested by the Consultant. The Company acknowledges and agrees that
in performing its services under this  engagement,  Consultant may rely upon the
data,   material  and  other   information   supplied  by  the  Company  without
independently  verifying the accuracy,  completeness or veracity of same. In the
event that the Company  fails or refuses to furnish  any such data,  material or
information reasonably requested by the Consultant, and thus prevents or impedes
the  Consultant's  performance  hereunder,  any  inability of the  Consultant to
perform shall not be a breach of its obligations hereunder.

     (b) Except as contemplated by the terms hereof or as required by applicable
law, Consultant shall keep confidential all non-public  information  provided to
it by the Company and shall not  disclose  such  information  to any third party
without the Company's prior written consent, other than to such of its employees
and advisors as  Consultant  determines in its sole judgment need to have access
thereto.  Notwithstanding the foregoing, the Consultant shall not be required to
maintain  confidentiality  with respect to  information  (i) which is or becomes
part of the public domain;  (ii) of which it had independent  knowledge prior to
disclosure;  (iii)  which comes into the  possession  of the  Consultant  or its
employees or agents in the normal and routine  course of its own  business  from
and through independent  non-confidential  sources; or (iv) which is required to
be disclosed by the Consultant  pursuant to legal process or in accordance  with
governmental  or  regulatory  requirements.  If the  Consultant  is requested or
required  (by oral  questions,  interrogatories,  requests  for  information  or


                                        5

<PAGE>



document subpoenas, civil investigative demands, or similar process) to disclose
any confidential  information supplied to it by the Company, or the existence of
other  negotiations  in the  course  of its  dealings  with the  Company  or its
representatives, the Consultant shall, unless prohibited by law, promptly notify
the  Company of such  request(s)  so that the  Company  may seek an  appropriate
protective order.

     8.  Indemnification:  The Company agrees to indemnify and hold harmless the
Consultant,  its partners,  employees,  agents,  representatives and controlling
persons (and the officers,  directors,  employees,  agents,  representatives and
controlling  persons  of each of them)  from  and  against  any and all  losses,
claims,  damages,  liabilities,  costs and  expenses  (and all  actions,  suits,
proceedings  or claims in respect  thereof)  and any legal or other  expenses in
giving testimony or furnishing  documents in response to a subpoena or otherwise
(including,  without  limitation,  the  costs  of  investigating,  preparing  or
defending  any  such  action,  suit,  proceeding  or  claim,  whether  or not in
connection with any action, suit, proceeding or claim in which the Consultant is
a party), as and when incurred, directly or indirectly,  caused by, relating to,
based  upon  or  arising  out of  the  Consultant's  service  pursuant  to  this
Agreement.  The  Company  further  agrees  that the  Consultant  shall  incur no
liability to the Company or any other party on account of this  Agreement or any
acts or  omissions  arising out of or related to the  actions of the  Consultant
relating to this Agreement or the performance or failure to perform any services
under  this  Agreement,  except  for the  Consultant's  intentional  or  willful
misconduct.  The  obligations of the Company under the Section shall survive the
termination of this  Agreement.  

     9. Independent Contractor:  Consultant shall perform its services hereunder
as an  independent  contractor  and  not as an  employee  of the  Company  or an
affiliate thereof. It is expressly

                                        6

<PAGE>



understood  and agreed to by the parties  hereto that  Consultant  shall have no
authority to act for,  represent or bind the Company or any affiliate thereof in
any manner,  except as may be agreed to expressly by the Company in writing from
time to time.

     10. Miscellaneous:

          (a) This Agreement between the Company and Consultant  constitutes the
entire agreement and  understanding of the parties hereto and supersedes any and
all previous agreements and understandings, whether oral or written, between the
parties with respect to the matters set forth herein.

          (b) Any notice or communication  permitted or required hereunder shall
be in writing and shall be deemed  sufficiently  given if hand-delivered or sent
(i) postage prepaid by registered  mail,  return receipt  requested,  or (ii) by
facsimile,  to the  respective  parties  as set forth  below,  or to such  other
address as either party may notify the other in writing:

If to the Company, to:          ProtoSource Corporation
                                2300 Tulare Street
                                Suite 210
                                Fresno, CA 93721
                                (209) 486-8638
                                Fax: (209) 490-8630

         with a copy to:        Gary Agron, Esq.
                                5445 DTC Parkway
                                Denver, Colorado 80111

If to Consultant:               Andrew Alexander Wise & Company
                                17 State Street
                                4th Floor
                                New York, New York 10004
                                Attn: Andreas Zigouras
                                (212) 809-7300
                                Fax: (212) 809-7383

                                        7

<PAGE>



         with a copy to:         Snow Becker Krauss P.C.
                                 605 Third Avenue
                                 New York, New York 10158
                                 Attn: Charles Snow
                                 (212) 687-3860
                                 Fax: (212) 949-7052

          (c) This  Agreement  shall be binding upon and inure to the benefit of
each  of  the   parties   hereto   and  their   respective   successors,   legal
representatives and assigns.

          (d) This Agreement may be executed in any number of counterparts, each
of which together shall constitute one and the same original document.

          (e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.

          (f) This Agreement  shall be construed in accordance with and governed
by the laws of the State of New York,  without  giving effect to conflict of law
principles.  The parties  hereby agree that any dispute  which may arise between
them arising out of or in connection  with this  Agreement  shall be adjudicated
before a court located in New York City, and they hereby submit to the exclusive
jurisdiction  of the courts of the State of New York  located  in New York,  New
York and of the Federal  District  Court for the  Southern  District of New York
with respect to any action or legal proceeding  commenced by any party, and they
irrevocably  waive any objection  they now or hereafter may have  respecting the
venue of any such action or proceeding brought in such a court or respecting the
fact that such court is an  inconvenient  forum,  relating  to or arising out of
this  Agreement,  and  consent to the  service of process in any such  action or
legal  proceeding  by means of  registered  or certified  mail,  return  receipt
requested, in care of the address set forth in Section 10(b) hereof.

                                        8

<PAGE>


          IN WITNESS  WHEREOF,  the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.

                                           ANDREW ALEXANDER WISE & CO., INC.

                                           By:  
                                               --------------------------------
                                               Andreas Zigouras, President


                                           PROTOSOURCE CORPORATION


                                           By:    
                                                --------------------------------
                                                Raymond J. Meyers, President




                                        9





ProtoSource Corporation
Page 1
November 18, 1997



                                  EXHIBIT 5.05


                                November 18, 1997





ProtoSource Corporation
2800 28th Street
Santa Monica, CA 90405

     Re: Registration Statement for Form SB-2

Ladies and Gentlemen:

     We are counsel for ProtoSource  Corporation,  a California corporation (the
"Company") in connection  with its proposed public offering under the Securities
Act of 1933, as amended,  of up to 1,035,000 Units of its securities,  each Unit
consisting  of one share of no par value common stock  ("Common  Stock") and one
common stock purchase warrant  ("Warrant")  through a Registration  Statement on
Form SB-2  ("Registration  Statement") as to which this opinion is a part, to be
filed with the Securities and Exchange Commission (the "Commission").

     In  connection  with  rendering  our  opinion as set forth  below,  we have
reviewed and examined  originals or copies identified to our satisfaction of the
following:

     (1)  Articles of Incorporation,  and amendments  thereto, of the Company as
          filed with the Secretary of State of the State of California.

     (2)  Corporate minutes containing the written deliberations and resolutions
          of the Board of Directors and shareholders of the Company.

     (3)  The Registration  Statement and the Preliminary  Prospectus  contained
          within the Registration Statement.

     (4)  The other exhibits to the Registration Statement.


<PAGE>


ProtoSource Corporation
Page 2
November 18, 1997

     We  have  examined  such  other  documents  and  records,  instruments  and
certificates of public officials,  officers and  representatives of the Company,
and  have  made  such  other  investigations  as we  have  deemed  necessary  or
appropriate under the circumstances.

     Based upon the  foregoing and in reliance  thereon,  it is our opinion that
the Units, Common Stock, Warrants and Common Stock issuable upon exercise of the
Warrants  offered  under the  Registration  Statement  will,  upon the purchase,
receipt of full payment,  issuance and delivery in accordance  with the terms of
the  offering  described  in the  Registration  Statement,  be fully and validly
authorized, legally issued, fully paid and non-assessable.

     We  hereby  consent  to the  use  of  this  opinion  as an  exhibit  to the
Registration  Statement  and to the use of our name  under  the  caption  "Legal
Matters" in the Prospectus constituting a part thereof.

                                        Very truly yours,



                                        Gary A. Agron





                              EMPLOYMENT AGREEMENT

     This Employment Agreement ("Agreement") is made this 3rd day of April, 1997
between  Protosource  Corporation,  a California  corporation,  ("Employer") and
Raymond Meyers, ("Employee").

     This Agreement is made with respect to the following facts:

     A)   Employer is engaged in the business of providing  internet  access and
          related services.

     B)   Employee has skills and  experience  which Employer can utilize in its
          business.

     C)   Employer  desires to employ  Employee as chief  executive  officer and
          Employee desires to accept such  employment,  and has been employed by
          Employer since December 1, 1996.

     D)   This  Agreement  is  intended  to  formally   reduce  to  writing  and
          memorialize the agreement  between  Employer and Employee with respect
          to Employee's employment by Employer.

     Now,  Therefore,  in consideration of the mutual promises  contained herein
Employer and Employee agree to the following terms and conditions of employment:

     1. TERM
        ----

     This Agreement  shall commence on January 1, 1997 and terminate  January 1,
1999 as unless  earlier  terminated  as  provided  for in  Section 9 hereof. 

     2. EMPLOYMENT
        ----------

     Employee shall serve as chief executive officer of Employer  throughout the
term of this Agreement. Employee shall have all authority customarily granted to
a chief executive  officer including but not limited to hiring and firing of all
employees of Employer,  fixing the compensation of such employees,  unless board
of  directors  approval is required,  and  generally  conducting  the day to day
business  operations  of  Employer.  Employee  shall report only to the board of
directors of Employer.

     Employer  may not  change  Employee's  position  without  Employee's  prior
written  consent.  Any  attempt  by  Employer  to make any  material  changes to
Employees authority without Employee's prior written consent shall be deemed, at
Employee's option, a breach of this Agreement.

     Employee agrees to faithfully perform the duties of chief executive officer
to the best of  Employee's  ability  and to devote  such  time as is  reasonably
necessary to perform those duties.


<PAGE>


     3. SALARY
        ------

     Employee's salary for the first year of the term of this Agreement shall be
$110,000.00  and for the second  year of the term  $140,000.00.  Employer  shall
deduct and pay all applicable  taxes and other  deductions  required by law from
Employee's salary.

     Salary shall be paid  periodically in accordance  with Employer`s  standard
practices, but no less than monthly.

     4. EMPLOYEE BENEFITS
        -----------------

     Employee shall be entitled to all employee  benefits  provided to employees
of Employer as well as the following whether or not generally provided:

     a)   Term life insurance insuring the life Employee for $1,000,000.00.

     b)   Health  insurance  coverage  provided  to company  employees  insuring
          Employee and his family.  Such insurance  shall be provided at no cost
          to employee.

     c)   Automobile allowance of $700.00 per month.

     d)   Disability insurance coverage insuring payment of Employee's full base
          salary for the term of this  Agreement in the event  Employee  becomes
          disabled.

     5. ADDITIONAL COMPENSATION
        -----------------------

     Employee shall receive the following additional compensation based upon the
net income of Employer before taxes.

            NET INCOME                                   EMPLOYEE'S BONUS
            ----------                                   ----------------

     $500,000.00 - $600,000.00                              $25,000.00

     $600,000.00 - $750,000.00                              $35,000.00

     $750,000.00 - $1,000,000.00                            $50,000.00

     $1,000,000.00 - $1,250,000.00                          $60,000.00

     Over $1,250,000.00                                     $75,000.00


     Net income  shall be  determined  in  accordance  with  generally  accepted
     accounting practices and shall include extraordinary items.


                                       2

<PAGE>

     Payment shall be made to Employee of the full bonus amount, less applicable
     taxes, within sixty (80) days from the end of Employer's fiscal year ending
     December 31. Should this Agreement be terminated prior to expiration of its
     term,  Employee  shall be  entitled  to a bonus  based upon the  Employer's
     prorata results,  (example,  if this Agreement is terminated as of June 30,
     Employee's  bonus  would be $12,500  if net  income is  between  $250,000 -
     $300,000).  Payment  shall be made to  Employee  within  sixty (60) days of
     termination.

     6. STOCK OPTION
        -------------

     Employee  is hereby  granted  the  option to acquire  shares of  Employer's
capital  stock at the price of $0.25 per share.  This option is  effective as of
the date of this  Agreement and may be exercised by Employee in accordance  with
the following scheduled:

     a)   200,000 shares on or after January 1, 1997

     b)   200,000 shares on or after January 1, 1998

     c)   150,000 shares on or after January 1, 1999

     Provided,  however,  that should  substantially  all of Employer's  capital
stock or assets be  subject  to an  agreement  for  acquisition  or  merger,  or
Employer  acquires  another  entity,  Employee  may prior to the closing of such
acquisition or merger immediately  exercise the remaining balance of unexercised
options. All options shall expire if not exercised by October 31, 2001.

     7. EXPENSE REIMBURSEMENT
        ---------------------

     Employer shall reimburse Employee for all reasonable out of pocket expenses
that Employee shall incur in connection  With promoting the business of Employer
and performing  his duties under this  Agreement.  Upon request,  Employee shall
support  such  request  for  reimbursement  with  appropriate  receipts or other
evidence of incurring such expenses.

     8. DISABILITY OF EMPLOYEE
        ----------------------

     Should  Employee be unable to perform his duties pursuant to this Agreement
due to  disability,  Employee  shall  continue  to receive  his base  salary and
employee  benefits  during the period of  disability,  up to and  including  the
remaining term of this Agreement.  Such payment shall make up for any amount not
covered by disability insurance.

     9. TERMINATION
        -----------

     Employee's employment under this Agreement shall terminate:

                                       3

<PAGE>


     a)   Upon  expiration of the term of this Agreement as set forth in Section
          1 hereof  unless  extended by the mutual  agreement  of  Employer  and
          Employee.

     b)   Employer may  terminate  this  Agreement  only for cause upon ten (10)
          days prior  written  notice,  and upon a majority  vote of  Employer's
          board of directors. Cause shall be defined as and be limited to:

          (1)  Employee's gross negligence or wilful misconduct which materially
               adversely effects Employer's business.

          (2)  Employee's  wilful  failure to perform the duties  prescribed  in
               this Agreement.

     10. LIABILITY INSURANCE/INDEMNIFICATION
         -----------------------------------

     Throughout the term of this Agreement and any extension  thereof,  Employer
shall provide Employee with officers and directors  liability  insurance average
in an amount not less than $3,000,000.  Failure of insurance to cover and act or
omission for which  Employer would  otherwise have a duty to indemnify  Employee
under  applicable  law  shall not  relieve  Employer  of such duty to  indemnify
Employee.

     11. REPRESENTATION AND WARRANTIES OF EMPLOYER

     Employer hereby represents and warrants that:

     a)   All  appropriate  corporate  action  has been  taken to  approve  this
          Agreement  and the  party  signing  on  behalf  of  Employer  has full
          authority to bind Employer to its terms.

     b)   Employer has fully disclosed to Employee all material facts concerning
          Employer  and  its  financial  condition  upon  which  Employee  would
          reasonably rely in accepting employment with Employer.

     12. NOTICE
         ------

     All notices, requests, demands,  instructions or other communications to be
given to any party  hereunder  shall be in  writing  and shall be deemed to have
been duly given (i) on the date of service if personally  served on the party to
whom notice is to be given; (ii) within twenty-four (24) hours after mailing, if
mailed to the party to whom notice is to be given,  by first class mail which is
registered or certified,  return receipt requests, postage prepaid; (iii) within
twenty-four (24) hours after being

                                       4

<PAGE>


deposited with a recognized private courier service (e.g., Federal Express),  if
delivered  by a private  courier  service  to the party to whom  notice is to be
given,  all charges  prepaid;  or (iv) when sent, if given by telex or telecopy.
Any notice, request,  demand,  instructions or other communication sent by telex
or telecopy must be confirmed within  twenty-four (24) hours by letter mailed or
delivered  in  accordance  with this  Section.  All  notices  shall be  properly
addressed to tho party receiving notice as follows:

If to Employer to:

2300 Tulare St., Suite 210
Fresno, CA 93721

If to Employee to:

851 Iliff Street
Pacific Palisades, CA 90272

The address for the  purposes of this  Section may be changed by giving  written
notice of such change.

     13. GENERAL PROVISIONS
         ------------------

     a)   Nothing  contained in this Agreement shall be construed to require the
          commission  of any act  contrary  to law,  and  whenever  there is any
          conflict between any provision of this Agreement and any statute, law,
          ordinance, or regulation,  contrary to which the parties have no legal
          right to  contract,  then the  latter  shall  prevail;  but in such an
          event, the provisions of this Agreement so affected shall be curtailed
          and limited only to the extent  necessary to bring it within the legal
          requirements.

     b)   Failure  to  insist  upon  strict  compliance  with any of the  terms,
          covenants,  and conditions hereof shall not be deemed a waiver of such
          term,  covenant or  condition.  No waiver of any of the  provisions of
          this Agreement  shall be deemed,  or shall  constitute a waiver of any
          other  provision,  whether  or  not  similar,  not  shall  any  waiver
          constitute a continuing  waiver and no waiver shall be binding  unless
          contained in a writing  specifically  referring to this  Agreement and
          executed by the party making the waiver.

     c)   The invalidity or unenforceability of any provision hereon shall in no
          way affect the validity or enforceability of any other provision.

                                       5

<PAGE>


     d)   This Agreement  constitutes the entire  agreement  between the parties
          pertaining to the subject matter  contained  herein and supersedes all
          prior   and    contemporaneous    agreements,    representations   and
          understandings, whether oral or written, of the parties and none shall
          be available to interpret or construe this  Agreement.  No supplement,
          modification  or amendment of this  Agreement  shall be binding unless
          contained in a writing  specifically  referring to this  Agreement and
          executed  by Employee  and  Employer,  approved by a majority  vote of
          Employer's Board of Directors.

     e)   The paragraph  headings  used in this  Agreement are for reference and
          convenience  only, and shall not in any way limit or amplify the terms
          and  provisions  hereof,  nor enter  into the  interpretation  of this
          Agreement.

     f)   This  Agreement  shall inure to the benefit of and be binding upon the
          parties  and  their  respective  heirs,   executors,   administrators,
          successor  and  assigns,  except  that the duties and  obligations  of
          Employee hereunder may not be delegate or assigned.

     g)   Employer and Employee agree that this Agreement and performance  under
          it,  and all suits and  special  proceedings  that may ensue  from its
          breach,  be  construed  in  accordance  with and under the laws of the
          State of California.

     h)   In the event an action is  brought  by either  party  related  to this
          Agreement  the  prevailing  party  shall be  entitle  to  recover,  in
          addition to any other remedy, reasonable attorney's fees and costs.

EMPLOYER                                        EMPLOYEE

PROTOSOURCE CORPORATION                       

BY:                                            /s/  RAYMOND MEYERS
   ------------------------------------        ---------------------------------

TITLE:
      ---------------------------------


                                       6





                             BRIDGE LOAN AGREEMENT

ProtoSource Corporation (the "Company")
2300 Tulare Street, Ste 210
Fresno, California 93721

To:  Raymond Meyers, Chief Executive Officer

The undersigned (the "Lender") hereby promises to lend, as provided herein,  the
amount  specified in Item 2 below in the Company.  ProtoSource  Corporation (the
"Borrower")  shall execute a series of notes in connection with the extension of
credit made by various Lenders in the aggregate  principal amount up to $750,000
(the "Credit").  In  consideration  of the extension of the Credit,  each Lender
shall  receive  shares of the Common  stock in  proportion  to the amount of the
Credit which is extended by such  Creditor;  the  aggregate  number of shares of
Common Stock of the Borrower shall be up to 150,000 shares.

1. ACKNOWLEDGEMENT OF RECEIPT

     Lender hereby  acknowledges  receipt of a copy of the Company's  Prospectus
dated May 14, 1997,  the  Company's  Form 10-QSB  dated March 31, 1997,  and the
Company's Proxy Statement dated April 10, 1997, and the other documents relating
to an investment in the Common Stock that were included therein or were received
by the Lender from the  Company or from  another  party  acting on behalf of the
Company  prior  to  executing  this  Agreement   (collectively,   the  "Offering
Documents").  Terms used  herein  without  definition  shall  have the  meanings
assigned thereto in the Offering Documents.

2. PAYMENT

     Subject to the terms and  conditions  set forth in the Offering  Documents,
the Lender is hereby required,  together with other lenders, to lend the Company
an amount not to exceed Seven Hundred Fifty Thousand  ($750,000)  Dollars.  Such
amount is to be raised on a Best Efforts  basis and may be advanced  immediately
for use by the Company upon receipt of same.  These loans,  together  comprising
the Bridge Loan are to be made subject to the form or  promissory  Note attached
hereto  as  Exhibit  A.  Andrew,  Alexander,  Wise & Company  Incorporated  (the
"Placement  Agent"),  will transfer the loan amounts as received by the Lenders.
Subsequent to the  execution of the Bridge Loan,  and subject to the approval of
the National  Association of Securities  Dealers,  Inc. ("NASD"),  the Placement
Agent intends to raise a minimum of Four Million  ($4,000,000) Dollars through a
secondary public offering of the Company's Shares,  (the "Secondary  Offering").
The  Placement  Agent will  transfer the  Subscription  payment less ten percent
(10%) sales commission and three percent (3%) non-accountable  expense allowance
earned in the  placement  of the Bridge Loan as such funds are  received by said
Placement Agent. In the event that the  Subscription  payment amount is received
directly by the Company,  the Company shall forward to Placement  Agent any fees
due in connection with such Subscription.

                                     Page 1

<PAGE>


3.  ACCEPTANCE OF LOAN

The Company has the right to accept or reject the Loan in whole or in part. This
Agreement  will be deemed to be accepted by the Company  only when signed by the
Company.  Once accepted by the Company,  this loan is irrevocable  except (a) as
required by applicable state  securities laws, and (b) as otherwise  provided in
the Offering Documents.

4.  Lender UNDERSTANDS THAT:

     (a) No federal or state agency has made any finding or  determination as to
the  fairness  of  the  offering  for  investment,   or  any  recommendation  or
endorsement, of the Common Stock.

     (b) Lender's  right to transfer all or any part of the Common Stock will be
restricted  for  the  reasons  and in  the  manner  set  forth  in the  Offering
Documents,  and such Common Stock may not be transferred unless registered under
the Securities Act of 1933, (the  "Securities  Act"),  and any applicable  state
securities  laws, or an exemption from such  registration  is available.  Lender
recognizes  that the Company has not made any  representations  with  respect to
registration  of the Common  Stock under the  Securities  Act or any  applicable
state  securities  laws,  other than set forth in Section  4(c) below,  that the
exemption afforded by Rule 144 under the Securities Act will be available,  that
there is an active current  market for the Common Stock,  and that a sale of the
Common Stock by the Lender will accordingly be restricted.

     (c)  The  Company  will  use  cause  a  registration  statement  under  the
Securities  Act covering the Common Stock (the  "Registration  Statement") to be
filed with the  Commission  upon the first to occur of (i) December 31, 1997; or
(ii)  concurrently with the final closing date for the Secondary  Offering,  and
will use its Best  Efforts  to  cause  such  Registration  Statement  to  become
effective as soon as  practicable.  All expenses of the  Registration  Statement
including,  but not limited to,  legal,  accounting,  printing and other related
fees will be borne by the Company.

5. Lender HEREBY REPRESENTS, WARRANTS AND AGREES THAT:

     (a) Lender is  acquiring  the Common  Stock for  Lender's  own  account for
investment and not for the account of others or with a view to  distribution  or
resale of such Common  Stock or any  interest  therein.  Lender  shall not sell,
hypothecate  or  otherwise  dispose of Common  Stock  except as permitted by the
Offering  Documents  and  unless  such  Common  Stock is  registered  under  the
Securities Act and any  applicable  state  securities  laws or in the opinion of
counsel,  an exemption from the registration  requirements of the Securities Act
and any applicable state securities laws is available.

     (b)  Lender is aware that  Common  Stock may not be  liquidated  readily in
cases of emergency.  Lender has adequate means of providing for Lender's current
needs and possible personal  contingencies and has no need for liquidity of this
investment.

                                     Page 2

<PAGE>


     (c) Lender has  carefully  read and  understands  the terms of the Offering
Documents, and the Company has made available to Lender all other documents that
Lender has  requested  relating  to an  investment  in the Common  Stock and has
afforded  Lender the  opportunity  to  discuss  the  investment  with and to ask
questions of the Company and has provided  answers to all of Lender's  questions
concerning  the offering of Common Stock.  The Company has also afforded  Lender
the opportunity to obtain any additional nonproprietary information necessary to
verify the accuracy of any information in the Offering Documents.  In evaluating
the suitability of an investment in the Common Stock, Lender has not received or
relied upon any  representations or other information  (whether oral or written)
made by the  Company  other than as set forth in the  Offering  Documents  or as
contained in other documents supplied at the request of Lender as aforesaid.

     (d) Lender  recognizes  that an  investment  in the Common  Stock  involves
certain risks and Lender has taken full cognizance of and understands all of the
risk  factors  related to a purchase  of the Common  Stock,  including,  without
limitation, those set forth in the "RISK FACTORS" attached hereto as Exhibit B.

     (e) Lender has not relied upon the  Company for any tax or legal  advise in
connection  with  Lender's  purchase of Common  Stock,  and Lender has consulted
Lender's  own adviser  with  respect to the tax and other  legal  aspects of the
acquisition of Common Stock.

     (f) Lender will not duplicate or furnish  copies of the Offering  Documents
to persons other than Lender's investment and tax advisors, accountants or legal
counsel assisting Lender in the evaluation of the Common Stock.

     (g) Lender has such  knowledge  and  experience  in financial  and business
matters generally that Lender is capable of evaluating the meets and risks of an
investment in the Common Stock.  Lender, or Lender's  professional  advisor, has
the capacity to protect  Lender's  concerns in  connection  with the purchase of
Common  Stock,  and Lender is able to bear the economic risk of an investment in
Common Stock.

     (h) Lender, if a corporation,  partnership,  trust or other entity, is duly
formed  and is  validly  existing  and in good  standing  under  the laws of its
jurisdiction of organization and has all powers and is authorized, has taken all
required  action,  and otherwise has duly  qualified to execute and perform this
Agreement and to purchase and hold the Common Stock, and this Agreement has been
duly  executed and  delivered  by Lender and  constitutes  the legal,  valid and
binding obligation of Lender  enforceable  against Lender in accordance with its
terms. The Individual signing this Agreement on behalf of Lender represents that
he or she has full power and authority to execute and deliver this  Agreement in
such capacity and on behalf of Lender. Lender and/or the individual signing this
Agreement on Lender's behalf will provide to the Company such information as its
shall reasonable request to substantiate the foregoing.  Lender has furnished to
the Corporation:

     1.  if  the  Lender  is a  corporation,  the  articles  or  certificate  of
     incorporation and by-laws



                                     Page 3

<PAGE>

     of the Lender and a copy  (certified by the  secretary or other  authorized
     officer of the Lender) of  appropriate  corporate  resolutions  authorizing
     Lender's investment in the Common Stock; 

     2.   if Lender is a trust, the trust agreement of Lender;

     3.   if  Lender  is a  partnership,  the  partnership  agreement  (or other
          evidence  of due  authorization  to make  Lender's  investment  in the
          Common Stock.

     (i) Lender,  if executing this agreement in a  representative  or fiduciary
capacity,  has full power and authority to execute and deliver this Agreement in
such  capacity and on behalf of the  subscribing  individual  for whom Lender is
executing  this  Agreement,  and such  individual  has full  right  and power to
perform pursuant to this Agreement and become a shareholder of the Corporation.

     (j) Lender, if a corporation,  partnership,  trust or other entity, was not
formed reformed or  recapitalized  for the specific  purpose of investing in the
Company.

     (k) Lender will make such  additional  representations  and  warranties and
furnish such information  regarding Lender's investment experience and financial
position as the Company may reasonably require.  All information that Lender has
provided to the  Company is correct and  complete as of the date set forth below
and if there should be any material  change in the  information set forth herein
or in any other information  provided to the Company prior to Lender's admission
to the  Company,  Lender will  immediately  furnish  such  revised or  corrected
information to the Company.

     6.  Lender   understands   the  meaning  and  legal   consequences  of  the
representations  and warranties and the restrictions and limitations on transfer
contained in this  Agreement and in the Offering  Documents and hereby agrees to
indemnify  and  hold  harmless  the  Company,   the  Board  members,  and  their
affiliates,  advisors,  agents and employees, from and against any and all loss,
damage or liability due to or arising out of any  inaccuracy in or breach or any
of those representations or warranties by Lender. Notwithstanding the provisions
of this Section 6, however,  no  representation,  warranty,  acknowledgement  or
agreement  made in this  Agreement  by  Lender  will in any  manner be deemed to
constitute  a waiver of any  rights  granted  to Lender  under  federal or state
securities laws. Lender  acknowledges  specifically that the representations and
warranties  and  understandings  and agreements set forth in this Agreement will
survive the date of this Agreement.

7.  CERTIFICATION OF STATUS AS AN ACCREDITED INVESTOR

     Lender certifies that Lender  qualifies as an "accredited  investor" within
the meaning of Rule 501 (a) of  Regulation D  promulgated  under the  Securities
Act, [for the reason set forth herein].  The Lender if an entity has checked the
appropriate box below indicating Lender's status as an accredited investor:

                             (check applicable box)

                                     Page 4

<PAGE>


Certain Entities

[ ]  (A) a bank,  as defined in  Section  3(a)(2) of the Act or a savings  and
     loan company or other institution as defined in Section 3(a) (5) (A) of the
     Act;

[ ]  (B) a  broker  or  dealer  registered  pursuant  to  Section  15 of  the
     Securities Exchange Act of 1934, as amended;

[ ]  (C) an insurance company as defined in Section 2(13) of the Act;

[ ]  (D) an investment  company registered under the Investment Company Act of
     1940,  as amended or a business  development  company as defined in Section
     2(a)(48)  thereunder; 

[ ]  (E) A small  business  investment  company  licensed  by the  U.S.  Small
     Business  Administration  under Section 301(c) or (d) of the Small Business
     Investment Act of 1958, as amended;

[ ]  (F) a  private  business  development  company  as  defined  in  Section
     202(a)(22) of the Investment Advisers Act of 1940, as amended;

[ ]  (G) an  organization  described  in  Section  50l(c)(3)  of the  Internal
     Revenue  Code of 1986,  as  amended,  or a  corporation,  Massachusetts  or
     similar  business trust, or partnership not formed for the specific purpose
     of acquiring the securities  offered in the offering in the offering,  with
     total assets in excess of $5,000,000; or

[ ]  (H) a trust with total assets in excess of $5,000,000, not formed for the
     specific purpose of acquiring the securities offered in the offering, whose
     purchase  is  directed  by a  sophisticated  person  as  described  in Rule
     506(b)(2)(ii) promulgated under the Act; or

[ ]  (I) a corporation or  partnership in which each and every  shareholder of
     such  corporation  or each and every partner  (including,  in the case of a
     limited partnership, each and every limited partner) of such partnership is
     an  "accredited  investor"  as  such  term  is  defined  in  Rule  501  (a)
     promulgated under the Act.

OTHER

[ ]  (J) Any natural  person whose  individual  net worth,  or joint net worth
     with that person's spouse, at the time of his purchase exceeds $1,000,000;

[ ]  (K) Any natural person who had an individual income in excess of $200,000
     in each of the two most recent  years or joint  income  with that  person's
     spouse in excess of $300,000  in each of those  years and has a  reasonable
     expectation of reaching the same income level in the current year;

                                     Page 5

<PAGE>



[ ]  (L) Any trust,  with total assets in excess of $5,000,000,  not formed for
     the specific purpose of acquiring the securities offered, whose purchase is
     directed by a sophisticated  person  described as having such knowledge and
     experience  in  financial  and  business  matters  that  he is  capable  of
     evaluating  the  merits  and risks of the  prospective  investment,  or the
     issuer reasonably  believes  immediately prior to making the sale that such
     purchaser comes within this description;

[X]  (M) Any entity in which all of the equity owners are accredited investors.

8.  CERTIFICATION OF STATUS AS A UNITED STATES PERSON

Lender hereby  certifies  under  penalties of perjury  that:  (i) if Lender is a
natural person, he or she is a citizen or resident of the United States, or (ii)
if Lender is a partnership, corporation, trust or other entity, it was organized
under the laws of one of the 50 States of the United  States (or the laws of the
District of Columbia).

9.  MISCELLANEOUS

     (a)  Failure by the  Company  to  exercise  any right or remedy  under this
Agreement or any other agreement between the Company and Lender, or delay by the
Company in exercising the same, shall not operate as a waiver.  No waiver by the
Company shall be effective unless it is in writing and signed by the Company.

     (b) In the  event  that any  provision  of this  Agreement  is  invalid  or
unenforceable  under any applicable  statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict with such statute
or rule of law and shall be deemed modified to conform therewith.  Any provision
hereof which may prove invalid or unenforceable shall not affect the validity or
enforceability of any other provision hereof.

     (c) Notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed to be sufficiently  given when sent by registered
or certified  United States mail,  postage  prepaid,  addressed to the party for
whom intended at the address of such party as set forth below.

     (d) This Agreement is not transferable or assignable by Lender.

     (e)  This   Agreement   and  all   questions   relating  to  its  validity,
interpretation,  performance, and enforcement shall be governed and construed in
accordance  with the laws of the State of New  York,  without  giving  effect to
conflict of law principles  (except insofar as affected by the state  securities
or "Blue Sky" laws of the  jurisdiction in which the offerings  described herein
have been made).  Lender  understands  that this  Agreement (i) shall be binding
upon Lender and Lender's legal representatives, successors and assigns and shall
inure to the benefit of the Company,  its  successors  and  assigns,  (ii) shall
survive Lender's admission as a shareholder of the Company; (iii) shall, if

                                     Page 6

<PAGE>


Lender consists of more than one person, be the joint and several obligations of
all such persons; and (iv) may be executed by Lender and accepted by the Company
in one or more counterparts, each of which shall be an original and all of which
together shall constitute one instrument.

10. FOR NEW YORK RESIDENTS

     Lender  understands that the offering of Common Stock has not been reviewed
by the  Attorney  General  of the  State of New York  because  of the  Company's
representations  that this is intended to be a non-public  offering  pursuant to
Regulation  D  promulgated  under  the  Securities  Act,  and that if all of the
conditions  and  limitations of Regulation D are not complied with, the offering
will be  resubmitted  to the  Attorney  General  for amended  exemption.  Lender
understands  that any offering  literature used in connection with this offering
has not been  pre-filed  with the Attorney  General and has not been reviewed by
the  Attorney  General.  The Common  Stock is being  purchased  for Lender's own
account for investment,  and not for  distribution  or resale to others.  Lender
agrees that Lender will not sell or  otherwise  transfer the Common Stock unless
an exemption from such registration is available.  Lender represents that Lender
has adequate means of providing for Lender's current needs and possible personal
contingencies, and that Lender has no need for liquidity of this investment.

     All documents,  records,  and books pertaining to this investment have been
made available for inspection by Lender's  attorney and/or  Lender's  accountant
and  Lender,  and the books and records of the Company  will be  available  upon
reasonable  notice,  for  inspection  by  investors at  reasonable  hours at its
principal place of business.

11.  FORM OF OWNERSHIP

     Please indicate the form of ownership you desire for the Common Stock;

     Individual (one signature required)
- ----
     Joint Tenants with Right of Survivorship (all parties must sign)
- ----
     Tenants in Common (all parties must sign)
- ----
     Tenants by the Entirety (all parties must sign)
- ----
     Community  Property (one  signature  required if interest held in one name,
     i.e. managing spouse;  two signatures  required if interest is held in both
     names)
- ----
 X   Corporation (signature of authorized officer or officers required)
- ----
     Partnership  (signature of general  partner and any  additional  signatures
     required by partnership agreement required)
- ----


                                     Page 7

<PAGE>


     Trust (signature of trustee and any additional signatures required by trust
     instrument required)
- ----
     Other Entities (all signatures required by governing instrument required)
- ----


Please  PRINT  below the exact  name  (registration)  you  desire for the Common
Stock:

World Spirit Inc.
- ------------------------------


In WITNESS  WHEREOF,  Lender has executed this  Agreement  this 16th day of June
1997.

If Lender is a Natural Person:

- ------------------------------
(Signature of Lender)

- ------------------------------
(Name of Lender)
(Please Print of Type)


If Lender is not a Natural Person:

World Spirit Inc.
- --------------------------------
(Type or Print Name of Corporation, Partnership, Trust or Other Entity)


- --------------------------------
(Signature of Individual Signing)



(Capacity of Individual Signing on behalf of Corporation, Partnership, Trust
 or Other Entity)

                                     Page 8

<PAGE>


                 Investment Representation Letter and Agreement

                             Name: World Spirit Inc.

                        Address: 350 5th Ave., suite 6603
                            New York, New York 10018
                                  June 16, 1997


ProtoSource Corporation
2300 Tulare Street, Suite 210
Fresno, California 93721

        
I am  receiving  50,000  (50,000)  shares (the  "Shares") of the common stock of
ProtoSource  Corporation,  a  California  corporation  (the  "Company"),  for no
additional  consideration,  in  connection  with a concurrent  loan by me to the
Company.  I  understand  and  acknowledge  that the Shares will be shares of the
common stock of the Company.

In connection therewith, I hereby represent and certify to you and agree that:

     1. I am  receiving  the Shares for  investment  only and not with a view to
their resale or  distribution.  I am not receiving the Shares as a result of any
advertisement, general solicitation, public meeting or other public offering.

     2. I understand that the Shares are not registered under the Securities Act
of 1933, as amended (the "Act"),  or qualified  under the  California  Corporate
Securities  Law  of  1968,  as  amended  (the"CSL"),  and  must  be  held  by me
indefinitely  unless  they  are  subsequently  registered  under  the  Act,  and
qualified under the CSL, or an exemption from such registration or qualification
is available.  I understand that the resale of such Shares will be restricted so
that such resale may be made only in accordance with the appropriate  exemptions
(including  holding  such  Shares  for  periods  of time  specified  in Rule 144
promulgated under the Act and compliance with the other provisions  thereof,  if
such exemption is available)  under the Act and the CSL, or  registration  under
the Act and qualification under the CSL.

     3. I am an  accredited  investor  as that term is defined in  Regulation  D
under the Act.  Based upon my  experience  in business and as an investor,  I am
aware of the risks of an investment in restricted securities, and I have no need
for any income from my  investment.  I am aware that the Hares may have no value
now, and the Company has not made any representation as to their value now or in
the future.  I have such  knowledge  and  experience  in financial  and business
matters so that I am capable of assessing  the merits and risks of acquiring the
Shares. I have reviewed the Company's definitive  prospectus dated May 14, 1997,
the Company's last Form 1O-QSB,  and its proxy  statement  dated April 10, 1997,
and have  had an  opportunity  to ask  questions  of and  receive  answers  from
management  of the Company  and to obtain any  additional  information  that the
Company possesses or can acquire without unreasonable effort or expense relating
to the  Company's  business,  financial  condition  and  results  of  operation,
although the Company has made no  representation or warranty except as expressly
contained herein.

<PAGE>


     4. I  understand  that all  certification  evidencing  the Shares will bear
legend substantially in the following form:

     "The Securities  represented by this  certificate  have not been registered
     under the  Securities  Act of 19337 as amended  (the  "Act"),  or qualified
     under  any  state  securities  law.  These  securities  may  not  be  sold,
     transferred,  pledged  or  hypothecated  in  the  absence  of an  effective
     registration statement for the securities under the Act and qualified under
     any  applicable  state  securities  law,  or unless an  opinion  of counsel
     acceptable to counsel to the Company, and other assurances  satisfactory to
     the Company, have been delivered to the Company prior to the transaction to
     the effect that registration and qualification is not required."

     5. I have consulted with the and legal counsel selected by the undersigned,
and with such financial advisors,  who have reviewed the merits of an investment
in the Shares.  The  undersigned,  together  with such persons,  has  sufficient
knowledge and experience in business and financial matters to evaluate the meets
of the risks of an investment in the Shares, and the undersigned, fully aware of
the  risks  involved,  has  determined  that  an  investment  in the  Shares  is
consistent  with the  undersigned's  investment  objectives.  The  undesigned is
relying  solely o~ e  undersigned's  own tax  advisors  with  respect to the tax
factors relating to an investment in the Shares.

     6. I understand  that 10% of my loan  proceeds to the (Company will be used
to pay sales  commissions to Andrew,  Alexander  Wise and Company,  Incorporated
(hereinafter  "AAWC")  ~  connection  with  this  transaction.  In  addition,  I
understand  that AAWC shall be allocated an additional 3% of my loan proceeds as
and for a non-accountable expense allowance.

     7. I hereby agree as follows:

     (a) If the undersign,  or any subsequent holder, desires to transfer any of
the Shares,  the  undersigned  must give to the Company prior written  notice of
such  proposed  transfer   including  the  name  and  address  of  the  proposed
transferee.  Unless  registered and qualified as provided herein,  such transfer
may be made  only  either  (i)  upon  publication  by  Securities  and  Exchange
Commission (the "Commission") of a ruling, interpretation, opinion or "no action
letter" based upon facts  presented to the  Commission,  or (ii) upon receipt by
the Company of an opinion of counsel  acceptable  to counsel to the Company,  in
either  case to the effect  that the  proposed  transfer  will not  violate  the
provisions  of the Act, the  Securities  Exchanges  Act of 1934,  as amended any
state securities laws, or the rules and regulations  promulgated  under any such
acts or laws.

     (b) Prior to any such proposed  transfer,  and as a condition  thereto,  if
such offer is not made pursuant to our effective  registration  statement  under
the Act, the undersigned,  or any subsequent  holder,  will, if requested by the
Company,  deliver  to the  Company  (i)  and  investment  letter  setting  forth
investment   representations  of  the  proposed  transferee  and  such  proposed
transferee's  covenant to comply with the transfer  provisions set forth in this
Section 7 and elsewhere in this  Agreement,  signed by the proposed  transferee,
and (ii) an agreement  by the  transferee  to indemnify  the Company to the same
extent as set forth in Section 7 (c) hereof.

     (c) The  undersigned  acknowledges  that the  undersigned  understands  the
meaning and legal consequences of the  representation  and warranties  contained
herein,  and the  undersigned  hereby  agrees to indemnify and hold harmless the

<PAGE>



Company  and its  agents  and  representatives  and each of their  heirs,  legal
representative, successors and assigns from and against any and all loss, damage
or  liability  (including  without  limitation  all  attorneys'  fees and  costs
incurred in enforcing this indemnity provision) due to or arising out of (i) the
inaccuracy  of  any  representation  or  the  breach  of  any  warranty  of  the
undersigned  contained in, or any other breach of, this letter  agreement,  (ii)
any transfer of any of the Shares in violation  of the Act, the  Securities  and
Exchange Act of 1934, as amended,  any state  securities  laws, or the rules and
regulation promulgated under any of such acts or laws, (iii) any transfer of any
to the Shares not in accordance herewith or (iv) any undue statement or omission
to state any material fact in connection with the investment  representation  or
with respect to the facts and  representations  supplied by the  undersigned  to
counsel to the Company  upon which its opinion as to a proposed  transfer  shall
have been based.

     (d) The  Company  may  place a stop  order  with  its  transfer  agent  and
registrar,  if any, with respect to any of the Shares or any  certificates  unto
which such Shares are exchanged.

     (e)  Notwithstanding  the above,  the Company will use cause a registration
statement under the Securities Act covering the Common Stock (the  "Registration
Statement")  to be filed  with  the  Commission  upon the  first to occur of (i)
December  31, 1997;  or (ii)  concurrently  with the final  closing date for the
Secondary  Offering  and will use its Best  Efforts to cause  such  Registration
Statement  to become  effective  as soon as  practicable.  All  expenses  of the
Registration  Statement  including,  but  not  limited  to,  legal,  accounting,
printing and other related fees will be done by the Company.

     8. In  conjunction  with  the  investment  referred  to in this  Investment
Representation  Letter and  Agreement,  by its execution of the  acceptance  and
agreement below, Company agrees as follows:

     (a) Upon  funding  and proper  documentation  of the loan  which  serves as
consideration for the issuance of the Shares, the Company agrees to issue to the
undersigned investor for no additional consideration one (1) share of its common
stock for each five  dollars  ($5.00)  lent to the  Company  by the  undersigned
investor.

     (b) The Company will offer not more than $750,000 of aggregated  loans on a
Best Efforts Basis only.

                                      Very truly yours,

                                      World Spirit Inc.
                                      -----------------------------------------
                                       Investor


                                       ----------------------------------------
                                       Name (Please Type or Print)
                                       By: President


Accepted and agreed to:
Dated: June  , 1997
ProtoSource Corporation, a California corporation

<PAGE>

By:
Name:  Raymond Meyers
Title:  Chief Executive Officer



<PAGE>


                                PROMISSORY NOTE

$250,000                                                     New York, New York
- ---------

                                                                   June 16, 1997
                                                                   -------------
                                                                   Date

A.  GENERAL; TERMS OF PAYMENT; USE OF PROCEEDS; PREPAYMENT

     1.  FOR  VALUE  RECEIVED,  the  undersigned,   ProtoSource  Corporation,  a
corporation organized under the laws of the State of California (the"Borrower"),
hereby promises to pay to the order of WORLD SPIRIT INC.(the  "Lender"),  at the
offices of Andrew, Alexander,  Wise & Company,  Incorporated hereinafter "AAWC")
at 17 State  Street,  New York,  New York 10004 the principal sum of $250,000 on
the first to occur of the following; (i) upon the closing of a public or private
offering of securities of the Borrower for at least  $1,000,000 (the "Closing");
or (ii) fifteen months from the date hereof.

     The Borrower will pay interest on the unpaid principal amount hereof at the
rate of 12 per cent per  annum  computed  on the  basis of a  360-day  year,  at
maturity (whether by acceleration or otherwise).

     The loan proceeds shall be used as bridge financing until the occurrence of
the Closing.

     2.  PREPAYMENT.  The  Borrower  shall have the right to prepay this Note in
whole or in part at any time without penalty or premium.

B.  EVENTS OF DEFAULT; REMEDIES

     1. If any of the following  events shall occur and be  continuing  (each an
"Event of Default")  (a) the  Borrower  fails to make any payment when due under
the Note; (b) the Borrower shall default in the performance or observance of any
covenant or agreement contained herein or any agreement between the Borrower and
the Lender; (c) the Borrower sells, agrees to sell, leases, agrees to lease to a
third party all or  substantially  all of its assets or stock;  (d) the Borrower
terminates its business  operations;  (e) any representation or warranty made by
or on  behalf  of  the  Borrower  in  this  Note  or in any  other  certificate,
agreement,  instrument  or statement  delivered to the Lender by or on behalf of
the  borrower  shall at any time prove to have been  incorrect  when made in any
material respect;  (f) the Borrower shall default in the payment of principal or
interest on any  indebtedness for borrowed money including  without  limitation,
any  portion of the  Credit  (as such term is defined  below) of which this loan
forms a part, or shall default in the  performance or observance of the terms of
any instrument  pursuant to which such  indebtedness  was created or is secured,
the  effect  of which  default  is to cause or  permit  any  holder  of any such
indebtedness  to cause the same to become due prior to its stated  maturity (and
whether or not such default is waived by the holder  thereof;  (g) any change in
the condition or affairs  (financial  or otherwise) of the Borrower  shall occur
which, in the opinion of the Lender, increases its risk with respect to the loan
evidenced  by  this  Note;  (h)  any  judgement  against  the  Borrower  or  any

<PAGE>


attachment,  levy, or execution  against any of there  properties for any amount
shall remain unpaid or shall not be released,  discharged  dismissed,  stayed or
fully bonded for a period of thirty (30) days or more after its entry,  issue or
levy, as the case may be; (i) the Borrower  shall become  insolvent or be unable
or admit in writing its inability,  to pay its debts as they mature;  or (j) the
Borrower  shell make an  assignment  for the benefit of  creditors or a trustee,
receiver or  liquidator  shall be appointed for the Borrower or for any of their
property,  or the  commencement  of any  proceeding  by the  Borrower  under any
bankruptcy, reorganization arrangement of debt insolvency, readjustment of debt,
receivership,  liquidation or dissolution law or statute, or the commencement of
any such  proceeding  without the consent of the  Borrower  and such  proceeding
shall  continue  undischarged  for a period of 30 days.  Then,  the  Lender  may
declare the entire  unpaid  principal  amount of this Note and all  interest and
fees accrued and unpaid  hereon to be forthwith  due and payable,  whereupon the
same shall become and be forthwith due and payable by the Borrower.

     2. In case any one or more  Event(s)  of  Default  hereunder  or under  any
related  document shall happen and be continuing,  Lender may proceed to protect
and  enforce  Lender's  rights  either by suit in equity or by action at law, or
both,  whether for the  specific  performance  of any  covenant,  condition,  or
agreement contained in this Note, or in aid of the exercise of any power granted
in this Note to enforce any other legal or equitable  right of Lender.  After an
Event of Default,  Borrower shall pay to Lender  immediately upon written demand
therefore  any amounts  reasonably  expended or incurred by Lender in collecting
any amount due  hereunder  including,  without  limitation,  attorneys  fees and
costs, whether or not any legal action is instituted in connection therewith.

C.  MISCELLANEOUS

     1.  Amendments.  No amendment,  modification  or waiver of any provision of
this Note nor  consent  to any  departure  by the  Borrower  therefrom  shall be
effective  unless the same shall be in writing and signed by the Lender and then
such waiver or consent shall be effective only in the specific  instance and for
the specific purpose for which it is given.

     2. Constructions. This Note shall be deemed to be a contract made under the
laws of the State of New York and shall be construed in accordance with the laws
of said State.

     3. Successors and Assigns. This Note shall be binding upon the Borrower and
its heirs, legal  representatives,  successors and assigns, and the terms hereof
shall  inure to the  benefit  of the  Lender  and its  successors  and  assigns,
including subsequent borders thereof.

     4.  Severability.  The  provisions of this Note are  severable,  and if any
provision  shall be held  invalid  or  unenforceable  in whole or in part in any
jurisdiction,  then such  invalidity or  enforceability  shall not in any manner
affect such provision in any other  jurisdiction  or any other provision of this
Note in any jurisdiction.

     5. No Waiver: Remedies Cumulative.  No failure on the part of the Lender to
exercise  and no delay in  exercising  any right  hereunder  shall  operate as a
waiver  thereof;  nor shall any single or partial  exercise by the Lender of any
right hereunder  preclude any other or further  exercise thereof or the exercise

<PAGE>



of any other right Borrower hereby waives presentment,  demand,  protest, notice
of dishonor  and all other  notices and demands,  except as expressly  set forth
herein. Borrower also hereby waives the right to trial by jury in any litigation
related to this Note. written.

     6. Costs and Expenses. The Borrower shall reimburse the Lender of all costs
and expenses  incurred by it and shall pay the reasonable fees and disbursements
of counsel to the Lender  connection  with the enforcement of the Lenders rights
hereunder. The Borrower shall also pay any and all taxes (other than taxes on or
measured by net income of the holder of this Note)  incurred in connection  with
the execution and delivery of this Note.

     7. Series of Notes.  This, Note is one of a series of notes executed by the
Borrower in connection  with the  extension of credit made by various  creditors
(together the "Creditor") in the aggregate  principal amount up to $750,000 (the
"Credit~).  In consideration of the extension of the Credit, each Creditor shall
receive  shares of the Common  stock in  proportion  to the amount of the Credit
which is extended by such  Creditor;  the  aggregate  number of shares of Common
Stock of the Borrower shall be up to 150,000 shares.

     IN WITNESS  WHEREOF,  Borrower has  executed  this Note on the day and year
first above



                                     ProtoSource Corporation

                                     By:
                                        ---------------------------------------

                                     Name:  Raymond Meyers
                                     Title:  Chief Executive Officer

<PAGE>



                         REGISTRATION RIGHTS AGREEMENT

                              W I T N E S S E T H:
                              --------------------

     WHEREAS,  the  Stockholders  are the  purchasers of am aggregate of 150,000
shares of Common Stock of the Company (the "Shares")  issued in connection  with
interim  financing  on this date of the  Company in an  aggregate  amount not to
exceed $750,000 (the "Bridge Financing"), and

     WHEREAS,  the Company and the  Stockholders  desire that certain  terms and
provisions be applicable to the Shares  hereinafter  referred to as  Registrable
Securities") held by the Stockholders;

     NOW, THEREFORE,  in consideration of the covenants and agreements set forth
herein, and for other good and valuable consideration,  the adequacy and receipt
of which are hereby acknowledged, the parties hereby agree as follows:

     Section 1. Registration  Rights.  The Company covenants and agrees with the
Stockholders  that the  Company  will  file  with the  Securities  and  Exchange
Commission ("SEC") a Registration  Statement,  (the "Registration  Statement") a
post-effective amendment to an existing Registration Statement (the "Amendment")
or a  Regulation  A  Offering  Statement  (an  "Offering  Statement")  under the
Securities  Act of 1933, as amended (the "Act"),  registering  or qualifying the
Registrable  Securities for sale concurrently with the proposed Secondary Public
Offering of the Company's  Securities (the "Secondary  Offering) to be placed by
Andrew Alexander Wise & Company, Incorporated (the "Placement Agent") or if such
Secondary  Offering is not completed by December 31, 1997.  The Company will use
its best efforts,  through its officers,  directors,  auditors md counsel in all
matters  necessary or advisable,  to cause to become effective such Registration
Statement as promptly as  practicable,  and, for a period of one year hereafter,
to reflect in the  Amendment,  Registration  Statement  or  Offering  Statement,
financial  statements  which are prepared in accordance with Section 10(a)(3) of
the Act and any facts or events arising that, individually, or in the aggregate,
represent a fundamental  and/or  material change in the information set forth in
the  Amendment,  Registration  Statement  or  Offering  Statement  to enable any
Stockholder of the Registrable  Securities to sell such  Registrable  Securities
during said two-year period.

     Section 2. Piggyback  Registration Rights. The Company covenants and agrees
with the Stockholders  and any other holders of the Registrable  securities that
if, at anytime  within the period  commencing  from the date hereof,  and ending
five  (5)  years  thereafter,  it  proposes  to file a  Registration  Statement,
Amendment  or  Offering  Statement,   as  the  case  may  be  (collectively,   a
"Registration  Statement")  with  respect to any class of  security  (other than
pursuant to a Registration  Statement on Forms S-4 or S-8 or any successor form)
under the Act in a primary  registration  on behalf of the  Company and for in a
secondary registration on behalf of holders of securities,  and the Registration
Statement to be used may be used for registration of the Registrable Securities,
the  Company  will  give  written  notice  to the  holders  of  the  Registrable
Securities  at least  thirty (30) days prior to the filing of such  Registration
Statement  at the  addresses  appearing  on the  records  of the  Company of its
intention to file a Registration Statement, and will offer to include in such

                                     Page 1

<PAGE>


Registration  Statement,  all or any portion of the Shares, and limited,  in the
case of a  Regulation A offering,  the amount of the  available  exemption.  The
offer to include  the Shares is  limited  by  subparagraphs  (a) and (b) of this
Section 2. In any event,  the maximum  number of  Registrable  Securities  which
shall be  registered  shall not exceed  that  number for which the  Company  has
received written  requests for inclusion  therein within fifteen (15) days after
the  giving of notice by the  Company  The  Company  will use its best  efforts,
through its officers,  directors,  auditors and counsel in all matters necessary
or  advisable,  to cause to become  effective  such  Registration  Statement  as
promptly as practicable.  All registrations requested pursuant to this Section 2
are referred to herein as "Piggyback Registrations." All Piggyback Registrations
pursuant to this Section 2 will be made solely at the Company's expense,  except
for  the  Stockholders'  co~el  fees  and  sales  commissions  incurred  if  the
Registrable Securities be sold.

     (a) Priority on Primary Registrations. If a Piggyback Registration includes
     an  underwritten  primary  registration  on behalf of the  Company  and the
     underwriter  so  requests,  the  Company  and such  holder  of  Registrable
     Securities will enter into an underwriting  agreement with such underwriter
     for such offering,  which shall be reasonably satisfactory in substance and
     form  to the  Company,  such  holder  of  Registrable  Securities  and  the
     underwriter,  and such  agreement  shall contain such  representations  and
     warranties by the Company md such holder of Registrable Securities and such
     other terms and  provisions as are  customarily  contained in  underwriting
     agreement  with  respect  to  secondary  distributors,  including,  without
     limitation,  indemnities  substantially  to the  effect  and to the  extent
     provided Section 8.  Furthermore,  if the  underwriter(s)  for the offering
     being  registered by the Company  shall  determine ln good faith and advise
     the company in writing that in its/their  opinion the number of Registrable
     Securities requested to be included in such registration exceeds the number
     that can be sold in such offering without  materially  adversely  affecting
     the  distribution  of such securities by the Company (such opinion to state
     the reasons  therefor).  then the Company will promptly furnish the holders
     of the  Registrable  Securities with a copy of such opinion and the Company
     will  include in such  registration  (1)  first,  the  securities  that the
     Company  proposes  to sell  and (ii)  second,  the  Registrable  Securities
     requested  to be included in such  registration,  apportioned  and pro rata
     among the holders of the Registrable Securities,  but in any event not less
     than 50% of the Shares? and (iii) third, securities of the holders of other
     securities requesting registration.

     (b)  Priority  on  Secondary  Registrations.  If a  Piggyback  Registration
     consists  only of an  underwritten  secondary  registration  on  behalf  of
     holders  of  securities  of the  Company  and  the  underwriter(s)  for the
     offering being registered by the Company advise the Company in writing that
     in its/their opinion the number of Registrable  Securities  requested to be
     included in such  registration  exceeds the number that can be sold in such
     offering without  materially  adversely  affecting the distribution of such
     securities  by the Company  (such  opinion to state the reasons  therefor).
     then the Company  will  promptly  furnish  the  holders of the  Registrable
     Securities with a copy of such opinion and the Company will include in such
     registration (1) first, the securities  requested to be included therein by
     the holders  requesting such  registration  and the Registrable  Securities
     requested to be included in such

                                     Page 2

<PAGE>


     registration  above,  pro rata,  among all such holders on the basis of the
     number of shares  requested to be included by each such holder,  but in any
     event  not less than 50% of the  Registrable  Securities  and (ii)  second,
     other securities requested to be included in such registration.

Notwithstanding  the foregoing,  if any such underwriter shall determine in good
faith and advise the Company in writing that the distribution of the Registrable
Securities  requested to be included in the registration  concurrently  with the
securities being registered by the Company would materially adversely affect the
distribution  of  such  securities  by the  Company,  then  the  holders  of the
Registrable  Securities  shall  delay  their  offering  and sale for such period
ending  on the  earliest  of (i) 90 days  following  the  effective  date of the
Company's  registration  Statement,  (ii) the day upon  which  the  underwriting
syndicate,  if any, for such offering  shall have been  disbanded or, (iii) such
date as the Company,  managing underwriter and holders of Registrable Securities
shall otherwise  agree. In the event of such delay,  the Company shall file such
supplements,  post-effective  amendments and take any such other steps as may be
necessary to permit such holders to make their proposed  offering and sale for a
period of 120 days immediately following the end of such period of delay. If any
party  disapproves  of the  terms  of any  such  underwriting,  it may  elect to
withdraw  therefrom by written notice to the Company,  the underwriter,  and the
Stockholder's.  Notwithstanding the foregoing, the Company shall not be required
to file a registration statement to include Shares pursuant to this Section 2 if
an  opinion  of  independent  counsel  for  the  Stockholders,  that  all of the
Registrable Securities proposed to be disposed of may be transferred pursuant to
the  provisions  of Rule 144 under the Act shall have been  delivered to counsel
for the Company.

     Section 3. Other  Registration  Rights.  In  addition  to the rights  above
provided, the Company will cooperate with the then Stockholders in preparing and
signing any Registration  Statement,  in addition to the Registration Statements
and Offering Statements  discussed above,  required In order to sell or transfer
the Registrable  Securities and will supply all information  required  therefor,
but such  additional  Registration  Statement shall be at the then Holders' cost
and  expense;  provided,  however,  that if the Company  elects to register  and
qualify  additional  shares  of Common  Shares,  the cost and  expenses  of such
Registration Statement will be pro-rated, between the Company and the Holders of
the  Registrable  Securities  according  to the  aggregate  sales  price  of the
securities being registered.

     Section 4. Certain  Understandings.  The  Stockholders  understand that the
Company makes no representations of any kind concerning its intent or ability to
offer  or  sell  any of the  Registrable  Securities  in a  public  offering  or
otherwise and that its sole rights to have the Registrable Securities registered
under the Act are contained in this Agreement.  So long as there are Registrable
Securities  outstanding and the Company is subject to the reporting requirements
of the Act and the Securities  E;exchange Act of 1934 (the "Exchange  Act"), the
Company  will file the reports  required to be filed by it under the Act and the
Exchange Act and the rules and  regulations  adopted by the SEC  hereunder,  and
will take such  further  action as the  holders of  Registrable  Securities  may
reasonably  request,  all to the extent required from time to time to enable the
holders of Registrable  Securities without registration under the Act within the
limitation of the exemptions provided by (i) Rule 144

                                     Page 3

<PAGE>


under  the Act,  as such  Rule may be  amended  from  time to tune,  or (ii) any
similar rule or regulation hereafter adopted by the SEC. Upon the request of the
holders of  Registrable  Securities,  the Company will deliver to the holders of
Registrable  Securities a written  statement as to whether it has complied  with
such information requirements.

     Section 5. Company Obligations.  In connection with the registration of the
Registrable Securities pursuant to this agreement, the Company shall:

     (a)  furnish  to the  holders  of  the  Registrable  Securities  and to the
     underwriter(s),  if any,  thereof such  reasonable  number of copies of the
     Registration Statement,  preliminary prospectus,  final prospectus and such
     other  documents as such holders and  underwriters  may request in order to
     facilitate the public offering of such securities;

     (b) use its best efforts to register or qualify the Registrable  Securities
     under state securities laws of the jurisdictions  which the holders thereof
     may  reasonably  request in writing  within 20 days  following the original
     filing of such  Registration  Statement,  and do any and all other acts and
     things  which may be  necessary  or  advisable  to enable  the  holders  of
     Registrable   Securities  to  consummate  the  disposition  of  Registrable
     Securities  in such  jurisdictions  except  that the  Company  shall not be
     required  to execute a general  consent to service of process or to qualify
     to do business as a foreign  corporation in any jurisdiction  wherein it is
     not so qualified;

     (c) notify the holders of the  Registrable  Securities  promptly  when such
     Registration   Statement  has  become  effective  or  a  supplement  to  my
     prospectus  forming a part of such  Registration  Statement has been filed;
     and

     (d) advise the holders of the  Registrable  Securities,  promptly  after it
     shall.receive  notice or obtain  knowledge  thereof of the  issuance of any
     stop order by the SEC suspending  the  effectiveness  of such  Registration
     Statement,  or the  initiation or  threatening  of any  proceeding for that
     purpose and  promptly  use its best  efforts to prevent the issuance of any
     stop order or to obtain its withdrawal if such stop order should be issued.

     (e) prepare and file with the SEC such  amendments and  supplements to such
     Registration Statement,  and the prospectus used in connection therewith as
     may be  necessary  to keep such  Registration  Statement  effective  and to
     comply with the  provisions of the Act with respect to the  disposition  of
     all   Registrable   Securities  and  other   securities   covered  by  such
     Registration  Statement,  until the earlier of (a) such time as all of such
     Registrable  Securities and securities  have been disposed of in accordance
     with the intended  methods of disposition by seller or sellers  thereof set
     forth in such  Registration  Statement,  or (b) the  expiration  of 90 days
     after such Registration Statement becomes effective,

     (f)  furnish  to  the  holders  of  the  Registrable  Securities  a  signed
     counterpart, addressed to the holders of the Registrable Securities, of (a)
     an opinion of counsel for the Company

                                     Page 4

<PAGE>


     dated the  effective  date of such  registration  statement  (and,  if such
     registration  includes an underwritten  public offering,  dated the date of
     the closing of such underwritten public offering), and (b) a "cold comfort"
     letter signed by the independent  public accountants who have certified the
     Company's  financial  statements  included in such Registration  Statement,
     covering  substantially  the same matters with respect to such registration
     statement  (and the prospectus  included  therein) and, in the case of such
     accountants'  letter, with respect to events subsequent to the date of such
     financial  statements,  as are customarily  covered in opinions of issuer's
     counsel  and  in   accountants'   letters   delivered  to  underwriters  in
     underwritten  public  offerings  of  securities  and,  in the  case  of the
     accountants'  letter,  such other financial matters,  as the holders of the
     Registrable Securities may reasonably request;

     (g) promptly notify the holders of the  Registrable  Securities at any time
     when a prospectus  relating  thereto is required to be delivered  under the
     Act,  of the  happening  of my event as a result  of which  the  prospectus
     included in such registration  statement,  as then in effect, would include
     an untrue  statement of a material  fact or omit to state any material fact
     re~red to be stated therein or necessary to malice the  statements  therein
     not misleading in the light of the circumstances then existing,  and at the
     reasonable request of the holders of the Registrable Securities prepare and
     furnish to the holders of the Registrable  Securities such number of copies
     of a supplement  to or an amendment of such  prospectus as may be necessary
     so that, as  thereafter  delivered to the  purchasers  of such  Registrable
     Securities  of  securities,  such  prospectus  shall not  include an untrue
     statement of a material  fact or omit to state a material  fact required to
     be  stated  therein  or  necessary  to  make  the  statements  therein  not
     misleading in the light of the circumstances under which they were made,

     (h) in  connection  with the  preparation  and  filing of the  Registration
     Statement  registering  Registrable  Securities  under the Act, the Company
     will give the  holders of  Registrable  Securities  and their  counsel  and
     accountants,  the  opportunity to  participate  in the  preparation of such
     registration statement,  each prospectus included therein or filed with the
     SEC, and each amendment thereof or supplement  thereto,  and will give each
     of them such  access to its books and  records  and such  opportunities  to
     discuss the business of the Company  with its officers and the  independent
     public accountants who have certified its financial  statements as shall be
     reasonably  necessary,  in  the  opinion  of  the  holders  of  Registrable
     Securities,  or their counsel, to conduct a reasonable investigation within
     the meaning of the Act.


     (i) otherwise use of all of its or their reasonable  efforts to comply with
     all applicable  rules and  regulations of the SEC and make available to its
     securities  holders,  as  soon  as  reasonably  practicable,   an  earnings
     statement covering the period of at least twelve months beginning after the
     effective date of such  registration  statement,  which earnings  statement
     shall satisfy the provisions of the Section ii(a) of the Act; and

                                     Page 5

<PAGE>


     (j) provide and cause to be maintained a transfer  agent and registrant for
     such  Registrable  Securities  from  and  after a date not  later  than the
     effective date of such registration statement.

     Section 6.  Expenses.  The  Company  will bear all  expenses  attendant  to
registering the  Registrable  Securities,  including,  without  limitation,  all
registration  and filing  fees,  all  listing  fees,  all fees and  expenses  of
complying with securities or blue sky laws, all word processing, duplicating and
printing   expenses,   messenger   and  delivery   expenses  and  the  fees  and
disbursements of counsel for the Company and its independent public accountants,
including the expenses of "cold comfort" letters and expenses any special audits
required by or incident to such  performance and compliance,  premiums and other
costs of policies of policies of insurance  against  liabilities  arising out of
the public offering of the Registrable  Securities being registered and any fees
and  disbursements  of underwriters  customarily  paid by issuers and sellers of
securities,  but  excluding  underwriting  discounts  and  commissions,  if any,
applicable to the sale of such securities. Furthermore, the Company shall not be
required to pay the fees an  disbursements  of counsel and  accountants  for any
holder of  Registrable  Securities or other  expenses  incurred by any holder of
Registrable Securities or other expenses incurred by any holder thereof that are
not  customarily  paid by an issuer in response to the exercise of  registration
rights.

     Section 7.  Indemnification and Contribution.  The Stockholders  understand
that  indemnification  and  contribution  provisions  such as the  following are
customarily included in an underwriting agreement and agree that they will enter
into an  agreement  containing~  such  provisions  or  provisions  substantially
similar thereto as a condition  precedent to the  registration by the Company of
any of their Registrable Securities:

     (s) The Company will indemnify and hold harmless each holder of Registrable
     Securities which are included in a Registration  Statement  pursuant to the
     provisions of this  Agreement and any  underwriter  (as defined in the Act)
     for such holder, each officer,  director,  employee,  agent and counsel, if
     any,  of each such holder and  underwriter,  and each  person,  if any' who
     controls such holder or such  underwriter  within the meaning of Section 15
     of the Act or  Section  20(a) of the  Exchange  Act  (each,  a "person  who
     controls" or a "controlling  person"),  from and against, any and all loss,
     claim, damage, liability, costs and expense (including, without limitation,
     reasonable  legal  expenses) to which such holder or any such  underwriter,
     officer,  director,  employee,  agent,  counsel of  controlling  person may
     become subject under the Act or otherwise,  insofar as such losses, claims,
     damages,  liabilities,  costs or  expenses  (or actions or  proceedings  in
     respect  thereof)  arise out of or are based upon any untrue  statement  or
     alleged   untrue   statement  of  any  material  fact   contained  in  such
     Registration  statement,  any prospectus contained therein or any amendment
     or  supplement  thereto,  or arise out of or are based upon the omission or
     alleged  omission to state  therein a material  fact  required to be stated
     therein  or  necessary  to make  the  statement  therein,  in  light of the
     circumstances in which they were made, not misleading;  provided,  however,
     that the Company will not be liable in any such case to the extent that any
     such loss, claim,  damage,  liability,  cost or expense arises out of or is
     based upon an untrue statement or alleged untrue

                                     Page 6

<PAGE>


     statement or omission or alleged  omission so made in reliance  upon and in
     strict  conformity  with  information  furnished  by or on  behalf  of such
     holder,  underwriter,   officer,  director,  employee,  agent,  counsel  or
     controlling  person  in  writing  specifically  for use in the  preparation
     thereof.

     (b) Each  holder  of  Registrable  Securities  included  in a  registration
     pursuant  to the  provisions  of this  Agreement  will  indemnify  and hold
     harmless the Company, any underwriter,  each officer,  director,  employee,
     agent,  counsel  of and  each  person  who  controls  the  Company  or such
     underwriter  from and against,  any and all losses,  damages,  liabilities,
     costs or expenses to which the Company or such officer, director' employee,
     agent,  counsel or  controlling  person may become subject under the Act or
     otherwise, insofar as such losses, damages, liabilities,  costs or expenses
     are  caused by any untrue  statement  of alleged  untrue  statement  of any
     material fact  contained in such  Registration  Statement,  any  prospectus
     contained therein or any amendment or supplement  thereto,  or arise out of
     or are based upon the  omission  or  alleged  omission  to state  therein a
     material  fact  required  to be stated  therein  or  necessary  to make the
     statements  thereon, in light of the circumstances in which they were made,
     not misleading,  in each case to the extent,  but only to the extent,  that
     such untrue  statement or alleged  untrue  statement or omission or alleged
     omission was so made in reliance upon and in strict conformity with written
     information  furnished by or on behalf or such holder  specifically for use
     in the preparation thereof,

     (c)  Promptly  after  receipt  by an  indemnified  party  pursuant  to  the
     provisions  of  Section  7(a) or (b) of notice of the  commencement  of any
     action involving the subject matter of the foregoing indemnity  provisions,
     shall  indemnified  part will, if a claim thereof is to be made against the
     indemnifying  party pursuant to the provisions of said  subparagraph (a) or
     (b),  promptly notify the indemnifying  party of the commencement  thereof,
     but the  omission to so notify the  indemnifying  party will not relieve it
     from any liability  which it may have to any  indemnified  party  otherwise
     than  hereunder.  In case such action is brought  against  any  indemnified
     party and it notifies the indemnifying  party of the commencement  thereof,
     the indemnifying  party shall have the right to participate in, and, to the
     extent  that  it may  wish,  jointly  with  any  other  indemnifying  party
     similarly notified,  to assume the defense thereof, with counsel reasonably
     satisfactory  to  such  indemnified  party;   provided,   however,  if  the
     defendants  in any  action  include  both  the  indemnified  party  and the
     indemnifying   party  and  the  indemnified  party  shall  have  reasonably
     concluded  that there may be legal  defenses  available  to it and/or other
     indemnified  parties  which  are  different  from or in  addition  to those
     available to the indemnifying  party, or if there is a conflict of interest
     which  would  prevent  counsel  for  the   indemnifying   party  from  also
     representing the indemnified  party, the indemnified party or parties shall
     have the right to select separate  counsel to participate in the defense of
     such action on behalf of such  indemnified  party or parties.  After notice
     from the indemnifying party to such indemnified party of its election so to
     assume the defense thereof,  the  indemnifying  party will not be liable to
     such  indemnified  party  pursuant to the provisions of Section 7(a) or (b)
     for any legal or other expenses  subsequently  incurred by such indemnified
     party in connection with the defense

                                     Page 7

<PAGE>


     thereof,  other  than  reasonable  costs of  investigation,  unless (i) the
     indemnified  party  shall  have  employed  counsel in  accordance  with the
     provisions of the immediately  preceding  sentence,  (ii) the  indemnifying
     party  shall  not have  employed  counsel  reasonably  satisfactory  to the
     indemnified  party to represent the  indemnified  party within a reasonable
     time  after  notice  of  the  commencement  of the  action,  or  (iii)  the
     indemnifying  party  has  authorized  the  employment  of  counsel  for the
     indemnified party at the expense of the indemnifying party.

     (d)  If the  indemnification  provided  for  in  this  Section  7 from  the
     indemnifying  party is  unavailable to an  indemnified  party  hereunder in
     respect of any losses,  claims, damages or liabilities referred to therein,
     then the  indemnifying  party,  in lieu of  indemnifying  such  indemnified
     party,  shall  contribute to the amount paid or payable by such indemnified
     party, as a result of such losses,  claims,  damages or liabilities in such
     proportion  as is  appropriate  to  reflect  the  relative  fault  of  such
     indemnifying  party and indemnified  parties in connection with the actions
     which resulted in such losses, claims,  damages or liabilities,  as well as
     any other  relevant  equable  considerations.  The  relative  fault of such
     indemnifying party and indemnified parties shall be determined by reference
     to, among other things, whether any action in question including any untrue
     or alleged  untrue  statement  of a material  fact or  omission  or alleged
     omission  to state a  material  fact,  has  been  made by,  or  relates  to
     information supplied by, such indemnifying party or indemnified parties and
     the  parties'  relative  intent,  knowledge,   access  to  information  and
     opportunity to correct or prevent such action, provided,  however, that any
     holder of Registrable  Securities shall not be required to contribute in an
     amount  greater  than the dollar  amount of the  proceeds  received by such
     holder  of  Registrable   Securities  with  respect  to  the  sale  of  any
     securities.  The  amount  paid or  payable  by a party as a  result  of the
     losses, claims,  dan~ages and liabilities referred to above shall be deemed
     to include,  subject to the  limitations set for~ in this Section 7(d). any
     legal  or other  fees or  expenses  reasonably  incurred  by such  party in
     connection with any investigation or proceeding.

     The  parties  hereto  agree  that it  would  not be just and  equitable  if
contribution  pursuant  to  this  Section  7(d)  were  determined  by  pro  rata
allocation or by any other method of allocation  which, does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person  guilty of a  fraudulent  misrepresentation  (within  the  meaning  of
Section 1 l(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation

     Section 8. No  Inconsistent  Agreements.  The Company shall not on or after
the  date of this  Agreement  enter  into  amy  agreement  with  respect  to its
securities  which is  inconsistent  with the rights  granted  to the  holders of
Registrable   Securities,   this  Agreement  or  otherwise  conflicts  with  the
provisions hereof. The Company has not previously entered into or become a party
to nor is it bound by any agreement with respect to its securities  granting any
registration rights to any person,  except as set forth in or as contemplated by
the Merger Agreement. The rights granted to the holders of the securities of the
Company under any other agreements.

                                     Page 8

<PAGE>


Section 9.  Miscellaneous.

     (a) All notices or other communications given or made hereunder shall be in
     writing and shall be delivered by hand, against written receipt,  or mailed
     by registered or certified mail, ret~n receipt requested,  postage prepaid,
     to the Stockholders at their respective address appearing on the records of
     the Company and to the  Company at its  address  set forth  above.  Notices
     shall be deemed given on the date of receipt or, if mailed,  three business
     days after  ma~ling,  except  notices of change of address,  which shall be
     deemed given when received.

     (b)  Notwithstanding  the place where this Agreement may be executed by the
     Stockholders  or the Company,  they agree that all the terms and provisions
     hereof shall be construed  in  accordance  with and governed by the laws of
     the State of New York without regard to principles of conflict of laws.

     (c)  This  Agreement   constitutes   the  entire   agreement   between  the
     Stockholders  and the Company with respect to the subject matter hereof and
     may be amended only by writing executed by each of them.

     (d) This  Agreement  shall be binding upon and inure to the benefit of each
     of the  Stockholder'  and the Company  and their  respective  heirs,  legal
     representatives, successors and assigns.

     (e)  The   Stockholders   and  the  Company  each  hereby   submit  to  the
     non-exclusive  jurisdiction  of the courts of the State of New York located
     in New York,  New York and of the federal  courts  located in the  Southern
     District  of New York  with  respect  to any  action  or  legal  proceeding
     commenced  by either  of them  with  respect  to this  Agreement  or to the
     Registrable Securities.  Each of them irrevocably waives any objection they
     now have or hereafter may have  respecting  the venue of any such action or
     proceeding  brought in such a court or  respecting ~e fact that such courts
     an  inconvenient  forum and  consents to the service of process in any such
     action or  proceeding  by means of  registered  or certified  mail,  return
     receipt  requested,  in care of the  address set forth above or below or at
     such other address as either of them shall furnish in writing to the other.

     (f) The parties hereto  acknowledge and agree that irreparable damage would
     occur in the event that any of the  provisions of this  Agreement  were not
     performed  in  accordance  with  their  specific  terms  or were  otherwise
     breached. It is accordingly agreed that the parties shall be entitled to an
     injunction or  injunctions to prevent or cure breaches of the provisions of
     this  Agreement,  this being in addition to any other  remedy to which they
     may be entitled by law or equity.

     (g) The invalidity or  unenforceability of any provisions of this Agreement
     shall not affect the validity or  enforceability  of any other provision of
     this Agreement.

                                     Page 9

<PAGE>

     (h) The waiver by either the Stockholders or the Company of a breach of any
     provision of this Agreement shall not operate, or be construed, as a waiver
     of any subsequent breach or any provision of this Agreement.

     (i) The  Stockholders  and the  Company  agree to execute  and  deliver all
     further  documents,  agreements  and  instruments  and to take  such  other
     further action as may be necessary or appropriate to carry out the purposes
     and intent of this Agreement.

     (j) This  Agreement  may be executed by one or more  counterparts,  each of
     which  shall  be  deemed  an  original,  but all of  which  shall  together
     constitute one and the same instrument.

     (k) References in this Agreement to the pronouns  "him," "he" and "his" are
     not  intended to convey the  masculine  gender  alone and are employed in a
     generic sense and apply equally to the feminine gender or to an entity.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
firrt written above.

                                      ProtoSource Corporation

                                      By: 
                                          -------------------------------------
                                          Name: Raymond Meyers
                                          Title: Chief Executive Officer


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



WORLD SPIRIT INC.
- -------------------------------           -------------------------------------
By Its President



                                    Page 10





               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


We hereby  consent to the use, in this  Registration  Statement on Form SB-2, of
our report dated  February 28, 1997,  except for Note 12 as to which the date is
April 25, 1997 relating to the financial  statements of ProtoSource  Corporation
for the years ended  December  31, 1996 and 1995 and the  reference  to our firm
under the caption  "Experts" in the  Prospectus  contained in said  Registration
Statement.





                                        Angell & Deering
                                        Certified Public Accountants

Denver, Colorado
November 18, 1997





<TABLE> <S> <C>


<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-QSB September 30, 1997.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               SEP-30-1997
<CASH>                                          61,471
<SECURITIES>                                         0
<RECEIVABLES>                                  183,220
<ALLOWANCES>                                         0
<INVENTORY>                                      8,980
<CURRENT-ASSETS>                               319,888
<PP&E>                                       2,691,195
<DEPRECIATION>                                 659,141
<TOTAL-ASSETS>                               3,255,812
<CURRENT-LIABILITIES>                          904,503
<BONDS>                                      1,812,493
                                0
                                          0
<COMMON>                                     5,590,455
<OTHER-SE>                                 (5,051,639)
<TOTAL-LIABILITY-AND-EQUITY>                 3,255,812
<SALES>                                        550,969
<TOTAL-REVENUES>                               550,969
<CGS>                                                0
<TOTAL-COSTS>                                1,415,019
<OTHER-EXPENSES>                               591,234
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             898,678
<INCOME-PRETAX>                            (1,455,284)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (1,455,284)
<EPS-PRIMARY>                                   (2.61)
<EPS-DILUTED>                                   (2.61)
        



</TABLE>


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