UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)

|X|   Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
      Act of 1934

                   For the Fiscal Year ended December 31, 2002

|_|   Transition Report Pursuant to Section 13 or 15(D) of the Securities
      Exchange Act of 1934

        For the transition period from _______________ to _______________

                        Commission File Number 001-15363

                                  ADSTAR, INC.
                 (Name of Small Business Issuer in its Charter)

            Delaware                                             22-3666899
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization                             Identification No.)

        4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292
               (Address of Principal Executive Office) (Zip Code)

                  Registrant's telephone number (310) 577-8255

Securities registered under Section 12(b) of the Exchange Act:

    Title of Each Class                                 Name of Each Exchange on
       Common Stock,                                        Which Registered
par value $.0001 per share                               Boston Stock Exchange
        Warrants

Securities Registered under Section 12(g) of the Exchange Act:

                    Common Stock, par value $.0001 per share
                                 Title of Class

                                    Warrants
                                 Title of Class

      Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B in this form and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. | |

      For the year ended December 31, 2002, the revenues of the registrant were
$2,241,492

      The aggregate market value of the voting Common Stock of the registrant
held by non-affiliates of the registrant, based on the closing price on the
Nasdaq Market on March 28, 2003 of $0.79 per share, was approximately
$5,666,503.

      As of March 28, 2003, the registrant has a total of 8,263,676 shares of
Common Stock outstanding, including 19,279 shares issuable pursuant to the
vendor compensation program.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE


<PAGE>


                                  ADSTAR, INC.

                            Form 10-KSB Annual Report

                                TABLE OF CONTENTS

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PART I
     Item 1.    Description of Business.............................................     3
     Item 2.    Description of Property.............................................    15
     Item 3.    Legal Proceedings...................................................    15
     Item 4.    Submission of Matters to a Vote of Security Holders.................    15

PART II
     Item 5.    Market for Common Equity and Related Stockholder Matters............    16
     Item 6.    Management's Discussion and Analysis of Operations or Plan
                of Operation........................................................    18
     Item 7.    Financial Statements................................................    27
     Item 8.    Changes in and Disagreements With Accountants on Accounting
                and Financial Disclosure............................................    27

PART III
     Item 9.    Directors and Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act...................    27
     Item 10.   Executive Compensation..............................................    29
     Item 11.   Security Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters ....................................    31
     Item 12.   Certain Relationships and Related Transactions......................    34
     Item 13.   Exhibits, List and Reports on Form 8-K..............................    35
     Item 14.   Controls and Procedures.............................................    37
</TABLE>

                           FORWARD-LOOKING STATEMENTS

      Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934 regarding the plans and objectives of management for
future operations and market trends and expectations. Such statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties. Our
plans and objectives are based, in part, on assumptions involving the continued
expansion of our business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein,
particularly in view of our early stage operations, the inclusion of such
information should not be regarded as a representation by us or any other person
that our objectives


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and plans will be achieved. The terms "we", "our", "us", or any derivative
thereof, as used herein shall mean AdStar, Inc., a Delaware corporation.

                                     PART I

Item 1. BUSINESS

General

AdStar, Inc., a Delaware corporation ("AdStar") provides technology services
within the classified advertising industry. Our proprietary software is an
integrated suite of applications that electronically connects publishers with
the source of their advertising revenue. Our software applications allow
professional advertising agencies businesses and individuals to electronically
send ads to newspapers. This gives newspapers the ability to electronically
receive classified advertising insertions directly into their sophisticated
publishing systems. Our solutions are available in an application service
provider ("ASP") model whereby we contract with publishers to design, implement,
host, and manage the on-line ad-taking capabilities of their Web sites. We
provide all the technical and application expertise, customer support, and
security measures that the publisher needs to install our application modules
and begin to generate revenue in a short time frame. Our software solutions
afford newspapers the ability to increase revenue and are the application of
choice for advertisers, because it affords them the ability to effortlessly and
quickly compose and format classified ads, price them, schedule them, and
electronically send them into the publishing system at multiple newspapers.

Corporate History

AdStar was originally incorporated in New York as AdStar-Services, Inc. a
privately held corporation. In 1999, we incorporated AdStar.com, Inc. in
Delaware and merged AdStar-Services, Inc. into this entity. We completed an
initial public offering of AdStar.com, Inc. common stock in December 1999,
receiving net proceeds of approximately $5.4 million. This was followed in
September 2000, with another offering of common stock, receiving net proceeds of
approximately $2.8 million. In July 2001, we formally changed our name to
AdStar, Inc. to more accurately reflect our current business, products and our
plans for future growth.

The AdStar Software Solution

The new AdStar e-business application suite is an enterprise class, integrated
software solution that allows print and on-line publications to electronically
receive completed classified advertising copy using the Internet as the
communication channel. This new application suite was developed in conjunction
with our existing customers, and in response to their need for a software
solution supporting both business-to-business (B-to-B) operations and
business-to-customer (B-to-C) operations. These software solutions enable our
customers to expand the relationships with their customers using a single
integrated platform, while increasing sales volumes at reduced costs. Our ASP
product provides our customers an opportunity to generate incremental revenue
from their on-line business while increasing the number of visitors to their Web
site. Our software allows newspapers to turn their on-line presence into an
e-commerce-enabled, revenue generating Web site.

Our new e-business application suite includes two main products that can be
purchased separately or as a fully integrated software solution:

      o     Professional software - This technology is designed for use by the
            professional marketplace. Specifically, the applications accept
            transmissions from classified advertising agencies and large


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            corporations using advanced Web-based technology. The software
            includes sophisticated pricing algorithms to provide for maximum
            flexibility and intricate design resources to provide unlimited
            creative capabilities.

      o     ASP Web site technology - This technology is a publisher-specific
            ad-taking Web site service designed to enhance a publication's Web
            site by allowing the general public to execute transactions to
            purchase classified advertising. Specifically, it is an integrated
            application suite that offers visitors to a newspaper's Web page the
            opportunity to buy classified ads, for both the print and/or on-line
            editions of the newspaper, in real-time, on a 24/7 basis. This
            product allows a publication to completely outsource the classified
            ad-taking power of their Web site whereby the publication receives
            incremental revenue at a very low incremental cost. We handle all
            functions associated with this revenue source. We furnish and host
            the application suite, run the technology, monitor the transactions
            throughout the session, handle the payment authorization and
            settlement process, electronically deliver the ad text to the
            newspaper, and provide customer service support to the newspaper's
            customers. We provide all the technical and application expertise,
            customer support, and security measures that the publication needs
            to get an application up and running in a short time. Typically, we
            are able to process many more ads and do so much more quickly and
            affordably than the publisher could do internally. In addition, this
            software solution provides tools to evaluate performance, provide
            additional customer care, and increase future revenue opportunities.
            We provide the means to deliver highly personalized email
            communications to existing customers for the purpose of creating
            additional revenues and creating a profitable, long-term
            relationship.

Both software products allow transactions to be executed in a secure
infrastructure. Our application suite is designed to be quickly integrated into
our customer's existing publishing software and readily expands as our
customer's needs and business grows. Our products use a single platform to
connect and integrate transmissions between multiple browsers and multiple
technology standards. In continually ensuring that our AdStar software solution
works with all available technology standards, we solve the problems created for
our customers because advertisers create and deliver content using ever changing
technology with multiple standards, multiple browsers and evolving network
infrastructures. By bridging disparate technologies in a way that seamlessly
allows for communication and transmission of advertising copy, we alleviate this
obstacle for our customers, freeing them to focus on their business.

Both lines of business require fees to customize the AdStar software solution to
the technical specifications for each publication. In addition, we charge
ongoing monthly fees to manage the ad-taking process, provide technical support,
supply a customer service phone room, and manage the entire e-commerce function.
The monthly fees include a small hosting fee plus a fee based on transaction
volumes and structured in such a way that we are, in essence partnering with our
customers. Therefore, when our customer's revenue increases, our revenue will
also increase. With this structure, we are able to offer superior service in a
manner that is cost effective for publishers of all sizes.

BonafideClassifieds.com

The Newspaper Association of America (NAA) is the newspaper industry's trade
association representing the $55 billion newspaper industry and over 2,000
publishers in the United States and Canada. In 2002 AdStar entered into an
Agreement with the NAA to allow the NAA to market and private label (operate
under it's name) Advertise123.com, AdStar's one-stop marketplace on the Web for
the general public to buy classified ads. Through this portal, individuals and
businesses can, on a 24/7 basis, compose professional looking classified ads
using one of several pre-programmed templates, schedule the ad to run in one or
several of over 200 newspapers and 50 state newspaper associations, and purchase
the ad using a credit card. Beginning in 2003, AdStar will expand its
relationship with the NAA by authorizing the


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NAA to market a version of AdStar's ASP Web site technology to its members.
AdStar receives set up and transaction fees for these businesses.

Application Programming Interface (API)

In 2002, AdStar learned that a variety of third parties including call centers,
niche web publishers, auto dealer management businesses and others were
interested in utilizing AdStar technologies to allow their customers, who
advertise with newspapers, the convenience of AdStar services. Third parties are
using AdStar's application programming interface (API) to access AdStar services
so that the customer of the third party can remain within that third parties
application. AdStar's service provides fast and accurate ways for composing,
pricing and delivering ads. For allowing third parties access to AdStar
services, AdStar charges fees based on transaction volume.

Background

We began developing the professional software application in 1986, and today
have grown to become the preeminent software solution providing large newspapers
with the ability to electronically receive classified advertising from
advertising agencies and large corporations. Our professional software
application has seen numerous technological enhancements over the years, and is
still in place at the majority of installations. This technology enables
newspapers to reduce the amount of manual effort required to publish an ad and
eliminates newspaper typographical errors. Our software allows newspapers to
process more ads accurately while under tight time constraints at deadline and
thus realize greater revenue. Our remote entry version of this software is
currently in use at more than 40 large metropolitan newspapers linked to more
than 1,500 advertising agencies and numerous large corporations. Our customers
include such highly respected publications as the Los Angeles Times, the Chicago
Tribune, The Atlanta Journal-Constitution, and The Miami Herald.

During 1999 and 2000, we designed, engineered, and marketed Advertise123.com, a
one-stop marketplace on the Web for advertisers to buy classified ads. By
accessing our Web site, we enable advertisers to plan, schedule, compose, and
purchase classified advertising from a large number of print and on-line
publishers using one simple interface. Our service permits both advertising
agencies and consumers, including the general public, to create and submit to
one or many publications any number of classified ads, 24 hours a day, seven
days a week, using any standard Web browser.

This Web-based service, Advertise123.com, is an outgrowth of our historical
business as the largest provider of remote entry for classified ads into
newspapers in the United States. Since 1986, we have offered advertising
agencies the ability to process classified ads electronically with a number of
the largest newspapers in the United States. Our historical business enables
professional advertisers to electronically input, format and price ads. It is
based on a software system that we developed which is currently installed on
computers used by 43 newspapers and more than 1,500 advertising agency and
advertiser locations. Using this system, we have become the largest provider of
remote entry for classified ads into newspapers in the United States. We
estimate that in 2001, approximately $400 million in classified ads were placed
in newspapers using our remote entry system and in 2002 that number has grown to
greater than $400 million. We believe we have enjoyed our leadership in the
remote entry ad placement business because of the extremely difficult process of
properly formatting, pricing and scheduling an ad and finding a way to send this
ad to a classified system without seriously impeding the processing demands of
both the automated systems and human processes involved.

We received our first transaction fees from Internet business in June 1999 with
one on-line publication available on the Advertise123.com site. At the end of
1999, we had five print and one on-line publications available on the site. By
the end of 2000, we had over 280 print publications and newspaper networks


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and 30 on-line publications available. In October 2000, we achieved our target
coverage in the top 100 designated market areas ("DMAs") in the U.S. In
addition, in 1999 and 2000, we powered approximately $550,000 and $4,383,000,
respectively, of classified advertising through our classified advertising
marketplace, Advertise123.com, and private-label ad-taking sites built and
powered by us.

Although the volume and dollar value of ads placed through our Advertise123.com
portal continued to grow, the margins on this business were not sufficient to
sustain a business. In an effort to minimize marketing expenses and maintain the
ongoing growth of Advertise123.com, in 2002 we entered into an Agreement with
the NAA. The NAA now markets and sells Advertise123.com under its national brand
bonafideclassifieds.com.

During 2002, we successfully shifted our revenue to recurring, transaction based
sources. In 2002 the largest Knight-Ridder, Inc. newspapers and Tribune Company
major market newspapers contracted to install the ASP Web site technology. By
the end of 2002, 24 newspapers were operating under this new model with
additional implementations scheduled for 2003. Other large newspapers were
contracted with including: The Detroit News (www.detnews.com) and Detroit Free
Press (www.freep.com); and eight Southern California newspapers owned by
MediaNewsGroup, Inc. - the Los Angeles Daily News (www.dailynews.com), Long
Beach Press-Telegram (www.presstelegram.com), San Gabriel Valley Tribune
(www.sgvtribune.com), Pasadena Star News (www.pasdenastarnews.com), San
Bernardino County Sun (www.sbsun.com), Inland Valley Daily Bulletin
(www.dailybulletin.com), Whittier Daily News (www.whittierdailynews.com) and the
Redlands Daily Facts (www.redlandsdailyfacts.com). We also enhanced our core
platform by implementing iPix photo technology, enabling our ASP Web site
technology customers to add photo up sell capability.

In 2002, AdStar entered into a strategic relationship with Tribune Company in
which Tribune invested $1,800,000 in March 2002, $900,000 in December 2002 and
$600,000 in March 2003 and AdStar agreed to build, host and manage Tribune
Company's integrated print and online employment web-based ad taking technology.
For its investment Tribune received the following:

      (i)   In March 2002, 1,443,457 shares of our Series A Preferred Stock;

      (ii)  In December 2002, 1,200,000 shares of our Series B-1 Preferred
            Stock; and

      (iii) In March 2003, 800,000 shares of our Series B-2 Preferred Stock plus
            an additional 1,200,000 shares of our Series B-2 Preferred Stock, in
            exchange for all of the previously issued Series B-1 Preferred Stock
            and all accrued and unpaid dividends on those shares.

Each of these transaction are described below in Item 5 under the subsection
entitled "Recent Sales of Unregistered Securities."

Finally in 2002, we aggressively began marketing our application-programming
interface whereby we allow third parties to use AdStar services. A variety of
businesses have taken advantage of this interface, with more implementations
scheduled for 2003. The most notable agreement is with Manheim Interactive, the
technology services division of Manheim Auctions, Inc. Manheim will develop ad
transaction services using AdStar's application programming interface to help
automotive dealerships compose, schedule and pay for ads in print and online
versions of newspapers. There are over 11,000 Tracker Dealer Management System
users who could potentially take advantage of this service.


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AdStar Business Strategy

In 2002 we were able to transition the business to an application service
provider model. For 2002, 41% of our revenue was from recurring transaction
based fees. This represents a 27% increase over the prior year. As part of this
transition we developed new ASP services supporting high volume revenue (e.g.,
API business) and shifted low volume operations to organizations better equipped
to market the services (e.g., Advertise123.com to Bonafideclassifieds.com).

Our goal is to leverage the classified ad-taking knowledge we've gained over the
past 16 years and the complex technology we've developed during that same time
to continue to be the preeminent supplier of technology that connects publishers
with the source of their advertising revenue. In 2002 we demonstrated this
sophistication in building the most complex cross media, cross publication
application in newspaper classified history Tribune Company's integrated print
and online Flex Ad product. The Flex Ad product offers the ability to
simultaneously place an employment ad in print and online with a Web ID enabling
the reader to link the print ad to its online complement. Advances in Internet
technology, digital technology, and the public's demand for more interactive Web
sites puts us in a unique position to capitalize on the foundation that we have
already built.

To maintain the momentum we created in 2002, we will continue to aggressively
pursue the following:

      o     Focus our sales efforts at large and middle tier publications which
            we believe have more than five full-time ad-takers and the ability
            to process 200 or more ads on-line each month;

      o     Aggressively market our ad-taking platform to media companies and
            vertically integrated on-line businesses, consistently showing
            evidence of its cost effectiveness;

      o     Pursue relationships with third-parties who can add ad taking
            capability to their customers by using our API;

      o     Enter into arrangements with companies offering complementary
            technologies, such as digital photo technology where we receive
            additional fees when advertisers access these services through our
            transaction engine.

Our strategies involve certain risk. We may be unable to implement our
strategies, and our strategies, even if implemented, may not lead to successful
achievement of our objectives. If we are unable to implement our strategies
effectively, our business may be harmed.

Customers and Marketplace

According to the Newspaper Association of America, Classified advertising in the
United States alone was $16 billion. Despite this level of activity, the vast
majority of classified ads published continue to be submitted to the publisher
by telephone, fax, email, mail, or messenger. The publisher must provide
personnel to receive the ad, enter the ad into its computer system, provide
price information, and collect payment from the advertiser through direct
billing or, for certain classes of advertisers, by credit card charge. This ad
placement process must be repeated by the advertiser for each ad purchased and,
when ads are placed in multiple publications, for each publication. In addition
to the considerable processing cost to both the advertiser and the publisher,
publishers sometimes are required to refund or give credits for all or a portion
of their fee as a result of errors in input.

Our Web technologies eliminate much of these inefficiencies by allowing
advertisers to electronically:


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      o     Select publications for ad placement, including both print and
            on-line media;

      o     Compose and format ads using formats supported by each publication;

      o     Preview the ad as it will appear in each publication; and

      o     Specify editions and scheduled publication dates.

Our application-programming interface (API) is expanding the notion of AdStar
customers into new realms. Manheim Interactive, which provides software products
to auto dealerships, is using AdStar services to find ways of bringing ad
placement services to their customers. Historically these customers would not
have looked at someone like Manheim Interactive for ad placement services. But
the Internet creates new opportunities for businesses not previously viable.

On-line ad-taking technologies are taking on an increasing degree of complexity.
First, publications are moving toward cross media classified ad publication (the
ability to simultaneously place an ad in multiple media vehicles such as in a
print and on-line publication). Second, classified system integration remains
difficult because more than 10 major technology vendors exist, each supplying
highly customized publishing software systems to the print publication industry.
Each of these systems handles ads differently and each publication will require
the technology vendor to customize their product extensively to meet the needs
of the publication.

We have managed these and other complexities successfully for more than 16
years. Our software solutions have been designed to work with all major vendors'
publishing software. We have transferred this integration experience to our Web
portal Advertise123.com, where we take standard and contract advertisers' ads
and send them directly into classified systems. AdStar has implemented digital
image capability through an alliance with Internet Pictures Corporation (nasdaq:
IPIX(R)), using their Rimfire(R) photo solution.

Competition

Due to the complexities of the classified ad-taking process, we have not
experienced extensive competition to date. However, over the past year Web-based
ad-taking has become more accepted in the industry and as a result, other
software vendors, including publishing system vendors have begun to develop
technologies that may compete directly with our products. Many of these
potential new competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than us. We cannot guarantee that we will be
able to compete successfully against current or future competitors or that
competitive pressures will not have a material and adverse effect on our
financial position, results of operations and cash flows. We also expect that
large media companies may decide to design, create, and program software
internally that will allow them to manage the Web-based classified ad-taking
process internally.

Our ability to compete will also depend upon our ability to continually improve
our products and services, the enhancements we develop, the quality of our
customer service, and the ease of use, performance, price and reliability of our
products and services.

Intellectual Property

We regard our intellectual property as critical to our success, and we rely upon
trademark, and trade secret laws in the United States to protect our proprietary
rights. We have established trademark rights in various forms of the mark ADSTAR
and ADVERTISE123.COM, based on our use of these marks and our


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ownership of incontestable United States trademark registrations.

We seek to protect our proprietary rights through the use of confidentiality
agreements with employees, consultants, advisors and others. We cannot guarantee
that these agreements will provide adequate protection for our proprietary
rights in the event of any unauthorized use or disclosure, that our employees,
consultants, advisors or others will maintain the confidentiality of proprietary
information, or that proprietary information will not otherwise become known, or
be independently developed, by competitors.

In the past, we have licensed elements of our trademarks, trade dress and
similar proprietary rights to third parties, and we expect to do so in the
future. While we attempt to ensure that the quality of our name and brand are
maintained by our business partners, we cannot guarantee that these partners
will not take actions that could materially and adversely affect the value of
our proprietary rights or the reputation of our software solutions and
technologies.

Legal standards relating to the validity, enforceability and scope of protection
of certain proprietary rights in Internet-related industries are uncertain and
still evolving, and we cannot make any guarantees as to the future viability or
value of any of our proprietary rights or those of other companies within the
industry. We cannot guarantee that the steps taken by us to protect our
proprietary rights will be adequate or that third parties will not infringe or
misappropriate our proprietary rights. Any infringement or misappropriation,
should it occur, could have a materially adverse effect on our business, our
results of operations, and our financial condition. Furthermore, we cannot
guarantee that our business activities will not infringe upon the proprietary
rights of others, or that other parties will not assert infringement claims
against us.

Employees

As of March 15, 2003, we had a total of 31 employees. All of them are full-time
employees, including 4 in executive management, 4 in technical services, 2 in
product development, 11 in Web operations, 6 in customer support, and 4 in
finance and administration. We are not subject to any collective bargaining
agreements and we believe that our relations with our employees are good. We
believe that we are currently staffed at an appropriate level to implement and
carry out our business plan for the next 12 months.

          CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY

      The following factors may affect the growth and profitability of AdStar
and should be considered by any prospective purchaser of AdStar's securities:

Our Ability To Sustain Our Operations And Ultimately Attain Profitability Could
Be Adversely Affected If We Are Not Able To Generate New Significant ASP
Revenues.

      It is uncertain as to whether we can transform our business to one
generating new significant revenues from our ASP services. The uncertainty
includes risks as to whether we will be able to:

      o     attract a sufficient number of publishers for our new publisher
            specific ASP ad-taking services to permit profitable operations;

      o     develop profitable pricing models for our volume related fees;

      o     respond effectively to competitive pressures; and


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      o     attract, retain and motivate qualified personnel.

Our failure to address these risks successfully could adversely affect our
ability to sustain our operations and ultimately attain profitability.

Our Unproven On-Line Business Model May Not Generate Expected Revenues.

      Because we have limited Internet experience, we cannot accurately forecast
the source, magnitude or timing of our future revenues. Current expectations are
that we will generate revenue from:

      o     hosting and transaction fees for ads processed through our ASP
            product,

      o     installation fees from publishers installing our new publisher
            specific ad-taking Web site services;

      o     fees from publishers to process classified advertising utilize our
            professional software product.

Our expectations with respect to future revenues are principally based on our
ability to attract advertisers and publications. In particular, our assumption
that we will not encounter any significant resistance by publishers to accepting
Web-based ads may be wrong. Publishers might view transactions in which we
charge a transaction fee as reducing the amounts they would receive if they
obtained the ads directly. Conversely, advertisers may be reluctant to pay a
mark-up to published classified advertising rates. If because of these factors,
the revenues are not generated in the amounts and within the time periods
necessary to sustain our operations, the prospects for our ASP, on-line business
will be seriously compromised.

We Have A History Of Losses And Until We Are Able To Significantly Increase ASP
Revenues We Expect Continued Losses.

The Company has incurred significant recurring net losses, and has used
substantial funds in its operations. For the years ended December 31, 2001 and
2002 we had net losses of $1,884,498 and $2,159,643, respectively. Our 2001 and
2002 net losses were principally attributable to our shift in focus from an
on-line business to an ASP business. We expect to continue to incur losses until
we are able to increase our revenues significantly from fees based on the number
of ad purchases transacted through our ASP product. Our operating expenses are
expected to remain constant in connection with our expanded activities. Our
future profitability will depend on our ability to increase our transaction and
service revenues while controlling or reducing our costs. We may not be able to
achieve profitability. However, based on our current operating plan, cash on
hand, our ability to control costs and our historical record of achieving
financings, we believe we have sufficient resources available to see us through
March 31, 2004.

The Growth Of Our Historical AdStar Business Is Limited And May Not Be Able To
Sustain Our Operations On Its Own.

Our historical AdStar remote ad entry business is limited both in current size
and growth potential due principally to the installation, training and on-going
support costs at advertiser sites and the requirement that advertisers
separately dial-up each publication in which they intend to buy an ad. Our
ability to achieve sufficient revenues to justify the expectations of our
investors is dependent on the success of our professional software product which
we believe eliminates these barriers. Our belief that we can successfully expand
our business by migrating to an Internet delivery system and providing publisher
specific site design, customization, implementation and management services may
not be correct.

We May Be Unable To Obtain The Additional Capital Required To Grow Our Business
Which Would Have An Adverse Effect On The Successful Implementation Of Our
Planned Business Expansion.


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      Our ability to grow depends significantly on our ability to attract
publishers to sign-up for AdStar's suite of products, which means having an
adequate sales and marketing budget and adequate funds to continue to enhance
our Web sites and ad-taking technology. If the actual cost of attracting
publishers, and enhancing our Web sites and ad-taking technology are higher than
projected or the revenues from our operations fall below our current
expectations, we may need additional financing in the near future. In either
event, if our revenues are insufficient to provide the necessary cash flow for
ongoing operations, we will need to seek additional capital from public or
private equity or debt sources to fund our growth and operating plans and
respond to other contingencies. We may not be able to raise needed cash on terms
acceptable to us or at all. Financings may be on terms that are dilutive or
potentially dilutive to our stockholders. If sources of financing are required,
but are insufficient or unavailable, we will be required to modify our growth
and operating plans to the extent of available funding, which would have an
adverse effect on the successful implementation of our planned business
expansion.

We Are Vulnerable To Breakdowns In Service Which Could Cause Our Customers And
Prospective Customers To Lose Faith In Our Ability To Service Their Needs.

      As a business delivering certain services via the Internet, we are
vulnerable to breakdowns and interruptions in Internet transmission which could
disrupt our ability to provide continued and sustained support to advertisers
and publishers. We have not yet suffered any serious breakdowns in service. If
because of interruptions our customers and prospective customers lose faith in
our ability to service their needs, they may choose more traditional means for
placing their classified ads, may turn to our competition, or may choose to no
longer outsource their Web-based ad-taking functions and instead perform the
services in-house. If this were to occur, we would not be successful in building
an on-line business. In March 2003 we entered into an arrangement with Tribune
Company to build out a fully functional back-up site at their AT&T co-location
in Chicago, Illinois. We expect the site to be fully operational during 2003.

Our Ability To Compete Effectively And Operate Profitably Cannot Be Assured
Because Our ASP Business Could Face Competition From Many Sources.

      We are unaware of any major company that provides a centralized publisher
specific ad-taking Web site services for the selection, transaction and
processing of classified ads or to multiple print and on-line publication
technology. Those publishers that accept and process ads by traditional means
like telephone, facsimile transmission and printed copy submissions are
potential competitors. Our ability to compete successfully will depend on the
perceived convenience of our services, ease of use and the amount of fees we
charge. In addition, companies not now in the business of providing on-line
remote ad entry but possessing more capital resources than we do may seek to
develop their own technology and enter into the business of offering a similar
broad based, centralized on-line classified ad placement services to ours. Some
of these companies could have longer operating histories, greater name
recognition, larger customer bases and significantly greater technical and
marketing resources than we have. As a result, they may be able to respond more
quickly than we can to new or emerging technologies and can devote greater
resources than we can to development, promotion and sale of their services.
Faced with this type of competition, our ability to compete effectively and
operate profitably cannot be assured.

Our Limited Experience May Affect Our Ability To Deal Effectively With
Technological Change Which Could Materially and Adversely Affect Our Business.

      Our on-line business is characterized by:

      o     rapidly changing technology;

      o     evolving industry standards;

      o     frequent new product and service announcements;


                                       11
<PAGE>


      o     introductions and enhancements; and

      o     changing customer demands.

These market characteristics are heightened by the emerging nature of the
Internet, Internet advertising, Internet transactional activity, and in
particular by our limited experience and short operating history in this market.
For these reasons, our future success depends on:

      o     our ability to adapt the rapidly changing technologies to the needs
            of our advertising and publishing clients; and

      o     our ability to continually improve the performance, features and
            reliability of our on-line services.

      Furthermore, we do not know if we will have the experience and talent to
overcome technical difficulties that may arise from time to time that could
delay or prevent the successful design, development, testing, introduction or
marketing of software solutions, or that any new software solutions or
enhancements to existing software applications will adequately meet the
requirements of our current and prospective customers and achieve any degree of
significant market acceptance. If we are unable, for technological or any other
reasons, to develop and introduce new software solutions or enhancements to
existing software solutions in a timely manner or in response to changing market
conditions or customer requirements, or if our software solutions or
enhancements contain errors or do not achieve a significant degree of market
acceptance, our financial position, results of operations and cash flows could
be materially and adversely affected.

We May Be Unable To Manage Our Growth.

      Our business plan contemplates a sizable increase in the advertisers and
publishers using our on-line services. In the event we need to increase the
number of our employees beyond current levels, the recruitment, training and
integration of these persons into our operations will place a significant strain
on our managerial, operational and financial resources. We cannot guarantee that
we will be able to manage effectively the expansion of our operations, or that
our personnel, systems, procedures and controls will be adequate to meet our
anticipated future operations. If this were to occur, it would materially and
adversely affect our business and prospects.

We May Not Be Able To Retain Key Existing Employees Or Attract The Large Number
Of Additional Employees Essential To The Success Of Our New On-Line Business.

      Our performance is substantially dependent on the performance of our
management and key technical personnel and on our ability to attract the new
Internet-oriented employees required in the implementation of our business plan.
The competition for Internet-oriented people of the type we will be seeking is
intense and we may be hard pressed to find the personnel needed as fast as we
need them. If we are unable to retain our key existing employees or to attract,
hire and assimilate the qualified employees we will be seeking, the growth of
our on-line business will be arrested and we will not be able to meet the
projected revenue increases within the time period contemplated in our business
plan, if at all.

Our Business Could Be Adversely Affected If The Services Of Either Our Chief
Executive Officer Or Chief Technology Officer Become Unavailable To Us.

      We are dependent on the continuing efforts of our President and Chief
Executive Officer, Leslie Bernhard, and our Executive Vice President and Chief
Technology Officer, Eli Rousso. Our business may be adversely affected if the
services of either officer become unavailable to us. While we have obtained a
key-man life insurance policy on the lives of both Leslie Bernhard and Eli
Rousso in the amount of $850,000 each, this amount may not be sufficient to
offset the loss of their services.

We Are Vulnerable To Potential Lawsuits Regarding Ad Content Or System Failure.


                                       12
<PAGE>


      Because we facilitate the placement of advertisements in print and on-line
publications, potential claims may be asserted against us for negligence,
defamation or personal injury, or for reasons based on other theories, due to
the nature of the content of these advertisements. Our technology does not
contemplate our reviewing classified advertisement content processed on our Web
sites for libelous or other statements that might give rise to possible
liability. This role has been fulfilled historically by each publication and we
expect the publications will continue to monitor their ads. Although we carry
general and professional liability insurance, our coverage may not cover
potential claims or may not be adequate to indemnify us fully. Any imposition of
liability or legal defense expenses that are not covered by insurance or that
are in excess of our insurance coverage could place a strain on our available
cash resources, could seriously jeopardize the success of our business plan and
could materially and adversely affect our financial position, results of
operations and cash flows.

Our On-Line Businesses Have A Limited History And May Not Be Successful.

      We did not begin to offer our technology over the Internet until June 1999
and offered only a limited number of publications from which to purchase
classified advertising until March 2000. Moreover, we know of no other major
company that accepts classified ads on-line for publication both on-line and in
print. Accordingly, we cannot guarantee that we will be able to generate the
public interest necessary to sustain our business model.

We May Not Be Able To Protect Our Proprietary Rights.

      We believe that our future success will depend, in part, on our ability to
develop proprietary rights with respect to our systems and services including
domain names, trademarks, trade names, service marks and copyrights. This is
particularly true with respect to our Web-based service technology. We do not
currently own any patents or patent applications on our technology and we have
no assurance that our rights to that technology are patentable or otherwise
protectable. Moreover, there is no assurance that others might not develop
alternate technologies that might be more effective than ours regardless of
whether or not we obtain patent protection.

      Despite our existing trademark rights in the marks AD-STAR, ADSTAR, and
Advertise123.com, the marks remain susceptible to trademark infringement due to
the frequent illicit use and piracy of trademarks by "cybersquatters" on the
Internet. Although we own the domain names Advertise123.com and ADSTAR.com,
there remains the risk that third parties will seek to register our marks
AD-STAR and Advertise123 in the other "top level" domains, e.g., .org, .net, and
..gov, or that they will register close copies of our marks.

      Furthermore, we cannot guarantee that our business activities will not
infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against us. If for any of the above reasons we are
deprived of any proprietary rights to our technology or trade style, our
prospects for success may be seriously and adversely affected.


                                       13
<PAGE>


If Others Develop Alternate Technologies, Or Use Our Technology Without Our
Authorization, Our Business, Results Of Operation And Financial Position Could
Be Materially And Adversely Affected.

      We do not currently own any patents or patent applications on our
technology and we have no assurance that it will not be used by others without
our authorization. Moreover, there is no assurance that others might not develop
alternate technologies that might be more effective than ours whether or not we
obtain patent protection. If others develop alternate technologies or use our
technology without our authorization, our results of operations and financial
position could be materially and adversely affected.

Natural Disasters Which Disrupt Our Services Could Have An Adverse Effect On Our
Business, Results Of Operations And Financial Condition.

      Our operations and services depend on the extent to which our computer
equipment and the telecommunications infrastructure of our third-party network
providers is protected against damage from fire, earthquakes, power loss,
telecommunications failures, and similar events. A significant portion of our
computer equipment, including critical equipment dedicated to our Internet
access is located in the Los Angeles, California area. Despite precautions taken
by us and our third-party network providers, over which we have no control, a
natural disaster or other unanticipated problems at our network hub, or a
third-party network provider point of presence could cause interruptions in the
services that we provide. If disruptions occur, we may have no means of
replacing these network elements on a timely basis or at all. We do not
currently maintain back-up Internet services or facilities or other back-up
computing and telecommunications facilities. Extensive or multiple interruptions
in providing users with Internet access is a reason for user to decide to stop
using access services. Accordingly, any disruption of access services in
general, or our service specifically, due to systems failure could have an
adverse effect on our business, results of operations and financial condition.
Furthermore, we do not currently have any business disruption insurance.

Our Corporate Documents May Limit Rights Of Stockholders.

      Our Board of Directors has the authority to issue up to an additional
1,556,543 shares of preferred stock without any further vote or action by our
stockholders, and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of these shares. Since the preferred stock
could be issued with voting, liquidation, dividend and other rights superior to
the rights accompanying shares of our common stock, the rights of the holders of
shares of common stock will be subject to, and may be adversely affected by, the
superior rights of the holders of preferred stock. The issuance of preferred
stock could also make it more difficult for a third party to acquire a majority
of our outstanding voting stock. Furthermore, certain provisions of our
Certificate of Incorporation, and certain provisions of our Bylaws and of
Delaware law, could have the effect of delaying or preventing a change in
control of the corporation which the stockholders may deem to be in the best
interests of AdStar.

If Our Shares Of Common Stock Are Removed Or Delisted From The Nasdaq Small Cap
Market, The Ability Of Stockholders To Sell Our Common Stock And Warrants In The
Secondary Market Could Be Restricted.

      The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions, including an exception of an equity
security that is quoted on The Nasdaq Stock Market. If our shares of common
stock are removed or delisted from The Nasdaq Small Cap Market, the security may
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell these securities. For transactions covered by these
rules, the broker-dealer must make a special suitability determination for the
purchaser of such securities and have received the purchaser's written consent
to the transactions prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the


                                       14
<PAGE>


delivery, prior to the transaction, of a disclosure schedule prepared by the
Securities and Exchange Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered underwriter, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, among other requirements, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. As such, the "penny stock"
rules, in the event our securities are delisted from The Nasdaq Small Cap
Market, may restrict the ability of stockholders to sell our common stock and
warrants in the secondary market.

If We Are Unable To Satisfy Nasdaq's Maintenance Requirements, Our Common Stock
May Be Delisted From Nasdaq Which Could Impair The Liquidity And The Value Of
Our Common Stock.

      While the shares of common stock met current Nasdaq listing requirements
when initially listed and are currently included on Nasdaq, there can be no
assurance that we will meet the criteria for continued listing. Continued
listing on Nasdaq generally requires that (i) we maintain at least $2,500,000 in
stockholders equity, or $35,000,000 in market capitalization, or $500,000 in net
income for either the last fiscal year, or two out of the last three fiscal
years, (ii) the minimum bid price of the common stock be $1.00 per share, (iii)
there be at least 500,000 shares in the public float valued at $1,000,000 or
more, (iv) the common stock have at least two active market makers, and (v) the
Common Stock be held by at least 300 holders. In March 2003, we received a
letter from Nasdaq putting us on notice that the bid price of our common stock
had fallen below their $1.00 per share minimum. If we are unable to satisfy
Nasdaq's maintenance requirements, our securities may be delisted from Nasdaq.
In that event, trading, if any, in the common stock and warrants would be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's "OTC Bulletin Board." Consequently, the liquidity of our securities could
be impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts and new media coverage of AdStar, and lower prices for our
securities than might otherwise be obtained.

Item 2. Description of Property

      Our offices are currently located in two separate facilities. The
principal office in Marina del Rey, California consists of an aggregate 10,000
square feet, of which approximately 5,000 has been sub-let. Offices for the east
coast technical services department are located in Syosset, New York, consisting
of approximately 1,400 square feet. Additionally, in July 2000, we entered into
a lease consisting of approximately 1,700 square feet in Lyndhurst, New Jersey.
In May 2001, we assigned all rights in this lease to Dominion Telecom, Inc.,
however we remain secondarily liable on this lease. These three existing leases
expire on March 31, 2005, April 31, 2005, and November 30, 2005, respectively.
The aggregate monthly rent, net of the current sub-lease and assignment, is
approximately $13,745. We believe that if these leases are not renewed,
satisfactory alternative space will be available. In December 2002 management
executed a plan to close our east coast offices, in Syosset, New York, and
transfer the function performed at that location to Marina del Rey.

Item 3. Legal Proceedings

      We are not currently a party to any legal proceeding.

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

      Not applicable.


                                       15
<PAGE>


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

      (a)   Market Information

      AdStar's Common Stock is traded on The Boston Stock Exchange and The
Nasdaq Small Cap Market under the symbol "ADST". The following table sets forth,
for the periods indicated, the high and low bid information for AdStar's Common
Stock. Such quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.

                                                            Bid Information
   Price range of Common Stock                          High                Low
--------------------------------------------------------------------------------
Year Ended December 31, 2001
First quarter                                          $1.531             $0.500
Second quarter                                          1.590              0.530
Third quarter                                           0.950              0.520
Fourth quarter                                          0.880              0.520

Year Ended December 31, 2002
First quarter                                           1.440              0.450
Second quarter                                          1.250              0.630
Third quarter                                           1.640              0.750
Fourth quarter                                          1.120              0.740

      As of March 28, 2003, the closing bid price per share for our Common
Stock, as reported on the Nasdaq Small Cap Market was $0.79.

      (b)   Holders

      As of March 28, 2003, the number of record holders of the Preferred and
Common Stock of AdStar was one and 35, respectively. AdStar believes that there
are more than 800 beneficial holders of the Common Stock.

      (c)   Dividends

      The holders of Common Stock are entitled to receive such dividends as may
be declared by AdStar's Board of Directors. During the years ended 2001 and
2002, AdStar did not pay any dividends, and it does not expect to declare or pay
any dividends in the foreseeable future. Payment of future dividends will be
within the discretion of AdStar's Board of Directors and will depend on, among
other factors, retained earnings, capital requirements, and the operating and
financial condition of AdStar.


                                       16
<PAGE>


Recent Sales of Unregistered Securities.

      AdStar established a vendor payment plan whereby it may pay vendors who
are accredited investors, as defined under Rule 215 of the Securities Act of
1933, in shares of its common stock in lieu of cash. Under the plan, 400,000
shares are available for issuance. During 2001 and 2002, 119,000 and 63,000 (net
of 68,000 returned) shares, respectively, were issued to vendors under the plan
relying upon the exemptions under Sections 4(2) and 4(6) of the Securities Act
of 1933 and which represented compensation of $196,000 and $10,000 (net of
$68,000 returned), respectively. In addition, warrants to purchase 50,000 shares
at $1.50 and 50,000 shares at $2.00 were issued to a vendor in 2001.

      In February 2001, AdStar issued 593,483 of its authorized but unregistered
shares of its common stock to satisfy a Note, dated October 21, 1999, payable to
Paulson Capital Corporation in payment of principal and accrued interest
totaling $1,186,966. The issuance was exempt from registration, by reason of it
being a nonpublic offering, made pursuant to Sections 4(2) and 4(6) of the Act.

      In April 2001, we entered into an agreement with 4 accredited investors
for the sale, in the aggregate, of 400,000 units at a price of $1.00 per unit.
Each unit comprises two shares of AdStar's authorized but unregistered common
stock and one warrant to purchase an additional share of Common Stock at $1.07
per share. The warrants expire on April 5, 2006 and have anti-dilution
protection against capital changes. The common stock issued as part of the units
sold was exempt from registration, by reason of it being a nonpublic offering,
made pursuant to Section 4(2) and 4(6) of the Act.

      From October 2001 through January 2002, AdStar sold 1,300,000 shares of
its common stock through a private offering priced at a price of $0.50 per
share. These shares were sold to accredited investors, as defined under Rule 215
of the Securities Act of 1933, and required a minimum investment of $25,000. In
connection with this offering AdStar issued warrants to purchase 130,000 shares
of its common stock, at $0.75 per share, as part of the placement agent fees.
The warrants expire on January 16, 2007 and have anti-dilution protection
against capital changes. This offering was exempt from registration, as it was a
nonpublic offering, made pursuant to Sections 4(2) and 4(6) of the Act.

      In January 2002, AdStar issued to Morse, Zelnick, Rose and Lander LLP,
AdStar's legal counsel, 114,545 shares of restricted common stock, issued at
fair market value as payment for $ 62,500 in legal services accrued in December
31, 2001 financial statements. This sale was exempt from registration, as it was
a nonpublic offering, made pursuant to Sections 4(2) and 4(6) of the Act.

      In February 2002, AdStar sold to an accredited investor (as previously
defined) 100,000 shares of its Common Stock at a price per share equal to 85% of
its per share closing price on January 31, 2002 ($0.50). In connection with this
sale AdStar issued warrants to purchase 10,000 shares of its Common Stock, at
$0.75 per share, as part of the placement agent fees. The warrants expire on
January 31, 2007 and have anti-dilution protection against capital changes. This
sale was exempt from registration, as it was a nonpublic offering, made pursuant
to Sections 4(2) and 4(6) of the Act.

      In March 2002, the Board of Directors approved the sale of 1,443,457
shares of our Series A Preferred Stock to Tribune Company for an aggregate
purchase price of $1.8 million. These shares currently convert on a 1:1 basis.
Shareholders of Series A Preferred Stock are entitled to vote on all matters
submitted to the stockholders for vote and as a single class with the Common
Stock. The holders of Series A Preferred Stock are entitled to one vote for each
share of Common Stock issuable upon conversion. This sale was exempt from
registration, as it was a nonpublic offering, made pursuant to Sections 4(2) and
4(6) of the Act.


                                       17
<PAGE>


      In December 2002 the Board of Directors approved the sale of shares of its
Series B Preferred Stock to Tribune Company for an aggregate price of $1.5
million. The sale was split into two funding segments:

      (i) In December 2002, AdStar sold 1,200,000 shares of its Series B-1
Preferred Stock to Tribune Company for an aggregate purchase price of $900,000.
These shares currently convert on a 1:1 basis. Shareholders of Series B-1
Preferred Stock are entitled to vote on all matters submitted to the
stockholders for vote and as a single class with the Common Stock. The holders
of Series B-1 Preferred Stock are entitled to one vote for each share; and

      (ii) In March 2003, AdStar sold 800,000 shares of its Series B-2 Preferred
Stock to Tribune Company for an aggregate purchase price of $600,000. These
shares currently convert on a 1:1 basis. Shareholders of Series B-2 Preferred
Stock are entitled to vote on all matters submitted to the stockholders for vote
and as a single class with the Common Stock. The holders of Series B-2 Preferred
Stock are entitled to one vote for each share. In addition, on March 28, 2003,
in exchange for all of the Series B-1 Preferred Stock plus accrued and unpaid
dividends on those shares, issued in December 2002 to Tribune Company, AdStar
issued an additional 1,200,000 shares of its Series B-2 Preferred Stock to the
Tribune Company.

These sales were exempt from registration, as it was a nonpublic offering, made
pursuant to Sections 4(2) and 4(6) of the Act.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation

The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and related notes to
the financial statements included elsewhere in this annual report. Certain
statements in this discussion and elsewhere in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934. See "Forward-Looking Statements" following the Table
of Contents of this 10-KSB. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.

Overview

In 2001 we repositioned our products, moving away from the idea of the Internet
as a stand-alone business category, and moving towards the idea of the Internet
as an extremely efficient and flexible communication channel. We recognized that
this technology can be utilized to greatly enhance the functionality of the
software we licensed to our existing customer base, as well as expand into new
areas where our technology can be used to connect advertising outlets with
advertisers. During 2002, we began to execute our game plan and spent virtually
the entire year on successfully enhancing and integrating our existing
technology and new products into the existing and new customers. While some of
our historical business has migrated to our new transaction based model, it
continues to be used by hundreds of recruitment agencies and volume advertisers.
We anticipate continuing customer requested enhancements to our existing
applications and expect to monetize the roll-outs to a greater extent in 2003 as
more publications adapt the new robust applications available to them.

In working with our customers, we recognized there was a great demand for our
Web-based technology within the newspaper industry to run the online classified
ad-taking abilities at our customer's Web sites under a private label branded
site concept. Therefore, we revised our business model to embrace these


                                       18
<PAGE>


concepts, and we focused on the immediate needs of our customers. While doing
this, we also made sure that our technology remained flexible to allow for
changes as the needs of our customers change and as we develop product
extensions and new lines of business based on our existing technology and
expertise.

We adopted our marketing and sales strategies to our new Web-based ad-taking ASP
product, and began marketing the product in June 2001 and found that it was well
received by our customers. During 2001, we implemented our Web-based classified
ad-taking ASP product at 14 new metropolitan newspapers. Given the severe
downturn in advertising revenue in 2001, we were told by many potential
customers that implementing our ASP product will need to wait until their
advertising revenue has returned to more normal levels. In 2002, despite a slow
economy we contracted with an additional 16 newspapers to use our Web-based
classified ad-taking ASP product.

In March 2002, we entered into an agreement with Tribune Company to provide
Web-based recruitment ad sales technology to all major market Tribune
newspapers, including Chicago Tribune, Los Angeles Times, and Newsday, and to
provide customization services to CareerBuilder, a Tribune Company affiliate.
Under this arrangement, we have customized our existing application suite to
expand its capabilities and provide additional functionality in exchange for the
right to provide web-based ad sales for Tribune Company's major market
newspapers. Beginning in the third quarter of 2002 the Tribune Corporation
launched a multimillion-dollar ad campaign promoting this new product, FlexAd.
AdStar created the Web based version of FlexAd that allows professional
advertisers and businesses to simultaneous compose, schedule, pay and place a
job ad in CareerBuilder and an affiliated newspaper.

In addition to the enhancements developed for our base technology, we continued
to actively explore and develop new revenue sources. In 2001, we entered into an
agreement with eBay, Inc. to provide the technology behind eBay Seller
Classified, a service that allowed eBay sellers to advertise their items in a
dedicated eBay sellers section of newspaper classifieds. Advertiser support for
this product waned and the service was eliminated. However, the relationship
with eBay provided us an opportunity to enhance our application-programming
interface (API) that allows third parties to access AdStar services. In 2002, we
capitalized on these enhancements by expanding our API business.

AdStar's API business allows third parties to access AdStar's e-business suite
to create ad taking capability for their customers. This is especially appealing
to businesses that support newspapers (e.g., after hour call centers, software
manufacturers providing authoring tools for advertisers, etc.) and businesses
that aggregate advertisers (e.g., niche web sites, software companies that
provide services to auto dealerships or realtors, etc.). In 2002, we entered
into agreement with a number of such organizations including Manheim
Interactive, who provides services to auto dealers, as well as a niche web site
that provides services to commercial real estate brokers and an after hours call
center.

In addition to transitioning to a recurring revenue model and expanding our
newspaper customers, we are now in a position to reduce our operating costs on a
go forward basis. There can be no assurance that our new product offerings or
the arrangement with Tribune Company will be successful in generating revenues
sufficient to support our operating expenses.

Prior to the development of our Web business, revenues had been generally
sufficient to support our historic business. In developing our Web-based system
we began to incur significant losses that could not be offset by the revenues
generated by our historic business. These expenses caused us to incur
significant losses from 1998 through 2002. Our future success is dependent upon
our ability to substantially grow revenues and control costs to the point where
we can fund the level of operations necessary to serve the anticipated customer
base. To this end, our plans have included expanding the products and services
offered to our customers by building on our proprietary software processes and
unique position within the industry. We feel that there is significant
opportunity to increase revenues by


                                       19
<PAGE>


offering the Web software and services that we had initially developed for
ourselves to print publications as an application service provider ("ASP"). In
addition we have already taken steps to control or in some case reduce costs on
an ongoing basis. (see Business in part I).

Results of Operations

The following table sets forth the results of operations expressed as a
percentage of net revenues.

                                                         Year Ended December 31,
                                                         ----------------------
                                                         2001              2002
                                                         ----              ----
Net revenues .......................................     100%              100%
Cost of revenues ...................................      39%               49%
                                                         ---               ---
Gross Profit .......................................      61%               51%

General and administrative expense .................      90%               83%
Selling and marketing expense ......................      32%               25%
Product development costs ..........................      31%               28%
Restructuring ......................................      --                14%
                                                         ---               ---
Loss from operations ...............................     -91%              -91%
Other income .......................................      --                 3%
Interest income (expense) ..........................       1%                1%
                                                         ---               ---
Loss before taxes ..................................     -90%              -96%
Provision for taxes ................................      --                --
                                                         ---               ---

Net loss ...........................................     -90%              -90%
                                                         ===               ===

Years Ended December 31, 2002 and 2001

Revenues

Net revenues increased to $2,241,000 in 2002 from $2,081,000 in 2001, a net
increase of $160,000 or 8%. The increase in net revenue for 2002 is primarily
comprised of a net increase of $629,000 or 220% in response to our strategic
shift from our old software and licensing model to our application service
provider ("ASP") product, offset by a $438,000 or 63% reduction in one time
customization and other fees. The Increase in 2002 ASP revenues includes
approximately $70,000 of revenues from existing licensing and software customers
who converted to our new transaction based ASP product. Licensing and software
revenues decreased to $1,070,000 in 2002 from $1,100,000 in 2001, a net decrease
of $30,000 or 3% for 2002 over 2001. The decrease is comprised of the
aforementioned $70,000 migration of existing customers to the ASP model offset
by approximately $40,000 in pricing increases.

Cost of revenues

Cost of revenue consists primarily of the costs to customize and install the
AdStar software applications, configure end-user software, install Web-based
ad-taking software, amortization of internally developed application modules,
royalties, and co-location costs. Cost of revenues increased to $1,107,000 in
2002 from $806,000 in 2001, a net increase of $301,000 or 37%. The increase
during 2002 was primarily related to a $209,000 increase in amortization of
capitalized software and deferred contract costs, an increase of approximately
$60,000 in direct labor and $40,000 in hardware costs. The increase in


                                       20
<PAGE>

amortization is primarily related to our focus on strategic development for ASP
activities and for the CareerBuilder project whereby approximately $560,000 of
2001 software enhancements being amortized for a full year during 2002 and an
additional $600,000 in 2002 software enhancements being placed into service.

Selling and marketing expense

Selling and marketing expense consists primarily of direct charges for
advertising, sales promotion, marketing, and trade shows, as well as the cost
for business development. Selling expense decreased to $556,000 in 2002 from
$656,000 in 2001, a net decrease of $100,000 or 15%. The decrease is primarily
the result of a $65,000 decrease in direct advertising and travel trade show
costs as well as a $35,000 reduction of personnel-related expenses.

General and administrative expense

General and administrative expense consists primarily of the cost of executive,
administrative, professional fees, accounting, finance, and information
technology personnel. Administrative expenses decreased to $1,860,000 in 2002
from $1,882,000 in 2001, a net decrease of $22,000 or 1%. The net decrease was
primarily related to a $94,000 loss on disposal of assets which was expensed in
2001, offset by a net $61,000 increase in legal, accounting, insurance and
shareholders costs.

Product development costs

Product development expenses consist of expenses to identify functional
requirements, to plan, identify and conceptually design the required technical
infrastructure, and to perform Web-site maintenance and other general routine
fixes. The costs consist primarily of personnel related expenses for technical
and design personnel and consultants. Development expense decreased to $627,000
in 2002 from $640,000 in 2001, a net decrease of $13,000 or 2%. Our technical
infrastructure requirements relating to our revenue generating activities
resulted in product development expense being essentially flat for 2002 as
compared to 2001. We expect the expense level to continue through the first half
of 2003 when we should realize a net reduction over the second half of the year.

Restructuring costs

During 2001 we critically examined the processing capabilities of our existing
software modules and identified potential new commercial applications that could
be developed using our existing technology as a starting point. With these
changes in mind, we repositioned our products, moving away from the idea of the
Internet as a stand-alone business category, and moving towards the idea of the
Internet as an extremely efficient and flexible communication channel. During
2002 we continued executing our ASP model while maintaining the existing
infrastructure and personnel responsible for the historical licensing and
software and portal model while formulating a formal transition plan.

The plan contemplated among other things the closure of the New York office
within approximately six months, a related reduction in force of the 4
technology staff as of December 31, 2002 and the abandonment of an externally
created customized billing software module. While the strategy had been in play
for several months, including the addition of office space in the corporate
offices to facilitate the transition, Management formally approved the final
strategy in December 2002. During December 2002


                                       21
<PAGE>


the Company hired a seasoned industry executive to transfer the software
programs and intellectual knowledge from the New York office to the corporate
office, identify and begin training existing personnel in anticipation of the
reduction-in-force, and abandoned the billing software system. The corporate
office will assume full revenue responsibilities concurrently with the closing
of the office. Accordingly, management recorded direct restructuring write-offs
and reserves totaling $323,000, which are primarily comprised of estimated costs
of $128,000 for abandoned software and equipment, $76,000 relating to the office
lease, and $119,000 in legal, and other.

Other income

Other income (expense) has historically been comprised of net interest income
(expense). During the second quarter 2002 AdStar finalized the termination of
the Kodak licensing agreement whereby Kodak returned 67,796 shares of AdStar
common stock resulting in a non-cash gain of approximately $63,000. Net interest
income decreased $10,000 during 2002 compared to 2001. This decrease in net
interest is attributable to a reduction in cash held in interest bearing
accounts as we utilized cash to fund development projects and operating
deficits, a reduction in interest rates available in short-term time deposits
and money market accounts at commercial banks, as well as an increase in
interest expense during 2002 relating to the addition of capital leases.

Liquidity and Capital Resources

Prior to 1999 we financed our business primarily from cash generated by
operations. Subsequently, we have financed our business through a combination of
cash generated from operations and debt and equity financing. In 2001 and 2002,
we raised net proceeds of $694,000 and $2,663,000, respectively, in equity
financings to fund operations and enhance and expand the product line we provide
our customers.

As of December 31, 2002, we had cash and cash equivalents of approximately
$940,000 and restricted cash of $175,000 compared to $410,000 and $45,000 as of
December 31, 2001 a combined net increase of $658,000. The net increase in cash
and cash equivalents and restricted cash resulted from net proceeds of
$2,599,000, net of a $129,000 increase in restricted cash, from financing
activities offset by $533,000 used in operations and $1,537,000 used in
investing activities to enhance our ASP products and funds advanced to a
shareholders.

Net cash used in operations during 2002 was approximately $533,000 compared with
$1,181,000 during 2001, a $648,000 decrease. The decrease in cash used in
operations is primarily the result of a $591,000 increase in accounts payable
and a $129,000 increase in accrued expenses in 2002 from 2001. The increase in
accounts payable primarily related a shift in payment terms to our
customers/vendors who historically paid us in 45 days while we paid them in less
than 30 days. The increase in accrued expenses is primarily due to restructuring
reserves set up to reflect closing of our New York office to shift all
operations to the corporate offices.

Net cash used in investing activities increased to $1,537,000 during 2002
compared with $715,000 during 2001. The increase of $821,000 is primarily the
result of our using $560,000 to enhance our existing ASP software per terms of
the CareerBuilder agreement and $210,000 in officer loans. Included in the
$1,537,000 is $773,000 of ongoing upgrades and enhancements of existing software
used to in our ASP products. We expect to generally complete all aspects of the
CareerBuilder agreement during the second quarter of 2003 and anticipate a
significant reduction in ongoing upgrades and enhancements of existing software
during the second half of 2003.

Net cash provided by financing activities increased to $2,599,000 during 2002
compared with $701,000 during 2001. The proceeds were primarily comprised of net
proceeds $1,698,000 from the issuance of Series A and $813,000 of Series B-1
Preferred Stock to Tribune Company, net proceeds of $152,000 from the closing of
a private placement which commenced in October 2001 and net borrowings under
capital leases of $65,000. The proceeds were offset by a net increase of
restricted cash of $129,000 as compared


                                       22
<PAGE>


to 2001. The increase in restricted cash was due to a $175,000 credit card
processing reserve instituted by Chase Merchant Services, L.L.C (Chase) offset
by a $46,000 decrease in restricted cash with Comerica, our commercial bank.

In August 2002, AdStar was informed by Chase, a merchant bank that provides
credit card processing services for AdStar, that it required the Company to
maintain a restricted cash balance of $175,000. Chase indicated the primary
reason for the reserve was the significant increase in dollar volume of AdStar
transactions during the second quarter 2002. Under the terms of the agreement
the Company can terminate the contract with 30 days notice and Chase can retain
a reserve for up to six months from the date of termination.

The Company has entered into a new arrangement with another merchant banker
whereby the initial terms and conditions do not require AdStar to provide a
reserve. Preliminary testing for the changeover was completed in November 2002
with final testing and transition to the new banker expected to be completed
during March 2003.

At December 31, 2002, we had an accumulated deficit of $11,324,000. We have
incurred significant recurring net losses. For the years ended December 2001
and 2002 we had net losses of $1,884,000 and $2,160,000. Our 2001 and 2002 net
losses were principally attributable to our shift if focus from an on-line
business to an ASP business. We expect to continue to incur losses until we are
able to increase revenues significantly from fees based on the number of
purchases transacted through our ASP product. We are not assured that we will
generate sufficient capital to meet our cash needs through December 31, 2003. We
believe that the additional $600,000 raised through the sale of 800,000 shares
of Series B-2 convertible preferred stock (each convertible into one share of
common stock) in March 2003, our available funds, combined with cash generated
from existing operations, new customers, the flexibility to cut back our
work-force upon completion or delay of significant customization projects,
coupled with our historical ability to obtain bridge financing, will be
sufficient to meet our anticipated working capital needs through March 31, 2004.
Although we are optimistic that our growing ASP business will continue to be
accepted in the marketplace and we will fulfill our obligations to Tribune
Company in a timely manner, the timing is not assured. Our ability to sell ASP
business products and service offerings during the current year may be hampered
by the current downturn in the advertising market, the geo-political climate,
including the war in Iraq, and state of the economy in general. These factors,
coupled with the extended selling cycle in our industry and customer delays in
customization and implementations, could delay our ability to increase revenue
to a level sufficient to cover our expenses.

We currently have no additional borrowings available to us under any credit
arrangement, and we are continuing to look for additional financing. Adequate
funds may not be available or may not be available on terms favorable to us or
at all. If additional funds are raised through the issuance of equity
securities, dilution to existing stockholders may result. If funding is
insufficient at any time in the future, we may be unable to develop or enhance
our products or services, take advantage of business opportunities or respond to
competitive pressures, any of which could have a material adverse effect on our
financial position, results of operations and cash flows.

New accounting pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, Accounting for Asset Retirement Obligations ("SFAS 143"), effective January
2003. SFAS 143 requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the estimated useful life of the asset. The Company will adopt SFAS
143 on January 1, 2003, and does not believe that the adoption will have a
material impact on the Company's financial statements.


                                       23
<PAGE>


In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"), effective for exit or disposal
activities initiated after December 31, 2002. SFAS 146 addresses the financial
accounting and reporting for certain costs associated with exit or disposal
activities, including restructuring actions. SFAS 146 excludes from its scope
severance benefits that are subject to an on-going benefit arrangement governed
by SFAS 112, Employer's Accounting for Post employment Benefits, and asset
impairments governed by SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company does not believe that the adoption of SFAS 146
will have a material impact on the Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based
Compensation - an Amendment of SFAS No. 123 ("SFAS 148"). This statement amends
SFAS No. 123 to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
will retain the intrinsic method of accounting for stock based awards granted to
employees.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this Interpretation are
currently effective and did not affect the Company's financial position and
results of operations. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation requires that
variable interest entities created after January 31, 2003, and variable interest
entities in which an interest is obtained after that date, be evaluated for
consolidation into an entity's financial statements. This interpretation also
applies, beginning July 1, 2003 for the Company, to all variable interest
entities in which an enterprise holds an interest that it acquired before
February 1, 2003. We are in the process of evaluating all of our investments and
other interests in entities under the provisions of FIN 46 and have not yet
determined the effect of its adoption on our financial position and results of
operations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements require that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosure. On an on-going basis, we re-evaluate our
estimates, including those relating to revenue recognition, uncollectible
accounts receivable, intangible assets and contingent expenses and revise
reported amounts prospectively. We base our estimates on historical experiences,
combined with anticipated activity and various other assumptions that we believe
to be reasonable under the circumstances. When combined, this body of knowledge
forms the basis for making judgments about the carrying value of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.


                                       24
<PAGE>


Financial Reporting Release No. 60, which was recently issued by the Securities
and Exchange Commission, requires all companies to include a discussion of
critical accounting policies or methods used in preparation of financial
statements. The following is a brief discussion of our most critical accounting
policies, including those methods affected by our more complex judgments and
estimates.

Revenue Recognition

AdStar derives revenue from several products and services as follows:

      Licensing and customization and other revenues - We receive revenue from
      technology service contracts that generally contain multiple elements such
      as software customization services, monthly fees and post-contract
      customer support (PCS). Revenue from these arrangements is recognized in
      accordance with Statement of Position ("SOP") 97-2, "Software Revenue
      Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
      Certain Transactions". Accordingly, revenue is allocated to each element
      within the contract based on the relative fair values of those elements
      using vendor specific objective evidence. Revenue from monthly fees and
      PCS under software maintenance arrangements is based upon renewal rates
      and is recognized ratably over the term of the arrangement. Revenue from
      software customization services is recognized as the services are
      performed, using a percentage of completion methodology based on labor
      hours. We also provide customization services at the customers' request
      and recognize revenue as the services are performed, using a percentage of
      completion methodology based on labor hours

      Areas requiring management's judgment includes revenue recognition and
      cost estimation on the fixed fee software customization element of the
      contracts. Revenue is recognized on these contracts using a
      percentage-of-completion methodology, based upon labor input measures and
      an estimate of time to completion. Monthly, technical management reviews
      the estimate of labor hours required to complete the customization and the
      effect of any change in estimate is reflected in the period in which the
      change is first known. Such changes in estimate have not been material to
      our quarterly results of operation. The corresponding cost of revenue
      charge is derived based upon the same labor input measurements and our
      existing cost structure. If we do not accurately estimate the resources
      required under the contract or the scope of the work to be performed, or
      if we do not manage our projects properly within the prescribed timeframe,
      future margins may be significantly and adversely affected. If increases
      in projected costs-to-complete are sufficient to create a loss contract,
      the entire estimated loss is charged to operations in the period the loss
      first becomes known. The complexity of the estimation process and
      uncertainties inherent in software customization activities may affect the
      percentages derived under the percentage-of-completion accounting method,
      which in turn may affect the amounts reported in the financial statements.
      Despite the complexities inherent in the estimating process, we believe
      that this accounting policy most accurately presents the revenue
      generating activities of AdStar.

      ASP revenue - We receive revenue from providing an application service
      provider ("ASP") product that allows companies to use the applications on
      a "shared system" over the Internet. This technology is a
      publisher-specific ad-taking Web site service that offers visitors to a
      newspaper's Web page the opportunity to buy classified ads, for both the
      print and/or on-line editions of the newspaper, in real-time, on a 24/7
      basis. We receive monthly fees for hosting the transactions and providing
      customer support, and recognize the fees ratably over the contract period.

      Web site revenue - We receive revenue from fees charged to customers who
      transact business on the Advertise123.com Web site. This site permits the
      general public to plan, schedule, compose and purchase advertising from
      many print and on-line publishers. Under the guidance provided by the
      Securities Exchange Commission Staff Accounting Bulletin ("SAB) No. 101,
      "Revenue


                                       25
<PAGE>


      Recognition" and the Emerging Issues Task Force ("EITF") Abstract No.
      99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent"
      ("EITF 99-19"), we are, in substance, acting as an agent for the
      publishers and therefore recognize as revenue only the net fees realized
      on the transactions. We recognize revenues on a per-transaction basis when
      the ad is placed through our system and collection from the customer is
      probable.

Web Site Software Development Costs

In March 2000, the Financial Accounting Standards Board's Emerging Issue Task
Force ("EITF") issued EITF No. 00-2 "Accounting for Web Site Development Costs",
which provides guidance with respect to capitalization of certain costs incurred
in connection with Web development activities and references Statement of
Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed". In accordance with
these pronouncements, costs to establish the technological feasibility of our
software applications are charged to expense as incurred. Certain costs incurred
subsequent to achieving technological feasibility are capitalized. Accordingly,
we capitalize a portion of the internal labor costs and external consultant
costs associated with essential Web site development and enhancement activities.
Costs associated with conceptual design and feasibility assessments as well as
maintenance and routine changes are expensed as incurred. Capitalized costs are
amortized on a straight-line basis over the estimated useful lives of the
applications. In accordance with this policy, we have capitalized expenditures
incurred to develop the new AdStar e-business application suite.

Contractual Obligations, Commitments and Contingencies

The Company has contractual obligations and commitments primarily with regards
to Employment agreements for 3 of its executives, certain noncancelable
operating lease obligations for office space and equipment, and capital lease
obligations for computer equipment and office furniture.

The following table aggregates the Company's expected contractual obligations
and commitments subsequent to December 31, 2002:

<TABLE>
<CAPTION>
                                                         Payments due by Period
                                   ------------------------------------------------------------------
                                                                               Beyond
Contractual obligations                2003       2004-2005     2006-2007       2007         Total
-----------------------------------------------------------------------------------------------------

<S>                                <C>           <C>           <C>           <C>           <C>
Employment agreements              $  617,300    $  851,200    $  212,800    $       --    $1,681,300

Capital Lease commitments              43,067        58,716           126            --       101,909

Operating lease commitments (1)       328,541       451,164            --            --       779,705
                                   ----------    ----------    ----------    ----------    ----------

                                   $  988,908    $1,361,080    $  212,926    $       --    $2,562,914
                                   ==========    ==========    ==========    ==========    ==========
</TABLE>

(1)   Excludes sublet office agreement of $11,000 per month through May 2005.


                                       26
<PAGE>


Item 7. Financial Statements

      See Index to Financial Statements below, beginning on page F-1.

Item 8. Change in and Disagreements with Accountants on Accounting Financial
Disclosure

      Previously reported on a Current Report on Form 8-K filed with the
      Securities Exchange Commission on February 24, 2003.

                                    PART III

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

Our executive officers and directors and their respective ages are as follows:

<TABLE>
<CAPTION>
                                                                                 Director
     Name                 Age                   Position                          Since
----------------------    ---     ------------------------------------------     --------

<S>                        <C>    <C>                                              <C>
Leslie Bernhard            59     President, Chief Executive Officer
                                  and Director                                     1991

Eli Rousso                 66     Executive Vice President, Chief
                                  Technology Officer, Secretary, Treasurer,
                                  and Director                                     1991

Jeffrey Baudo              56     Senior Vice President, Chief Operating
                                  Officer, and Director                            2001

Anthony Fidaleo(1)         44     Vice President and Chief Financial Officer

Stephen A. Zelnick (2)     65     Director                                         2002

Richard Salute (2)(3)      57     Director                                         2003
</TABLE>

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

(1)   Commenced employment on June 24, 2002.

(2)   Members of the compensation committee and the audit committee of the Board
      of Directors.

(3)   Mr. Salute was elected to AdStar's Board in January 2003.

      Leslie Bernhard, one of our co-founders, has served as our President and
Chief Executive Officer since the organization of our predecessor in 1986. Ms.
Bernhard holds a B.S. degree from St. John's University. Ms. Bernhard is the
sister of Mr. Baudo.

      Eli Rousso, our other co-founder, has served as our Executive Vice
President and Chief Technology Officer since the organization of our predecessor
in 1986. Mr. Rousso holds a B.S. degree in


                                       27
<PAGE>


Electrical Engineering from Massachusetts Institute of Technology (MIT) and has
completed graduate work at the Polytechnic Institute (New York).

      Jeffrey Baudo joined us as Chief Operating Officer in January 2001 and
became a director in February 2001. Prior to joining AdStar, Mr. Baudo, served
as president and COO of the publishing division of United Advertising
Publications. Mr. Baudo holds a B.A. degree from St. Johns University. Mr. Baudo
is the brother of Ms. Bernhard.

      Anthony Fidaleo joined us as Chief Financial Officer in June 2002 and
became Vice President of Finance in September 2002. Prior to joining AdStar, Mr.
Fidaleo served in a consulting capacity, as acting Chief Financial Officer or
Vice President Controller, over the past 5 years primarily servicing the
technology sector with Companies such as Autobytel.Inc. and L90. Inc. Between
1992 and 1997 Mr. Fidaleo served as Chief Financial Officer of privately held
national companies American Dawn, Inc. and Vagabond Inns, Inc. Mr. Fidaleo was
in public accounting from 1982 through 1992, primarily with BDO Seidman, LLP
where he attained the level of audit senior manager. Mr. Fidaleo is a CPA and
holds a B.S. degree in Accounting from California State University at Long
Beach.

      Stephen A. Zelnick, a director, has been a partner in the law firm Morse,
Zelnick, Rose & Lander, LLP since its inception in August 1995. Mr. Zelnick also
serves on the Board of Directors of DAG Media, Inc. a publisher of classified
telephone directories. Mr. Zelnick holds a B.S. degree in Economics with an
accounting major from the Wharton School of the University of Pennsylvania in
1957 and an LLB from Yale Law School in 1960.

      Richard Salute, a director, was a partner with Arthur Andersen until
December 2001. Mr. Salute was employed by Arthur Andersen in various positions
since 1973. Mr. Salute has been nominated to the Board of Directors of Copytel,
Inc., a developer and distributor of flat panel displays and encryption devices.
He is a Certified Public Accountant, licensed to practice in New York, New
Jersey and Connecticut. Mr. Salute holds a B.A. degree from Adelphi University.

      All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed.

      AdStar's Board of Directors has established compensation and audit
committees. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all the officers of AdStar, reviews
general policy matters relating to compensation and benefits of employees of
AdStar, and administers the issuance of stock options to AdStar's officers,
employees, directors and consultants. The Audit Committee meets with management
and AdStar's independent auditors to determine the adequacy of internal controls
and other financial reporting matters.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 requires AdStar's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of AdStar's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors and greater than ten percent (10%) stockholders are required
by SEC regulations to furnish AdStar with copies of all Section 16(a) forms they
file.

      To the best of AdStar's knowledge, based solely on review of the copies of
such forms furnished to it, or written representations that no other forms were
required, AdStar believes that all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten percent (10%) stockholders


                                       28
<PAGE>


were complied with during 2002 with the following exceptions: (i) Anthony
Fidaleo, our Chief Financial Officer and Nancy Works, a Vice President of
AdStar, did not timely file their Initial Statement of Beneficial Ownership of
Securities on Form 3; (ii) each of Tribune Company, a greater than ten percent
(10%) stockholder and Stephen Zelnick, a director, did not timely file one
Change in Beneficial Ownership on Form 4. With respect to any former directors,
officers, and ten percent (10%) stockholders of AdStar, AdStar does not have any
knowledge of any known failures to comply with the filing requirements of
Section 16(a).

Item 10. Executive Compensation.

      The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2000, 2001
and 2002 by our (i) Chief Executive Officer, and (ii) executive officers, other
than the CEO, whose salary for the 2002 fiscal year as determined by Regulation
S-B, Item 402, exceeded $100,000 (the individuals falling within categories (i)
and (ii) are collectively referred to as the "Named Executives").

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                Long-Term Compensation
                                            Annual        ---------------------------------
                                         Compensation          Awards             Payouts
                                         ------------     ------------------    ------------
                                                            Common Stock         All Other
Name and Principal                          Salary        Underlying Options    Compensation
     Position                  Year           ($)                (#)                ($)
------------------             ----      ------------     ------------------    ------------

<S>                            <C>         <C>                 <C>                  <C>
Leslie Bernhard,               2002        $211,250            150,000              $  0
President & Chief Executive    2001         251,680            100,000                 0
Officer                        2000         231,912                  0                 0



Eli Rousso                     2002        $209,450            150,000              $  0
Executive Vice                 2001         240,371            100,000                 0
President & Chief              2000         230,301                  0                 0
Technology Officer


Jeffrey Baudo                  2002        $191,700            150,000              $  0
Chief Operating                2001(1)      197,872            100,000                 0
Officer

Jeffrey Diamond                2002        $141,721                  0              $  0
Vice President -Technology     2001         177,224                  0                 0
                               2000         230,301                  0                 0
</TABLE>

----------
      (1)   Since commencement of employment on January 22, 2001.


                                       29
<PAGE>


Stock Options

      The following tables show certain information with respect to incentive
and non-qualified stock options granted in 2002 to the Named Executives under
AdStar's 1999 Stock Option Plan who received options and the aggregate value at
December 31, 2002 of such options. The per share exercise price of all options
is equal to the fair market value of a share of Common Stock on the date of
grant. No options granted to any Named Executives have been exercised.

                              Option Grants in 2002
--------------------------------------------------------------------------------
                          Individual Grants of Options
--------------------------------------------------------------------------------

                       Number of
                       Shares of      Percent of
                        Common       Total Options
                         Stock         Granted to     Exercise
                       Underlying     Employees in      Price
       Name             Option #          2002        ($/Sh)     Expiration Date
--------------------   ----------    -------------    --------   ---------------
Leslie Bernhard  (1)     150,000        20.8%          $0.60      January 2007
Eli Rousso (1)           150,000        20.8%          $0.60      January 2007
Jeffrey Baudo (1)        150,000        20.8%          $0.60      January 2007

----------
      (1)   The options vested 50% on the date of grant and 50% on one year from
            the date of grant.

               Aggregated Option Exercises in Last Fiscal Year and
                          Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                 Number of
                  Shares                      Number of Shares Underlying Unexercised             Dollar Value of Unexercised
                 Underlying  Dollar Value          Options at fiscal Year-End(1)          In-the-Money Options at fiscal Year-End(1)
                  Options     Realized on     ---------------------------------------     ------------------------------------------
Name             Exercised     Exercise         Exercisable           Nonexercisable         Exercisable            Nonexercisable
----             ---------     --------         -----------           --------------         -----------            --------------
<S>                   <C>       <C>               <C>                   <C>                    <C>                     <C>
Leslie Bernhard        --       $ --              175,000                75,000                $33,250                 $23,250
Eli Rousso             --       $ --              175,000                75,000                $33,250                 $23,250
Jeffrey Baudo          --       $ --              108,334               141,666                $23,250                 $23,250
Jeffrey Diamond        --       $ --               16,667                 8,333                $    --                 $    --
</TABLE>

----------
(1)   Based on the closing price of the AdStar's common stock on December 31,
      2002 of $0.91.

Employment Contracts

      On July 1, 2002, AdStar entered into four-year employment agreements with
each of Leslie Bernhard and Eli Rousso. Their prior agreements expired on June
30, 2002. Pursuant to her employment agreement, Leslie Bernhard was retained as
our Chief Executive Officer and her total annual compensation was reduced to
$212,800. Pursuant to his employment agreement, Eli Rousso was retained as our
Executive Vice President and his total annual compensation was reduced to
$212,800. Each agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement, separation and disability
plans for employees or executives and for participation in other employee
benefits applicable to employees and executives of AdStar. Each agreement
further provides for fringe benefits which commensurate with the executive's
duties and responsibilities. Under each agreement, employment may be terminated
by us with cause or by the executive with good reason. Termination by us without
cause, or by the executive for good reason, would subject us to liability for
liquidated damages in an amount equal to the terminated executive's base salary
for the remaining term of his or her employment agreement or 12 months,
whichever is greater.

      In January 2001, AdStar entered into a 2-year employment contract with Mr.
Jeffrey Baudo. Pursuant to his employment agreement, Mr. Baudo was retained as
our Chief Operating Officer at an annual rate of $213,000 per year, and granted
options to purchase 100,000 shares of AdStar's common stock. Subsequently, as of
July 1, 2002, Mr. Baudo agreed to an amendment to employment agreement reducing
his annual rate of compensation to $191,700. Mr. Baudo's contract was extended
for one year with successive one year terms for the same salary under
essentially the same terms and conditions, effective January 22, 2003. Mr. Baudo
is the brother of Leslie Bernhard.

Compensation of Directors

      In 2002, each of our non-employee directors received options to purchase
50,000 shares of our common stock exercisable at the fair market value on the
date of grant. These options vest one-half on the date of grant and one-half on
the 1st anniversary of the date of grant, provided the grantee is still a
director on such date.

Limitation of Directors' Liability and Indemnification

      The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their shareholders for monetary damages for breach of directors' fiduciary duty
of care. The AdStar's Certificate of Incorporation limits the liability of its
directors to AdStar or its stockholders to the fullest extent permitted by
Delaware law.

      AdStar's Certificate of Incorporation provides mandatory indemnification
rights to any officer or director of AdStar who, by reason of the fact that he
or she is an officer or director of AdStar, is involved in a legal proceeding of
any nature. Such indemnification rights include reimbursement for expenses
incurred by such officer or director in advance of the final disposition of such
proceeding in accordance with the applicable provisions of the DGCL. Insofar as
indemnification for liabilities under the Securities Act of 1933 (the "Act") may
be provided to officers and directors or persons controlling AdStar, AdStar has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.


                                       30
<PAGE>

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

      The following table, together with the accompanying footnotes, sets forth
information, as of March 28, 2003, regarding stock ownership of all persons
known by AdStar to own beneficially more than 5% of AdStar's outstanding Common
Stock, Named Executives, all directors, and all directors and officers of AdStar
as a group:

                                                     Shares of
                                                    Common Stock
                                                    Beneficially   Percentage of
    Name of Beneficial Owner (1)                      Owned (2)      Ownership
-----------------------------------------           ------------   -------------

Leslie Bernhard (3)                                     860,054        10.0%
Eli Rousso (3)                                          887,891        10.3%
Jeffrey Baudo (4)                                       220,466         2.6%
Anthony Fidaleo                                               0            *
Jeffrey Diamond (8)                                      16,667            *
Stephen A. Zelnick (5)                                  134,250         1.6%
Richard Salute                                                0            *
Chester L. F. Paulson (6)                             2,251,574        24.7%
Tribune Company (7)                                   3,443,457        29.4%
All Directors and Officers (7 persons) as a group     2,119,330        24.7%

----------
      *     less than 1%

(1)   The addresses of the persons named in this table are as follows: Leslie
      Bernhard, Eli Rousso, Jeffrey Baudo, Anthony Fidaleo, and Jeffrey Diamond
      c/o AdStar, Inc., 4553 Glencoe Avenue, Suite 325, Marina del Rey, CA
      90292; Stephen A. Zelnick c/o Morse Zelnick, Rose & Lander, 405 Park
      Avenue, New York, NY 10022; Watertown Connecticut 06795; Richard Salute 7
      Lori Court, Woodbury, New York, 11797; Chester L. F. Paulson, c/o Paulson
      Capital Corp. 811 SW Naito Parkway, Suite 200, Portland, OR 97204, and
      Tribune Company, 435 N. Michigan Ave. Chicago IL, Attn: General Counsel.

(2)   A person is deemed to be a beneficial owner of securities that can be
      acquired by such person within 60 days from the filing of this report upon
      the exercise of options and warrants or conversion of convertible
      securities. Each beneficial owner's percentage ownership is determined by
      assuming that options, warrants and convertible securities that are held
      by such person (but not held by any other person) and that are exercisable
      or convertible within 60 days from March 28, 2003 have been exercised or
      converted. Except as otherwise indicated, and subject to applicable
      community property and similar laws, each of the persons named has sole
      voting and investment power with respect to the shares shown as
      beneficially owned. On March 28, 2003, 8,263,676 shares of Common Stock
      were outstanding.

(3)   Includes an aggregate of 110,054 shares in respect of which Ms. Bernhard
      and Mr. Rousso have voting power. Additionally, Ms. Bernhard and Mr.
      Rousso each have options to purchase 100,000 and 150,000 shares of AdStar
      common stock at $0.81 and $0.60 per share, respectively, exercisable
      within 60 days.


                                       31
<PAGE>


(4)   Consists of options to purchase 66,667 and 150,000 shares of AdStar common
      stock, at $1.25 and $0.60 per share, exercisable within 60 days.

(5)   Includes: (i) options to purchase 50,000 shares of common stock of AdStar,
      at $0.60 per share, and warrants to purchase 25,000 shares of AdStar
      common stock, at $1.07 per share, exercisable within 60 days; and (ii)
      9,250 shares of common stock of AdStar which represents Mr. Zelnick's
      proportionate interest in 37,000 shares beneficially owned by a nominee
      of Morse, Zelnick, Rose & Lander, LLP, of which Mr. Zelnick is a member.
      The filing of this report shall not be construed as an admission that Mr.
      Zelnick is the beneficial owner of any of the shares owned by the nominee
      for the purposes of Section 13(d) or 13(g) of the Securities Exchange Act
      of 1934, as amended.

(6)   Consists of 1,408,458 shares of common stock of AdStar and the currently
      exercisable common stock purchase warrants listed below:

            (i)   24,116 exercisable at $0.75

            (ii)  350,000 exercisable at $1.07

            (iii) 200,000 exercisable at $1.80

            (iv)  139,000 exercisable at 7.20

            (v)   130,000 exercisable at 9.00

(7)   Consists of 1,443,457 shares of Series A and 2,000,000 of Series B-2
      Preferred Stock, which currently convert into Common Stock on a 1 for 1
      basis.

(8)   Consist of options to purchase 16,667 shares of common stock of Adstar at
      $1.66 per share, exercisable within 60 days.


                                       32
<PAGE>


Securities Authorized for Issuance Under Equity Compensation Plans

      The following table summarizes the (i) options granted under the Stock
Option Plan, (ii) options granted outside the Stock Option Plan and (iii)
issuances of Common Stock under our Vendor Plan (described below), as of
December 31, 2002. The shares covered by outstanding options are subject to
adjustment for changes in capitalization stock splits, stock dividends and
similar events. No other equity compensation has been issued.

<TABLE>
<CAPTION>
                                                                      Equity Compensation Plan Table
                                                     ----------------------------------------------------------------
                                                                                                     Number of
                                                                                                     securities
                                                                                                remaining available
                                                                                                for future issuance
                                                                                                    under equity
                                                     Number of securities   Weighted-average     compensation plans
                                                      to be issued upon    exercise price of         (excluding
                                                         exercise of          outstanding            securities
                                                     outstanding options,  options, warrants    reflected in column
                                                     warrants and rights       and rights               (a))

                                                             (a)                  (b)                   (c)
                                                     --------------------  -----------------    -------------------
Equity Compensation Plans Approved By
Security Holders

<S>                                                       <C>                 <C>                     <C>
Grants under the AdStar, Inc. 1999 Stock                  1,133,474           $ 0.95                  366,526
Option Plan.......................................

Equity Compensation Plans Not Requiring
Approval By Security Holders

Aggregate Individual Option Grants ...............          375,001           $ 5.42                  Not applicable

Vendor Plan (1) ..................................          279,384           Not applicable          120,616
                                                        ------------------------------------------------------------

Total Option Grants ..............................        1,508,475           $ 2.06                  366,526
                                                        ------------------------------------------------------------

Total Issuances under the Vendor Plan ............          279,384           Not applicable          120,616
                                                        ------------------------------------------------------------
</TABLE>

      (1)   Reflect shares of AdStar Common Stock.

      o The aggregate individual option grants outside the Stock Option Plan
referred to in the table above includes: (a) warrants issued to the underwriter
in our initial public offering for the purchase of 200,000 shares of Common
Stock, with an exercise price of $7.20 per share; and (b) warrants issued to our
public relations firms for the purchase of an aggregate of 125,000 shares of
Common Stock, consisting of warrants to purchase 50,000 shares, with an exercise
price $1.50 per share, warrants to purchase 50,000 shares, with an exercise
price $2.00 per share and warrants to purchase 25,000 shares, with an exercise
price $10.00 per share.

      o In AdStar established a plan (the "Vendor Plan") to pay vendors, who are
accredited investors (as defined under Rule 215 of the Securities Act of 1933),
in shares of its Common Stock, valued at fair


                                       33
<PAGE>


market value, for goods or services. Up to 400,000 shares may be issued under
the Vendor Plan. Under the Vendor Plan, as of December 31, 2002, an aggregate of
279,384 shares of Common Stock had been issued leaving 120,616 shares available
for future issuance. In June 2002 67,796 shares issued under the Vendor Plan
were returned to AdStar by a Kodak these shares included in shares available for
future and conversely have been excluded from shares issued under the plan.

Item 12. Certain Relationships and Related Transactions

      In February 2001, AdStar satisfied the $1.1 million note bearing interest
annually at a rate of 6%, held by Paulson Capital Corporation, of which Chester
Paulson is the controlling shareholder, by issuing 593,483 shares of common
stock to Paulson Capital Corporation in payment of principal and accrued
interest totaling $1,186,966.

      In January 2002, AdStar issued to Morse, Zelnick, Rose and Lander LLP,
AdStar's legal counsel and of which Stephen Zelnick is a member, 114,545 shares
of restricted common stock, at fair market value in full settlement of a $62,500
liability included in the year-end financial statements. Additionally, AdStar
completed a private offering of 1,300,000 shares of its common stock to
accredited investors, raising $650,000 in capital. In connection with this
offering AdStar paid $65,000 to Paulson Investment Company, Inc., which Chester
Paulson is the controlling shareholder, as part of the placement agent fees.

      In March 2002, the Board of Directors approved the sale of 1,443,457
shares of our Series A Preferred Stock to Tribune Company for an aggregate
purchase price of approximately $1.8 million. These shares carry a liquidation
preference that includes a dividend of 7% per year available only upon
liquidation and currently convert on a 1:1 basis. Shareholders of Series A
Preferred Stock are entitled to vote on all matters submitted to the
stockholders for vote and vote as a single class with the shareholders of our
Common Stock. The holders of Series A preferred stock are entitled to one vote
for each share of common issuable upon conversion.

      In December 2002 the Board of Directors approved the sale of shares of its
Series B Preferred Stock to Tribune Company for an aggregate price of $1.5
million. The sale was split into two funding segments:

      (i) In December 2002, AdStar sold 1,200,000 shares of its Series B-1
Preferred Stock to Tribune Company for an aggregate purchase price of $900,000.
These shares currently convert on a 1:1 basis. Shareholders of Series B-1
Preferred Stock are entitled to vote on all matters submitted to the
stockholders for vote and as a single class with the Common Stock. The holders
of Series B-1 Preferred Stock are entitled to one vote for each share; and

      (ii) In March 2003, AdStar sold 800,000 shares of its Series B-2 Preferred
Stock to Tribune Company for an aggregate purchase price of $600,000. These
shares currently convert on a 1:1 basis. Shareholders of Series B-2 Preferred
Stock are entitled to vote on all matters submitted to the stockholders for vote
and as a single class with the Common Stock. The holders of Series B-2 Preferred
Stock are entitled to one vote for each share. In addition, on March 28, 2003,
in exchange for all of the Series B-1 Preferred Stock plus accrued and unpaid
dividends on those shares, issued in December 2002 to Tribune Company, AdStar
issued an additional 1,200,000 shares of its Series B-2 Preferred Stock to the
Tribune Company.


                                       34
<PAGE>


Item 13. Exhibits, List and Reports on Form 8-K.

(a)   Exhibits:

      Exhibit
        No.                            Description
      -------                          -----------

      2.1         Agreement and Plan of Merger (1)

      3.1         Certificate of Incorporation of AdStar (1)

      3.1a        Amendment to Certificate of Incorporation, as filed with the
                  Secretary of State of Delaware on July 11, 2001 (5)

      3.1b        Series A Preferred Stock Certificate of Designation as filed
                  with the Secretary of State of Delaware on March 15, 2002 (8)

      3.1c        Series B-1 Preferred Stock Certificate of Designation as filed
                  with the Secretary of State of Delaware on December 20, 2002,
                  effective December 23, 2002 (10)

      3.1d        Series B-2 Preferred Stock Certificate of Designation as filed
                  with the Secretary of State of Delaware on March 28, 2003,
                  effective March 28, 2003 *

      3.2         By-Laws of AdStar (1)

      4.1         Specimen Stock Certificate (1)

      4.2         Revised Form of Underwriter's Warrant (4)

      4.3         Form of 5-year warrant issued in the Private Placement of
                  units on April 6, 2001 (6)

      4.4         Form of 5-year warrant issued in connection with the Private
                  Placement of AdStar Common Stock during the period of October
                  2001 through January 2002(7)

      4.5         Form of 3-year warrant issued to C.C.R.I. Corporation in
                  connection with an agreement between it and AdStar, dated as
                  of October 2, 2001(7)

      10.1        1999 Stock Option Plan (1)

      10.2        Employment Agreement between AdStar and Leslie Bernhard *

      10.3        Employment Agreement between AdStar and Eli Rousso *

      10.4        Employment Agreement between AdStar and Jeffrey Baudo.*

      10.5        Memorandum of Agreement between AdStar and CareerPath.com LLC
                  dated March 11, 1999(1)

      10.6        Distribution and Service Agreement dated February 9, 1999 by
                  and between the Company and PowerAdz (1)

      10.7        Distribution and Service Agreement dated November 19, 1998 by
                  and between AdStar and AdOne Classified Network, Inc. (1)

      10.8        Agreement dated March 16, 1999 by and between James E. Mann
                  and the Company (1)

      10.9        Form of warrant to purchase 16,667 shares of Common Stock
                  issued to Jonathan Cohen and Ronald Posner (1)

      10.10       Loan and Subscription Agreement dated July 13, 1999 by and
                  between the Company and Interequity Capital Partners L.P. (1)

      10.11       Form of Subscription Agreement for 12% Convertible
                  Subordinated Unsecured Promissory Note (1)

      10.12       Form of 12% Convertible Subordinated Unsecured Promissory Note
                  (1)

      10.13       Form of Shareholders' Agreement by and among AdStar, its
                  principal stockholders and certain investors (1)

      10.14       Employment Agreement dated July 20, 1998 between Adam Left and
                  the Company and amendment dated July 15, 1999(1)

      10.15       Employment Agreement dated as of April 12, 1999 between
                  Michael Kline and AdStar (1)

      10.16       Promissory Note issued to Paulson Capital Corporation (1)


                                       35
<PAGE>


      10.17       Distribution and Service Agreement dated as of September 3,
                  1999 by and between AdStar and Landon Media Group, Inc. (2)

      10.18       Distribution and Service Agreement dated as of August 30, 1999
                  by and between AdStar and Career Engine (2)

      10.19       Distribution and Service Agreement dated as of August 27, 1999
                  by and between AdStar and CareerPath.com (2)

      10.20       Engagement Agreement, dated March 7, 2000, between RCG Capital
                  Markets Group and AdStar (3)

      10.21       First Amendment of Office Lease and Parking License Agreement,
                  dated December 13, 1999, between TIAA Realty, Inc. and AdStar
                  (4)

      10.22       Second Amendment of Office Lease and Parking License
                  Agreement, dated March 24, 2000, between TIAA Realty, Inc. and
                  AdStar (3)

      10.23       Letter Agreement between Company and Paulson Capital
                  Corporation for the satisfaction of outstanding principal and
                  interest due on $1.1 million note bearing interest at 6% per
                  annum, dated October 21, 1999.(9)

      10.24       Copy of Agreement, among Company and certain accredited
                  investors, dated April 6, 2001.(9)

      10.25       Series A Preferred Stock Purchase Agreement, dated March 18,
                  2002, by and between AdStar, Inc. and Tribune Company.(8)

      10.26       Software Development and Deployment Agreement, dated March 18,
                  2002, by and between AdStar, Inc. and Tribune Company.(8)

      10.27       Registration Rights Agreement, dated March 18, 2002, by and
                  between AdStar, Inc. and Tribune Company.(8)

      10.28       Governance Agreement, dated March 18, 2002, by and among
                  AdStar, Inc., Leslie Bernhard, Eli Rousso and Tribune
                  Company.(8)

      10.29       Series B Preferred Stock Purchase Agreement, dated December
                  23, 2002, by and between AdStar, Inc. and Tribune Company.(10)

      10.30       Second Software Development and Deployment Agreement, dated
                  December 23, 2002, by and between AdStar, Inc. and Tribune
                  Company.(10)

      10.31       Amended and Restated Registration Rights Agreement, dated
                  December 23, 2002, by and between AdStar, Inc. and Tribune
                  Company.(10)

      10.32       Amended and Restated Governance Agreement, dated December 23,
                  2002, by and among AdStar, Inc., Leslie Bernhard, Eli Rousso
                  and Tribune Company.(10)

      16.1        Letter from PricewaterhouseCoopers LLP dated February 20,
                  2003.(11)

      23.1        Consent of PricewaterhouseCoopers LLP *

      23.2        Consent of BDO Seidman, LLP *

      99.1        Chief Executive Officer Certification pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to section 906 of the
                  Sarbanes-Oxley Act of 2002, filed with the Securities and
                  Exchange Commission on the date hereof.*

      99.2        Chief Financial Officer Certification pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to section 906 of the
                  Sarbanes-Oxley Act of 2002, filed with the Securities and
                  Exchange Commission on the date hereof.*

----------

            Notes to exhibits

      *     Filed herewith

      (1)   Filed as an exhibit to Registration Statement on form SB-2 No.
            333-84209, and incorporated


                                       36
<PAGE>

            herein by reference.

      (2)   Filed as an exhibit to Registration Statement on form SB-2 No.
            333-90649 and incorporated herein by reference.

      (3)   Filed as an exhibit with the same number to Quarterly Report on Form
            10QSB for the period ended March 31, 2000 and incorporated herein by
            reference.

      (4)   Filed as an exhibit with the same number to Registration Statement
            on form SB-2 No. 333-43408 and incorporated herein by reference.

      (5)   Filed as an exhibit to Quarterly Report on Form 10QSB for the period
            ended September 30, 2001 and incorporated herein by reference.

      (6)   Filed on May 10, 2001 as an exhibit to Registration Statement on
            Form S-3 No. 333-60664 and incorporated herein by reference.

      (7)   Filed on January 24, 2002 as an exhibit to Registration Statement on
            Form S-3 No. 333-81338 and incorporated herein by reference.

      (8)   Filed on March 25, 2002 as an exhibit to the Current Report on Form
            8-K filed and incorporated herein by reference.

      (7)   Filed as an exhibit to the Annual Report on Form 10KSB for the
            period ended December 31, 2000 and incorporated herein by reference.

      (8)   Filed on December 31, 2002 as an exhibit to the Current Report on
            Form 8-K filed and incorporated herein by reference.

      (9)   Filed on February 24, 2003 as an exhibit to the Current Report on
            Form 8-K filed and incorporated herein by reference.

(b)   Reports on Form 8-K:

            (i)   On December 31, 2002, AdStar filed a Current Report on Form
                  8-K in accordance with Item 5 of such report; and

            (ii)  On February 24, 2003, AdStar filed a Current Report on Form
                  8-K in accordance with item 4 of such report

Item 14. Controls And Procedures

a)    Evaluation of Disclosure Controls and Procedures. Our chief executive
      officer and our chief financial officer, after evaluating the
      effectiveness of the Company's "disclosure controls and procedures" (as
      defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
      15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
      filing date of this annual report, have concluded that as of the
      Evaluation Date, our disclosure controls and procedures are adequate and
      designed to ensure that material information relating to us would be known
      to them.

b)    Changes in Internal Controls. There were no significant changes in our
      internal controls or in other factors that could significantly affect our
      disclosure controls and procedures subsequent to the Evaluation Date.


                                       37
<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      AdStar, Inc.

                                      By:  /s/ Leslie Bernhard
                                           ------------------
                                           Leslie Bernhard,
                                           President and Chief Executive Officer

Date: March 31, 2003

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated on March 31, 2003.

              Signature                  Title
              ---------                  -----

Principal Executive Officer

         /s/ Leslie Bernhard             President and Chief Executive Officer
         ---------------------           and Director
             Leslie Bernhard

Principal Financial Officer

         /s/ Anthony J. Fidaleo          Chief Financial Officer
         ---------------------
             Anthony J. Fidaleo

Directors

         /s/ Eli Rousso                  Director
         ---------------------
             Eli Rousso

         /s/ Jeffrey Baudo               Director
         ---------------------
         Jeffrey Baudo

         /s/ Stephen Zelnick             Director
         ---------------------
         Stephen Zelnick

         /s/ Richard Salute              Director
         ---------------------
         Richard Salute


                                       38
<PAGE>


                                 CERTIFICATIONS

I, Leslie Bernhard, certify that:

1.    I have reviewed this annual report on Form 10-KSB of Adstar, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for the periods presented in this annual report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

            a)    Designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant is made
                  known to us particularly during the period in which this
                  annual report is being prepared;

            b)    Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

            c)    Presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of registrant's board of directors (or persons performing the
      equivalent function):

            a)    All significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

            b)    Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Date: March 31, 2003
                                                     /s/ Leslie Bernhard
                                                     -----------------------
                                                     Leslie Bernhard
                                                     Chief Executive Officer


                                       39
<PAGE>


I, Anthony J. Fidaleo, certify that:

1.    I have reviewed this annual report on Form 10-KSB of Adstar, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for the periods presented in this annual report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

            a)    Designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant is made
                  known to us particularly during the period in which this
                  annual report is being prepared;

            b)    Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

            c)    Presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of registrant's board of directors (or persons performing the
      equivalent function):

            a)    All significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

            b)    Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Date: March 31, 2003

                                                     /s/ Anthony J. Fidaleo
                                                     -----------------------
                                                     Anthony J. Fidaleo
                                                     Chief Financial Officer


                                       40
<PAGE>


                          Index To Financial Statements

                                                                            Page
                                                                            ----

Reports of Independent Certified Public Accountants                         F-2

Financial Statements:

     Balance Sheet as of December 31, 2002                                  F-4

     Statements of Operations for the two years ended
        December 31, 2002                                                   F-5

     Statements of Stockholders' Equity (Deficit) for the
        two years ended December 31, 2002                                   F-6

     Statements of Cash Flows for the two years ended
        December 31, 2002                                                   F-7

     Notes to Financial Statements                                          F-8


                                      F-1
<PAGE>


Report of Independent Certified Public Accountants

Board of Directors
Adstar, Inc.
Marina del Rey, California

We have audited the accompanying balance sheet of Adstar, Inc. (the "Company")
as of December 31, 2002 and the related statement of operations, stockholders'
equity, and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 Adstar, Inc. at December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.


/s/ BDO Seidman, LLP

Los Angeles, California
March 28, 2003


                                      F-2
<PAGE>


                      REPORT OF PRICEWATERHOUSECOOPERS LLP,
                             INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of AdStar, Inc.

In our opinion, the accompanying statements of operations, stockholders' equity
and cash flows present fairly, in all material respects, the results of
operations and cash flows of AdStar, Inc. for the year ended December 31, 2001,
in conformity with accounting principles generally accepted in the United States
of America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not audited the
financial statements of AdStar, Inc. for any period subsequent to December 31,
2001.


/s/      PricewaterhouseCoopers LLP

Los Angeles, California
February 22, 2002 except for the subsequent events
described in Note 9 to the 2001 financial statements,
as to which the date is March 15, 2002


                                      F-3
<PAGE>


AdStar, Inc.
Balance Sheet
As of December 31, 2002
--------------------------------------------------------------------------------

<TABLE>
<S>                                                                                       <C>
Assets

Current assets:
   Cash and cash equivalents                                                              $    940,378
   Restricted cash                                                                             174,918
   Accounts receivable, net of allowance for doubtful
     accounts of $49,672                                                                       155,159
   Notes receivable from officers - current portion                                              7,179
   Prepaid and other current assets                                                            143,884
                                                                                          ------------
     Total current assets                                                                    1,421,518

Notes receivable from officers, net of current portion                                         239,945
Property and equipment, net                                                                  2,548,969
Intangible assets, net                                                                          47,346
Other assets                                                                                    31,413
                                                                                          ------------

     Total assets                                                                         $  4,289,191
                                                                                          ============

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable                                                                       $  1,126,425
   Accrued expenses                                                                            555,816
   Deferred revenue                                                                            113,571
   Capital lease obligations - current portion                                                  28,980
                                                                                          ------------

     Total current liabilities                                                               1,824,792

Capital lease obligations, net of current portion                                               49,807
                                                                                          ------------

     Total liabilities                                                                       1,874,599
                                                                                          ------------
Commitments and contingencies (Note 12)

Stockholders' equity:
   Convertible Preferred stock, par value $0.0001; authorized 5,000,000
   shares; issued and outstanding:
       Series A, 1,443,457 issued and outstanding; liquidation preference
       of $1,898,000                                                                         1,697,840
       Series B-1, 1,200,000 issued and outstanding; liquidation preference
       of $901,000                                                                             813,720
   Common stock, par value $0.0001; authorized 20,000,000 shares; 8,260,928
       issued and outstanding                                                                      826
   Additional paid-in capital                                                               11,294,075
   Treasury stock; 67,796 shares                                                               (67,796)
   Accumulated deficit                                                                     (11,324,073)
                                                                                          ------------
     Total stockholders' equity                                                              2,414,592
                                                                                          ------------
     Total liabilities and stockholders' equity                                           $  4,289,191
                                                                                          ============
</TABLE>

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


                                      F-4
<PAGE>


AdStar, Inc.
Statements of Operations
For the Two Years
Ended December 31, 2002
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           2001           2002
                                                                           ----           ----

<S>                                                                    <C>            <C>
ASP, net                                                               $   286,501    $   915,819
Licensing and software                                                   1,100,431      1,070,341
Customization and other                                                    693,680        255,332
                                                                       -----------    -----------
Net revenues                                                             2,080,612      2,241,492
Cost of revenues, including of amortization of $191,279 and $400,023       805,964      1,106,502
                                                                       -----------    -----------

   Gross profit                                                          1,274,648      1,134,990

General and administrative expense                                       1,881,957      1,859,826
Selling and marketing expense                                              656,349        555,588
Product development costs                                                  639,503        627,040
Restructuring expenses                                                          --        322,604
                                                                       -----------    -----------

   Loss from operations                                                 (1,903,161)    (2,230,068)

Other income                                                                    --         62,796
Interest income (expense), net                                              23,871         14,389
                                                                       -----------    -----------

   Loss before taxes                                                    (1,879,290)    (2,152,883)

Provision for income taxes                                                  (5,208)        (6,760)
                                                                       -----------    -----------

   Net loss                                                            $(1,884,498)   $(2,159,643)

Deemed dividend on issuance of series B-1 preferred stock                       --       (204,000)
                                                                       -----------    -----------

Net loss applicable to common stockholders                             $(1,884,498)   $(2,363,643)
                                                                       ===========    ===========

Loss per share - basic and diluted                                     $     (0.30)   $     (0.29)
Weighted average number of shares - basic and diluted                    6,373,037      8,193,132
</TABLE>


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


                                      F-5
<PAGE>


AdStar, Inc.
Statements of Stockholders' Equity
For the Two Years
Ended December 31, 2002
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             Preferred Stock             Preferred Stock
                                   Common Stock                 Series A                   Series B-1             Treasury Stock
                               ---------------------    ------------------------    ------------------------  ----------------------
                                Shares       Amount       Shares        Amount        Shares        Amount      Shares      Amount
                               ---------   ---------    ----------    ----------    ----------    ----------  ---------   ----------
<S>                            <C>           <C>        <C>           <C>            <C>           <C>          <C>       <C>
Balance, December 2000         5,217,120     $  522            --     $       --            --     $     --         --    $     --
  Common stock issued
    in private placement       1,800,000        180            --             --            --           --         --          --
  Common stock issued
    for services                 119,249         12            --             --            --           --         --          --
  Warrants issued for
    services                          --         --            --             --            --           --         --          --
  Amortization of deferred
    compensation                      --         --            --             --            --           --         --          --
  Conversion of debt to
    equity                       593,483         59            --             --            --           --         --          --
  Stockholder payments                --         --            --             --            --           --         --          --
  Net loss                            --         --            --             --            --           --         --          --
                               ---------     ------     ---------     ----------     ---------     --------     ------    --------
Balance, December 2001         7,729,852        773            --             --            --           --         --          --
  Net proceeds from
    Preferred Series A                --         --     1,443,457      1,697,840            --           --         --          --
  Net Proceeds from
    Preferred Series B-1              --         --            --             --     1,200,000      609,720         --          --
  Common stock and warrants
    issued in private
    placement                    400,000         40            --             --            --           --         --          --
  Common stock issued
    for services                 131,076         13            --             --            --           --         --          --
  Warrants issued for
    services                          --         --            --             --            --           --         --          --
  Restructure of
    stockholder loan                  --         --            --             --            --           --         --          --
  Kodak shares returned               --         --            --             --            --           --     67,796     (67,796)
  Deemed dividend                     --         --            --             --            --      204,000         --          --
  Net loss                            --         --            --             --            --           --         --          --
                               ---------     ------     ---------     ----------     ---------     --------     ------    --------
Balance, December 2002         8,260,928     $  826     1,443,457     $1,697,840     1,200,000     $813,720     67,796    $(67,796)
                               =========     ======     =========     ==========     =========     ========     ======    ========
</TABLE>


<TABLE>
<CAPTION>

                                 Additional                                                       Total
                                 Paid - In      Shareholder     Deferred       Accumulated     Stockholders'
                                  Capital       Receivable    Compensation       Deficit     Equity (Deficit)
                                ------------   ------------  --------------   ------------   ----------------
<S>                             <C>               <C>           <C>           <C>               <C>
Balance, December 2000          $  8,849,241      $(49,006)     $(28,239)     $ (7,075,932)     $ 1,696,586
  Common Stock issued
    in private placement             693,414            --            --                --          693,594
  Common stock issued
    for services                      89,508            --            --                --           89,520
  Warrants issued for
    services                          24,725            --            --                --           24,725
  Amortization of deferred
    compensation                          --            --        28,239                --           28,239
  Conversion of debt to
    equity                         1,186,907            --            --                --        1,186,966
  Stockholder payments                    --         5,886            --                --            5,886
  Net loss                                --            --            --        (1,884,498)      (1,884,498)
                                ------------      --------      --------      ------------      -----------
Balance, December 2001            10,843,795       (43,120)           --        (8,960,430)       1,841,018
  Net proceeds from
    Preferred Series A                    --            --            --                --        1,697,840
  Net Proceeds from
    Preferred Series B-1             204,000            --            --                --          813,720
  Common stock and warrants
    issued in private
    placement                        151,522            --            --                --          151,562
  Common stock issued
    for services                      77,456            --            --                --           77,469
  Warrants issued for
    services                          17,302            --            --                --           17,302
  Restructure of
    stockholder loan                      --        43,120            --                --           43,120
  Kodak shares returned                   --            --            --                --          (67,796)
  Deemed dividend                         --            --            --          (204,000)              --
  Net loss                                --            --            --        (2,159,643)      (2,159,643)
                                ------------      --------      --------      ------------      -----------
Balance, December 2002          $ 11,294,075      $     --      $     --      $ 11,324,073      $ 2,414,592
                                ============      ========      ========      ============      ===========
</TABLE>

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


                                      F-6
<PAGE>

AdStar, Inc.
Statements of Cash Flows
For the Two Years
Ended December 31, 2002
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                          2001           2002
                                                                          ----           ----
<S>                                                                   <C>            <C>
Cash flows from operating activities:
   Net loss                                                           $(1,884,498)   $(2,159,643)
   Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and amortization                                        366,212        612,425
     Allowance for doubtful accounts                                           --         34,672
     Stock based charges                                                  142,484         94,771
     Kodak shares returned                                                     --        (67,796)
     Interest on convertible notes and shareholder receivable               5,320             --
     Loss (gain) on disposal of equipment and software                     94,077        128,379
     Changes in assets and liabilities:
       Accounts receivable                                                 16,774         20,539
       Prepaids and other assets                                          (10,031)        23,953
       Accounts payable                                                   118,188        709,689
       Accrued expenses                                                   (17,708)       109,188
       Deferred revenue                                                   (12,091)       (39,642)
                                                                      -----------    -----------

         Net cash used in operating activities                         (1,181,273)      (533,465)
                                                                      -----------    -----------
Cash flows from investing activities:
   Purchase of property and equipment                                    (751,017)      (772,766)
   Costs of CareerBuilder development                                          --       (559,740)
   Proceeds from disposal of equipment                                     26,661             --
   Notes from officers                                                         --       (210,434)
   Repayment of officer receivable                                          9,000          6,430
                                                                      -----------    -----------

         Net cash used in investing activities                           (715,356)    (1,536,510)
                                                                      -----------    -----------
Cash flows from financing activities:
   (Increase) decrease to restricted cash                                  54,543       (129,461)
   Proceeds from issuance of notes payable                                185,300        300,000
   Repayment of notes payable                                            (185,300)      (300,000)
   Proceeds from issuance of series A preferred stock                          --      1,697,840
   Proceeds from issuance of series B-1 preferred stock                        --        813,720
   Proceeds from sale of stock in private placement                       693,594        151,562
   Proceeds from capital leases                                                --         79,752
     Principal repayments on capital leases                               (46,968)       (14,599)
                                                                      -----------    -----------
         Net cash from financing activities                               701,169      2,598,814
                                                                      -----------    -----------

         Net increase (decrease) in cash and cash equivalents          (1,195,460)       528,839
Cash and cash equivalents at beginning of period                        1,606,999        411,539
                                                                      -----------    -----------

Cash and cash equivalents at end of period                            $   411,539    $   940,378
                                                                      ===========    ===========
Supplemental cash flow disclosure:
   Taxes paid                                                         $     4,565    $     9,739
   Interest paid                                                      $     3,561    $     9,159
Noncash investing and financing activities:
   Conversion of notes payable and accrued interest to Common stock   $ 1,186,966    $        --
   Issuance of Common stock for legal expenses                        $        --    $    62,500
   Restructuring of shareholder receivable                            $        --    $    43,120
</TABLE>

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


                                      F-7
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

1.    Organization and Business

      AdStar, Inc. (the "Company" or "AdStar") (formerly AdStar.com, Inc. and
      AdStar-Services, Inc.) was incorporated in the State of New York on June
      29, 1991 as an S-Corporation under the Internal Revenue Code. In 1999, the
      Company reincorporated as a C-Corporation in Delaware.

      The Company's core business has been licensing proprietary software
      systems and supplying the related support and maintenance. This
      Professional software system allows large commercial advertising agencies
      and corporations to directly enter classified advertisements into the
      publishing systems at the Company's customers, through modems on a dial-up
      basis. The Company's customers are principally located in the United
      States. In June 1999, the Company commenced offering a one-stop
      marketplace on the World Wide Web for advertisers to buy classified ads.
      This service enables advertisers to plan, schedule, compose and purchase
      classified advertising from many print and on-line publishers, using one
      interface.

      In 2001, the Company formally introduced its new AdStar e-business
      application suite. This is an enterprise class, integrated software
      solution that allows print and on-line publications to electronically
      receive completed classified advertising copy using the Internet as the
      communication channel. These software solutions enable customers to expand
      the relationships with their customers using a single integrated platform,
      while increasing sales volumes at reduced costs. This suite includes an
      updated version of the Company's core Professional software product that
      utilizes the Internet as the communication channel. In addition, the
      Company has added an application service provider ("ASP") product that
      provides its customers an opportunity to generate incremental revenue from
      classified ad sale transactions completed on-line, while increasing the
      number of visitors to the customer's Web site.

2.    Basis of Presentation and Summary of Significant Accounting Policies

      Basis of Presentation and Management's Plan

      The accompanying financial statements have been prepared assuming the
      Company will have liquidity to maintain its required minimum level of
      operations. At December 31, 2002, we had an accumulated deficit of
      $11,324,000. We have incurred significant recurring net losses. For the
      years ended December 2001 and 2002 we had net losses of $1,884,000 and
      $2,160,000. Our 2001 and 2002 net losses were principally attributable to
      our shift if focus from an on-line business to an ASP business. We expect
      to continue to incur losses until we are able to increase revenues
      significantly from fees based on the number of purchases transacted
      through our ASP product. We are not assured that we will generate
      sufficient capital to meet our cash needs through December 31, 2003. We
      believe that the additional $600,000 raised through the sale of 800,000
      shares of Series B-2 convertible preferred stock in March 2003, our
      available funds, combined with cash generated from existing operations,
      new customers, the flexibility to cut back our work-force upon completion
      or delay of significant customization projects, coupled with our
      historical ability to obtain bridge financing, will be sufficient to meet
      our anticipated working capital needs through March 31, 2004.

      Although we are optimistic that our growing ASP business will continue to
      be accepted in the marketplace and we will fulfill our obligations to
      Tribune Company in a timely manner, the timing is not assured. Our ability
      to sell ASP business products and service offerings during the current
      year may be hampered by the current downturn in the advertising market,
      the geo-political climate, including the war in Iraq, and state of the
      economy in general. These factors, coupled with the extended selling cycle
      in our industry and customer delays in customization and implementations,
      could delay our ability to increase revenue to a level sufficient to cover
      our


                                      F-8
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      expenses. There is no assurance that management will be successful with
      its operating plan and, if events and circumstances occur such that the
      Company does not meet its the plan as expected, and the Company is unable
      to raise additional financing, the Company may be required to further
      reduce certain discretionary spending, which could have a material adverse
      effect on the Company's ability to achieve its intended business
      objectives.

      Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires 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 amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.

      Cash and Cash Equivalents

      The Company considers all highly liquid investments purchased with an
      initial maturity of three months or less to be cash equivalents. Cash and
      cash equivalents are carried at cost, which approximates fair value. At
      times, cash balances held at financial institutions are in excess of FDIC
      insurance limits.

      Restricted cash

      In August 2002, AdStar was informed by Chase Merchant Services, L.L.C
      (Chase), a merchant bank that provides credit card processing services for
      AdStar, that it required the Company to maintain a restricted cash balance
      of $175,000. Chase indicated the primary reason for the reserve was the
      significant increase in dollar volume of AdStar transactions during the
      second quarter 2002. Under the terms of the agreement the Company can
      terminate the contract with 30 days notice and Chase can retain a reserve
      for up to six months from the date of termination.

      The Company has entered into a new arrangement with another merchant
      banker whereby the initial terms and conditions do not require AdStar to
      provide a reserve. Preliminary testing for the changeover was completed in
      November 2002, and final testing and transition to the new banker is
      expected to be completed in March 2003.

      Concentration of Credit Risk and Major Customers

      Financial instruments that potentially subject the Company to significant
      concentrations of credit risk are principally comprised of trade accounts
      receivable and shareholder loans.

      For the year ended December 31, 2001, three different customers accounted
      for 9%, 6% and 6% respectively of the Company's net revenues.

      For the year ended December 31, 2002, two different customers accounted
      for 9% and 7% respectively of the Company's net revenues. As of December
      31, 2002, eight customers, in the aggregate, accounted for 55% of the
      Company's accounts receivable.

      The majority of the Company's customers have historically consisted of
      newspapers and publishers of classified advertisements. The Company's
      customers on its Web site are the general public.


                                      F-9
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      Receivable and Allowance for Doubtful Accounts

      We regularly evaluate the collectibility of our trade receivables based on
      a combination of factors. When a customer's account become past due, we
      initiate dialogue with the customer to determine the cause. If it is
      determined that the customer will be unable to meet its financial
      obligation to us, such as bankruptcy filing, deterioration in the
      customer's operating results or financial position or other material
      events impacting their business, we record a specific reserve for bad debt
      to reduce the related receivable to the amount we expect to recover given
      all information presently available. We also record reserves for bad debts
      for all other customers based on certain other factors including length of
      time the receivables are past due and historical collection experience
      with individual customers. If circumstances related to specific customers
      change, our estimates of the recoverability of receivables could
      materially change.

      Property and Equipment

      Property and equipment are stated at cost less accumulated depreciation
      and amortization. When such items are retired or otherwise disposed of,
      the cost and related accumulated depreciation and amortization are
      relieved from the accounts and the resulting gain or loss is reflected in
      operations. Depreciation and amortization are provided using the
      straight-line method over the estimated useful lives of the assets. The
      depreciation and amortization periods by asset category are as follows:

            Furniture and fixtures        7 years
            Computer equipment            5 years
            Computer Software             3 to 5 years
            Leasehold improvements        Shorter of useful life or lease term

      Maintenance and minor replacements are charged to expense as incurred
      while renewals and improvements are capitalized. Leasehold improvements
      are amortized over their estimated useful lives or the lives of the
      related leases, whichever is shorter.

      Web site Software Development Costs

      In March 2000, the Financial Accounting Standards Board's Emerging Issue
      Task Force ("EITF") issued EITF No. 00-2 "Accounting for Web Site
      Development Costs", which provides guidance with respect to capitalization
      of certain costs incurred in connection with Web development activities
      and references Statement of Financial Accounting Standards ("SFAS") No. 86
      "Accounting for the Cost of Computer Software to be Sold, Leased or
      Otherwise Marketed". In accordance with these pronouncements, costs to
      establish the technological feasibility of software applications developed
      by the Company are charged to expense as incurred. Certain costs incurred
      subsequent to achieving technological feasibility are capitalized.
      Accordingly, the Company capitalizes a portion of the internal labor costs
      and external consulting costs associated with essential Web site
      development and enhancement activities. Costs associated with conceptual
      design and feasibility assessments as well as maintenance and routine
      changes are expensed as incurred. Capitalized costs are amortized based on
      current or future revenue for each product with an annual minimum equal to
      the straight-line basis over the estimated useful lives of the
      applications. In accordance with this policy, the Company has capitalized
      expenditures incurred to develop the new AdStar e-business application
      suite. At December 31, 2002, the Company has capitalized software
      development costs of $2,335,000, with associated accumulated amortization
      of $632,000.

      Intangible Assets

      Intangible assets comprise trademarks, license agreements and proprietary
      technology and are carried at cost less accumulated amortization.
      Amortization is calculated on a straight-line basis over the estimated
      useful lives of the intangible assets of 5 years.

      Long-Lived Assets

      The carrying value of long-lived assets is periodically reviewed by
      management and impairment losses, if any are recognized when the expected
      non-discounted future operating cash flows derived from such assets are
      less than their carrying value. The loss on disposal of equipment and
      software of $94,077 in 2001 was incuded in General and administrative
      expenses.


                                      F-10
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      Fair Value of Financial Instruments

      Cash and cash equivalents, accounts receivable, shareholder notes
      receivable, accounts payable, deferred revenue, notes payable, capital
      leases and accrued expenses are carried at cost which approximates their
      fair value because of the short-term maturity or the current lending rates
      of these instruments.

      Revenue Recognition

      The Company derives revenue from several products and services as follows:

      Licensing and customization other revenues - The Company generates revenue
      from technology service contracts that generally contain multiple elements
      such as software customization services, monthly fees and post-contract
      customer support (PCS). Revenue from these arrangements is recognized in
      accordance with Statement of Position ("SOP") 97-2, "Software Revenue
      Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
      Certain Transactions". Accordingly, revenue is allocated to each element
      within the contract based on the relative fair values of those elements
      using vendor specific objective evidence. Revenue from monthly fees and
      PCS under software maintenance arrangements is based upon renewal rates
      and is recognized ratably over the term of the arrangement. Revenue from
      software customization services is recognized as the services are
      performed, using a percentage of completion methodology based on labor
      hours. The Company also provides customization services at the customers'
      request and recognizes revenue as the services are performed, using a
      percentage of completion methodology based on labor hours.

      Areas requiring management's judgment includes revenue recognition and
      cost estimation on the fixed fee software customization element of the
      contracts. Revenue is recognized on these contracts using a
      percentage-of-completion methodology, based upon labor input measures and
      an estimate of time to completion. Monthly, technical management reviews
      the estimate of labor hours required to complete the customization and the
      effect of any change in estimate is reflected in the period in which the
      change is first known. Such changes in estimates have not been material to
      our results of operation. The corresponding cost of revenue charge is
      derived based upon the same labor input measurements and our existing cost
      structure. If the Company does not accurately estimate the resources
      required under the contract or the scope of the work to be performed, or
      if the Company does not manage its projects properly within the prescribed
      timeframe, future margins may be significantly and adversely affected. If
      increases in projected costs-to-complete are sufficient to create a loss
      contract, the entire estimated loss is charged to operations in the period
      the loss first becomes known. The complexity of the estimation process and
      uncertainties inherent in software customization activities may affect the
      percentages derived under the percentage-of-completion accounting method,
      which in turn may affect the amounts reported in the financial
      statements.

      ASP revenue - The Company receives revenue from providing an application
      service provider ("ASP") product that allows customers to use the
      Company's software applications on a "shared system" over the Internet.
      This technology is a publisher-specific ad-taking Web site service that
      offers visitors to a newspaper's Web page the opportunity to buy
      classified ads, for both the print and/or on-line editions of the
      newspaper, in real-time, on a 24/7 basis. The Company receives monthly
      fees for hosting the transactions and providing customer support, and
      recognizes the fees ratably over the contract period.

      Web site revenue - The Company receives revenue from fees charged to
      customers who transact business on the Advertise123.com Web site. This
      site permits the general public to plan, schedule, compose and purchase
      advertising from many print and on-line publishers. Under the guidance
      provided by the Securities Exchange Commission Staff Accounting Bulletin
      ("SAB") No. 101, "Revenue Recognition" and the Emerging Issues Task Force
      ("EITF") Abstract No. 99-


                                      F-11
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      19 "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF
      99-19"), the Company is, in substance, acting as an agent for the
      publishers and therefore recognizes as revenue only the net fees realized
      on the transactions. The Company recognizes revenues on a per-transaction
      basis when the ad is placed through their system and collection from the
      customer is probable.

      Income Taxes

      The Company utilizes the liability method of accounting for income taxes.
      Under this method, deferred tax liabilities and assets are determined
      based on the difference between the financial statement and tax bases of
      assets and liabilities using enacted tax rates in effect for the period in
      which the differences are expected to reverse. Valuation allowances are
      established, when necessary, to reduce the deferred tax assets to the
      amounts expected to be realized.

      Advertising Costs

      The Company expenses the costs of advertising in the periods in which
      those costs are incurred. Advertising expense was approximately $76,000
      and none for the years ended December 31, 2001 and 2002.

      Earnings (Loss) Per Share

      Basic earnings (loss) per share is computed by dividing the net income
      (loss) applicable to common stockholders' by the weighted average number
      of shares of common stock outstanding during the period. Diluted earnings
      (loss) per share is computed by dividing the net income (loss) applicable
      to common stockholders' by the weighted average number of common shares
      outstanding plus the number of additional common shares that would have
      been outstanding if all dilutive potential common shares had been issued,
      using the treasury stock method. Potential common shares are excluded from
      the computation when their effect is antidilutive.

      For the years ended December 31, 2001 and 2002, diluted earnings (loss)
      per share does not include 2,547,661 and 6,041,932, of options and
      warrants to purchase common stock, and preferred stock as their inclusion
      is antidilutive.

      Comprehensive Income

      The Company discloses comprehensive income in accordance with the
      provisions of Statement of Financial Accounting Standards ("SFAS") No.
      130, "Reporting Comprehensive Income". This statement establishes
      standards for reporting and disclosing comprehensive income and its
      components in a full set of general purpose financial statements.
      Comprehensive income generally represents all changes in stockholders'
      equity (deficit) during the period except those resulting from investments
      by, or distributions to, stockholders. The Company has no other
      comprehensive income items and, accordingly, net income (loss) equals
      comprehensive income (loss) for all periods presented.

      Segment Reporting

      The Company determines and discloses its segments in accordance with SFAS
      No. 131, "Disclosures about Segments of an Enterprise and Related
      Information," which uses a "management" approach for determining segments.
      The management approach designates the internal organization that is used
      by management for making operating decisions and assessing performance as
      the source of a company's reportable segments. SFAS No. 131 also requires


                                      F-12
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      disclosures about products or services, geographic areas and major
      customers. The Company's management reporting structure provides for only
      one reportable segment and accordingly, no separate segment information is
      presented.

      Accounting for Stock-Based Compensation

      The Company accounts for stock-based employee compensation arrangements in
      accordance with the provisions of Accounting Principles Board ("APB")
      Opinion No. 25, "Accounting for Stock Issued to Employees," and has
      elected the disclosure-only provisions of SFAS No. 123, "Accounting for
      Stock-Based Compensation." Under APB No. 25, compensation expense is based
      on the difference, if any, on the date of grant, between the fair value of
      the Company's stock for financial reporting purposes and the exercise
      price of the option. The Company accounts for equity instruments issued to
      non-employees in accordance with the provisions of SFAS No. 123 at fair
      value.

      Reclassifications

      Certain reclassifications have been made to prior year balances in order
      to conform to the current year presentation.

      New accounting pronouncements

      In June 2001, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"),
      effective January 2003. SFAS 143 requires legal obligations associated
      with the retirement of long-lived assets to be recognized at their fair
      value at the time that the obligations are incurred. Upon initial
      recognition of a liability, that cost should be capitalized as part of the
      related long-lived asset and allocated to expense over the estimated
      useful life of the asset. The Company will adopt SFAS 143 on January 1,
      2003, and does not believe that the adoption will have a material impact
      on the Company's financial statements.

      In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
      Associated with Exit or Disposal Activities ("SFAS 146"), effective for
      exit or disposal activities initiated after December 31, 2002. SFAS 146
      addresses the financial accounting and reporting for certain costs
      associated with exit or disposal activities, including restructuring
      actions. SFAS 146 excludes from its scope severance benefits that are
      subject to an on-going benefit arrangement governed by SFAS 112,
      Employer's Accounting for Post employment Benefits, and asset impairments
      governed by SFAS 144, Accounting for the Impairment or Disposal of
      Long-Lived Assets. The Company does not believe that the adoption of SFAS
      146 will have a material impact on the Company's financial statements.

      In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based
      Compensation - an Amendment of SFAS No. 123 ("SFAS 148"). This statement
      amends SFAS No. 123 to provide alternative methods of transition for a
      voluntary change to the fair value based method of accounting for
      stock-based employee compensation. In addition, this statement amends the
      disclosure requirements of SFAS No. 123 to require prominent disclosures
      in both annual and interim financial statements about the method of
      accounting for stock-based employee compensation and the effect of the
      method used on reported results. The Company will retain the intrinsic
      method of accounting for stock based awards granted to employees.

      In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
      Accounting and


                                      F-13
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      Disclosure Requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness of Others. This Interpretation elaborates on the disclosures
      to be made by a guarantor in its interim and annual financial statements
      about its obligations under certain guarantees that it has issued. It also
      clarifies that a guarantor is required to recognize, at the inception of a
      guarantee, a liability for the fair value of the obligation undertaken in
      issuing the guarantee. The disclosure requirements of this Interpretation
      are currently effective and did not the Company's financial position and
      results of operations. The initial recognition and initial measurement
      provisions of this Interpretation are applicable on a prospective basis to
      guarantees issued or modified after December 31, 2002. The Company does
      not believe that the adoption will have a material impact on the Company's
      financial statements.

      In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
      of Variable Interest Entities ("FIN 46"). This Interpretation requires
      that variable interest entities created after January 31, 2003, and
      variable interest entities in which an interest is obtained after that
      date, be evaluated for consolidation into an entity's financial
      statements. This interpretation also applies, beginning July 1, 2003 for
      the Company, to all variable interest entities in which an enterprise
      holds an interest that it acquired before February 1, 2003. We are in the
      process of evaluating all of our investments and other interests in
      entities under the provisions of FIN 46 and have not yet determined the
      effect of its adoption on our financial position and results of
      operations.

3.    Property and Equipment

      Property and equipment consisted of the following at December 31:

                                                                        2002
                                                                        ----

      Computer equipment and software development                   $ 2,909,627
      Furniture and fixtures                                             40,391
      Leasehold improvements                                             32,402
      CareerBuilder software development (Note 5)                       559,740
                                                                    -----------

                                                                      3,542,160
      Less: Accumulated depreciation and amortization                  (993,191)
                                                                    -----------

      Net property and equipment                                    $ 2,548,969
                                                                    ===========

      Computer equipment and furniture and fixtures include equipment held under
      capital leases of $86,511 and $13,948, respectively. Accumulated
      depreciation and amortization includes amortization of computer equipment
      and furniture and fixtures held under capital leases of approximately
      $13,829 for the year ended December 31, 2002. Depreciation and
      amortization expense for the years ended December 31, 2001 and 2002 was
      approximately $327,000 and $533,000, respectively.

4.    Intangible Assets

      Intangible assets are comprised of the following at December 31:

                                                                         2002
                                                                         ----

      Cost                                                            $ 197,858
      Less: Accumulated amortization                                   (150,512)
                                                                      ---------
                                                                      $  47,346
                                                                      =========


                                      F-14
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

5.    Significant Contracts

      On March 18, 2002, the Company entered into a series of agreements with
      Tribune Company ("Tribune"). In accordance with these agreements, the
      Company sold 1,443,457 shares of Series A convertible preferred stock to
      Tribune Company for approximately $1.7 million. The Company has recorded
      the $1.7 million investment in the Series A convertible preferred stock at
      cost which approximated fair value. The rights and preferences of the
      Series A preferred stock are described in Note 6 below. Additionally, the
      Company agreed to develop and customize a version of its Web software
      applications to Tribune specifications in exchange for earning
      volume-based transaction fees in the future by providing Web-based
      recruitment ad sales technology to all major market Tribune newspapers and
      on-line services. This customization will provide a platform that allows
      Tribune owned newspapers, together with CareerBuilder, L.L.C., to receive
      recruitment advertising from agencies, corporate customers, and the
      general public. On completion of the development and customization effort,
      the Company will manage the related transactions and receive a
      volume-based ASP fee with a guaranteed monthly minimum. Costs incurred in
      the customization effort, are reflected as deferred contract costs in the
      balance sheet.

      Through September 30, 2002, $559,740 in development and customization
      costs have been capitalized. During August 2002 the Company launched the
      FlexAds(R) service on two Tribune newspapers and commenced amortization of
      the cost of the development and customization effort over the expected 5
      year period of the agreement. Under the agreement the Company will receive
      $7,500 minimum monthly payments totaling $450,000. The Company commenced
      recognition of revenue from the $7,500 minimum monthly fee under the
      agreement on a straight-line basis during August 2002. To the extent that
      transaction based fees exceed the monthly minimum payments, the Company
      will record the excess in revenue when earned. The transactions did not
      exceed the contracted minimums during any month for the year ended
      December 31, 2002.

      In December 2002 the Company entered into an agreement with Tribune
      Company for an additional investment by Tribune of $1,500,000. As part of
      the transaction, AdStar will develop additional features that expand the
      capabilities of its generic service and the customized services that were
      launched in August 2002. The investment is in the form of an initial
      purchase by Tribune of $900,000 for 1,200,000 Series B-1 preferred stock
      which funded in December 2002 and a subsequent purchase, of $600,000 for
      800,000 shares Series B-2 preferred stock, plus additional shares issued
      for accrued dividends on Series B-1. The purchase price for each share of
      the Series B-1 and Series B-2 preferred stock was $0.75 or below the fair
      market value of AdStar common stock at the time of the respective closing.
      These shares carry a liquidation preference that includes a dividend of 7%
      per year available only upon liquidation and currently convert on a 1:1
      basis. Shareholders of Series B Preferred Stock are entitled to vote on
      all matters submitted to the stockholders for vote and vote as a single
      class with the shareholders of our Common Stock. The holders of Series B
      preferred stock are entitled to one vote for each share of common issuable
      upon conversion. In connection with the Series B-1 offering, the Company
      recognized a beneficial conversion feature of $204,000, which represents
      the difference between the fair value of the Company's common stock on the
      commitment date of this transaction and the value at which the Series B-1
      shares were issued. The $204,000 was credited against the additional paid
      in capital account and taken as a charge to retained earnings.

6.    Convertible Preferred Stock

      The Company has authorized 5,000,000 shares of preferred stock, par value
      $0.0001 per share, of which 1,443,457 shares have been designated as
      Series A, convertible preferred stock ("Series A preferred stock"),
      1,200,000 shares have been designated as Series B-1, convertible preferred
      stock and 800,000 shares have been designated as Series B-2, convertible
      preferred stock ("Series B preferred stock"). The remaining authorized
      shares have not been designated.


                                      F-15
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      At December 31, 2002, the Company has reserved 1,443,457 shares of common
      stock for issuance upon the conversion of the Series A and 2,000,000
      Series B preferred stock. The Series A and B preferred stock have the
      following characteristics:

      Voting Rights - Each holder of the Series A and B preferred stock is
      entitled to the number of votes equal to the number of shares of common
      stock into which such holder's shares are convertible. The Company cannot
      amend its certificate of incorporation amending the rights of the Series A
      and B preferred stockholders, enter into any capital stock or equity
      agreements with rights ranking the same or above the rights of the Series
      A preferred stock or liquidate the Company without the approval of at
      least a majority of the holders of the Series A preferred stock then
      outstanding.

      Liquidation Preference - In the event of any liquidation, dissolution or
      winding up of the affairs of the Company, the holders of the Series A and
      B preferred stock will be entitled to receive in preference to the holders
      of the common stock, an amount per share equal to $1.244 and $0.75 accrued
      and unpaid dividends, respectively. After such payment, the Series A and B
      preferred stockholders share equally with the common stockholders in any
      remaining assets or funds of the Company.

      Conversion - Each share of the Series A and B preferred stock is
      convertible at anytime at the option of the holder into shares of common
      stock pursuant to a ratio of one share of common stock for each share of
      Series A preferred stock, subject to certain stock split and stock
      dividend adjustments. In addition, the conversion ratio is subject to
      adjustment, as defined in the agreement, in the event that the Company
      issues common stock at a per share price less than $1.244 per share for
      series A and $0.75 for series B. All Series A preferred stock will
      automatically convert to common stock on the first day after March 18,
      2004 for which the market price of the Company's common stock exceeds
      $2.25 per share. All Series B preferred stock will automatically convert
      to common stock on the first day after December 23, 2005 for which the
      market price of the Company's common stock exceeds $1.50 per share

      Dividends - Dividends on the Series A and B preferred stock shall accrue
      cumulatively at 7% per annum through the date of liquidation or
      conversion. In the event of conversion all accrued and unpaid dividends
      will be waived. The 7% cumulative dividend has not been shown as a
      deduction from net loss applicable to common shareholders, since the
      dividends are only to be paid if a liquidation event occurs and the
      dividends would be accrued from the original issuance date to the date of
      the liquidating event. If the Series A preferred stock is converted into
      common stock, the right to the cumulative dividends will be waived.

7.    Notes Payable

      On October 23, 2001, the Company entered into a loan and security
      agreement with a financial institution to establish a line of credit. The
      maximum revolving credit line is $500,000 and is secured by the Company's
      accounts receivable. The Company was able to borrow up to 80% of the
      eligible accounts receivable as defined in the terms of the agreement.
      Interest was payable on the balance at a rate of 3 percentage points above
      the Prime Rate. The line of credit agreement was terminated effective
      February 27, 2002. During December 2002, the Company entered into a 7%
      $300,000 unsecured bridge note payable agreement with Tribune Company
      pending the closing of the $900,000 funding on the Series B-1 preferred
      stock transaction. During December 2002 the note was repaid out of the
      proceeds from the $900,000, see Note 5.

8.    Income Taxes

      Prior to June 30, 1999, the Company was taxed as an S-Corporation.
      Deferred taxes reflect the net tax effects of temporary differences
      between the carrying amounts of assets and liabilities for financial
      reporting purposes and the amounts used for income tax purposes.
      Significant components for the Company's deferred taxes at December 31,
      consisted of the following:


                                      F-16
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                                                           2002
                                                           ----
Deferred tax assets:
       Net operating loss carryforwards                $ 3,952,000
       Depreciation and amortization                            --
       Deferred revenue                                     45,000
       Other                                                50,000
       Less: Valuation allowance                        (3,897,000)
                                                       -----------

           Net deferred tax asset                      $   150,000

Deferred tax liability
       Depreciation and amortization                      (150,000)
                                                       -----------
           Net deferred tax                            $        --
                                                       ===========

      In assessing the realizability of deferred tax assets, management
      considers whether it is more likely than not that some portion or all of
      the deferred tax assets will be realized. Based upon the level of
      historical losses and projections of future taxable income over the
      periods in which the deferred tax assets are deductible, a full valuation
      allowance has been provided as management believes that it is more likely
      than not, based upon available evidence, that the deferred tax assets will
      not be realized.

      As of December 31, 2002, the Company has federal net operating loss
      carryforwards of approximately $9,653,000. As of December 31, 2002, the
      Company has state net operating loss carryforwards of approximately
      $4,823,000. The federal and state net operating loss carryforwards will
      begin to expire in 2019 and 2004, respectively. The Company's ability to
      utilize net operating loss carryforwards may be limited in the event that
      a change in ownership, as defined in the Internal Revenue Code, occurs in
      the future.

      The provision for income taxes for the years ended December 31, 2001 and
      2002 differs from the amount that would result from applying the federal
      statutory rate as follows:

                                                               2001       2002
                                                               ----       ----

Statutory regular federal income tax rate                     (34.0%)    (34.0%)
Change in valuation allowance                                  33.1%      34.4%
State taxes, net of federal benefit                            (3.0%)     (3.0%)
Other                                                           4.2%       2.5%
                                                              -----      -----
                                                               (0.3%)     (0.0%)
                                                              =====      =====

9.    Capitalization

      Common Stock

      In June 2001, the shareholders approved an increase to the number of
      authorized shares of the Company's common stock from 10,000,000 to
      20,000,000.

      In December 1999, the Company established a vendor compensation plan
      whereby it may compensate vendors who are accredited investors, as defined
      under Rule 215 of the Securities Act of 1933, in shares of its common
      stock in lieu of cash. Under the plan, 400,000 shares are available for
      issuance. During 2001 and 2002, 119,249 and 131,076 shares were issued to
      vendors


                                      F-17
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      under the plan relying upon the exemptions under Sections 4(2) and 4(6) of
      the Securities Act of 1933 and which represented compensation of $90,000
      and $77,000, respectively. In addition, during 2001 warrants to purchase
      50,000 shares at $1.50 per share and 50,000 shares at $2.00 per share were
      issued to a vendor. The Black-Scholes value of these warrants was $25,000.

      In February 2001 the Company issued 593,483 common shares to satisfy a
      note, dated October 21, 1999, in full payment of principal and accrued
      interest totaling $1,186,966. In April 2001, the Company completed a
      private offering and raised net proceeds of approximately $328,000 through
      the issuance of 400,000 units comprising two shares of the Company's
      authorized but unregistered common stock and one warrant to purchase an
      additional share of common stock at a per share price of $1.07. In October
      2001, the Company initiated a private placement offering of up to
      1,300,000 shares of the Company's authorized but unregistered common stock
      at $0.50 per share. Through December 31, 2001, the Company had raised
      gross proceeds of $500,000, of the planned $650,000, with the remaining
      investment raised in January 2002.

      In January 2002, AdStar issued to Morse, Zelnick, Rose and Lander LLP, (a
      related party) AdStar's legal counsel, 114,545 shares of restricted common
      stock, at fair market value as payment in full for $62,500 legal expenses
      accrued at December 31, 2001. In January 2002, the Company sold an
      additional 300,000 shares of common stock at a price of $0.50 per share.
      These shares were sold as part of a 1,300,000 share private placement made
      pursuant to Sections 4(2) and 4(6) of the Act, of which 1,000,000 were
      sold prior to December 31, 2001. In connection with this offering the
      Company issued warrants to purchase 130,000 shares of its common stock, at
      $0.75 as part of the placement agent fees. The warrants expire on January
      16, 2007.

      On February 1, 2002, AdStar sold to an accredited investor 100,000 shares
      of its common stock at a price per share equal to 85% of its per share
      closing price on January 31, 2002 ($0.50). In connection with this sale
      the Company issued warrants to purchase 10,000 shares of its common stock,
      at a per share price equal to 110% of the closing price of the stock on
      January 17, 2002, as part of the placement agent fees. The warrants expire
      on January 31, 2007.

      In November 2000, AdStar entered in a one-year strategic alliance
      agreement with Eastman Kodak Company (Kodak) whereby AdStar issued 67,796
      shares of its common stock valued at $100,000, which was capitalized and
      amortized over the life of the contract. As of December 2001 the parties
      had not been able to complete the provisions of the agreement to both
      parties' satisfaction, whereby Kodak notified AdStar of its intention to
      terminate the agreement as of February 28, 2002. After protracted
      settlement discussions the parties agreed to a mutual termination and
      release agreement entered into during May 2002. As part of the agreement
      Kodak returned AdStar's common stock, valued at $67,796, which AdStar
      recorded as a gain on the return of common stock shares and included in
      other income and AdStar agreed not to pursue any further actions for
      performance against Kodak.

      Stock Options

      In 1999, the Board of Directors adopted the 1999 Stock Option Plan (the
      "Plan") in order to attract and retain officers, other key employees,
      consultants and non-employee directors of the Company. The plan as amended
      during 2002 has an aggregate of 1,500,000 shares of common stock has been
      authorized for issuance under the Plan.

      The Plan provides for issuance of nonqualified and incentive stock options
      to officers, key employees, consultants and non-employee directors to the
      Company. Each nonqualified stock option shall have an exercise price not
      less than 100% of the fair value of the common stock on the date of grant,
      unless as otherwise determined by the committee that administers the Plan.

                                      F-18
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      Incentive stock options shall have an exercise price equal to or greater
      than the fair value of the common stock on the date of grant provided that
      incentive stock options granted to a 10% holder of the Company's voting
      stock shall have an exercise price equal to or greater than 110% of the
      fair market value of the common stock on the date of grant. Each option
      generally has a term of five to ten years from the date of grant unless
      otherwise determined by the committee that administers the Plan. All
      options granted in from 1999 through 2002 have a five-year term.

      Upon the occurrence of a change in control, as defined in the Plan, each
      option granted under the Plan shall thereupon become fully vested and
      exercisable.

      The following table summarizes activity under the Plan for the years ended
      December 31, 2001and 2002

                                                                        Weighted
                                                                         Average
                                                                        Exercise
                                                           Shares         Price
                                                           ------       --------

Outstanding at December 31, 2000                            380,170      $ 5.21
   Granted                                                  388,026      $ 0.94
   Exercised                                                     --          --
   Forfeited                                               (299,737)     $ 5.35
                                                          ---------
Outstanding at December 31, 2001                            468,459      $ 1.58
    Granted                                                 720,446      $ 0.87
    Exercised                                                    --          --
    Forfeited                                               (55,431)     $ 2.59
                                                          ---------
Outstanding at December 31, 2002                          1,133,474      $ 0.95
                                                          =========

Options exercisable at December 31, 2001                    287,586      $ 1.60
Options exercisable at December 31, 2002                    645,052      $ 0.95
Options available for future grant                          366,526
Weighted average fair value of options granted in 2002                   $ 0.67
Weighted average fair value of options granted in 2001                   $ 0.87

The following table summarizes information about stock options outstanding at
December 31, 2002:

                         Options Outstanding at           Options Exercisable at
                           December 31, 2002                 December 31, 2002
                 --------------------------------------   ----------------------
                                 Weighted
                                  Average      Weighted                 Weighted
                  Number of      Remaining      Average    Number of    Average
   Range of        Shares       Contractual    Exercise      Shares     Exercise
Exercise Price   Outstanding   Life (years)      Price    Exercisable     Price
--------------   -----------   ------------      -----    -----------     -----

$0.01 - $0.99      881,528          3.01        $0.67      555,197       $0.70
$1.00 - $2.99      216,000          3.69        $1.23       55,335       $1.38
$3.00 - $5.99       10,389          1.47        $4.94        9,889       $4.89
$6.00 - $7.20       25,557          1.81        $6.63       24,631       $6.62
                 ---------                                 -------
                 1,133,474                                 645,052
                 ---------                                 -------


                                      F-19
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      Fair Value Disclosures

      Prior to the Company's initial public offering, the fair value of each
      option grant was determined on the date of grant using the minimum value
      method. Subsequent to the Company's initial public offering, the fair
      value of each option grant was determined using the Black-Scholes
      option-pricing model. The Company calculated the fair value of each option
      granted on the date of grant using the minimum value method or
      Black-Scholes model as prescribed by SFAS No. 123 using the following
      assumptions:

                                                    Year Ended December 31,
                                                   2001                 2002
                                                 --------             --------
      Risk-free interest rate                      1.75%                1.75%
      Expected lives (years)                       3.5                  3.5
      Dividend yield                               0.0%                 0.0%
      Expected volatility                        190.0%               190.0%

      The Company has adopted the disclosure only provisions of SFAS No. 123. If
      compensation cost associated with the Company's stock-based compensation
      plan had been determined using the fair value prescribed by SFAS No. 123,
      the Company's net loss for 2001 and 2002 would have increased to the pro
      forma amounts indicated below:

                                                       Year Ended December 31,
                                                         2001           2002
                                                     -----------    -----------
      Net loss -       as reported                   $(1,884,498)   $(2,159,643)
                       Add: Stock based employee
                         compensation included
                         in reported loss                    -0-            -0-
                       Deduct: Employee compensation
                         expense                         (57,297)      (242,755)
                       pro forma                      (1,941,795)    (2,402,398)

      Loss per share - as reported                   $     (0.30)   $     (0.29)
                       pro forma                     $     (0.31)   $     (0.29)

      Because additional stock options are expected to be granted each year, the
      above pro forma disclosures are not representative of pro forma effects on
      reported financial results for future years.

      Warrants

      The following table summarizes the outstanding warrants, all of which are
      currently exercisable, to purchase common stock at December 31, 2002:

             Number          Exercise Price          Expiration Date
             ------          --------------          ---------------
              16,667             $6.00               September 2003
              33,334             $1.66               September 2003-October 2004
              50,000             $1.50               October 2004
           1,150,000             $9.00               December 2004
             200,000             $7.20               December 2004
              25,000            $10.00               March 2005
             200,000             $1.80               September 2005
              50,000             $2.00               October 2005
             400,000             $1.07               April 2006
             140,000             $0.75               January 2007


                                      F-20
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

10.   Shareholder receivable

      In July 2002, AdStar entered into a loan transaction with Leslie Bernhard,
      President and Chief Executive Officer and Eli Rousso, Executive Vice
      President and Chief Technical Officer for $110,434 and $100,000,
      respectively. As part of the transaction, Ms. Bernhard and Mr. Rousso each
      issued to AdStar an unsecured, non negotiable promissory note bearing
      interest at 5.56% with monthly principal and interest payments of $763 and
      $691, respectively, payable on a monthly basis, with all remaining
      outstanding principal and interest amounts due on July 31, 2022.
      Concurrently, an outstanding note from Ms. Bernhard in the amount of
      $39,566 was restructured under the same terms and conditions as the
      aforementioned new note. The loans are forgiven if there is a change in
      control in AdStar or if the loan holder is dismissed for other than cause
      as defined by the loan and employment agreements. See Note 12.

11.   Restructuring costs

      During 2001 the Company critically examined the processing capabilities of
      its existing software modules and identified potential new commercial
      applications that could be developed using our existing technology as a
      starting point. With these changes in mind, we repositioned our products,
      moving away from the idea of the Internet as a stand-alone business
      category, and moving towards the idea of the Internet as an extremely
      efficient and flexible communication channel. During 2002 we continued
      executing our ASP model while maintaining the existing infrastructure and
      personnel responsible for the historical licensing and software and portal
      model while formulating a formal transition plan.

      The plan contemplated among other things the closure of the New York
      office within approximately six months, a related reduction in force of
      the 4 technology staff as of December 31, 2002 and the abandonment of an
      externally created customized billing software module. While the strategy
      had been in play for several months, including the addition of office
      space in the corporate offices to facilitate the transition, Management
      formally approved the final strategy in December 2002. During December
      2002 the Company hired a seasoned industry executive to transfer the
      software programs and intellectual knowledge from the New York office to
      the corporate office, identify and begin training existing personnel in
      anticipation of the reduction-in-force, and abandoned the billing software
      system. The corporate office will assume full revenue responsibilities
      concurrently with the closing of the office. Accordingly, management
      recorded direct restructuring write-offs and reserves totaling $323,000,
      which are primarily comprised of estimated costs of $128,000 for abandoned
      software and equipment, $76,000 relating to the office lease, and $119,000
      in legal and other.

12.   Commitments and Contingencies

      Operating and Capital Lease Commitments

      The Company has certain noncancelable operating lease obligations for
      office space and equipment, and capital lease obligations for computer
      equipment and office furniture. The operating leases are for office space
      located in New York, California, and New Jersey and expire through
      November 2005. The leases contain certain escalation clauses based on
      certain charges that the landlords of the properties may incur over the
      base year, as defined in the lease agreements.

      In June 2001, the Company assigned the lease for its New Jersey office to
      a third party, whereby that party would be primarily responsible and the
      Company would be secondarily liable for lease payments through the end of
      the lease agreement.


                                      F-21
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      Future minimum lease payments under the noncancelable operating and
      capital leases as of December 31, 2002 are as follows:

      Years Ending                                  Operating       Capital
      December 31,                                   Leases         Leases
      ------------                                  ---------      ---------
          2003                                      $ 328,541      $  43,067
          2004                                        330,238         39,251
          2005                                        120,926         19,465
          2006                                             --            126
                                                    ---------      ---------

             Total minimum obligations              $ 779,705        101,109
                                                    =========

      Less: Amounts representing interest                            (23,122)
                                                                   ---------
      Present value of minimum obligations                            78,787
      Less: Current portion                                          (28,980)
                                                                   ---------
      Non-current portion                                          $  49,807
                                                                   =========

      Rent expense for the years ended December 31, 2001 and 2002 was
      approximately $181,100 and $181,700, respectively, including
      month-to-month rentals. Beginning in March 2001, the Company entered in an
      agreement to sub-lease a portion of its office space to a third party for
      $10,750 per month for the first 18-months which increased to $11,012 for
      the remaining 30 months. For the years ended December 31, 2001 and 2002,
      the Company received approximately $107,500 and $135,900, respectively, of
      sublease income, which is included in General and administrative expense
      on the statement of operations.

      Employment Agreements

      On July 1, 2002, AdStar entered into four-year employment agreements with
      each of Leslie Bernhard and Eli Rousso. Their prior agreements expired on
      June 30, 2002. Pursuant to her employment agreement, Leslie Bernhard was
      retained as our Chief Executive Officer and her total annual compensation
      was reduced to $212,800. Pursuant to his employment agreement, Eli Rousso
      was retained as our Executive Vice President and his total annual
      compensation was reduced to $212,800. Each agreement provides, among other
      things, for participation in an equitable manner in any profit-sharing or
      retirement, separation and disability plans for employees or executives
      and for participation in other employee benefits applicable to employees
      and executives of AdStar. Each agreement further provides for fringe
      benefits which commensurate with the executive's duties and
      responsibilities. Under each agreement, employment may be terminated by us
      with cause or by the executive with good reason. Termination by us without
      cause, or by the executive for good reason, would subject us to liability
      for liquidated damages in an amount equal to the terminated executive's
      base salary for the remaining term of his or her employment agreement or
      12 months, whichever is greater.

      In January 2001, AdStar entered into a 2-year employment contract with Mr.
      Jeffrey Baudo. Pursuant to his employment agreement, Mr. Baudo was
      retained as our Chief Operating Officer at an annual rate of $213,000 per
      year, and granted options to purchase 100,000 shares of AdStar's common
      stock. Subsequently, as of July 1, 2002, Mr. Baudo agreed to an amendment
      to employment agreement reducing his annual rate of compensation to
      $191,700. Mr. Baudo's contract was extended for one year with successive
      one year terms for the same salary under essentially the same terms and
      conditions, effective January 22, 2003. Mr. Baudo is the brother of Leslie
      Bernhard.


                                      F-22
<PAGE>


                                  AdStar, Inc.

                          NOTES TO FINANCIAL STATEMENTS

      License Agreement

      In April 1996, the Company entered into an exclusive license agreement
      with a software company that developed the facsimile technology available
      as a feature within the Company's historical software product. This
      agreement provides that the Company pays royalties of up to 50% of net
      revenues generated by the Company on license fees, implementation fees and
      maintenance fees. This agreement is for an initial term of 20 years,
      though it can be terminated by the Company upon six months' notice or by
      the software company in certain circumstances. For the years ended
      December 31, 2001 and 2002, the Company paid royalties of approximately
      $31,000 and $47,000, respectively.

13.   Subsequent Event

      In March 2003, AdStar sold 800,000 shares of its Series B-2 Preferred
      Stock to Tribune Company for an aggregate purchase price of $600,000.
      These shares currently convert on a 1:1 basis. Shareholders of Series B-2
      Preferred Stock are entitled to vote on all matters submitted to the
      stockholders for vote and as a single class with the Common Stock. The
      holders of Series B-2 Preferred Stock are entitled to one vote for each
      share. In addition, on March 28, 2003, in exchange for all of the Series
      B-1 Preferred Stock plus accrued and unpaid dividends on those shares,
      issued in December 2002 to Tribune Company, AdStar issued an additional
      1,200,000 shares of its Series B-2 Preferred Stock to the Tribune Company.


                                      F-23
<PAGE>


                                  ADSTAR, INC.
                                   EXHIBITS TO
                          ANNUAL REPORT ON FORM 10-KSB
                               FOR THE YEAR ENDED
                                DECEMBER 31, 2002