##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  T
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   ADSTAR, INC.
  Delaware
    
    22-3666899(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 4553 Glencoe Avenue, Suite 300, Marina del Rey, California 90292
   Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $.0001 per share
Warrants
    
    Boston Stock Exchange
  Common Stock, par value $.0001 per share
 Warrants
 T £
 T
 £ T
    DOCUMENTS INCORPORATED BY REFERENCE
    1




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##### 



ADSTAR, INC. AND SUBSIDIARY
Form 10-KSB Annual Report
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Description of Property
    
    
    14Item 3.
    
    Legal Proceedings
    
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    15Item 6.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operation
    
    
    18Item 7.
    
    Financial Statements
    
    
    28Item 8.
    
    Change in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    28Item 8A.
    
    Controls And Procedures
    
    
    28Item 8B.
    
    Other Information
    
    
    29PART IIIItem 9.
    
    Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
    
    
    30Item 10.
    
    Executive Compensation.
    
    
    32Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
    
    
    34Item 12.
    
    Certain Relationships and Related Transactions
    
    
    37Item 13.
    
    Exhibits
    
    
    37Item 14.
    
    Principal Accountant Fees and Services
    
    
    41Exhibit 10.14Exhibit 10.15Exhibit 10.16Exhibit 10.17Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  FORWARD-LOOKING STATEMENTS
  2




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PART I
 
 Item 1. BUSINESS
 General
  Corporate History
  AdStar Services
   
    
    Professional software This technology is designed for use by the professional
marketplace. Specifically, the applications accept transmissions from classified
advertising agencies and large 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.
    
    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. We enable 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,
 3




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in real-time, on a 24/7 basis. This service 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, we provide tools to evaluate performance, provide
additional customer care, and increase future revenue opportunities. We also 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
    
    XML Gateway (Application Programming Interface) This technology allows third
parties, internal newspaper applications, and niche Web publishers to facilitate the
processing of classified advertising. The third party application interfaces with
AdStars platform to incorporate Web-based ad taking for print, or for print in
combination with an online ad.
    
    Credit Card Processing Through our Edgil Associates subsidiary, we offer to
newspapers credit card processing for use in phone rooms accepting classified ads,
subscription departments or for any other transaction that requires a credit card.
Edgil offers system integration services, installation support, training and customer
service. Edgils proprietary EdgCapture payment processing software processes over 12
million newspaper advertising and circulation transactions annually for Tribune
Company, Gannett Company, Inc., Media News,Copley Press, Inc., the New York Times,
Advance Publications, Inc., Cox Enterprises, Inc., and Village Voice Media, Inc., as
well as many independent daily and specialty publications. Edgils product strategy
focuses on providing newspapers with the financial benefits afforded by reduced labor
costs and lower credit card processing discount rates. Edgils experience with
integration services has given the EdgCapture product line the technical
differentiation to meet the specific credit card processing requirements of the
publishing industry.
   Background
  4




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Marketing
   5




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AdStar Business Strategy
      
    
    cross-selling papers on Web-based ad-taking and credit card processing;
    
    pursuing third parties who can provide ad-taking capability to their customers by using
our XML Gateway;
    
    expanding services to our existing account base with additional functions and
capabilities; and
 6




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
    
    acquiring technologies that offer enhancements to ad-taking such as text messaging,
sound, auction functions, order fulfillment and virtual tours where we receive fees when
advertisers access these services through our transaction engine.
 Competition
    Intellectual Property
    7




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Employees
  Research and Development
  CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY
  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.
  
    
    attract a sufficient number of publishers for our publisher-specific ASP ad-taking
services to permit profitable operations;
    
    develop profitable pricing models for our volume-related fees;
    
    respond effectively to competitive pressures; and
    
    attract, retain and motivate qualified personnel.
  Our Unproven On-Line Business Model May Not Generate Expected Revenues.
  
    
    hosting and transaction fees for ads processed through our ASP product,
 8




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
    
    installation fees from publishers installing our new publisher-specific ad-taking
Web site services; and,
    
    fees from publishers to process classified advertising utilizing our professional
software product.
  We Have A History Of Losses And Until We Are Able To Significantly Increase ASP Revenues We Expect
Continued Losses.
  The Growth Of Our Historical AdStar Business Is Limited And May Not Be Able To Sustain Our
Operations On Its Own.
  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.
  9




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At December 31, 2005 We Have Negative Working Capital Which May Restrict The Rate Of Our Revenue
Growth.
  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.
  Our Ability To Compete Effectively And Operate Profitably Cannot Be Assured Because Our ASP
Business Competes With Established Methods For Ad-Taking.
  10




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Our Limited Experience May Affect Our Ability To Deal Effectively With Technological Change Which
Could Materially and Adversely Affect Our Business.
  
    
    rapidly changing technology;
    
    evolving industry standards;
    
    frequent new product and service announcements;
    
    introductions and enhancements; and
    
    changing customer demands.
  
    
    our ability to adapt the rapidly changing technologies to the needs of our
advertising and publishing clients; and
    
    our ability to continually improve the performance, features and reliability of our
on-line services.
  We May Be Unable To Manage Our Growth.
  11




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We May Not Be Able To Retain Key Existing Employees Or Attract The Additional Employees Essential
To The Success Of Our Business.
  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 Vulnerable To Potential Lawsuits Regarding Ad Content Or System Failure.
  Our On-Line Businesses Have A Limited History And May Not Be Successful.
  We May Not Be Able To Protect Our Proprietary Rights.
   12




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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.
  Natural Disasters Which Disrupt Our Services Could Have An Adverse Effect On Our Business, Results
Of Operations And Financial Condition.
  Our Corporate Documents May Limit Rights Of Stockholders.
  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.
  13




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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.
  
 Item 2. Description of Property
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  14




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VotesNominee
    
    For
    
    
    Against
    
    
    WithheldLeslie Bernhard
    
    
    11,465,274
    
    
    
    0
    
    
    
    361,480Eli Rousso
    
    
    11,465,274
    
    
    
    0
    
    
    
    361,480Jeffrey Baudo
    
    
    11,465,274
    
    
    
    0
    
    
    
    361,480John Rudy
    
    
    11,475,274
    
    
    
    0
    
    
    
    351,480Michael Jackson
    
    
    11,579,100
    
    
    
    0
    
    
    
    247,654Peter M. Zollman
    
    
    11,580,374
    
    
    
    0
    
    
    
    246,380Michael P. Dubreuil
    
    
    11,579,374
    
    
    
    0
    
    
    
    247,380
  
 PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
 Market Information
  Trade PriceQuarters within Last Two Fiscal Years
    
    High
    
    LowYear Ended December 31, 2004First quarter
    
    $
    2.91
    
    
    $
    1.66Second quarter
    
    $
    3.25
    
    
    $
    1.95Third quarter
    
    $
    2.32
    
    
    $
    1.07Fourth quarter
    
    $
    1.75
    
    
    $
    0.88Year Ended December 31, 2005First quarter
    
    $
    1.14
    
    
    $
    0.61Second quarter
    
    $
    0.91
    
    
    $
    0.62Third quarter
    
    $
    2.55
    
    
    $
    0.99Fourth quarter
    
    $
    3.39
    
    
    $
    2.12
 $
 Holders
  15




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Dividends
   Recent Sales of Unregistered Securities.
      16




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1
 17




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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 consolidated financial statements and related notes to the consolidated
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
   Recent developments
    18




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Results of Operations
  Year Ended December 31,2004
    
    
    2005Net revenues
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    46
    %
    
    
    34
    %Gross Profit
    
    
    54
    %
    
    
    66
    %General and administrative expense
    
    
    41
    %
    
    
    37
    %Selling and marketing expense
    
    
    27
    %
    
    
    14
    %Product maintenance and development costs
    
    
    28
    %
    
    
    17
    %Restructuring expense
    
    
    -1
    %
    
    
    Amortization of customer list Restructuring
    
    
    1
    %
    
    
    2
    %Abandoned acquisition costs
    
    
    24
    %
    
    
    Loss from operations
    
    
    -67
    %
    
    
    -5
    %Beneficial interest and amortization of financing fees on convertible note
    
    
    -6
    %
    
    
    -15
    %Other income
    
    
    0
    %
    
    
    0
    %Interest income (expense)
    
    
    -1
    %
    
    
    -1
    %Loss before taxes
    
    
    -74
    %
    
    
    -21
    %Provision for taxes
    
    
    0
    %
    
    
    0
    %Net loss
    
    
    -74
    %
    
    
    -21
    %Deemed dividend
    
    
    
    
    
    
    -2
    %Net loss applicable to common shareholders
    
    
    -74
    %
    
    
    -23
    %
 Years Ended December 31, 2005 and 2004
 Revenues
   19




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Cost of revenues
   General and administrative expense
   Product maintenance and development costs
   20




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Selling and marketing expense
  Restructuring costs
  Amortization of Customer List
  Abandoned Acquisition Costs
  Beneficial interest and amortization of financing fees on Convertible Note
   21




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Interest expense, net
  Provision for taxes
   22




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Deemed Dividend
  Liquidity and Capital Resources
     23




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1 2
   24




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New accounting pronouncements
     Critical Accounting Policies and Estimates
  25




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Revenue Recognition
      26




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Software Development Costs
 .
 Warranties and Product liability
   Allowance for doubtful accounts
  Income taxes
  27




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Intangible Assets
  Contractual Obligations, Commitments and Contingencies
   Payments due by PeriodBeyondContractual obligations
    
    2006
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    TotalEmployment agreements
    
    $
    617,000
    
    
    $
    426,000
    
    
    $
    426,000
    
    
    $
    426,000
    
    
    $
    1,895,000Capital lease commitments
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Operating lease commitments
    
    
    191,000
    
    
    
    135,000
    
    
    
    138,000
    
    
    
    120,000
    
    
    
    584,000Loans from stockholders
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000$
    830,000
    
    
    $
    561,000
    
    
    $
    564,000
    
    
    $
    546,000
    
    
    $
    2,501,000
 
 Item 7. Financial Statements
  
 Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 Change in Certifying Accountant
  28




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Item 8A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Internal Control over Financial Reporting
  
 Item 8B. Other Information
  29




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PART III
 
 Item 9.
    
    Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act
  DirectorName
    
    Age
    
    Position
    
    SinceLeslie Bernhard
    
    
    61
    
    
    President, Chief Executive Officer and Director
    
    
    1991Eli Rousso
    
    
    69
    
    
    Executive Vice President, Chief Technology Officer,
Secretary, Treasurer, and Director
    
    
    1991Jeffrey Baudo
    
    
    59
    
    
    Senior Vice President, Chief Operating Officer, and Director
    
    
    2001Anthony J. Fidaleo (3)
    
    
    47
    
    
    Vice President and Chief Financial OfficerJames Linesch
    
    
    51
    
    
    Chief Financial OfficerPeter
M. Zollman (2)
    
    
    52
    
    
    Director
    
    
    2005Michael Jackson (1)
    
    
    41
    
    
    Director
    
    
    2005John
Rudy (1)(2)
    
    
    63
    
    
    Director
    
    
    2005Michael
P. Dubreuil (1)(2)
    
    
    46
    
    
    Director
    
    
    2005
 
 (1)
    
    Member of the audit committee of the Board of Directors.(2)
    
    Member of the compensation committee of the Board of
Directors.(3)
    
    Resigned effective November 30, 2005.     30




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,
    Audit Committee Financial Expert
  Section 16(a) Beneficial Ownership Reporting Compliance
  31




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Code of Ethics
  
 Item 10. Executive Compensation
  Summary Compensation Table
 Annual
    
    Long-Term CompensationCompensation
    
    Awards
    
    PayoutsCommon Stock
    
    All OtherUnderlying Options
    
    CompensationName and Principal Position
    
    Year
    
    Salary ($)
    
    (#)
    
    ($)Leslie Bernhard,
    
    
    2005
    
    
    $
    202,160
    
    
    
    279,151
    
    
    
    0President & Chief Executive
    
    
    2004
    
    
    $
    212,800
    
    
    
    0
    
    
    
    0Officer
    
    
    2003
    
    
    $
    212,800
    
    
    
    150,000
    
    
    
    0Eli Rousso
    
    
    2005
    
    
    $
    202,160
    
    
    
    254,151
    
    
    
    0Executive Vice President &
    
    
    2004
    
    
    $
    212,800
    
    
    
    0
    
    
    
    0Chief Technology Officer
    
    
    2003
    
    
    $
    212,800
    
    
    
    150,000
    
    
    
    0Jeffrey Baudo
    
    
    2005
    
    
    $
    182,115
    
    
    
    226,260
    
    
    
    0Chief Operating Officer
    
    
    2004
    
    
    $
    191,700
    
    
    
    0
    
    
    
    02003
    
    
    $
    191,700
    
    
    
    0
    
    
    
    0Anthony J. Fidaleo (1)
    
    
    2005
    
    
    $
    140,577
    
    
    
    19,178
    
    
    
    0Vice President Finance &
    
    
    2004
    
    
    $
    140,000
    
    
    
    0
    
    
    
    0Chief Financial Officer
    
    
    2003
    
    
    $
    125,000
    
    
    
    20,000
    
    
    
    0
 
 (1)
    
    Resigned effective November 30, 2005 Stock Options
  32




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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
 Number of Shares Underlying
    
    Dollar Value of UnexercisedNumber of Shares
    
    Dollar Value
    
    Unexercised Options at fiscal
    
    In-the-Money Options at fiscalUnderlying
    
    Realized on
    
    Year-End
    
    Year-End (1)Name
    
    Options Exercised
    
    Exercise
    
    Exercisable
    
    Nonexercisable
    
    Exercisable
    
    NonexercisableLeslie Bernhard
    
    
    
    
    
    $
    
    
    
    
    529,151
    
    
    
    
    
    
    $
    430,227
    
    
    $
    Eli Rousso
    
    
    
    
    
    $
    
    
    
    
    504,151
    
    
    
    
    
    
    $
    430,227
    
    
    $
    Jeffrey Baudo
    
    
    98,114
    
    
    $
    122,643
    
    
    
    378,146
    
    
    
    
    
    
    $
    285,738
    
    
    $
    Anthony J. Fidaleo
    
    
    55,845
    
    
    $
    59,534
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Based on the closing price of the AdStars Common Stock on December 31, 2005 of $2.23. For
the purposes of this calculation, value is based upon the difference between the exercise
price of the options and the per share price at December 31, 2005. Compensation of Directors
  Employment Contracts and termination of employment and change-in-control arrangements
   33




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Limitation of Directors Liability and Indemnification
   
 Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 ,
 Shares ofCommon StockBeneficially
    
    Percentage ofName of Beneficial Owner (1)
    
    Owned (2)
    
    OwnershipLeslie Bernhard (3)
    
    
    879,151
    
    
    
    4.5
    %Eli Rousso (4)
    
    
    881,988
    
    
    
    4.5
    %Jeffrey Baudo (5)
    
    
    378,146
    
    
    
    1.9
    %Michael Jackson (6)
    
    
    25,000
    
    
    
    *John Rudy (6)
    
    
    25,000
    
    
    
    *Michael Dubreuil (7)
    
    
    25,000
    
    
    
    *Michael A. Roth and Brian J. Stark
    
    
    1,000,000
    
    
    
    5.2
    %Peter Zollman (8)
    
    
    25,000
    
    
    
    *Tribune Company
    
    
    3,443,457
    
    
    
    18.0
    %All Directors and Officers (7 persons) as a group
    
    
    2,239,285
    
    
    
    11.3
    %
 
 *
    
    less than 1%(1)
    
    The addresses of the persons named in this table are as follows: Leslie Bernhard, Eli Rousso,
and Jeffrey Baudo, c/o AdStar, Inc., 4553 Glencoe Avenue, Suite 300, Marina del Rey, CA 90292; and
Tribune Company, 435 N. Michigan Ave. Chicago IL, Attn: General Counsel; Michael A. Roth and Brian
J. Stark, 3600 South Lake Drive, St. Francis, WI 53235; Peter Zollman 402 Spring Valley
Road, Altamonte Springs, Florida 32714; Michael Dubreuil, c/o
Brainhunter Global Solutions, 2 Sheppard Ave. E., Suite 700, Toronto, Ontario, M2N 5Y7; Michael Jackson, c/o Agency.com,
20 Exchange Place  9th Floor  New York, 34




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NY 10005; John Rudy, c/o Beacon Consulting Associates, P.O. Box 894,169 Main Street, Matawan, NJ
07747.(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 10,
2005 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 15, 2005, 19,250,286 shares of
Common Stock were outstanding.(3)
    
    Includes options to purchase 529,151 shares of AdStar Common Stock at prices between $0.60 and
$3.50, exercisable within 60 days.(4)
    
    Includes options to purchase 504,151 shares of AdStar Common Stock at prices between $0.60 and
$3.50, exercisable within 60 days.(5)
    
    Includes options to purchase 378,146 shares of AdStar Common Stock, at prices between $0.60 and
$3.50, exercisable within 60 days.(6)
    
    Includes options to purchase 25,000 shares of AdStar Common Stock at $0.83, exercisable within
60 days.(7)
    
    Includes options to purchase 25,000 shares of AdStar Common Stock at $1.31, exercisable within
60 days.(8)
    
    Includes options to purchase 25,000 shares of AdStar Common Stock at $1.08, exercisable within
60 days. Securities Authorized for Issuance Under Equity Compensation Plans
 2004 Stock Option Plan
  1999 Stock Option Plan
  35




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Equity Compensation Plan TableNumber of securitiesremaining availablefor future issuanceunder equityNumber of securities to be
    
    
    Weighted-average
    
    
    compensation plansissued upon exercise of
    
    
    exercise price of
    
    
    (excluding securitiesoutstanding options,
    
    
    outstanding options,
    
    
    reflected in columnwarrants and rights
    
    
    warrants and rights
    
    
    (a))(a)
    
    
    (b)
    
    
    (c)Equity
Compensation Plans
Approved By
Security Holders
(the 2004 plan and
the 1999 Plan)
    
    
    1,386,938
    
    
    $
    1.22
    
    
    
    784,285Equity Compensation
Plans Not Approved
By Security Holders
    
    
    1,107,509
    
    
    $
    2.39
    
    
    
    21,216
    (1)Total
    
    
    2,494,447
    
    
    $
    1.74
    
    
    
    805,501
 
 (1)
    
    Reflects shares of AdStar Common Stock under the Vendor Plan described below.  
 
 36




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
 
  
 Item 12. Certain Relationships and Related Transactions
     37




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Item 13. Exhibits, List and Reports on Form 8-K
 (a) Exhibits:
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Merger dated October 21, 2003(1)3.1
    
    Certificate of Incorporation of AdStar (2)3.1a
    
    Amendment to Certificate of Incorporation, as filed with the Secretary
of State of Delaware on July 11, 2001 (3)3.1b
    
    Series A Preferred Stock Certificate of Designation as filed with the
Secretary of State of Delaware on March 15, 2002 (4)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 (5)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(6)3.1e
    
    Amendment to Certificate of Incorporation, as filed with the Secretary
of State of Delaware on November 11, 2004 (17)3.2
    
    By-Laws of AdStar (2)4.1
    
    Specimen Stock Certificate (2)4.2
    
    Revised Form of Underwriters Warrant (7)4.3
    
    Form of 5-year warrant issued in the Private Placement of units on
April 6, 2001 (8)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(9)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(9)4.6
    
    Form of 5-year warrant issued in connection with the Private Placement
of AdStar Common Stock in September 2003 (10)4.7
    
    Registration Rights Agreement by and among the Company and the Edgil
Stockholders, dated October 21, 2003 (11)10.1
    
    1999 Stock Option Plan (2)10.2**
    
    Employment Agreement between AdStar and Leslie Bernhard (6)10.3**
    
    Employment Agreement between AdStar and Eli Rousso (6)10.4**
    
    Employment Agreement between AdStar and Jeffrey Baudo (6)10.5**
    
    Series A Preferred Stock Purchase Agreement, dated March 18, 2002, by
and between AdStar, Inc. and Tribune Company (4)10.6
    
    Software Development and Deployment Agreement, dated March 18, 2002,
by and between AdStar, Inc. and Tribune Company (4)10.7
    
    Registration Rights Agreement, dated March 18, 2002, by and between
AdStar, Inc. and Tribune Company (4)10.8
    
    Governance Agreement, dated March 18, 2002, by and among AdStar, Inc.,
Leslie Bernhard, Eli Rousso and Tribune Company (4)10.9
    
    Series B Preferred Stock Purchase Agreement, dated December 23, 2002,
by and between AdStar, Inc. and Tribune Company (5)10.10
    
    Second Software Development and Deployment Agreement, dated December
23, 2002, by and between AdStar, Inc. and Tribune Company (5)10.11
    
    Amended and Restated Registration Rights Agreement, dated December 23,
2002, by and between AdStar, Inc. and Tribune Company (5)
 38




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##### Table of Contents



ExhibitNo.
    
    Description10.12
    
    Amended and Restated Governance Agreement, dated December 23, 2002, by
and among AdStar, Inc., Leslie Bernhard, Eli Rousso and Tribune
Company (5)10.13
    
    2004 Stock Option Plan (14)10.14**
    
    Employment Agreement between AdStar and Leslie Bernhard, dated
December 21, 2005 *10.15**
    
    Employment Agreement Amendment between AdStar and Leslie Bernhard,
dated December 21, 2005 *10.16**
    
    Employment Agreement between AdStar and Eli Rousso, dated December 21,
2005 *10.17**
    
    Employment Agreement Amendment between AdStar and Eli Rousso, dated
December 21, 2005 *13.1
    
    Three Form 10QSB Quarterly Reports for the periods ending March 31,
2005; June 30, 2005; and, September 30, 2005 (16)14.1
    
    Code of Ethics (15)16.1
    
    Letter from PricewaterhouseCoopers LLP dated February 20, 2003 (12)20.1
    
    Notification to AdStar, Inc. stockholders of action taken by written
consent of the holders of a majority of outstanding shares (13)21.1
    
    Subsidiaries(15)22.1
    
    Published reports containing information called for by Item 4 of Part
I of this report (See Exhibit 20.1 above)(15)23.1
    
    Consent of BDO Seidman, LLP *23.2
    
    Consent of Holtz Rubenstein Remnick LLP *31.1
    
    Chief Executive Officer Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002*31.2
    
    Chief Financial Officer Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002*32.1
    
    Chief Executive Officer Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002*32.2
    
    Chief Financial Officer Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002*
 
 Notes to exhibits*
    
    Filed herewith**
    
    Indicates a management contract or compensatory plan or arrangement(1)
    
    Filed on November 4, 2003 as an exhibit with the same number to Current Report on Form 8-K
and incorporated herein by reference.(2)
    
    Filed on October 1999 as an exhibit with the same number to Registration Statement on Form
SB-2 (No. 333-84209), and incorporated herein by reference.(3)
    
    Filed as an exhibit to Quarterly Report on Form 10QSB for the period ended September 30, 2001
and incorporated herein by reference.(4)
    
    Filed on March 25, 2002 as an exhibit to the Current Report on Form 8-K filed and
incorporated herein by reference.(5)
    
    Filed on December 31, 2003 as an exhibit to the Current Report on Form 8-K filed and
incorporated herein by reference.(6)
    
    Filed as an exhibit to the Annual Report on Form 10KSB for the period ended December 31, 2003
and incorporated herein by reference.(7)
    
    Filed in September 2000 as an exhibit with the same number to Registration Statement on Form
SB-2 (No. 333-43408) and incorporated herein by reference.(8)
    
    Filed on May 10, 2001 as an exhibit to Registration Statement on Form S-3 No. 333-60664 and
incorporated herein by reference.(9)
    
    Filed on January 24, 2002 as an exhibit to Registration Statement on Form S-3 No. 333-81338
and incorporated herein by reference.(10)
    
    Filed on October 16, 2003 as an exhibit with the same number to Registration Statement on
Form S-3 (No. 333-109757) and incorporated herein by reference. 39




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##### Table of Contents



(11)
    
    Filed on November 4, 2003 as an exhibit to the Current Report on Form 8-K and incorporated
herein by reference.(12)
    
    Filed on February 24, 2003 as an exhibit to the Current Report on Form 8-K filed and
incorporated herein by reference.(13)
    
    Filed on March 9, 2004 by a Schedule 14C Information Statement.(14)
    
    Filed on October 13, 2004 as Appendix A to the Schedule 14A Proxy Statement and incorporated
herein by reference.(15)
    
    Filed as an exhibit to the Annual Report on Form 10KSB for the period ended December 31, 2003
and incorporated herein by reference.(16)
    
    Filed on May 16, 2005, August 15, 2005 and November 14, 2005.(17)
    
    Filed as an exhibit to the Annual Report on Form 10KSB for the period ended December 31, 2004
and incorporated herein by reference. 40




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
 :
 2004 (1)
    
    
    2005 (2)Audit fees
    
    $
    125,000
    
    
    $
    143,000Audit related fees
    
    
    28,000
    
    
    
    81,000Total audit and audit related fees
    
    $
    153,000
    
    
    $
    224,000Tax fees
    
    
    19,000
    
    
    
    13,000All other fees
    
    
    
    
    
    
    Total fees
    
    $
    172,000
    
    
    $
    237,000
 
 (1)
    
    Includes only fees charged by BDO Seidman, LLP(2)
    
    Includes $85,000 accrual of audit fees payable to Holtz Rubenstein Reminick LLP
for the 2005 audit Audit-Related Fees
  Tax Fees
  All Other Fees
   Audit Committee Pre-Approval Policies and Procedures
  41




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##### Table of Contents



SIGNATURES
  AdStar, Inc.By:
    /s/ Leslie BernhardLeslie Bernhard,President and Chief Executive Officer   Signature
    
    
    
    TitlePrincipal Executive Officer/s/ Leslie Bernhard

Leslie Bernhard
    
    
    
    President and Chief Executive Officer and DirectorPrincipal Financial Officer/s/ James Linesch

James Linesch
    
    
    
    Chief Financial OfficerDirectors/s/   Eli Rousso

Eli Rousso
    
    
    
    Director/s/     Jeffrey Baudo

Jeffrey Baudo
    
    
    
    Director/s/       John C. Rudy

John C. Rudy
    
    
    
    Director/s/      Michael J. Jackson

Michael J. Jackson
    
    
    
    Director/s/      Michael Dubreuil

Michael Dubreuil
    
    
    
    Director/s/ Peter Zollman

Peter Zollman
    
    
    
    Director
 42




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##### Table of Contents



Index To Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Report of Independent Registered Public Accounting Firm
    
    
    F-3Financial Statements:Consolidated Balance Sheet as of December 31, 2005
    
    
    F-4Consolidated Statements of Operations for the two years ended December 31, 2005
    
    
    F-5Consolidated Statements of Stockholders Equity for the two
years ended December 31, 2005
    
    
    F-6Consolidated Statements of Cash Flows for the two years ended December 31, 2005
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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Report of Independent Registered Public Accounting Firm
 
     
 F-2




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##### Table of Contents



F-3




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##### Table of Contents



AdStar, Inc. and Subsidiary
Consolidated Balance Sheet
As of December 31, 2005
 AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,338,000Accounts receivable, net of allowance for doubtful accounts of $68,000
    
    
    571,000Notes receivable from officers  current portion
    
    
    8,000Prepaid and other current assets
    
    
    115,000Total current assets
    
    
    2,032,000Notes receivable from officers, net of current portion
    
    
    216,000Property and equipment, net
    
    
    127,000Capitalized and purchased software, net
    
    
    1,031,000Intangible assets, net
    
    
    1,306,000Goodwill
    
    
    2,132,000Other assets
    
    
    30,000Total assets
    
    $
    6,874,000Liabilities and Stockholders EquityCurrent liabilities:Due to publications
    
    $
    1,314,000Accounts payable and accrued expenses
    
    
    677,000Deferred revenue and customer deposits  current portion
    
    
    219,000Loans from stockholders  current portion
    
    
    21,000Capital lease obligations  current portion
    
    
    1,000Total current liabilities
    
    
    2,232,000Deferred revenues, net of current portion
    
    
    28,000Total liabilities
    
    
    2,260,000Commitments and contingenciesStockholders equity:Preferred Stock, par value $0.0001; authorized 5,000,000 shares; 0
issued and outstanding
    
    
    Common Stock, par value $0.0001; authorized 40,000,000 shares;
18,250,287 issued and outstanding
    
    
    2,000Additional paid-in capital
    
    
    23,683,000Treasury stock; 67,796 shares
    
    
    (68,000
    )Accumulated deficit
    
    
    (19,003,000
    )Total stockholders equity
    
    
    4,614,000Total liabilities and stockholders equity
    
    $
    6,874,000
  F-4




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##### Table of Contents



AdStar, Inc. and Subsidiary
Consolidated Statements of Operations
For the Two Years
Ended December 31, 2005
 2004
    
    
    2005ASP, net
    
    $
    1,687,000
    
    
    $
    1,815,000Licensing and software
    
    
    2,268,000
    
    
    
    2,534,000Customization and other
    
    
    978,000
    
    
    
    890,000Net revenues
    
    
    4,933,000
    
    
    
    5,239,000Cost of revenues, including depreciation and
amortization of $649,095 and $595,000
    
    
    2,027,000
    
    
    
    1,779,000Loss on write-down of capitalized software
    
    
    258,000
    
    
    
    Total cost of revenues
    
    
    2,285,000
    
    
    
    1,779,000Gross profit
    
    
    2,648,000
    
    
    
    3,460,000General and administrative expense
    
    
    2,053,000
    
    
    
    1,959,000Product maintenance and development costs
    
    
    1,359,000
    
    
    
    901,000Selling and marketing expense
    
    
    1,291,000
    
    
    
    750,000Restructuring expenses
    
    
    (38,000
    )
    
    
    Amortization of customer list
    
    
    88,000
    
    
    
    88,000Abandoned acquisition costs
    
    
    1,203,000
    
    
    
    Loss from operations
    
    
    (3,308,000
    )
    
    
    (238,000
    )Beneficial interest and amortization of financing
fees on convertible note
    
    
    (299,000
    )
    
    
    (802,000
    )Interest income (expense), net
    
    
    (36,000
    )
    
    
    (38,000
    )Loss before income taxes
    
    
    (3,643,000
    )
    
    
    (1,078,000
    )Provision for income taxes
    
    
    (5,000
    )
    
    
    (12,000
    )Net loss
    
    $
    (3,648,000
    )
    
    $
    (1,090,000
    )Deemed dividends on exercise of warrants
    
    
    
    
    
    
    (98,000
    )Net loss applicable to common stockholders
    
    $
    (3,648,000
    )
    
    $
    (1,188,000
    )Loss per share  basic and diluted
    
    $
    (0.26
    )
    
    $
    (0.07
    )Weighted average number of shares  basic and diluted
    
    
    14,043,000
    
    
    
    16,133,000
  F-5




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##### Table of Contents



AdStar, Inc. and Subsidiary
Consolidated Statements of Stockholders Equity
For the Two Years
Ended December 31, 2005
 Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Series A
    
    
    Series B-1
    
    
    Series B-2
    
    
    Treasury Stock
    
    
    Additional
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Deficit
    
    
    EquityBalance, December 31, 2003
    
    
    12,778,531
    
    
    $
    2,000
    
    
    
    1,443,457
    
    
    $
    1,698,000
    
    
    
    
    
    
    $
    
    
    
    
    2,000,000
    
    
    $
    1,342,000
    
    
    
    67,796
    
    
    $
    (68,000
    )
    
    $
    17,166,000
    
    
    $
    (14,167,000
    )
    
    $
    5,973,000Conversion of Preferred Series A
net of associated costs and fees
    
    
    1,443,457
    
    
    
    
    
    
    
    (1,443,457
    )
    
    
    (1,698,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,667,000
    
    
    
    
    
    
    
    (31,000
    )Beneficial conversion of
warrants issued with convertible
debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734,000
    
    
    
    
    
    
    
    734,000Common Stock issued to legal
council for finders fee on
convertible debt
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    32,000Conversion of convertible debt
to Common Stock
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,000
    
    
    
    
    
    
    
    225,000Common Stock issued for services
    
    
    53,217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,000
    
    
    
    
    
    
    
    97,000Warrants exercised
    
    
    55,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,000
    
    
    
    
    
    
    
    109,000Options exercised
    
    
    58,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,000
    
    
    
    
    
    
    
    59,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,648,000
    )
    
    
    (3,648,000
    )Balance, December 31, 2004
    
    
    14,513,546
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    1,342,000
    
    
    
    67,796
    
    
    
    (68,000
    )
    
    
    20,089,000
    
    
    
    (17,815,000
    )
    
    
    3,550,000Conversion of Preferred Series B-2
To Common Stock
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (1,342,000
    )
    
    
    
    
    
    
    
    
    
    
    1,342,000
    
    
    
    
    
    
    
    Conversion of Laurus debt
To Common Stock
    
    
    435,470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    999,000
    
    
    
    
    
    
    
    999,000Warrants repriced and exercised
    
    
    702,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580,000
    
    
    
    
    
    
    
    580,000Preferential dividend
on repriced warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,000
    
    
    
    (98,000
    )
    
    
    Shares issued for services
    
    
    127,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,000
    
    
    
    
    
    
    
    94,000Options exercised
    
    
    470,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481,000
    
    
    
    
    
    
    
    481,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,090,000
    )
    
    
    (1,090,000
    )Balance, December 31, 2005
    
    
    18,250,287
    
    
    $
    2,000
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    67,796
    
    
    $
    (68,000
    )
    
    $
    23,683,000
    
    
    $
    (19,003,000
    )
    
    $
    4,614,000
  F-6




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##### Table of Contents



AdStar, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Two Years
Ended December 31,
 2004
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (3,648,000
    )
    
    $
    (1,090,000
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    797,000
    
    
    
    738,000Beneficial interest and amortization of financing fees on
convertible note
    
    
    299,000
    
    
    
    803,000Loss on write-down of capitalized software
    
    
    258,000
    
    
    
    Loss on disposal of equipment and purchased software
    
    
    13,000
    
    
    
    Stock based charges
    
    
    96,000
    
    
    
    94,000Bad debt provision
    
    
    12,000
    
    
    
    (7,000
    )Changes in assets and liabilities:Accounts receivable
    
    
    (257,000
    )
    
    
    21,000Prepaids and other assets
    
    
    15,000
    
    
    
    (1,000
    )Due to publications
    
    
    215,000
    
    
    
    16,000Accounts payable and accrued expenses
    
    
    196,000
    
    
    
    (713,000
    )Deferred revenue and customer deposits
    
    
    170,000
    
    
    
    (113,000
    )Net cash used in operating activities
    
    
    (1,834,000
    )
    
    
    (252,000
    )Cash flows from investing activities:Purchase of Edgil Associates, Inc., net of cash received
    
    
    29,000
    
    
    
    Additions to capitalized and purchased software
    
    
    (499,000
    )
    
    
    (68,000
    )Purchase of property and equipment
    
    
    (83,000
    )
    
    
    (53,000
    )Notes from officers
    
    
    (6,000
    )
    
    
    Repayment of officer receivable
    
    
    8,000
    
    
    
    8,000Net cash used in investing activities
    
    
    (551,000
    )
    
    
    (113,000
    )Cash flows from financing activities:Net proceeds from issuance of convertible debt
    
    
    1,347,000
    
    
    
    Repayment of convertible debt
    
    
    (45,000
    )
    
    
    (411,000
    )Proceeds from exercise of options and warrants
    
    
    168,000
    
    
    
    1,061,000Cost of conversion of series A Preferred Stock
    
    
    (31,000
    )
    
    
    Principal repayments on loans from shareholders
    
    
    (21,000
    )
    
    
    (21,000
    )Principal repayments on capital leases
    
    
    (32,000
    )
    
    
    (19,000
    )Net cash provided by financing activities
    
    
    1,386,000
    
    
    
    610,000Net increase (decrease) in cash and cash equivalents
    
    
    (999,000
    )
    
    
    245,000Cash and cash equivalents at beginning of year
    
    
    2,092,000
    
    
    
    1,093,000Cash and cash equivalents at end of year
    
    $
    1,093,000
    
    
    $
    1,338,000
  F-7




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##### Table of Contents



AdStar, Inc. and Subsidiary  Notes to Consolidated Financial Statements
 1.
    
    Organization and BusinessAdStar, 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 original core business was the licensing of 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 and through the Internet. The Companys customers are principally located in
the United States.In 2001, the Company introduced its AdStar e-business application services. Using the
Companys proprietary software solution platform, the Company enables both print and on-line
publications to electronically receive completed classified advertising copy using the
Internet as the communication channel. The services are provided on an application service
provider (ASP) basis, enabling publishers to expand their relationships with advertising
customers using a single integrated platform, while increasing sales volumes at reduced
costs.On October 21, 2003, AdStar acquired all of the business and assets of Edgil Associates,
Inc. (Edgil). Edgil was incorporated in the State of Massachusetts on February 22, 1984 as
a C-Corporation. Edgil, based in North Chelmsford, Massachusetts, is a provider of complete
automated payment processing systems and content processing solutions for the publishing
industry. Edgils core business has been licensing proprietary software systems and
supplying the related support and maintenance.Edgil develops software applications primarily for the newspaper publishing industry. Its
management and personnel combine extensive knowledge of newspaper publishing systems with
technical expertise in database management systems, electronic commerce, and Web application
development. Edgil offers system integration services, installation support, training, and
customer service. Edgils proprietary EdgCapture payment processing software processes over
10,000,000 newspaper advertising and circulation transactions annually for Tribune Company,
Gannett Company, Inc., Knight-Ridder, Inc., Copley Press, Inc., New York Times Company,
Advance Publications, Inc., Cox Enterprises, Inc., and Village Voice Media, Inc., as well as
many independent daily and specialty publications.Edgils product strategy focuses on providing newspapers with the financial benefits
afforded by reduced labor costs and lower credit card processing discount rates. Edgils
experience with integration services has given the EdgCapture product line the technical
differentiation to meet the specific credit card processing requirements of the publishing
industry.2.
    
    Basis of Presentation and Summary of Significant Accounting PoliciesBasis of Presentation and Managements PlanThe accompanying financial statements have been prepared assuming the Company will have
liquidity to maintain its required minimum level of operations. At December 31, 2005, we had
an accumulated deficit of $19,003,000. We have incurred significant recurring net losses.
For the years ended December 2004 and 2005 we had net losses of $3,648,000 and $1,090,000.
Our 2004 and
 F-8




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##### Table of Contents



Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  F-9




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##### Table of Contents



Supplemental schedule of noncash investing and financing activities for the two years ended
December 31, 2005:
 2004
    
    
    2005Supplemental cash flow disclosure:Taxes paid
    
    $
    8,000
    
    
    $
    17,000Interest paid
    
    $
    39,000
    
    
    $
    72,000Non-cash investing and financing activities:Conversion of 1,443,457 shares of Series A Preferred Stock to
equivalent shares of Common net of expenses
    
    $
    1,698,000
    
    
    
    Conversion of 2,000,000 shares of Series B-2 Preferred Stock to
equivalent shares of Common net of expenses
    
    
    
    
    
    $
    1,342,000Amortization of beneficial conversion feature and finance
costs on warrants issued in conjunction with convertible debt
    
    $
    734,000
    
    
    $
    621,000Conversion of convertible debt into shares of Common Stock
    
    $
    225,000
    
    
    $
    819,000Issuance of Common Stock to legal counsel as a finders fee for
securing convertible debt
    
    $
    32,000
    
    
    
    Issuance of Common Stock for legal expenses
    
    $
    
    
    
    $
    94,000Issuance of Common Stock to technical consultants
    
    $
    96,000
    
    
    
    
 Concentration of Credit Risk and Major Customers
     Accounts Receivable and Allowance for Doubtful Accounts
  Property and Equipment
  F-10




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##### Table of Contents



Furniture and fixtures
    
    7 yearsComputer equipment
    
    3 yearsComputer Software
    
    3 to 5 yearsLeasehold improvements
    
    Shorter of useful life or remaining lease term
  Software Development Costs
  Intangible Assets
  Long-Lived Assets
  Goodwill
  F-11




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##### Table of Contents



Fair Value of Financial Instruments
  Revenue Recognition
     F-12




---



##### Table of Contents



Income Taxes
  Advertising Costs
 , ,
 Earnings (Loss) Per Share
   Comprehensive Income
  F-13




---



##### Table of Contents



Warranties and Product liability
   Accounting for Stock-Based Compensation
  Fair Value Disclosures
  Year Ended December 31,2004
    
    
    2005Risk-free interest rate
    
    
    3.50
    %
    
    
    4.35
    %Expected lives (years)
    
    
    3.5
    
    
    
    3.5Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    70.7
    %
    
    
    80.1
    %
  F-14




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##### Table of Contents



Year Ended December 31,2004
    
    2005Net loss 
applicable to
Common Stockholders
    
    As Reported
    
    $
    (3,648,000
    )
    
    $
    (1,188,000
    )Add: Stock based employee compensation included in reported loss
    
    
    
    
    
    Deduct: Employee compensation expense
    
    
    (280,000
    )
    
    
    (1,091,000
    )Pro Forma
    
    $
    (3,928,000
    )
    
    $
    (2,279,000
    )Loss per share -
    
    As Reported
    
    $
    (0.26
    )
    
    $
    (0.07
    )Pro Forma
    
    $
    (0.28
    )
    
    $
    (0.14
    )
  New accounting pronouncements
    F-15




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##### Table of Contents



In June 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, a
replacement of existing accounting pronouncements. SFAS 154 modifies accounting and
reporting requirements when a company voluntarily chooses to change an accounting principle
or correct an accounting error. SFAS 154 requires retroactive restatement of prior period
financial statements unless it is impractical. Previous accounting guidelines allowed
recognition by cumulative effect in the period of the accounting change. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.3.
    
    Property and EquipmentProperty and equipment consisted of the following at December 31, 2005:
 Computer equipment
    
    $
    383,000Production equipment
    
    
    223,000Furniture and fixtures
    
    
    64,000Leasehold improvements
    
    
    9,000$
    679,000Less: Accumulated depreciation and amortization
    
    
    552,000Property and equipment, net
    
    $
    127,000
 Computer equipment and furniture and fixtures include equipment held under capital leases of
$75,000. Depreciation and amortization expense for December 31, 2004 and 2005 was
approximately $76,000 and $69,000 including amortization of computer equipment and furniture
and fixtures held under capital leases of approximately $23,000 and $6,000. Accumulated
depreciation on property and equipment held under capital leases was $63,000 and $69,000 at
December 31, 2004 and 2005, respectively.4.
    
    Capitalized and Purchased SoftwareCapitalized and purchased software consisted of the following at December 31, 2005:
 Capitalized software
    
    $
    2,785,000Purchased software
    
    
    564,000$
    3,349,000Less: Accumulated depreciation and amortization
    
    
    2,318,000Capitalized and purchased software, net
    
    $
    1,031,000
  F-16




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##### Table of Contents



5.
    
    Intangible AssetsIntangible assets are comprised of the following at December 31, 2005:
 Customer list
    
    $
    1,500,0000Trademarks
    
    
    198,000$
    1,698,000Less: Accumulated amortization
    
    
    392,000Intangible assets, net
    
    $
    1,306,000
  2006
    
    $
    89,0002007
    
    
    88,0002008
    
    
    88,0002009
    
    
    88,0002010
    
    
    88,000Thereafter
    
    
    865,000Total
    
    $
    1,306,000
 6.
    
    GoodwillIn accordance with SFAS No. 142, the Company recorded goodwill of $2,132,000 from the
purchase of Edgil. In accordance with SFAS 142, the Company does not amortize goodwill.
However, the Company evaluates goodwill at least on an annual basis for impairment. The
Company performed an impairment test of goodwill using the public company market multiple
method and concluded that goodwill was not impaired. In future periods if goodwill is
determined to be impaired, the Company will recognize a non-cash charge equal to the excess
of the carrying value over the fair value. There can be no assurance that future
evaluations of goodwill will not result in impairment and a charge to earnings.The Company completed its annual impairment analysis including obtaining an independent
outside appraisal and such analysis indicated that the amount of goodwill is fairly stated.7.
    
    Significant ContractsOn March 18, 2002, the Company entered into a series of agreements with Tribune Company
(Tribune) and sold 1,443,457 shares of Series A convertible preferred stock for
approximately $1.8 million. The Company recorded the $1.8 million investment in Series A
convertible Preferred Stock at cost, which approximated fair value. The Company converted
the Series A convertible preferred stock into an equivalent number of the Companys common
stock on April 1, 2004.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 developed
additional features that expanded the capabilities of its generic service and the customized
services that were launched in August 2002. The investment was in the form of an initial
purchase by Tribune of 1,200,000 shares of Series B-1 Preferred Stock for $900,000 funded in
December 2002 and a subsequent purchase of 800,000 shares of Series B-2 Preferred Stock for
$600,000. In addition, on
 F-17




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##### Table of Contents



the second closing, the series B-1 shares, plus additional shares issued for accrued
dividends on Series B-1 converted to series B-2. The purchase price for each share of the
Series B-1 and Series B-2 Preferred Stock was $0.75 at or below the fair market value of
AdStar Common Stock at the time of the respective closing. These shares carried a
liquidation preference that included a dividend of 7% per year available only upon
liquidation and convert on a 1:1 basis. Holders of Series B Preferred Stock were 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 were entitled
to one vote for each share of common issuable upon conversion. In September 2005, the
2,000,000 shares of Series B-1 Preferred Stock were automatically converted to 2,000,000
shares of Common Stock, which has been reserved for issuance. The conversion has been
recorded as of December 31, 2005. Pursuant to the terms of the financing, the shares
automatically converted into Common Stock on the first day after the 24-month anniversary of
the Series B-1 Original Issuance Date for which the Market Price of a share of Common
exceeds 200% of the average trading price per share of Common during the 30 consecutive days
immediately preceding the Series B-1 Original Issuance Date.In 2003, the Company entered into a development and customization contract with
CareerBuilder for FlexAds service in eight Tribune newspapers. In March 2005 the Company
received final notification from CareerBuilder terminating the contract effective as of
August 2005. Upon termination, the Company is no longer obligated to provide the 2 full
time equivalent programmers. As a result, during 2005 the Company reversed an accrual
previously established for such costs in the amount of $137,000, which was recorded as a
deduction from the costs of revenue. Additionally, $53,000 of deferred costs relating to
this contract was amortized as expense in 2005.8.
    
    Convertible DebtOn April 12, 2004, the Company issued a $1.5 million 3-year secured convertible note (the
Note) and 7-year warrants to purchase 200,000 shares of our common stock to Laurus Master
Fund, Ltd., a New York City based institutional fund and an accredited investor (Laurus
Master Fund). The Note bored interest at the prime rate minus one percentage point and was
convertible into Common Stock at an initial fixed conversion price of $2.25 per share, 105%
of the average closing price of the Common Stock during the 22 trading days preceding the
closing date.The Company allocated the purchase price based on the fair value, using the Black-Scholes
option pricing model, and recorded a debt discount of approximately $734,000 consisting of
the intrinsic value of the beneficial conversion of approximately $467,000 and the portion
of the proceeds allocated to the warrants issued to the lenders of approximately $267,000,
based on the relative fair values of the warrants and the notes. The debt discount was
amortized as interest expense over the three-year term of the notes using the interest
method.Beginning on July 1, 2004 and recurring on the first day of each succeeding month thereafter
through August 2005, the Company made minimum monthly principal payments of $45,000 on the
note, together with any accrued and unpaid interest due.In September 2005, AdStar offered Laurus Master Fund the opportunity to convert the balance
of its convertible note at a price of $1.88 per share (82.5% of the closing price on the
date of offer) during the 20 trading day period commencing on the delivery of the offer but,
without AdStars written consent, no more than 250,000 shares during the first 10 trading
days following such delivery. The offer was cancelable or deferrable by AdStar prior to the
end of the initial 10-day period with respect to the second 10-day period. Under the terms
of the offer Laurus Master Fund opted to convert $818,000 in note principal, the remaining
balance, into 435,470 shares of AdStar common stock.
 F-18




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##### Table of Contents



As an inducement to convert their note into shares of AdStar common stock, the Company
offered to convert the notes at a price of $1.88, which was below the fair market value at
the closing price of the Companys stock on the dates of conversion. As such the Company
recorded additional non-cash interest expense of approximately $181,000 on the dates of
conversion. The Company calculated the additional non-cash interest as the difference
between the fair market value of the Companys common stock and the fixed conversion price
(82.5% of the closing price on the date of offer) of the convertible note on the dates the
Company received and accepted the conversion notices.During 2005, approximately $203,000 of prepaid financing fees and debt discount was
amortized as interest expense, including a non-cash portion of approximately $164,000. The
non-cash portion was comprised of approximately $156,000 debt discount and $8,000 in prepaid
finder fees amortized during the period. In addition the conversion of $818,000 in
principal accelerated the realization of approximately $418,000 of prepaid financing fees
and debt discount as interest expense, including a non-cash portion of approximately
$339,000. The non-cash portion was comprised of approximately $321,000 debt discount and
$18,000 in prepaid finder fees.9.
    
    Notes PayablePursuant to the Merger agreement, the notes payable to the two former stockholders of Edgil
were restated whereby each stockholder received $51,500 in principal payments upon the
closing and the remaining $31,500 note balance, for each Stockholder, is to be repaid in six
equal payments of principal along with all interest at a rate of 8% per annum, with the
first payment to be made on the nine month anniversary of the Effective Date (October 21,
2003) and each of the next five payments to be paid each nine months thereafter, with the
final payment to be made on the third anniversary of the Closing Date. Accordingly, a
payment of $10,500 was made in October 2005, and $10,500 in minimum principal pay downs are
due during March and October 2006.10.
    
    Due to publicationsThe Company processes credit cards on behalf of certain of its customers as part of ASP
services provided. Due to publications is a result of contractual customer arrangements
whereby we receive net proceeds daily on behalf of these customers for third party ads
placed via credit card. These transactions are collected, reconciled monthly and submitted
to the publication, net of processing fees, generally within 35 days from the month end. We
have been providing this service at virtually no charge to customers since approximately
December 2000 without any customer terminations.
 F-19




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##### Table of Contents



11.
    
    Income TaxesProvision for income taxes consist of the following:
 December 31,2004
    
    
    2005Current taxesFederal
    
    $
    
    
    
    $
    State
    
    
    4,900
    
    
    
    12,000DeferredFederal
    
    
    (379,000
    )
    
    
    (66,000
    )State
    
    
    (39,000
    )
    
    
    (230,000
    )Total deferred taxes
    
    
    (418,000
    )
    
    
    (296,000
    )Change in valuation allowance
    
    
    418,000
    
    
    
    296,000Income tax provision
    
    $
    4,900
    
    
    $
    12,000
  2005Deferred tax assets:Net operating loss carry forwards
    
    $
    6,468,000Other
    
    
    111,000Gross deferred tax asset
    
    
    6,579,000Deferred tax liabilityDepreciation and amortization
    
    
    (563,000
    )Gross deferred tax liabilities
    
    
    (563,000
    )Net Deferred tax asset
    
    
    6,016,000Less: Valuation allowance
    
    
    (6,016,000
    )Gross deferred tax asset
    
    $
    
   F-20




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##### Table of Contents



2004
    
    
    2005Statutory regular federal income tax rate
    
    
    (34.0
    %)
    
    
    (34.0
    %)State taxes, net of federal benefit
    
    
    (3.8
    %)
    
    
    (3.6
    %)Change in valuation allowance
    
    
    37.8
    %
    
    
    36.5
    %(0.0
    %)
    
    
    (1.1
    %)
 12.
    
    CapitalizationCommon StockIn November 2004, the shareholders approved an increase to the number of authorized shares
of the Companys Common Stock from 20,000,000 to 40,000,000.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 2004, 53,217 shares were issued to vendors under the
plan, which represented compensation of $97,000. Additionally, during 2004, the Company
issued to Marina Co. 25,000 shares of restricted Common Stock, issued at fair market value,
as payment for $32,000 in legal services provided. During 2005, the Company issued to
Marina Co. 127,449 shares of restricted Common Stock, issued at fair market value, as
payment for $94,000 in legal services provided. These sales were 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. Pursuant
to automatic conversion provisions in the Tribune Company agreement, all 1,443,457 shares of
Series A Preferred Stock automatically converted to an equivalent number of shares of Common
Stock on April 1, 2004.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:
  F-21




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Stock Options and Employee Benefit Plans
     F-22




---



##### Table of Contents



WeightedAverageExerciseShares
    
    
    PriceOutstanding at December 31, 2003
    
    
    1,294,619
    
    
    $
    1.05Granted
    
    
    353,687
    
    
    $
    1.54Exercised
    
    
    (58,111
    )
    
    $
    1.01Forfeited
    
    
    (266,632
    )
    
    $
    1.95Outstanding at December 31, 2004
    
    
    1,323,563
    
    
    $
    1.00Granted
    
    
    1,378,667
    
    
    $
    2.13Exercised
    
    
    (470,972
    )
    
    $
    1.04Forfeited
    
    
    (64,431
    )
    
    $
    1.55Outstanding at December 31, 2005
    
    
    2,166,827
    
    
    $
    1.69Options exercisable at December 31, 2004
    
    
    1,169,401
    
    
    $
    0.90Options exercisable at December 31, 2005
    
    
    1,824,997
    
    
    $
    1.63Options available for future grant under 1999 ESOP Plan (1)
    
    
    18,959Options available for future grant under 2004 ESOP Plan (1)
    
    
    765,326Weighted average fair value of options granted in 2004
    
    
    
    
    
    $
    1.54Weighted average fair value of options granted in 2005
    
    
    
    
    
    $
    2.13
 
 (1)
    
    Excludes the 780,000 non-qualified options issued to the outside directors and consultants.
The 780,000 is comprised of 50,000 options issued to Steve Zelnick for services rendered as an
outside member of the board of directors, exercisable at $0.60 per share, expiring on January 27,
2007; 25,000 options issued to Arthur Salzfass for services rendered as an outside member of the
Board of Directors, exercisable at $1.29 per share, expiring on November 11, 2009; 30,000 options
issued to an Investor Relations firm for services rendered, exercisable at $1.99 per share,
expiring on November 24, 2008; 25,000 options issued to Michael Jackson for services rendered as an
outside member of the board of directors, exercisable at $0.83 per share, expiring on May 15, 2010;
25,000 options issued to John Rudy for services rendered as an outside member of the board of
directors, exercisable at $0.83 per share, expiring on May 15, 2010; 25,000 options issued to F-23




---



##### Table of Contents



Michael Dubreuil for services rendered as an outside member of the board of directors, exercisable
at $1.34 per share, expiring on May 15, 2010; 25,000 options issued to Peter Zollman for services
rendered as an outside member of the board of directors, exercisable at $1.08 per share, expiring
on December 20, 2010; 50,000, 83,333 and 83,333 options issued to Leslie Bernhard for services
rendered, exercisable at $2.38, $3.00 and $3.50 per share, respectively, expiring on December 20,
2010; 41,925, 75,000 and 75,000 options issued to Eli Rousso for services rendered, exercisable at
$2.38, $3.00 and $3.50 per share, respectively, expiring on December 20, 2010; 32,750, 66,667 and
66,667 options issued to Jeff Baudo for services rendered, exercisable at $2.38, $3.00 and $3.50
per share, respectively, expiring on December 20, 2010 .  Options Exercisable atOptions Outstanding at December 31, 2005
    
    December 31, 2005Weighted Average
    
    WeightedNumber of
    
    Remaining
    
    Average
    
    Number of
    
    WeightedRange of
    
    Shares
    
    Contractual Life
    
    Exercise
    
    Shares
    
    AverageExercise Price
    
    Outstanding
    
    (years)
    
    Price
    
    Exercisable
    
    Exercise Price$0.01 - $0.99
    
    
    915,831
    
    
    
    1.43
    
    
    $
    0.69
    
    
    
    878,331
    
    
    $
    0.68$1.00 - $1.99
    
    
    354,495
    
    
    
    2.00
    
    
    $
    1.26
    
    
    
    231,165
    
    
    $
    1.29$2.00 - $2.99
    
    
    466,501
    
    
    
    4.62
    
    
    $
    2.53
    
    
    
    265,501
    
    
    $
    2.33$3.00 - $3.50
    
    
    450,000
    
    
    
    4.97
    
    
    $
    3.25
    
    
    
    450,000
    
    
    $
    3.252,166,827
    
    
    
    
    
    
    
    
    
    
    
    1,169,401
  F-24




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##### Table of Contents



Warrants
  WeightedAverage ExerciseShares
    
    
    PriceOutstanding at January 1, 2003
    
    
    2,271,500
    
    
    $
    5.85Issued
    
    
    200,000
    
    
    $
    2.67Exercised
    
    
    (55,230
    )
    
    $
    1.98Forfeited
    
    
    (1,350,000
    )
    
    $
    8.27Outstanding at December 31, 2004
    
    
    1,066,270
    
    
    $
    1.81Issued
    
    
    
    
    
    
    Exercised
    
    
    (702,850
    )
    
    $
    0.85Forfeited
    
    
    (35,800
    )
    
    $
    7.53Outstanding at December 31, 2005
    
    
    327,620
    
    
    $
    2.02Warrants exercisable at December 31, 2004
    
    
    1,066,270
    
    
    $
    1.81Warrants exercisable at December 31, 2005
    
    
    327,620
    
    
    $
    2.02Weighted average fair value of warrants
issued in 2004
    
    
    
    
    
    $
    1.63Weighted average fair value of warrants
issued in 2005
    
    
    
    
    
    
    
  Number
    
    
    Exercise Price
    
    
    Expiration Date50,000
    
    
    $
    1.07
    
    
    April 200662,284
    
    
    $
    0.75
    
    
    January 200715,336
    
    
    $
    1.87
    
    
    March 2009120,000
    
    
    $
    2.58
    
    
    April 211180,000
    
    
    $
    2.80
    
    
    April 2111
  F-25




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##### Table of Contents



13.
    
    Shareholder receivableIn 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. The
notes are 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.
At December 31, 2005 the balance outstanding on the notes receivable was $224,000.14.
    
    Commitments and ContingenciesOperating and Capital Lease CommitmentsThe Company has certain non-cancelable 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 California and Massachusetts, and expire
through November 2009. 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 November 30, 2005, the end of the lease agreement.Future minimum lease payments under the non-cancelable operating and capital leases as of
December 31, 2005 are as follows:
 Operating
    
    
    CapitalYears Ending December 31,
    
    Leases
    
    
    Leases2006
    
    $
    191,000
    
    
    $
    1,0002007
    
    
    135,0002008
    
    
    138,000
    
    
    
    2009
    
    
    120,000
    
    
    
    2010
    
    
    
    
    
    
    Total minimum obligations
    
    $
    584,000
    
    
    
    1,000Less: Amounts representing interest
    
    
    
    
    
    
    Present value of minimum obligations
    
    
    
    
    
    
    1,000Less: Current portion
    
    
    
    
    
    
    (1,000
    )Non-current portion
    
    
    
    
    
    $
    
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Employment Agreements
   License Agreement
 $
 15.
    
    Related party transactionsDuring the years ended December 31, 2004 and 2005 the Companys total revenues derived from
Tribune Company agreements were $556,890 and $811,094 respectively.
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##### Table of Contents



16.
    
    Subsequent EventOn February 16, 2006, AdStar, Inc. (AdStar) entered into a Securities Purchase Agreement
to sell to a single accredited institutional investor one million (1,000,000) shares of its
Common Stock at an aggregate purchase price of $1,650,000. AdStar received the proceeds of
the sale on February 17, 2006. Pursuant to the agreement, and a Registration Rights
Agreement entered into on the same date, AdStar will file a registration statement covering
the resale of those shares by the later of the 15th day following the
closing date, or April 10, 2006, and will cause the registration statement to be effective
by the earlier of the 150th day following the closing date, or the
fifth trading day following the day on which AdStar is notified by the SEC that the
registration statement will not be (or will no longer be) subject to review by the SEC.
AdStar paid the placement agent a cash placement fee of 51/2%
of the amount raised, and warrants, exercisable for three years, to purchase 25,000 shares
of AdStars Common Stock at a price of $4.00 per share. The issuance was acquired for
investment by an accredited investor and will be issued without registration under the
Securities Act of 1933, as amended, pursuant to the exemptions provided under sections 4(6)
and 4(2) thereof and the exemption provided by Regulation D.
 F-28