ADSTAR COM INC, SB-2, 2000-08-10

ADSTAR COM INC
SB-2, 2000-08-10
BUSINESS SERVICES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

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

ADSTAR.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 7319 22-3666899
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

4553 GLENCOE AVENUE
SUITE 300
MARINA DEL REY, CALIFORNIA 90292
(310) 577-8255
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S EXECUTIVE OFFICES)
------------------------

LESLIE BERNHARD
CHIEF EXECUTIVE OFFICER
ADSTAR.COM, INC.
4553 GLENCOE AVENUE
SUITE 300
MARINA DEL REY, CALIFORNIA 90292
(310) 577-8255
(310) 577-8266 (FACSIMILE)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
STEPHEN A. ZELNICK, ESQ. JOHN HALLE, ESQ.
MORSE, ZELNICK, ROSE & LANDER, LLP STOEL RIVES, LLP
450 PARK AVENUE 900 S.W. FIFTH AVENUE
NEW YORK, NY 10022 PORTLAND, OREGON 97204
(212) 838-8040 (503) 294-9233
(212) 838-9190 (FACSIMILE) (503) 220-2480 (FACSIMILE)
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]

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

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

IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(d)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER REGISTRATION STATEMENT FOR THE SAME
OFFERING. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value(2)........... 1,610,000 $2.50 $4,025,000 $1,062.60
---------------------------------------------------------------------------------------------------------------------------------
Managing underwriter's warrants...... 140,000 $ -0- $ -0- $-0-(3)
---------------------------------------------------------------------------------------------------------------------------------
Common stock underlying the managing
underwriter's warrants(4).......... 140,000 $3.00 $ 420,000 $110.88
---------------------------------------------------------------------------------------------------------------------------------
Total Registration Fee............... $1,173.48
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act. Pursuant to Rule 457(c), the maximum
offering price for the common stock is based upon the average of the high
and low sales prices of the Common Stock on the Nasdaq on August 7, 2000 of
$2.50.

(2) Includes 210,000 shares issuable upon exercise of underwriters'
over-allotment option.

(3) No registration fee required pursuant to Rule 457(g) under the Securities
Act.

(4) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the antidilution provisions of the warrants.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED , 2000

[ADSTAR.COM LOGO]

1,400,000 SHARES OF COMMON STOCK

We are offering 1,400,000 shares of common stock.

Our common stock is traded on The Nasdaq SmallCap Market under the symbol
ADST. On August 7, 2000 the last reported sale price of our common stock on The
Nasdaq Small Cap Market was $2.50 per share.

INVESTING IN THE SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

We expect total cash expenses in connection with the offering to be
approximately $265,000, which will include a nonaccountable expense allowance of
3% of the gross proceeds of this offering that will be paid to Paulson
Investment Company, Inc., the managing underwriter of this offering. We have
granted to the underwriters a 45 day option to purchase up to 210,000 additional
shares to cover over-allotments. We will also grant to the managing underwriter
a five-year warrant to purchase up to 140,000 additional shares.

PAULSON INVESTMENT COMPANY, INC.

, 2000
<PAGE> 3

This Prospectus contains forward-looking statements based on our current
expectations about our company and our business. You can identify these
forward-looking statements because they usually contain words such as "expect,"
"believe," "plan," "intend," "anticipate" and other similar expressions. These
forward-looking statements involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of the factors described in the "Risk Factors" section
and elsewhere in this Prospectus.

2
<PAGE> 4

SUMMARY

You should read the following summary together with the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this Prospectus.

OUR BUSINESS

AdStar has developed a one-stop marketplace on the Web for advertisers to
buy classified ads. We enable advertisers, by accessing our Advertise123.com Web
site, to compose, schedule, and purchase classified advertising from a large
number of print and online publishers. Our service permits both professional and
non-professional advertisers, including the general public, to create and submit
to one or many publishers any number of ads, 24 hours a day, seven days a week,
using any standard Web browser. Our Web-based service is an outgrowth of our
historical business as the largest provider of remote entry for classified ads
into newspapers in the United States.

Since our initial public offering in December 1999, we have moved quickly
to build a critical mass of publications accessible through Advertise123.com.
Over the last six months, the number of print and online publications accessible
at the end of the months specified below, the number of designated market areas
("DMAs") within the top 100 in the United States which we cover and,
consequently, the number of transactions that we process online have grown as
follows:

<TABLE>
<CAPTION>
DEC-99 FEB-00 MARCH-00 JUNE-00
------ ------ -------- -------
<S> <C> <C> <C> <C>
Print publications...................................... 5 29 60 80
Top 100 DMA coverage.................................... 3 10 31 50
Online publications..................................... 1 23 28 30
Transactions processed during the month................. 540 2,150 3,654 5,500
</TABLE>

Now that we can offer advertisers a critical mass of publishers, we are
primarily focused on our next goals: increasing transactions by advertisers on
our Web site and enhancing the services offered on that site. Because we have
only recently achieved substantial DMA coverage, revenues from our Web-based
services have been small.

3
<PAGE> 5

THE OFFERING

Securities Offered............ 1,400,000 shares of common stock. For more
information, see "Description of Securities."

Common Stock Outstanding...... 2,833,185 shares of common stock were
outstanding on June 30, 2000. After the
offering, there will be 4,233,185 shares
outstanding excluding up to:

- 1,150,000 shares underlying publicly
traded warrants

- 200,000 shares underlying warrants
granted to Paulson Investment Company,
Inc., as the managing underwriter in our
initial public offering

- 438,164 shares underlying outstanding
options and other warrants; and

- 140,000 shares underlying the managing
underwriter's warrant

Risk Factors.................. An investment in the shares involves a high
degree of risk. You should not consider this
offer if you cannot afford to lose your entire
investment. Please refer to "Risk Factors" for
factors you should consider.

Use of Proceeds............... The net proceeds from the offering, estimated
to be approximately $2,885,000, will be used
for sales and marketing, continued development
and enhancement of Advertise123.com, and for
working capital. For more information regarding
how we will use the proceeds, please refer to
"Use of Proceeds."

4
<PAGE> 6

SUMMARY FINANCIAL DATA

The following tables set forth operations and balance sheet data for
AdStar. This information should be read in conjunction with the Financial
Statements and Notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.

STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................... $1,148,233 $1,559,361 $ 1,685,144 $ 781,043 $ 1,192,093
Cost of revenues............... 565,329 800,532 1,020,882 489,817 1,016,630
---------- ---------- ----------- ---------- -----------
Gross profit................. 582,904 758,829 664,262 291,226 175,463
Sales and administrative
expenses..................... 634,029 820,574 2,118,857 662,625 1,729,116
Development costs.............. -- -- 904,009 -- 760,804
Abandoned offering expenses,
net.......................... -- -- 171,854 -- --
---------- ---------- ----------- ---------- -----------
Loss from operations......... (51,125) (61,745) (2,530,458) (371,399) (2,314,457)
Interest income (expense),
net.......................... (7,873) (4,518) (333,464) (45,800) 32,297
---------- ---------- ----------- ---------- -----------
Loss before taxes............ (58,998) (66,263) (2,863,922) (417,119) (2,282,160)
Provision for income taxes..... (823) (2,760) (800) (400) (400)
---------- ---------- ----------- ---------- -----------
Net loss..................... $ (59,821) $ (69,023) $(2,864,722) $ (417,599) $(2,282,560)
========== ========== =========== ========== ===========
Loss per share -- basic and
diluted...................... $ (0.04) $ (0.05) $ (1.90) $ (0.28) $ (0.81)
Weighted average number of
shares -- basic and
diluted...................... 1,405,723 1,458,393 1,510,093 1,479,664 2,829,673
</TABLE>

The following table shows actual and as adjusted balance sheet data. The as
adjusted information gives effect to:

- the sale of 1,400,000 shares offered by us in this prospectus at an
assumed public offering price of $2.50 per share;

- payment of the underwriting discount and estimated offering expenses
payable by us.

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $1,662,991 $4,547,991
Working capital............................................. 1,386,229 4,271,229
Total assets................................................ 2,924,850 5,809,850
Notes payable............................................... 1,100,000 1,100,000
Total liabilities........................................... 1,804,178 1,804,178
Total stockholders' equity.................................. 1,120,672 4,005,672
</TABLE>

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

We were incorporated in New York in 1991 as the successor to a business
that was started in 1986. On August 31, 1999 we reincorporated in Delaware. Our
principal executive office is located at 4553 Glencoe Avenue, Suite 300, Marina
del Rey, California 90292. Our telephone number is (310) 577-8255 and our Web
site addresses are AdStar.com and Advertise123.com. Information contained on our
Web sites is not a part of this prospectus.

Unless otherwise indicated, all information in this prospectus assumes that
the underwriters will not exercise their over-allotment option.

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<PAGE> 7

RISK FACTORS

This offering involves a high degree of risk. Each prospective investor
should carefully consider the risks described below and other information in
this prospectus before making an investment decision.

OUR ONLINE BUSINESS HAS A LIMITED HISTORY AND MAY NOT BE SUCCESSFUL.

We did not begin to offer our remote ad entry services over the Internet
until June 1999 and offered only a limited number of publications in which to
purchase classified advertising until March 2000. Moreover, we know of no other
company that accepts classified ads online for publication both online and in
print. Accordingly, we cannot guarantee that we will be able to generate the
public interest necessary to sustain our business model. You must particularly
consider the risks and difficulties frequently encountered by an early-stage
business in a rapidly evolving market, which makes our ability to implement
successfully our business plan uncertain. These risks include uncertainty as to
whether we will be able to:

- attract a large number of advertisers to our Web sites;

- develop profitable pricing models for our transaction fees for ad
placements over our Web sites;

- increase awareness of our Advertise123.com brand;

- maintain current and develop new distribution relationships with highly
trafficked sites of Web publishers;

- respond effectively to competitive pressures; and

- attract, retain and motivate qualified personnel.

Our failure to address these risks successfully will adversely affect our
ability to attain profitability.

OUR UNPROVEN ONLINE 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 receive:

- transaction fees for ads processed on our Web sites except where we agree
to waive our fees in transactions between advertisers using our licensed
software with newspapers paying us license fees;

- fixed fees to be paid by online media clients;

- fees from media and advertising companies who advertise on our Web sites;
and

- fees from advertisers and newspapers for statistical reports generated by
data assembled from ads processed on our Web sites.

Our expectations with respect to future revenues are principally based on
our ability to attract advertisers and publications to our Web sites and thus
facilitate ad placements through these sites. In particular, our assumption that
we will not encounter any significant resistance by publishers to accepting
Web-based ads obtained by us may be wrong. Publishers might view transactions in
which we deduct 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 costs. If because of these
factors, the revenues are not generated in the amounts and within the time
periods necessary to sustain our operations our prospects for our online
business will be seriously compromised.

WE HAVE A HISTORY OF LOSSES AND WE EXPECT CONTINUED LOSSES.

For the years ended December 31, 1997, 1998 and 1999 we incurred net losses
of approximately $60,000, $69,000, and $2,865,000 respectively. Our 1999 loss
was principally attributable to expenses incurred in starting our online
business. For the six months ended June 30, 2000 we incurred a net loss of
$2,283,000. Our 2000 six-month loss was principally attributable to expenses
incurred in expanding our online business. We expect to continue to incur losses
until we are able to increase our Internet revenues significantly from
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<PAGE> 8

transaction fees based on the number of ad purchases transacted on our Web
sites. Our operating expenses are expected to continue to increase significantly
in connection with our proposed expanded activities. Our future profitability
will depend on our ability to increase our online advertiser base and
transaction revenues while controlling our costs. We may not be able to achieve
profitability.

GROWTH OF OUR HISTORICAL ADSTAR BUSINESS IS LIMITED.

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 new online business which we
believe eliminates these barriers. Our belief that we can successfully expand
our business by migrating to a delivery system over the Internet may not be
correct.

WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS.

Our ability to grow depends significantly on our ability to attract
advertisers to our Web sites, which means having an adequate advertising and
marketing budget and adequate funds to continue to enhance our Web sites. We
expect that the net proceeds from this offering together with our existing
resources will be sufficient to meet our cash needs for at least 12 months.
However, if the actual costs of attracting advertisers and enhancing our Web
sites are higher than projected or the revenues from our new operations fall
below our current expectations, we may need additional financing before the
expiration of 12 months. 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.

OUR EARLY STAGE AND UNTESTED INTERNET OPERATIONS ARE PARTICULARLY VULNERABLE TO
BREAKDOWNS IN SERVICE.

As an early stage Internet business, we are particularly vulnerable to
break downs and interruptions in our service 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. However, as our service
continues to be tested by repeated and continuous use our vulnerability to
interruptions in service increases. 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. If this were
to occur, we will not be successful in building an online business.

THE SUCCESSFUL INTRODUCTION OF OUR ONLINE BUSINESS MAY DIMINISH THE VALUE OF OUR
HISTORICAL LICENSED SOFTWARE BUSINESS, CAUSING MANY OF OUR NEWSPAPER CUSTOMERS
TO TERMINATE OR NOT RENEW THEIR SOFTWARE LICENSE AGREEMENTS.

Once our Web site is fully implemented, its versatility may encourage many
of the more than 1,800 large advertisers currently using our AdStar software, to
process their ad buys on Advertise123.com. This in turn may reduce the value of
our licensed software to our newspaper customers which could discourage them
from renewing their license agreements with us. We have experienced a decline in
our revenues from our historical business from $1,559,000 in 1998 to $1,418,000
in 1999 and from $739,000 in the first six months of 1999 to $668,000 in the
first six months of 2000. Our loss of any revenue source would need to be
replaced with transaction fees from ad buys on our Web sites. The failure to
replace license fees with transaction fees will adversely affect our revenue and
cash flow. We received revenues from our Internet business of $267,000 in 1999
and $524,000 in the first six months of 2000.

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<PAGE> 9

OUR ONLINE BUSINESS COULD FACE COMPETITION FROM MANY SOURCES.

We are unaware of any company which provides a centralized online sales
channel for the selection, transaction and processing of classified ads in
multiple print and online publications. Those publishers which accept and
process ads by traditional means like telephone, facsimile transmission and
printed copy submissions are potential competitors. Advertise123.com seeks to
attract advertisers to its Web site to capture the transaction whereby they will
select and process classified ads before they contact a publisher directly. Our
ability to compete successfully will depend on the perceived convenience of our
services, ease of use and the amount of fees we charge to process ads through
Advertise123.com.

In addition, companies not now in the business of providing online 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 online 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 us to new or emerging technologies and can devote greater resources than us
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.

WE MAY BE UNABLE TO MANAGE OUR GROWTH.

Our business plan contemplates a sizable increase in the publications we
offer on our Web sites, in the advertisers using our Web sites, in the
distribution arrangements we enter into and in the number of transactions we
process. We are trying to manage this growth while containing our employee
growth. We contemplate growing from 38 employees at June 30, 2000 to 42 by
December 31, 2000. In the event we need to increase the number of our employees
beyond projected levels, we would place a significant strain on our managerial,
operational and financial resources. In either event, to handle our projected
growth in customer base and operations we must install and operate new and more
complex accounting, management and telephone systems. 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.

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 ONLINE BUSINESS.

Our performance is substantially dependent on the performance of our senior
management and key technical personnel and on our ability to attract the new
Internet oriented employees required in the implementation of our business plan.
Our success depends in the first instance on the continued efforts of our Chief
Executive Officer, Leslie Bernhard, and of our Executive Vice President and
Chief Technical Officer, Eli Rousso. 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 online 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.

WE ARE VULNERABLE TO POTENTIAL LAWSUITS REGARDING AD CONTENT OR SYSTEM FAILURE.

Because we facilitate the placement of advertisements in print and online
publications, potential claims may be asserted against us for negligence,
defamation or personal injury, or based on other theories, due to the nature of
the content of these advertisements. Our technology does not contemplate our
reviewing classified advertisements 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 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
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<PAGE> 10

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 LIMITED INTERNET EXPERIENCE MAY AFFECT OUR ABILITY TO DEAL EFFECTIVELY WITH
TECHNOLOGICAL CHANGE.

Our online business is characterized by:

- rapidly changing technology;

- evolving industry standards;

- frequent new product and service announcements;

- introductions and enhancements; and

- changing customer demands.

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

- 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 online 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 solutions, or that any new solutions or enhancements to existing
solutions 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
solutions or enhancements to existing solutions in a timely manner or in
response to changing market conditions or customer requirements, or if our
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 DO NOT OWN ANY PATENTS AND 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. Although we
are in the process of determining whether patent protection is available for
certain aspects of our 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 whether or not we obtain patent protection.

We have recently begun to use the trademark and Internet domain name
Advertise123.com and have applied for registration of the trademark. We cannot
guarantee that our application for a registration of this trademark will be
granted and, if granted, that it will not be successfully challenged by others
or invalidated through administrative process or litigation. Further, if our
Advertise123.com trademark application is not granted due to the prior rights of
a third party we may not be able to obtain a license on commercially reasonable
terms to allow us to continue to use this trademark.

Despite our existing trademark rights in the marks AD-STAR, from use and
registration, and Advertise123.com, from use and our proposed expanded federal
protection for these marks, 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

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<PAGE> 11

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 that we may be unable to stop.

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. See "Business -- Intellectual Property."

OUR OPERATIONS AND SERVICES ARE VULNERABLE TO NATURAL DISASTERS.

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 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 are a reason for user decisions to stop using access
services. Accordingly, any disruption of our services due to system 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.

CONCENTRATION OF VOTING RIGHTS MAY PREVENT YOU FROM HAVING ANY VOICE IN
CORPORATE AFFAIRS.

Leslie Bernhard and Eli Rousso will each have voting rights with respect to
17.3% of our issued and outstanding shares of common stock after this offering.
With these holdings, Ms. Bernhard and Mr. Rousso may be able to control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing any change in how and by whom
we are controlled.

OUR CORPORATE DOCUMENTS MAY LIMIT RIGHTS OF STOCKHOLDERS.

Our Board of Directors has the authority to issue up to 5,000,000 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 company which you may deem to be in the
best interests of the company.

THE UNITS IN OUR INITIAL PUBLIC OFFERING MAY HAVE BEEN OFFERED OR SOLD IN
VIOLATION OF THE SECURITIES ACT OF 1933.

In a listing agreement with the managing underwriter in our December 1999
initial public offering, IPO.COM was authorized to include our prospectus on the
IPO.COM Web site. The listing agreement neither authorized nor requested that
any additional information about us be provided. However, IPO.COM provided, on
other pages reachable from its Web site home page, summary material that it
extracted from our prospectus, relating to us and our initial public offering.
Those pages also provided a direct link to our Web

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<PAGE> 12

site. If, the listing agreement created an agency relationship with the managing
underwriter and, through the managing underwriter, with us, then the summary
material contained on the IPO.COM Web site and the information contained in our
Web site could be deemed to constitute a prospectus that does not meet the
requirements of the Securities Act of 1933.

If there was a violation of the Securities Act, then for a period of one
year from the date of their purchase of units, investors in the recent offering
could bring a claim against us and our underwriters. In that action investors
would seek recovery of the consideration they paid for their units or, if these
persons had already sold the units, for damages resulting from their purchase
and sale of these securities. Recovery would be based on the theory that the
summary materials or the materials contained in our Web site were offering
materials for which we are responsible and which constitute a violation of the
Securities Act. If plaintiffs were to prevail, then damages could total up to
$6,900,000, plus interest, based on the initial public offering price of $6.00
per unit for 1,150,000 units and further assuming investors seek recovery or
damages after a loss of their entire investment and all purchasers in the
offering are entitled to this recovery. We are not aware that any investor in
our initial public offering has asserted or is contemplating a claim based on
these facts and we expect that investors would not be inclined to assert a claim
for rescission or damages unless, during the one-year period following the date
of their purchase of securities, the trading prices of the securities fall
significantly below the initial public offering price. If litigation was
instituted and if the plaintiffs were to prevail, our business, results of
operations and financial condition would be harmed. However, we believe we have
no material liability and would contest any action of this kind vigorously. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISK OF LOW-PRICED SECURITIES.

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 SmallCap 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 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
the company's securities are delisted from The Nasdaq SmallCap Market, may
restrict the ability of stockholders to sell our common stock and warrants in
the secondary market.

POSSIBLE DELISTING OF SECURITIES FROM NASDAQ.

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 $2,000,000 in
net tangible assets, 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. 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

11
<PAGE> 13

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 the company, and lower prices for our
securities than might otherwise be obtained.

USE OF PROCEEDS

The net proceeds to us from the sale of shares being offered by this
Prospectus, assuming a public offering price of $2.50 per share, are estimated
to be $2,885,000 after deducting the underwriting discounts and estimated
offering expenses. The following table sets forth the principal categories of
expense for which the offering proceeds are to be used, based on our current
budget. We expect that our actual allocation of proceeds will vary, possibly
substantially, from our current budget as a result of unforeseen developments.

<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE PERCENTAGE
ALLOCATION OF NET PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
-------------------------- ------------- ----------------------
<S> <C> <C>
Sales and marketing........................................ $1,750,000 60%
Product development and enhancement........................ 1,000,000 35%
General corporate purposes including working capital....... 135,000 5%
---------- ---
Total...................................................... $2,885,000 100%
</TABLE>

Sales and marketing includes electronic, print media and direct mail
advertising as well as marketing efforts directed at advertisers, publishers and
prospective strategic partners.

Product development and enhancement includes expanding site capability,
creating more user options, adding services for advertisers and making the site
more attractive to higher volume advertisers.

The remaining net proceeds will be used for general corporate purposes,
including working capital and capital expenditures. The amounts we actually
expend for general corporate purposes may vary significantly and will depend on
a number of factors, including the amount of our future revenues and the other
factors described under "Risk Factors." Our management will retain broad
discretion in the allocation of the net proceeds of this offering. A portion of
the net proceeds may also be used for strategic partnerships or to acquire or
invest in complementary businesses, technologies or product lines. We have no
current agreements or commitments and we are not currently engaged in any
negotiations with respect to any acquisitions. Pending these uses, the net
proceeds of this offering will be invested in short term, interest-bearing,
investment grade securities.

12
<PAGE> 14

PRICE RANGE OF COMMON STOCK

Our common stock commenced trading on The Nasdaq Small Cap Market under the
symbol "ADST" on January 18, 2000. The following table sets forth, for each of
the periods indicated, the high and low closing bid prices per share as reported
on The Nasdaq Small Cap Market. These quotations reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
CLOSING BID PRICES
------------------
2000 HIGH LOW
---- -------- ------
<S> <C> <C>
First quarter............................................... $10.875 $6.25
Second quarter.............................................. 7.125 3.25
Third quarter (through August 4)............................ 4.750 2.375
------- -----
</TABLE>

For a recent closing sale price of our common stock, please see the cover
page of this prospectus. As of August 7, 2000 we had 17 holders of record of our
common stock.

DIVIDEND POLICY

Through June 30, 1999 we were a "Sub S" corporation for income tax
purposes, owned by persons active in the business. From time to time we declared
and paid cash dividends on our common stock. We intend to retain future
earnings, if any, to finance the expansion of our business and do not expect to
pay any cash dividends on our common stock in the foreseeable future.

13
<PAGE> 15

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000.

- on an actual basis;

- on an as adjusted basis to give effect to:

- the sale of the 1,400,000 shares offered by us in this prospectus
assuming a public offering price of $2.50 per share; and

- payment of the underwriting discounts and estimated offering expenses
that we will pay.

<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Note payable................................................ $ 1,100,000 $ 1,100,000
----------- -----------
Stockholders' equity:
Preferred stock, par value $0.0001; authorized 5,000,000
shares; none issued and outstanding....................
Common stock, par value $0.0001; authorized 10,000,000;
Shares issued and outstanding: 2,833,185 actual;
4,233,185 as adjusted(1)............................... 283 423
Additional paid-in capital................................ 5,963,020 8,847,880
Deferred compensation..................................... (112,948) (112,948)
Accumulated deficit....................................... (4,729,683) (4,729,683)
----------- -----------
Total stockholders' equity............................. 1,120,672 4,005,672
----------- -----------
Total capitalization................................... $ 2,220,672 $ 5,105,672
=========== ===========
</TABLE>

---------------
(1) Excludes (i) 348,163 shares issuable upon the exercise of stock options
granted to employees, (ii) 200,000 shares issuable on the exercise of
warrants issued to the managing underwriter in our initial public offering,
(iii) 90,001 shares issuable upon the exercise of warrants, (iv) 1,150,000
shares issuable on the exercise of warrants sold in our initial public
offering in December 1999, and (v) 140,000 shares issuable upon the exercise
of warrants to be issued to the managing underwriter in this offering.

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<PAGE> 16

SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The statement of operations
data for each of the years in the three-year period ended December 31, 1999, and
the balance sheet data at December 31, 1999, are derived from financial
statements of AdStar.com, Inc., which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this Prospectus. The statement of operations data for the six month periods
ended June 30, 1999 and 2000, and the balance sheet data for June 30, 2000 are
derived from unaudited financial statements of AdStar.com, Inc. The unaudited
financial statements have been prepared on substantially the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the results of operations for such periods. historical
results are not necessarily indicative of the results to be expected in the
future, and the results of interim periods are not necessarily indicative of
results for the entire year.

STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $1,148,233 $1,559,361 $ 1,685,144 $ 781,043 $ 1,192,093
Cost of revenues................... 565,329 800,532 1,020,882 489,817 1,016,630
---------- ---------- ----------- --------- -----------
Gross profit..................... 582,904 758,829 664,262 291,226 175,463
Sales and administrative
expenses......................... 634,029 820,574 2,118,857 662,625 1,729,116
Development costs.................. -- -- 904,009 -- 760,804
Abandoned offering expenses, net... -- -- 171,854 -- --
---------- ---------- ----------- --------- -----------
Loss from operations............. (51,125) (61,745) (2,530,458) (371,399) (2,314,457)
Interest income (expense), net..... (7,873) (4,518) (333,464) (45,800) 32,297
---------- ---------- ----------- --------- -----------
Loss before taxes................ (58,998) (66,263) (2,863,922) (417,119) (2,282,160)
Provision for income taxes......... (823) (2,760) (800) (400) (400)
---------- ---------- ----------- --------- -----------
Net loss......................... $ (59,821) $ (69,023) $(2,864,722) $(417,599) $(2,282,560)
========== ========== =========== ========= ===========
Loss per share -- basic and
diluted.......................... $ (0.04) $ (0.05) $ (1.90) $ (0.28) $ (0.81)
Weighted average number of
shares -- basic and diluted...... 1,405,723 1,458,393 1,510,093 1,479,664 2,829,673
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
<S> <C> <C>
Cash and cash equivalents................................... $ 5,602,493 $1,662,991
Working capital............................................. 3,756,122 1,386,229
Total assets................................................ 6,809,972 2,924,850
Notes payable, net of current portion....................... 1,100,000 1,100,000
Total liabilities........................................... 3,543,662 1,804,178
Total stockholders' equity.................................. 3,266,310 1,120,672
</TABLE>

15
<PAGE> 17

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

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 Prospectus.
This discussion contains forward-looking statements that involve risk and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

We have developed a one-stop marketplace on the Web for advertisers to buy
classified ads. We enable advertisers, by accessing our Web site on their
computers, to compose, schedule and purchase classified advertising from a large
number of print and online publishers. Our service permits both professional and
non-professional advertisers, including the general public, to create and submit
to one or many publishers any number of ads, 24 hours a day, seven days a week,
using any standard Web browser.

This new Web-based service is an outgrowth of our historical business that,
since 1986, has offered professional advertisers the ability to place ads
electronically with a number of the largest newspapers in the United States
based on circulation. Using this system, we have become the largest provider of
remote entry for classified ads into newspapers in the United States.

In 1999 we commenced our transition from software provider to an Internet
marketplace for print and online classified advertising. We received our first
transaction fees from Internet business in June 1999 with one online publication
available on the site. By the end of the year we had five print and one online
publications available on the site and Internet revenues accounted for
approximately 16% of our total revenues for the year ended December 31, 1999. In
addition, we processed approximately $550,000 of classified advertising through
our classified advertising marketplace, Advertise123.com, and private-label
sites.

In the first six months of 2000 we have moved rapidly to build a critical
mass of publications on our Web site. On February 23, 2000, we announced that we
had publications available to advertisers on Advertise123.com that enabled them
to place ads in the top 10 designated market areas, or DMAs, in the U. S. On
March 15, 2000, we announced that we had expanded market coverage to the top 20
DMAs; on March 29, 2000 we had expanded coverage to the top 31 DMAs; and on June
1, 2000 we had expanded coverage to the top 50 DMAs. By the end of the second
quarter we had approximately 80 print and 30 online publications available on
our Web site, and Internet revenues comprised 44% of our revenues for the six
months ended June 30, 2000. In addition we processed approximately $1,612,000 of
classified advertising through Advertise123.com and private-label sites in the
six-month period.

Now that we can offer advertisers a critical mass of publishers, we are
focused on bringing advertisers to our site to increase transaction volume and
enhancing the services offered on that site. To bring more advertisers to
publishers through our Web site, we have established relationships with
publishers, vertical online Web sites in the major classified advertising
categories, with an auction tools site and with search engine sites who will
provide their customers with easy access to our site. Additionally we began an
advertising program in the latter part of July 2000 in high traffic Web
environments.

Revenues from our software business consist of licensing fees and fees for
advertiser service and support charged to publishers. In our Web-based service
our charges are currently based on the advertising fee charged by the publisher.
In certain cases we receive a percentage of the advertising fee charged by the
publisher and in others we mark-up the advertising fee and are paid by the
advertiser. We expect that in the future some of our revenues could be based on
a fixed transaction fee as well. As our business continues its transition from a
software service fee model to a transaction fee based model, there are likely to
be material changes in our financial statements, including changes in revenue
recognition policies, gross margin, timing of cash flows and volume of accounts
receivable as a percentage of revenues.

Our level of revenues had been generally sufficient to support our
historical business. In developing our Web-based system we began to incur
expenses in 1998 that could not be offset by the revenues generated by
16
<PAGE> 18

our historical business. These expenses caused us to incur losses in 1998 and
1999 and in the first six months of 2000. We intend to continue to make
significant financial investments to support publishers on our Web site,
Advertise123.com, for content development, technology and infrastructure
development and marketing and advertising expense. As a result, we believe that
we will incur operating losses and negative cash flows from operations before
the build-up in revenues from our Internet business offsets anticipated
increases in expense. Because we have limited Internet experience, we cannot
accurately forecast the source, magnitude or timing of our future revenues and
therefore cannot forecast if or when we will return to profitability.

Through June 30, 1999, we had elected to be taxed under Subchapter S of the
Internal Revenue Code of 1986. Effective July 1, 1999, we have been taxed as a
Subchapter C corporation, and therefore pay tax on our income, if any, at the
corporate level. This tax will be recorded as an expense and will affect our
operating results. Because we were a Subchapter S corporation through June 30,
1999, we have accumulated loss or credit carryforwards only since that date that
are usable to offset future income, if any. As a result of these changes, our
historical financial statements are not necessarily reflective of future
operating results.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues............................................... 100% 100% 100% 100% 100%
Cost of revenues....................................... 49% 51% 61% 63% 85%
--- --- ---- --- ----
Gross profit........................................... 51% 49% 39% 37% 15%
Sales and administrative expenses...................... 55% 53% 126% 85% 145%
Development costs...................................... -- -- 54% -- 64%
Abandoned offering expenses, net....................... -- -- 10% -- --
--- --- ---- --- ----
Loss from operations................................... (4)% (4)% (150)% (47)% (194)%
Interest income (expense), net......................... (1)% -- (20)% (6)% 3%
--- --- ---- --- ----
Loss before taxes...................................... (5)% (4)% (170)% (53)% (191)%
Provision for taxes.................................... -- -- -- -- --
--- --- ---- --- ----
Net loss............................................... (5)% (4)% (170)% (53)% (191)%
</TABLE>

SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999

Revenues. Revenues increased to approximately $1,192,000 for the six-month
period ended June 30, 2000 from $781,000 in the comparable 1999 period,
representing 53% growth. This increase was due to the recording of Internet
revenues of approximately $524,000 in the 2000 period versus $30,000 in the 1999
period. We earned our first Internet revenues in June 1999. Internet revenues
represented approximately 44% of our total revenues in the first six months of
2000. As we shifted our focus in 1999 to our Website, we also shifted resources
from building our software service business. Consequently, software
installation, license and end-user support revenues (referred to as "service
revenues") were down 2% to approximately $617,000 for the 2000 period compared
with approximately $651,000 for the comparable 1999 period. While we expect to
continue to recognize service revenues from existing and potential new software
licensing contracts, we expect that Internet transaction based revenues will
eventually become our principal source of revenues. Hardware sales were
approximately $51,000 in the first six months of 2000 compared with
approximately $88,000 in the 1999 period.

Cost of Revenues. Cost of revenues consists primarily of payments to
publications for Internet transactions on our Website, credit card processing
costs for transactions on our Website, costs to configure and install the AdStar
software into the publishing systems of newspapers, to configure end-user
software for the newspaper's advertiser clients, to provide customer training
and end-user support and payment for

17
<PAGE> 19

hardware and royalty fees. These costs increased to approximately $1,017,000 for
the first six months of 2000 compared with $490,000 for the comparable 1999
period. Cost of Internet transactions was $479,000 in 2000, representing
payments to publications and credit card companies and processors. In the
comparable 1999 period, Internet transaction costs amounted to $27,000.
Personnel costs associated with cost of revenues rose 25% to $305,000 in 2000
compared with $244,000 in 1999 for added technical support and end user support
staff and associated recruitment expenses necessary to grow our business.
Hardware expense decreased to $46,000 in 2000 from $78,000 in 1999. We view
sales of hardware as an accommodation to our clients coincident to the
installation of our software in the front-end publishing systems of newspapers.
Royalty expense relating to our fax product increased to $56,000 in 2000 from
$18,000 in 1999, due to the timing of installations. Cost of revenues increased
as a percentage of revenues because our Web business is a higher volume, lower
margin business than our service business.

Sales and Administrative Expenses. Sales and administrative expense
consists primarily of salaries of business development personnel, sales and
marketing personnel, executive and administrative personnel, and other
advertising and sales promotion, marketing, trade show and travel expense. These
personnel expenses increased to $805,000 in the first half of 2000 from $382,000
in 1999, representing a tripling in our marketing personnel and the employment
of temporary personnel to expand our business. Our personnel additions were
primarily for marketing, business development and operations for our Web-based
service. We expect to incur additional sales and administrative expenses as we
hire additional personnel and as we develop our Web-based service. Travel
expense, primarily associated with business development and investor relations,
increased to $174,000 in the 2000 period from $87,000 in the comparable 1999
period. Our advertising, sales promotion and trade show expense grew to $221,000
in the 2000 period compared with $41,000 for the same period in 1999 reflecting
our increased business development efforts.

Development Costs. Development costs of $761,000 for the first six months
of 2000 represent expenses to design, configure and build our branded and
private label sites. The primary components of this expense were technical and
design consultant fees of $336,000 and employee expense of $298,000. There were
no such expenses in the comparable prior period.

Interest Income (Expense), Net. Interest income was $74,000 in the first
half of 2000 attributable to investment available cash in short-term time
deposits and money market accounts at commercial banks. Interest expense was
$42,000 in the first six months of 2000 compared with $46,000 in 1999. The
interest expense in 1999 pertained to $1,050,000 principal amount of 12%
convertible notes issued in March and April 1999 and a 10% note in the amount of
$752,000 issued in March 1999. The 12% convertible notes were converted into
common stock in December 1999 when we closed our initial public offering and the
10% note was repaid from the proceeds of that offering in January 2000. The
interest expense in 2000 related primarily to our 6% note payable issued in
October 1999.

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

Revenues. Revenues increased to approximately $1,685,000 for 1999 from
$1,559,000 in 1998 and $1,148,000 for 1997. These levels represent growth of
approximately 8% for 1999 over 1998 and 36% for 1998 over 1997. The increase in
1999 was due primarily to the recording of our first Internet revenues,
beginning in June 1999, of $267,000. Internet revenues represented approximately
16% of our total revenues in 1999. As we shifted our focus in 1999 to our
Website, we also shifted resources from building our software service business.
Consequently, software installation, license and end-user support revenues
(referred to as "service revenues") declined to $1,286,000 for 1999 from
$1,465,000 for 1998. The increase in revenue from 1997 to 1998 was due primarily
to the large volume of installation work performed in 1998 for new and existing
customers. Three customers installed the AdStar fax system to complement their
pre-existing basic systems and one additional existing customer upgraded its
system. Additionally, two new customers were added in 1998. While we expect to
continue to recognize service revenues from existing and potential new software
licensing contracts, we expect that Internet transaction based revenues will
increase at a faster rate than service revenues and will eventually become our
principal source of revenues. Hardware sales were approximately $132,000 in
1999, $94,000 in 1998 and $8,700 in 1997.

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<PAGE> 20

Cost of Revenues. Cost of revenues consists primarily of payments to
publications for transactions placed on our Website system, payments for credit
card processing for transactions placed on our Website, payments to configure
and install the AdStar software into the publishing systems of newspapers, to
configure end-user software for the newspaper's advertiser clients, to provide
customer training and end-user support, and to pay costs of hardware sales and
royalty fees. These costs increased to approximately $1,020,000 for 1999, as
compared with approximately $801,000 in 1998. Cost of Internet transactions was
$231,000, representing payments to publications and credit card companies and
processors. Personnel costs associated with cost of revenues increased by 26% to
$428,600 in 1999 compared with $339,000 in 1998 as we added technical support
and end user support staff. Hardware expense increased to $116,000 in 1999 from
$86,000 in 1998. These increases were offset in part by a reduction in royalty
expense relating to the fax product to $17,000 in 1999 from $100,000 in 1998 due
to the timing of installations. Cost of revenues increased as a percentage of
net revenues because our Web business is a higher volume lower margin business
than our service business and also due to increases in hardware sales at a lower
margin than our service revenues. We view sales of hardware as an accommodation
to our clients coincident to the installation of our software in the front-end
publishing systems of newspapers. Cost of revenues increased by 42% in 1998 to
$801,000 from $565,000 in 1997. As a percentage of net revenues, cost of
revenues increased by 2% from 1997 to 1998 as a result of an increase in lower
margin hardware sales.

Sales and Administrative Expenses. Sales and administrative expense
consists primarily of salaries of business development personnel, sales and
marketing personnel, executive and administrative personnel, and other
advertising and sales promotion, marketing, trade show and travel expense. These
personnel costs increased to $907,000 in 1999 from $415,000 in 1998, primarily
because of the addition of business development personnel for our Web-based
service. We expect to incur additional sales and administrative expenses as we
hire additional personnel and incur additional expenses related to the
development of our Web-based service. Travel expense, primarily associated with
business development, increased to $321,000 in 1999 from $110,000 in 1998.
Accounting and legal fees grew to $203,000 in 1999 from $35,000 in 1998 as we
made the transition from a private company to a publicly owned company. Sales
and administrative expense increased by approximately 29% to $821,000 in 1998
compared with $634,000 in 1997. The primary factors accounting for the increase
were compensation and recruitment costs that increased to $415,000 in 1998 from
$374,000 in 1997 and travel expenses that increased from $40,000 in 1997 to
$110,000 in 1998.

Development Costs. Web site development costs in 1999 represented expenses
to design, configure and build our branded and private label sites. The primary
components of this expense were technical and design consultant fees of $508,000
and employee expense of $303,000.

Abandoned Offering Expenses, Net. In September 1999, a proposed public
offering of our securities was declared effective but did not close. In
connection with that offering we incurred expenses of approximately $672,000. We
also received $500,000 in reimbursement of expenses from the representative of
the underwriters, which has been recorded net of the actual expenses incurred.

Interest Expense. Interest expense increased for 1999 to $333,000 from
$4,500 in 1998 due to the issuance by us of $1,050,000 of 12% convertible notes
in March and April 1999, a 10% note for $751,710 to purchase the technology
intellectual property and software rights for the AdStar technology and a 14%
note for $850,000 issued in July 1999. We also amortized $138,000 of debt
discount related to the issuance of the 14% note. The 12% convertible notes were
converted into common stock in December 1999 when we closed our initial public
offering. We repaid the 14% and 10% notes with proceeds from that offering in
December 1999 and January 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, we had cash and cash equivalents of approximately
$1,663,000.

Net cash used in operations was approximately $2,853,000 for the first six
months of 2000 compared with $762,000 for the comparable 1999 period. The
difference is due primarily to the sizable net loss from operations in 2000 as
we built out our Web presence compared to the smaller net loss in 1999 when we
were

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developing our Web site for its initial commercial application. Also during the
2000 period cash of $859,000 was used to reduce accounts payable largely
attributable to the costs related to our initial public offering completed in
December 1999. Net cash used in investing activities increased to $402,000 in
the six-month period in 2000 compared with $277,000 in the comparable period in
1999 resulting from the purchase and development of computer equipment and
related infrastructure for our Web-based system. Net cash used in financing
activities was approximately $685,000 during the six-month period in 2000
compared to $1,062,000 provided by financing activities in the comparable period
in 1999. The activity in 2000 primarily reflects repayment of notes payable of
$750,000 partially offset by proceeds of an equipment lease financing through
Imperial Bank of $68,000. The equipment lease financing is part of a $100,000
line of credit. In March and April 1999, we sold $1,050,000 of our 12%
convertible notes in a private placement. These notes converted to common stock
in December 1999 upon the closing of our initial public offering. At June 30,
2000, we had no material commitments for capital expenditures. Over the next 12
months we do not expect that our capital expenditures will exceed $200,000.

We anticipate that our operating expenses will continue to run at a level
in excess of our revenues as we continue to build our presence among publishers
and advertisers. Additionally we may evaluate from time to time possible
investments in new businesses, products and technologies to build our business.
We expect that as our revenues trend upward and we monitor our costs closely,
our available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures. We can not guarantee, however, that the
assumed increases in our levels of revenue will occur in a timely manner or that
we will be able to contain our costs in accordance with our plans. We may need
to seek additional funding through public or private financings or other
arrangements. Adequate funds may not be available when needed or may not be
available on terms favorable to us. 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 and adverse
effect on our financial position, results of operations and cash flows.

Net cash used in operations was approximately $1,599,000 for 1999 compared
with net cash provided by operations of $98,600 for 1998. The difference is due
primarily to the sizable net loss from operations in 1999 compared to the small
net loss in 1998. Net cash used in investing activities increased to $406,000 in
1999 compared with $25,500 in 1998 resulting from the purchase and development
of computer equipment and related infrastructure for our Web-based system. Net
cash provided by financing activities was approximately $7,500,000 during 1999
compared to $30,600 used in financing activities in 1998. The activity in 1999
reflects the repayment of three sets of notes and the initial public offering of
our common stock. In March and April 1999, we sold $1,050,000 of our 12%
convertible notes in a private placement. These notes converted to common stock
in December 1999 upon the closing of our initial public offering. Also in March
1999, we purchased the technology, intellectual property and software rights
related to the AdStar technology for approximately $752,000 by the issuance of a
10% note. This note was payable in monthly installments of $8,333 comprising
principal and interest. We repaid this note from the proceeds of our initial
public offering in January 2000. In July 1999, we borrowed $850,000 from
InterEquity Capital Partners, L.P. a small business investment company. The loan
bore interest at 14% per annum and was repayable in 54 equal installments
commencing six months after the date of issuance. The holder of the note also
received 22,534 shares of our common stock. We repaid this note from the
proceeds of our initial public offering in December 1999. In October 1999 we
sold $1,100,000 of our 6% note to Paulson Investment Company, the parent company
of the managing underwriter in our public offering. This note is due in October
2001. In December 1999 we consummated a public offering of 1,150,000 units,
comprised of one share of our common stock and one warrant to purchase one share
of our common stock for gross proceeds of $6,900,000 and net proceeds of
$5,391,000.

Prior to 1999 we financed our business primarily from cash generated by
operations. Net cash provided by operations was approximately $98,600 for 1998
compared to net cash used in operations of $12,800 in 1997, primarily because of
an increase in accounts payable and accrued expenses offset by a reduction in
deferred revenue in 1998. Net cash used in investment activities increased to
$25,500 in 1998 from $12,900 in 1997.

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The difference is attributable to an increase in the purchase of equipment to
support additional personnel. Net cash used in financing activities was
approximately $30,600 in 1998 compared with cash provided by financing
activities in 1997 of $1,500. Principally, these activities involved proceeds
from, and repayments of, capitalized leases or notes payable.

YEAR 2000 READINESS

Many existing computers and computer programs could have malfunctioned or
failed completely when processing dates past the year 1999 because they used
only the last two digits of the year, for example, "98" or "99". This means, for
example, that they could not distinguish between the year 2000 and the year
1900, both of which would be referred to as "00". To date we have experienced no
disruptions due to year 2000 issues.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101") "Revenue Recognition in Financial Statements" which contain the SEC
Staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. We are currently evaluating the impact, if any, on
our financial statements.

In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions
Involving Stock Based Compensation -- an interpretation of APB No. 25." FIN 44
clarifies the accounting for stock based compensation in certain issues. We do
not believe that FIN 44 will have a material effect on our financial statements.

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BUSINESS

AdStar has developed a one-stop marketplace on the Web for advertisers to
buy classified ads. We enable advertisers, by accessing our Advertise123.com Web
site, to plan, schedule, compose and purchase classified advertising from a
large number of print and online publishers. Our service permits both
professional and non-professional advertisers, including the general public, to
create and submit to one or many publishers any number of ads, 24 hours a day,
seven days a week, using any recognized Web browser.

Our new Advertise123.com Web site was launched in June 1999. It permits any
prospective advertiser, individual or commercial, with Internet access, to:

- select print and online publications for ad placement;

- compose and format ads;

- preview ads;

- schedule publication dates;

- price and pay for ads at standard rates; and

- electronically submit ads to publications.

THE CLASSIFIED ADVERTISING MARKET

Classified newspaper advertisements consist of small to full page print and
combined print and graphic or pictorial advertisements that appear in designated
sections and are organized by category. The principal categories of classified
ads are employment, automotive and real estate. Classified ads generated
approximately $18.6 billion in revenues for the approximately 1,500 daily
newspapers in the United States in 1999. These figures do not include classified
advertising in 7,200 weekly newspapers in the United States. Online classified
advertising in 1999 was estimated at $300 million. Classified ads are placed by
advertising agencies, large and small businesses and individuals. Some large
volume advertisers enter into contractual relationships with publishers
providing for discounted rates in return for volume commitments.

Classified advertising in newspapers represents one of the highest margin
revenue sources for newspapers. Although the market for classified advertising
online is relatively new, it is growing rapidly.

Most classified ads are placed by the advertiser or its agent directly with
a newspaper by telephone, fax, e-mail, mail or messenger. The process can be
cumbersome, time consuming and inefficient. Ads placed in this way are
susceptible to error and misunderstanding in the voice or fax transmission or in
re-keying print submissions; they may require multiple phone calls or faxes
especially if ads are being placed in more than one newspaper; they require
familiarization with each newspaper's separate printing and pricing practices;
access both by phone and fax may be available only during limited business hours
and even then access may be difficult in periods of heavy phone activity or
facsimile transmission activity and there is much duplication of work between
the advertiser and the newspaper.

OUR HISTORICAL BUSINESS -- THE ADSTAR REMOTE AD ENTRY SOLUTION

Since 1986 we have enabled large advertisers and ad agencies to place
classified ads electronically in a limited number of large circulation
newspapers at which we have installed proprietary software which we developed.
However, because of the high cost of installation, training and on-going support
at advertiser sites, our system has not been available to many advertisers or
smaller newspapers.

In our historical business, we collect no fees from advertisers. Our
clients are large metropolitan newspapers to which we license our technology.
Our license agreements with newspapers are for terms of three to ten years. We
charge fixed license and maintenance fees and installation charges, based on
circulation and unrelated to the amount of advertising revenue generated by our
licensed technology. License fees range from $25,000 to $100,000 for the first
year and from $6,000 to $18,000 for years two through ten. User support fees
generally range between $6,000 to $30,000 per year during the life of a
contract. Installation fees usually are

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between $15,000 and $30,000, excluding hardware costs. We also offer a fax
management system, for fixed fees also based on circulation under which faxed
ads are received, logged, stored, converted into text files and edited on
split-screens at the newspaper. License fees range from $20,000 to $80,000 for
the first year and from $6,000 to $16,500 for years two through ten.
Implementation fees generally range from $15,000 to $30,000, excluding hardware
costs.

Our 43 current newspaper customers account for approximately 25% of the
total 1999 Sunday newspaper circulation in the United States. These newspapers
include major metropolitan newspapers including The Chicago Tribune, The
Washington Post, The (Newark) Star Ledger, The Los Angeles Times, The Denver
Post, The Miami Herald, The Philadelphia Inquirer, The (New York) Daily News and
The (Atlanta) Journal-Constitution as well as smaller suburban and regional
newspapers like the Ventura County (CA) Star and (NJ) Courier Post. In 1999,
more than 1,800 advertiser locations, including advertising agencies like
Bernard Hodes Advertising, TMP Worldwide, Shaker Advertising, Nationwide
Advertising, and Austin Knight Advertising and large direct advertisers like
Century 21, Coldwell Banker, Ford and General Cinema, placed, by our estimate,
classified advertising valued at more than $175 million in newspaper revenue
with our newspaper customers through our AdStar system. However, this volume
represents less than 1% of the $18.6 billion in newspaper classified advertising
sold in 1999.

OUR MISSION AND GOAL

We believe that by utilizing the Internet, we can make online buying of
classified advertising available to virtually all newspapers and advertisers.
The Advertise 123.com Web-based business we established to achieve this goal is
a natural extension of our historical business. It leverages our knowledge and
experience in classified advertising to establish our credibility in the
Web-based ad taking business. Based on our background and experience we believe
that we are uniquely positioned to establish Advertise123.com as a leading
online e-commerce marketplace for publishers and classified advertisers to
transact business. To realize this goal we have begun to:

- build our online presence by covering the top DMAs in the country with
destination publications;

- rapidly build online business with our established newspaper customer
base and commercial advertiser relationships;

- expand the number of publications accessible on Advertise123.com and
therefore its attractiveness to advertisers by emphasizing the e-commerce
opportunities of our site for building ad revenues as well as the many
proven advantages of remote ad entry over traditional manual methods of
classified ad placement to both advertisers and publishers;

- convert our revenue and pricing model from fixed software license fees to
transaction fees for each ad purchased on Advertise123.com and the
private label and co-branded sites which we host;

- expand our ad placement distribution channels through private label and
co-branded relationships with leading Web publishers which aggregate and
republish print media classified ads but do not provide for ad entry; and

- develop revenue sources for reporting trends and statistical information
of interest to print and online publishers and advertisers assembled from
data collected from our Web sites.

OUR EVOLUTION

We believe that our Web-based ad-taking services represents a major
improvement over the way most classified ads are placed today, with benefits to
the advertiser and the publisher. Most classified ads are manually placed in a
person-to-person exchange by an individual, advertising agency or commercial
entity with each publication in which the advertiser seeks to place an ad. This
process is time consuming and expensive both for the advertiser and the
publisher, particularly for advertisers not familiar with the procedures and
cost schedules of a particular publication. In these cases, the placing of an ad
may involve long or repeat phone calls, fax transmissions or other
communications before an ad is actually placed. The likelihood for

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error resulting in costly refunds or credits is high. We believe our Web-based
ad taking process improves on this business model in the following respects:

- It is accessible for use by any individual, small business or
professional advertiser with access to a computer.

- Classified ads may be placed by any of the above parties not only in our
43 remote entry newspaper customers but in many other print publications
that are available on our site.

- Ads may be placed for dissemination online on any one of several Web
sites engaged in the online distribution of classified ad postings.

- Classified ads from non-contract advertisers can be priced and paid for
in real time; ads from contract advertisers can be submitted directly to
the publisher for invoicing to the advertiser.

- A classified ad can be placed in multiple publications in one
transaction.

- While some of these features are available with various services
currently being offered by others, we believe that we will be the only
company offering all of these features in one service.

USING ADVERTISE123

In order to use our Advertise123.com system, advertisers access our Web
site, or the separate Web sites we maintain for some of our publisher clients,
and compose and format ads for each selected publication. The system
incorporates the style, format and data parameters unique to each publication's
ad posting system. For print ads this feature enables the user to preview the ad
as it will appear in the publication, showing the number of lines or inches of
the ad which in turn usually determines its price. Online publications usually
place a limit on ad size based upon text size and have a fixed price for a given
publication schedule. We can obtain these variables from any publication and
enter them into our system so as to provide the published rate.

If an advertiser pays for the ad by credit card or debit card we access a
separate third-party online service that processes credit card and debit card
payments on the Web. We either mark-up the ad with a fee, which is paid by the
advertiser, or, if we have a pre-existing arrangement, we deduct our fee from
the amount paid to the publisher. In 1999 and the first six months of 2000
CareerPath.com, a new Web based client, accounted for 14% and 29% of our
revenues respectively. Once the ad has been composed and formatted, the ad is
transferred to the publication selected. If it is directed to a newspaper that
is an AdStar licensee, the ad is transferred directly into that newspaper's
computer publishing system. If the ad is directed to a publication which is not
an AdStar licensee or which is an online publisher, then Advertise123.com
transfers it by e-mail, fax or by means of an Internet file transfer protocol
known as an FTP, as instructed by the publisher. We are encouraging more print
publishers to acquire the necessary AdStar software to enable them to receive
ads directly into their computer publishing systems from Advertise123.com; most
online publishers that can accept FTP transfer of ads will be able to use their
own software to accept Advertise123.com ad feeds.

BUILDING AND MARKETING ADVERTISE123

Our objective is to make Advertise123.com the recognized marketplace for
purchasing classified ads in print and online publications. Our first step in
meeting that objective was to aggregate, in the first six-months of this year, a
critical mass of newspapers and Web publishers that are accessible on our site
as ad recipients. The more publishers accessible on Advertise123.com, the more
attractive our service is to advertisers. In order to accelerate the build-up of
Advertise123.com, we added publications to the site by using publicly available
data. Consequently, we were able to control the pace at which publications were
added. We refer to these publications as destination publications. At the same
time we have entered into, and are actively marketing, agreements with
publications that include a broad range of additional services. These services
include developing and operating a private label sites for the placement of
classified ads and offering any special pricing that a publication indicates in
addition to its published rates. We refer to these publications as partner
publications.

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Since our initial public offering in December 1999, we have moved quickly
to build a critical mass of publications accessible through Advertise123.com.
Over the last six months, the number of print and online publications accessible
at the end of the months specified below, the number of designated market areas
("DMAs") within the top 100 in the United States which we cover and,
subsequently, the number of transactions processed by us online have grown as
follows:

<TABLE>
<CAPTION>
DEC-99 FEB-00 MARCH-00 JUNE-00
------ ------ -------- -------
<S> <C> <C> <C> <C>
Print Publications...................................... 5 29 60 80
Top 100 DMA Coverage.................................... 3 10 31 50
Online publications..................................... 1 23 28 30
Transactions processed during the month................. 540 2,150 3,654 5,500
</TABLE>

Now that we can offer advertisers a critical mass of publishers, we are
focused on our next goals, bringing more advertisers to our Web site to increase
transaction volume and enhancing the services offered on that site. We have
adopted a three-pronged approach to bringing advertisers to our site:

- Distribution and affiliate relationships -- integrate the
Advertise123.com service into Web sites that are focused on providing
information and services for classified categories, such as automotive,
recruitment, real estate, etc.

- Targeted direct advertiser promotion -- market the service directly to
advertisers using targeted promotions.

- Advertising agency migration -- migrate agencies that use AdStar client
software to Advertise123.com with attractions such as access to more
publishers, expanded services and training.

Distribution and Affiliate Relationships. We began actively seeking
affiliate and distribution relationships in April 2000. Since then, we have
entered into distribution and affiliate relationships with 21 Web sites of which
10 have been implemented through July 15, 2000. Our distribution and affiliate
relationships (by classified advertising category) include: (real estate)
Owners.com, HomeClassifieds, SellersHomeNetwork.com, Places4Rent.com;
(recruitment) HRTools.com, Jobdescription.com, DescriptionsNow (software),
JobAds1.com, RecruitmentMarkeplace.com; (automotive) Carprice.com, Cartimes.com;
(classified portals) Abracat.com; (businesses and auction sellers) Honesty.com
and dbusiness.com. Once a relationship is implemented, a visitor to an affiliate
or distributor Web site is prompted, from relevant areas and while completing
related processes on that Web site, to place a classified ad. Interested
advertisers link through to the Advertise123.com Web site, or a co-branded
version, to compose, schedule and purchase their advertising. The affiliate or
distributor Web site that brings the advertiser, shares in the service fee
revenue generated by the ad sale. We plan on expanding the resources dedicated
to establishing distribution and affiliate relationships.

Targeted Direct Advertiser Promotion. In July 2000, we launched a targeted
online direct advertiser promotion trial. The promotions will appear during the
third quarter on major search engines, leading classified focused sites and a
leading local content network. The elements of the promotion include:

- Targeted listings on Goto.com, About.com, Google.com, Looksmart.com and
FindWhat.com.

- Targeted Banners on AOL's Search.

- Listing optimization for the top 100 search engines by TrafficBoss
Classified focused sites.

- Banners on Homes.com, CyberHomes.com, Cars.com, Autobytel.com,
AutoTrader.com, KellyBlueBook.com, CarFax.com.

- Text and hyperlink from AOL's ClassifiedPlus e-mail newsletter Local
Content Network.

- Banners, buttons and text links on AOL's Digital Cities in the
Automotive, Real Estate and Employment channels and across all areas of
the top 60 digital cities.

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We plan on measuring results from our trial promotion to maximize
advertiser adoption at the lowest cost per customer acquisition. We also plan on
trial promotions to advertisers via targeted emails, telemarketing, direct mail,
trade shows, trade publications and corporate co-operative deals.

Advertising Agency Migration. In July we began a beta trial with a group
of recruitment advertising agencies of the Advertise123.com agency service.

These NY/NJ beta agencies including J Walter Thompson Specialized
Communication, Cherenson Advertising, Winston Advertising and Mary Pomerantz
Advertising are currently sending ads to 6 New York Newspapers including, The
Star Ledger, The Bergen Record, The NY Post, The NY Daily News, Newsday and The
Westchester Journal Group.

A plan is in place to roll this application out to our existing advertising
agency client base in the following markets by year's end: NY/NJ, Chicago,
Hartford/New Haven, Denver and Atlanta. These markets were selected based on a
set of criteria including; size of market, revenue potential, number of existing
AdStar remote agencies in the market, ease of rollout due to the number of
newspapers in the market, timeliness with regard to rolling out large markets
during heavy classified advertising periods and the status of the existing
marketing relationships with publications in that market.

CO-MARKETING AGREEMENTS

There are six major sites on the Web which aggregate and republish
classified ads from newspapers. None of these Web publishers originates ads
online -- whether for publication online or in print. We have entered into
co-marketing agreements with two of these Web publishers: AdOne, LLC (AdOne.com)
and PowerAdz, LLC (PowerAdz.com), which enable them to offer versions of
Advertise123 to their participating newspapers so that these newspapers can
obtain ads through Advertise123.com for publication either online or in print.
AdOne.com and PowerAdz.com provide online republication of the classified ads
from approximately 1,200 newspapers. Under our co-marketing agreements, a
prospective advertiser using one of our distribution partners' sites (or the
site of one of their participating newspapers) can click-on a "place an ad"
button which will link such party to a co-branded version of Advertise123.com
hosted by us. As we implement this ad taking service for our distribution
partners and their participating newspapers, each of these publications becomes
accessible on Advertise123.com which enhances our value to advertisers.

Each of our co-marketing agreements grants us the right to provide our
distribution partners and their participating newspapers with the ability to
enable advertisers to select, transact and process ads for print and online
publication from their Web sites and from Advertise123.com. For any
advertisement entered on a Web site of a distribution partner or one of its
participating newspapers -- which we call partnered sites -- and for any ad
entered on Advertise123.com for placement on a partnered site or in a
participating newspaper of one of our distribution partners, a percentage of the
publisher's charges for this advertisement is divided among us and the other
party or parties in the distribution chain to the transaction. Our agreements
with AdOne and PowerAdz are for three years but may be terminated on short
notice by either party. Our Advertise123.com service is being made available to
users of the AdOne and PowerAdz Web sites. We have begun integrating our ad
entry software on the Web sites of their participating newspapers -- and these
newspapers will join our Advertise123.com marketplace as their publications are
also accessible on our Web site.

In addition, AdStar.com has entered into an advertiser marketing and
publisher co-marketing agreement with Recruitment Marketplace, a division of
Landon Media Group, a major newspaper representative firm which represents over
two thirds of the nation's newspapers. The Recruitment Marketplace division is
dedicated to increasing newspaper exposure to recruitment advertising buyers and
their agents. AdStar will provide Recruitment Marketplace's online channel for
buying and selling print recruitment advertising. Recruitment Marketplace will
drive increased recruitment advertising to the publications it represents via
its soon to be released RecruitmentMarketPlace Web site. Advertisers who are
solicited by Recruitment Marketplace will be able to go to its
RecruitmentMarketplace.com Web site to create, schedule and submit their
recruitment advertising directly to the newspaper. AdStar's Advertise123.com
service will operate the Recruitment Marketplace Web site. As newspaper
publishers wish to use our online placement services provided through
RecruitmentMarketplace.com, they will become destination or partner publishers.
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SERVICE AGREEMENTS

We have also entered into three year agreements with Web publishers,
CareerPath.com and CareerEngine, which aggregate and republish job recruitment
advertisements online. These agreements grant us the right to provide our
Advertise123.com ad entry services on these Web sites, the co-branded Web sites
of CareerPath.com's participating newspapers, and on CareerEngine's 24 category
specific Web sites. This will enable prospective employers to place job related
ads on these sites.

CareerPath.com sources its listings from the help wanted ads of more than
90 daily newspapers and from employer Web sites. We have installed a "Post A Job
Online" button on CareerPath.com and on the sites of its more than 90
participating newspapers which takes a prospective advertiser to a private label
version of Advertise123.com. On July 17, 2000 a merger was announced between
CareerPath.com and CareerBuilder. If the transaction is completed the combined
company will be jointly owned by Knight Ridder and Tribune Company. Publications
owned by both companies license our AdStar client software. We do not know at
this time whether the proposed merger will have any impact on our relationship
with CareerPath.com.

CareerEngine sponsors the: ITClassifieds.com, SalesClassifieds.com and
AccountingClassifieds.com Web sites. CareerEngine job counselors and recruiters
help prospective candidates define, locate and secure career opportunities
and/or consulting assignments. CareerEngine offers e-recruiting services to
Fortune 1000 companies and has distribution partnerships with leading recruiting
firms, which sell the services of CareerEngine's sites.

In addition to making the Advertise123.com service available directly from
the respective Web sites of CareerPath.com and CareerEngine, advertising
opportunities of both will be available directly from the Advertise123.com Web
site. Pursuant to our service agreements, we receive installation fees and a
percentage of revenues generated by the service.

REVENUE

Our historical revenues have been derived principally from our license fees
and installation charges billed to our newspaper customers for our AdStar remote
ad entry service. We expect this revenue to continue in accordance with our
outstanding license agreements.

Our revenue sources from Advertise123.com are derived from the following
sources:

(1) Transaction Fees. These are fees charged for placing classified
ads on our Web site or on a partnered site. The charge for each
advertisement by the online or print publication is prepaid by the
advertiser by credit card payment through third party facilities accessible
online or, in cases involving large volume purchases, in separate
arrangements established with the publisher. Fees for ads placed in print
publications through our Advertise123.com Web site paid for by credit cards
are generally 10% of the cost of the ad, either as a mark-up to the ad
price paid by the advertiser or a discount from the ad price remitted to
the publisher, but may change as a result of changing market conditions.
Fees paid by advertisers under contracts with publishers carry a fixed
charge per ad. For those ads placed in existing AdStar newspapers there is
no charge to the publisher for use of Advertise123.com by contract
advertisers. Fees on ads which originate on the publisher's Web site, which
flow through our system, will be subject to annual caps ranging from $6,000
to $33,000 per publisher. There are no caps for revenues on ads originating
on Advertise123.com. Existing fees for online publications range from 5% to
10% of the cost of the ad, if originated on their Web site, and 10% to 35%
of the cost of the ad if originated on Advertise123.com. In our
distribution arrangements, we share this fee with our partners. We expect
our sharing arrangements to be separately negotiated for each distribution
arrangement. Credit card fees in partner publications are paid for by the
publications or a fixed handling charge or percentage is charged.

(2) Carriage Fees. In co-marketing or co-branding situations in which
we carry or display the brand of another company on our Web site, we will
in certain circumstances charge a fixed fee, known in the trade as a
carriage fee.

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(3) Market Research Reports. We expect to be able to derive a
separate revenue stream for providing market research and reporting
services to both advertisers and newspapers based on data we are able to
assemble from the operation of our Web-based market place.

(4) Fees From Advertisements On Our Web Site. Additional revenues may
be provided by premium positioning and promotional advertising sold to
media and advertising companies and carried on our Web site. Initially we
may provide an opportunity to these prospective advertisers to advertise on
our Web site without a fee. As we develop activity on our site, we will
adopt a rate schedule for these advertisers based on the number of "hits"
each advertiser receives from visitors to our site.

In 1997 the L.A. Times accounted for 13% of our revenues. In 1998 the
Chicago Tribune accounted for 12% of our revenues. In 1999 CareerPath accounted
for 14% of our revenues and in the six months ended June 30, 2000 CareerPath
accounted for 29% of our revenues.

COMPETITION

We expect to provide a "marketplace" or "one-stop-shop" Internet location
for publishers and advertisers. We will be competing with all traditional
methods of ad origination and entry -- as conducted by newspapers and Web
publishers.

Our ability to compete will also depend upon the timing and market
acceptance of our new Web-based ad taking service, the enhancements developed by
us, the quality of our customer service, and the ease of use, performance, price
and reliability of our services. We also have to expect that other companies may
enter our market and compete with us for ad origination business. Some of these
potential new competitors may 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.

INTELLECTUAL PROPERTY

We regard our intellectual property as critical to our success, and we rely
upon trademark, copyright and trade secret laws in the United States to protect
our proprietary rights. We do not currently own any patents. We have established
trademark rights in the mark AD-STAR, based on our use of this mark since 1985
and our ownership of the United States trademark registration No. 1,497,387 for
AD-STAR since 1988. While this registration covers computer programs for
preparation, editing and electronic transmission of classified advertisements,
we have expanded our use of the trademark AD-STAR to Internet-related
advertising services and we will be filing a new trademark application to cover
these services. Our trademark search, along with our longstanding use of the
mark AD-STAR and our ownership of the U.S. Registration for AD-STAR, should
entitle us to further registration, although we cannot guarantee how the
Trademark Office will view our proposed application or whether our expanded use
of the mark will encounter any opposition in the marketplace. We have also
recently begun to use the trademark and Internet domain name Advertise123.com
but have not yet applied for registration.

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.

We have licensed in the past, and expect that we may license in the future,
elements of our trademarks, trade dress and similar proprietary rights to third
parties. 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 solutions and technologies.

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<PAGE> 30

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 material adverse effect on our business, our
results of operations of 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 June 30, 2000, we had 38 full-time employees, including five in sales
and marketing and business development, 15 in technical staff and product
development, 13 in operations and customer support, and five in finance,
accounting, clerical and administration. We are not subject to any collective
bargaining agreements and we believe that our relations with our employees are
good.

FACILITIES

Our principal offices are currently located in two separate facilities. One
in Marina del Rey, California consisting of an aggregate of approximately 8,446
square feet and one in Syosset, New York consisting of 1,382 square feet. The
leases for these premises expire on March 31, 2005 and March 31, 2002. The
aggregate monthly rent is approximately $21,000. We believe that if these leases
are not renewed, satisfactory alternative space will be available.

29
<PAGE> 31

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors and their respective ages as of June
30, 2000 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
Leslie Bernhard.................... 56 President, Chief Executive Officer 1991
and Director
Eli Rousso......................... 63 Executive Vice President, Chief 1991
Technology Officer and Director
Michael Kline...................... 34 Senior Vice President -- Strategy
and Products
Adam Leff.......................... 34 Senior Vice President -- Business
Development and Corporate
Communications
Benjamin J. Douek.................. 49 Senior Vice President -- Chief 1999
Financial Officer, Secretary and
Director
Richard Bassler.................... 42 Senior Vice President -- Operations
Arthur Salzfass(1)................. 65 Director 2000
Chris A. Karkenny(1)............... 31 Director 1999
</TABLE>

---------------
(1) Member of the compensation committee and the audit committee of the Board of
Directors.

Leslie Bernhard is one of our co-founders and has served as our President
and Chief Executive Officer since the organization of our predecessor in 1986.

Eli Rousso is our other co-founder and has served as our Executive Vice
President and Chief Technology Officer since the organization of our predecessor
in 1986.

Michael Kline joined us in January 1999 first as a consultant and then in
April as a Senior Vice President-Strategy and Products. Prior to joining us, Mr.
Kline was associated with Recycler.com, a popular online classifieds publisher,
as a consultant from July 1998 to January 1999 and General Manager from March
1996 through July 1998. From October 1995 to March 1996 Mr. Kline worked as a
consultant for Recycler Classifieds, a newspaper company based in Los Angeles,
California. From August 1994 to October 1995 Mr. Kline was Assistant
Director-Strategic Development for the Times Mirror, Inc., a leading media
company.

Adam Leff joined us in August 1998 and is Senior Vice President-Business
Development and Corporate Communications. Prior to joining us Mr. Leff served as
Vice President-Product Development and Marketing and Vice President-Business
Development of AdOne Classified Network since June 1996. From 1993 to May 1996
he held various positions within the classified and new media departments of the
LA Times as well as positions with a joint venture in which the LA Times was a
co-venturer with PacBell.

Benjamin J. Douek joined us in April 1999 as Senior Vice President and
Chief Financial Officer. Mr. Douek has been a consultant and private investor
for more than the last five years during which period he also served as Director
of Investment Banking for Ladenberg Thalmann and Co., Inc. (1997-1998), Vice
Chairman for Coleman and Company (1996-1997) and Managing Director for Bankers
Trust Company (1992-1994).

Richard Bassler joined us in April 1999 as Vice President/Operations and
was promoted to Senior Vice President-Operations in January 2000. Prior to his
joining us he was Vice President-General Manager of AdOne Classified Network
from June 1998 to March 1999, and Vice President-Affiliate Relations from May

30
<PAGE> 32

1997 to June 1998. Previously he served as Director of New Media with Packet
Publications and News Director of Princeton Packet from May 1994 to May 1997.

Arthur Salzfass, a director, has been a private investor for the past five
years. Since January 1997 he has also been the owner and president of Rutledge
Books, Inc., a publisher. He is a director of Star Struck, Inc., a distributor
of sports and jewelry products.

Chris A. Karkenny, a director, has been Chief Executive Officer of
Technologz.com LLC, an incubator and venture catalyst company, since January
1999. Prior to January 1999 and since February 1998 Mr. Karkenny was a private
consultant in corporate finance. From September 1995 to February 1998 he was
Treasurer of Quarterdeck Corporation, a technology and software company and
prior to September 1995 Mr. Karkenny was a consultant for CDK Industries, a
consulting firm specializing in mergers and acquisitions.

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.

The Company'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 the Company,
reviews general policy matters relating to compensation and benefits of
employees of the Company, and administers the issuance of stock options to the
Company's officers, employees, directors and consultants. The Audit Committee
meets with management and the Company's independent auditors to determine the
adequacy of internal controls and other financial reporting matters.

EXECUTIVE COMPENSATION.

The following table sets forth all compensation awarded to, earned by or
paid to, our Chief Executive Officer and our other two most highly compensated
executive officers whose annual compensation exceeded $100,000 in 1999 for all
services rendered in all capacities to us during 1999, 1998 and 1997.

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.......................... 1999 $201,894 0 0
Chief Executive Officer 1998 150,131 0 0
and President 1997 150,131 0 0
Eli Rousso............................... 1999 $201,894 0 0
Executive Vice President and 1998 145,662 0 0
Chief Technology Officer 1997 145,357 0 0
Adam Leff................................ 1999 $168,834 24,460 0
Senior Vice President Business 1998 40,000 0 0
Development and Corporate
Communications
</TABLE>

STOCK OPTIONS

The following tables show information with respect to incentive and
non-qualified stock options granted in 1999 to the executives and the aggregate
value at June 30, 2000 of those 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.

31
<PAGE> 33

OPTION GRANTS IN 1999

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------
NUMBER OF
SHARES OF COMMON PERCENT OF TOTAL EXERCISE
NAME AND PRINCIPAL STOCK UNDERLYING OPTIONS GRANTED TO PRICE
POSITION OPTION # EMPLOYEES IN 1999 ($/SH) EXPIRATION DATE
------------------ ---------------- ------------------ -------- ---------------
<S> <C> <C> <C> <C>
Adam Leff......................... 24,460 7.5% 4.77 April 2004
</TABLE>

AGGREGATED JUNE 30, 2000 OPTIONS VALUES

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT EXERCISABLE/
AT 6/30/2000 JUNE 30, 2000 UNEXERCISABLE
------------------- --------------------- -------------
<S> <C> <C> <C>
Adam Leff................................. 24,460 -0- 24,460/0
</TABLE>

EMPLOYMENT CONTRACTS

We entered into three year employment agreements with each of Leslie
Bernhard and Eli Rousso, as of July 12, 1999. Pursuant to her employment
agreement, Leslie Bernhard was retained as our Chief Executive Officer at an
annual rate of $150,000 per year, which rate was increased to $200,000 per year
on December 16, 1999, the date of our initial public offering. Pursuant to his
employment agreement, Eli Rousso was retained as our Executive Vice President
and Chief Technology Officer at an annual rate of $150,000 per year, which rate
was increased to $200,000 per year on December 16, 1999.

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 our company. Each agreement
further provides for the use of an automobile and other fringe benefits
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.

STOCK OPTION PLANS

In July 1999, the board of directors and stockholders adopted our 1999
Stock Option Plan. We have reserved 500,000 shares of common stock for issuance
upon exercise of options granted from time to time under the option plan. The
stock option plan is intended to assist us in securing and retaining key
employees, directors and consultants by allowing them to participate in our
ownership and growth through the grant of incentive and non-qualified options.

Under our stock option plan, we may grant incentive and non-qualified
options to our officers, employees, directors, consultants, agents and
independent contractors. The stock option plan is to be administered by a
committee, appointed by our board of directors, consisting of from one to three
directors.

Subject to the provisions of the stock option plan, the committee will
determine who shall receive options, the number of shares of common stock that
may be purchased under the options, the time, manner of exercise and exercise
price of options. The term of options granted under the stock option plan may
not exceed ten years or five years for an incentive stock option granted to an
optionee owning more than 10% of our voting stock. The exercise price for
incentive stock options shall be equal to or greater than 100% of the fair
market value of the shares of the common stock at the date of grant; provided
that incentive stock options granted to a 10% holder of our voting stock shall
be exercisable at a price equal to or greater than 110% of the fair market value
of the common stock on the date of the grant. The exercise price for
non-qualified options will be set by

32
<PAGE> 34

the committee, in its discretion, but in no event shall the exercise price be
less than the fair market value of shares of common stock on the date of grant.
Shares of common stock received upon exercise of options granted under the plan
will be subject to restrictions on sale or transfer.

As of June 30, 2000, we had outstanding stock options to purchase 348,163
shares of common stock under our option plan at a weighted average price of
$5.74. Of these options, options to purchase 232,123 shares have been granted to
our officers and directors. All of the options granted to such officers and
directors terminate five years from the date of grant.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

As authorized by the Delaware General Corporation Law, our certificate of
incorporation provides that none of our directors shall be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for:

- Any breach of the director's duty of loyalty to us or our stockholders;

- Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- Unlawful payments of dividends or unlawful stock redemptions or
repurchases; or

- Any transaction from which the director derived an improper personal
benefit.

This provision limits our rights and the rights of our stockholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care.

Our certificate of incorporation further provides for the indemnification
of any and all persons who serve as our director, officer, employee or agent, to
the fullest extent permitted under the Delaware General Corporation Law.

We have obtained a policy of insurance under which our directors and
officers are insured, subject to the limits of the policy, against certain
losses arising from claims made against our directors and officers by reason of
any acts or omissions covered under this policy in their capacities as directors
or officers, including liabilities under the Securities Act.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.

CERTAIN TRANSACTIONS

In July 1999 Jeffrey Diamond, an employee and former director and officer,
sold 281,144 shares of our common stock to some of the holders of our
convertible notes for $500,000 pursuant to an agreement among Jeffrey Diamond, a
representative of the purchasers and us under which Diamond agreed to provide
technical services for us for a year at his current compensation of $100,000 a
year. In connection with this transaction the purchasers transferred 63,848
shares of our common stock to us. Each of the above transactions was approved by
the Board of Directors, in which at least two members were disinterested.

In September 1999, a proposed $15.5 million initial public offering of our
securities became effective but did not close. AdStar originally offered units
consisting of common stock and warrants in September 1999. That offering was
declared effective by the Securities and Exchange Commission and resulted in the
stock and warrants included in those units being traded on the American Stock
Exchange between September 30 and October 4, 1999. Initial trading in the units
resulted in a decline in the unit price to which AdStar responded by announcing
a reduction of the warrant exercise price. The American Stock Exchange took the
position that

33
<PAGE> 35

this reduction caused AdStar's securities to no longer meet its listing
requirements and therefore stopped trading in the units. As a result of these
events, the former offering was not consummated. In full settlement of our
claims, if any, against Paulson Investment Company, Inc., the representative of
the underwriters in that offering, we received $500,000 from the representative.
In addition, Paulson Capital Corporation, the parent of the representative lent
us $1.1 million evidenced by a promissory note due on October 21, 2001 and
bearing interest at 6% per annum payable at maturity. Paulson Investment
Company, Inc. is the representative of the underwriters in this offering.

All future transactions between the Company and its officers, directors or
five percent shareholders, and their respective affiliates, will be on terms no
less favorable than could be obtained from unaffiliated third parties and will
be approved by a majority of the independent, disinterested directors of the
Company.

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to beneficial
ownership of our common stock, as of June 30, 2000 and as adjusted to reflect
the sale by us of our common stock in this offering, for each person known by us
to beneficially own more than 5% of our common stock; each of our directors; and
all our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them.

The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options or warrants held by that person that are exercisable within 60 days of
June 30, 2000 but excludes shares of common stock underlying options or warrants
held by any other person. Percentage of shares beneficially owned is based on:

- prior to the offering, 2,833,185 shares of common stock outstanding.

- after the offering, 4,233,185 shares of common stock outstanding.

<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF SHARES
COMMON BENEFICIALLY OWNED
STOCK OWNED -----------------------------
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY(3) PRE-OFFERING POST-OFFERING
--------------------------- --------------- ------------ -------------
<S> <C> <C> <C>
Executive Officers and Directors
Leslie Bernhard(2).................................... 731,667 25.8% 17.3%
Eli Rousso(2)......................................... 731,667 25.8% 17.3%
Michael Kline(4)...................................... 73,941 2.5% 1.7%
Adam Leff(5).......................................... 98,401 3.4% 2.3%
Benjamin J. Douek(6).................................. 50,187 1.7% 1.2%
Richard Bassler(7).................................... 44,703 1.6% 1.1%
Chris A. Karkenny(8).................................. 16,667 * *
All Directors and Officers as a group(9).............. 1,543,403 50.7% 34.7%
</TABLE>

---------------
* Less than 1%

(1) The addresses of the persons named in this table are as follows: Leslie
Bernhard c/o AdStar.com, Inc., 4553 Glencoe Avenue, Suite 300, Marina del
Rey, California 90292; Eli Rousso c/o AdStar.com, Inc., 4553 Glencoe Avenue,
Suite 300, Marina del Rey, California 90292; Michael Kline c/o AdStar.com,
Inc., 4553 Glencoe Avenue, Suite 300, Marina del Rey, California 90292; Adam
Leff, c/o AdStar.com, Inc., 4553 Glencoe Avenue, Suite 300, Marina del Rey,
California 90292, Benjamin J. Douek, c/o AdStar.com, Inc., 4553 Glencoe
Avenue, Suite 300, Marina del Rey, California 90292, Richard Bassler,

34
<PAGE> 36

c/o AdStar.com, Inc., 4553 Glencoe Avenue, Suite 300, Marina del Rey,
California 90292, and Chris A. Karkenny, Net Catalyst, LLC., 11670 Chenault
St., Los Angeles, CA 90049.

(2) Includes an aggregate of 203,830 shares in respect of which Ms. Bernhard and
Mr. Rousso have voting power.

(3) 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. the filing of this report have been
exercise 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. All percentages are determined based on 2,833,185 shares
outstanding on June 30, 2000.

(4) Consists of 73,941 shares subject to stock options, exercisable within 60
days of the date hereof at $4.77 per share.

(5) Includes 24,460 shares subject to stock options exercisable within 60 days
of the date hereof at $4.77 per share.

(6) Includes 17,226 shares subject to stock options, exercisable within 60 days
of the date hereof at $4.77 per share and 32,961 shares subject to stock
options exercisable within 60 days of the date hereof at $6.00 per share.

(7) Includes 11,484 shares subject to stock options, exercisable within 60 days
of the date hereof at $4.77 per share, 25,553 shares subject to stock
options, exercisable within 60 days of the date hereof at $7.20 per share,
and 7,666 shares subject to stock options, exercisable within 60 days of the
date hereof at $6.00 per share.

(8) Consists of 16,667 shares subject to warrants, exercisable within 60 days of
the date hereof at $6.00 per share in the name of Net Catalyst LLC.

(9) Includes 209,958 shares of common stock that could be purchased by exercise
of options and warrants within 60 days of the date hereof; 127,111 at $4.77,
57,294 at $6.00 and 25,553 at $7.20.

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 10,000,000 shares of common stock,
$.0001 par value per share, and 5,000,000 shares of preferred stock, $.0001 par
value per share, whose rights and designation have not yet been established. We
will not have any shares of our preferred stock outstanding immediately after
the closing of our offering.

COMMON STOCK

Holders of our common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over our common stock.

Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to our
common stock. The rights of the holders of common stock are subject to any
rights that may be fixed for holders of preferred stock, when and if any
preferred stock is issued. All outstanding shares of common stock are, and the
shares underlying all options and warrants will be, duly authorized, validly
issued, fully paid and non-assessable upon our issuance of these shares.

35
<PAGE> 37

PREFERRED STOCK

Under our certificate of incorporation, our board of directors is
authorized, subject to limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of 5,000,000
shares of our preferred stock. The preferred stock may be issued in one or more
series. Each series may have different rights, preferences and designations and
qualifications, limitations and restrictions that may be established by our
board of directors without approval from the stockholders. These rights,
designations and preferences include:

- number of shares to be issued;

- dividend rights;

- dividend rates;

- right to convert the preferred stock into a different type of security;

- voting rights attributable to the preferred stock;

- right to set aside a certain amount of assets for payments relating to
the preferred stock; and

- prices to be paid upon redemption of the preferred stock or a bankruptcy
type event.

If our board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
AdStar. This is because the terms of the preferred stock could be designed to
make it prohibitively expensive for any unwanted third party to make a bid for
our shares of common stock. We have no present plans to issue any shares of
preferred stock.

WARRANTS

General. We issued 1,150,000 redeemable warrants as part of the units sold
in our initial public offering in December 1999. These warrants may be exercised
at any time until December 16, 2004, their expiration date. Each redeemable
warrant entitles the holder to purchase one share of our Common stock at an
exercise price of $7.20 per share until September 16, 2000 and $9.00 thereafter,
subject to adjustment upon the occurrence of certain events as provided in the
warrant certificate and summarized below. A warrant holder will not be deemed to
be a holder of the underlying common stock for any purpose until the warrant has
been exercised.

Redemption. We have the right to redeem the 1,150,000 warrants at a
redemption price of $.25 per warrant after providing 30 days' prior written
notice to the warrant holders, if the average closing bid price of the common
stock equals or exceeds $12.00 for ten consecutive trading days ending within 15
days prior to the date of the notice of redemption. We will send the written
notice of redemption by first class mail to warrant holders at their last known
addresses appearing on the registration records maintained by the transfer agent
for our warrants. No other form of notice or publication or otherwise will be
required. If we call the warrants for redemption, they will be exercisable until
the close of business on the business day next preceding the specified
redemption date or the right to exercise will lapse.

Exercise. A warrant holder may exercise our warrants only if an
appropriate registration statement is then in effect with the Securities and
Exchange Commission and if the shares of common stock underlying our warrants
are qualified for sale under the securities laws of the state in which the
holder resides.

Our warrants may be exercised by delivering to our transfer agent the
applicable warrant certificate on or prior to the expiration date or the
redemption date, as applicable, with the form on the reverse side of the
certificate executed as indicated, accompanied by payment of the full exercise
price for the number of warrants being exercised. Fractional shares of common
stock will not be issued upon exercise of our redeemable warrants.

Adjustments of Exercise Price. The exercise price is subject to adjustment
if we declare any stock dividend to stockholders, or effect any split or share
combination with respect to our common stock. Therefore, if we effect any stock
split or stock combination with respect to our common stock, the exercise
36
<PAGE> 38

price in effect immediately prior to this stock split or combination will be
proportionately reduced or increased, as the case may be. Any adjustment of the
exercise price will also result in an adjustment of the number of shares
purchasable upon exercise of a warrant or, if we elect, an adjustment of the
number of warrants outstanding.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BY-LAWS

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or his affiliate or associate who is an owner of 15% or more of the
outstanding voting stock of the corporation for a period of three years from the
date that this person became an interested stockholder.

TRANSFER AGENT AND WARRANT AGENT

The transfer agent for our common stock and warrants is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.

SHARES ELIGIBLE FOR FUTURE SALE

We cannot predict the effect, if any, that sales of, or the availability
for sale of, our common stock will have on the market price of our common stock
prevailing from time to time. Future sales of substantial amounts of common
stock in the public market, including shares issuable upon the exercise of
warrants issued in our initial public offering or options granted or to be
granted under our stock option plans, could adversely affect the prevailing
market price of our common stock and could impair our ability to raise capital
in the future through the sale of securities.

Upon completion of this offering, we will have outstanding an aggregate of
4,233,185 shares of our common stock assuming no exercise of outstanding options
or warrants. Of these shares, all of the shares sold in this offering will be,
and 1,150,000 shares sold in a prior public offering are, freely tradable
without restriction or further registration under the Securities Act, unless
these shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. The remaining 1,683,185 shares of common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 under the Securities Act, which rules are
summarized below.

We have the following shares subject to issuance upon exercise of options
and warrants:

<TABLE>
<C> <S>
1,150,000 shares subject to warrants issued in our initial public
offering
348,163 shares subject to options held by officers and key employees
200,000 shares subject to warrants granted to the representative of
the underwriters in our initial public offering.
90,001 shares subject to other warrants.
140,000 shares subject to warrants to be granted to the managing
underwriter upon consummation of this offering.
</TABLE>

37
<PAGE> 39

RULE 144

In general, under Rule 144 as currently in effect, beginning after the
expiration of the lock-up period, a person who has beneficially owned shares of
our common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

- 1% of the number of shares of common stock then outstanding which will
equal approximately 42,332 shares immediately after this offering; or

- the average weekly trading volume of the common stock on the Nasdaq
SmallCap Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

Upon expiration of the lock-up periods described in
"Underwriters -- Lock-up Agreements," 1,683,185 shares will be available for
resale to the public in accordance with the volume and trading limitations of
Rule 144.

RULE 144(K)

Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering.

RULE 701

In general, under Rule 701 of the Securities Act as currently in effect,
some of our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock plan or other written agreement may be
eligible to resell these shares. Resales under Rule 701 must be effected 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with many of the restrictions, including the holding period,
contained in Rule 144.

REGISTRATION RIGHTS

We have granted registration rights to Paulson Investment Company, Inc. and
its transferees with respect to an aggregate of 200,000 restricted shares
issuable upon exercise of Paulson's warrants issued in our initial public
offering to purchase units and upon exercise of warrants included in the units.
We have also granted limited registration rights including piggy-back
registration rights to the holders of an aggregate of 254,448 shares of common
stock. These rights are exercisable only after the expiration of the lock-up
agreements which these holders have entered into with Paulson, and only with
respect to shares not otherwise saleable under rule 144. In addition, three of
our investors have been granted piggy-back registration rights with respect to
an aggregate of 50,001 shares subject to warrants held by them.

38
<PAGE> 40

UNDERWRITING

The underwriters named below have severally agreed, subject to the terms
and conditions contained in an underwriting agreement with us, to purchase
1,400,000 shares from us at the price set forth on the cover page of this
prospectus, in accordance with the following table:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Paulson Investment Company, Inc.............................
Total..................................................... 1,400,000
</TABLE>

Nature of Underwriting Commitment. The underwriting agreement provides
that the underwriters are committed to purchase all the shares offered by this
prospectus if any shares are purchased. This commitment does not apply to
210,000 shares subject to the over-allotment option granted by us to the
underwriters to purchase additional shares in this offering.

Conduct of the Offering. We have been advised by Paulson Investment
Company, Inc., that the underwriters propose to offer the shares of common stock
to be sold in this offering directly to the public at the public offering price
set forth on the cover page of this prospectus, and to certain securities
dealers at that price less a concession of not more than $ per share. The
underwriters may allow, and those dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the shares of common
stock are released for sale to the public, the offering price and other selling
terms may be changed from time to time by the underwriters. No change in those
terms will change the amount of proceeds to be received by us as set forth on
the cover page of this prospectus.

The underwriters have informed us that they do not expect to confirm sales
of shares offered by this prospectus on a discretionary basis.

Overallotment Option. We have granted the underwriters an option, expiring
45 days after the date of this prospectus, to purchase up to 210,000 additional
shares from us on the same terms as set forth in this prospectus with respect to
the 1,400,000 shares offered hereby. The underwriters may exercise this option,
in whole or in part, only to cover over-allotments, if any, in the sale of the
shares offered by this prospectus.

Offering Discounts and Expenses. The following table shows the per share
and total underwriting discounts to be paid by us to the underwriters. These
amounts are shown assuming no exercise and full exercise, respectively, of the
underwriters' over-allotment option described above:

<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Total underwriting discount to be paid by us.......... $ -- $ -- $ --
</TABLE>

The expenses of this offering, not including the underwriting discounts,
are estimated to be approximately $265,000 and will be paid by us. Expenses of
this offering, exclusive of the underwriting discounts, include the 3%
nonaccountable expense allowance payable to Paulson Investment Company, Inc.,
the SEC filing fee, the NASD filing fee, NASDAQ listing fees, printing expenses,
legal and accounting fees, transfer agent and registrar fees and other
miscellaneous fees and expenses.

We have agreed that if this offering is successfully completed we will pay
to Paulson Investment Company, Inc., a non-accountable expense allowance equal
to three percent of the initial public offering price of the sale of the shares
in this offering (including sales on exercise of the underwriters'
over-allotment option).

Underwriter's Warrant. On completion of this offering, we will issue the
Underwriter's Warrant to Paulson Investment Company, Inc., entitling it to
purchase from us up to ten percent of the number of shares sold in this
offering, exclusive of the shares available pursuant to the over-allotment
option, for $ [120% of the public offering price] per share. The
warrant is exercisable during the four-year period beginning one year from the
date of issuance. The warrant, and the shares underlying the warrant, are not
transferable for

39
<PAGE> 41

one year following the effective date of the registration, except to an
individual who is an officer or partner of an underwriter, by will or by the
laws of descent and distribution, and are not redeemable.

The holder of the Underwriter's Warrant will have, in that capacity, no
voting, dividend or other shareholder rights. Any profit realized by the
underwriters on the sale of the shares issuable upon exercise of the
Underwriter's Warrant may be deemed to be additional underwriting compensation.
The securities underlying the Underwriter's Warrant are being registered
pursuant to the registration statement of which this prospectus is a part.
During the term of the Underwriter's Warrant, the holder thereof is given the
opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional equity capital while the
Underwriter's Warrant is outstanding. At any time at which the Underwriter's
Warrant is likely to be exercised, we may be able to obtain additional equity
capital on more favorable terms.

Indemnification. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities act, or to
contribute to payments that the underwriters may be required to make in respect
thereof.

Lock-up Agreements. We, our executive officers, and directors have agreed
not to sell or transfer any shares of our common stock for 90 days after the
date of this prospectus without first obtaining the written consent of Paulson
Investment Company, Inc. Additionally, we, our executive officers, directors and
all stockholders at the date of our initial public offering agreed not to sell
or transfer any shares of our common stock before December 16, 2000.
Specifically, we and these other individuals under both sets of lock-up
agreements have agreed not to, directly or indirectly:

- sell or offer to sell any shares of our common stock;

- grant any option to sell any shares of our common stock;

- engage in any short sale of our common stock;

- pledge or otherwise transfer or dispose of any shares of our common
stock; or

- publicly announce an intention to do any of the foregoing.

These lock-up agreements apply to shares of our common stock and also to
any options or warrants to acquire shares of our common stock, or securities
exchangeable or exercisable for or convertible into shares of our common stock.
These lock-up agreements apply to all such securities that are currently owned
or later acquired either of record or beneficially by the persons executing the
agreements. However, Paulson Investment Company, Inc. may, in it sole discretion
and without notice, release some or all of the securities subject to these
agreements at any time during the respective lock-up period. Currently, there
are no agreements by Paulson Investment Company, Inc. to release any of the
securities from the lock-up agreements during either such period.

Our executive officers and directors have agreed that, for a period of one
year from the date of this prospectus, they will notify Paulson Investment
Company, Inc. before they sell our common stock under Rule 144.

Online Activities. A prospectus in electronic format may be made available
on the Internet sites or through other online services maintained by one or more
of the underwriters of this offering, member of the selling group or by persons
with whom they may contract for such services. In those cases, prospective
investors may view offering terms online and, depending upon the particular
underwriter, prospective investors may be allowed to place orders online. The
underwriters may agree with us to allocate a specific number of shares for sale
to online brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same basis as other
allocations.

Stabilization and Other Transactions. The rules of the SEC generally
prohibit the underwriters from trading in our common stock on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our common stock to be above or below that which would
otherwise prevail in the open market. These

40
<PAGE> 42

activities may include stabilization, short sales and over-allotments, syndicate
covering transactions and penalty bids.

- Stabilizing transactions consist of bids or purchases made by the lead
representative for the purpose of preventing or slowing a decline in the
market price of our common stock while this offering is in progress.

- Short sales and over-allotments occur when the representatives, on behalf
of the underwriting syndicate, sell more of our shares than they purchase
from us in this offering. In order to cover the resulting short position,
the representative may exercise the over-allotment option described above
and/or they may engage in syndicate covering transactions. There is no
contractual limit on the size of the syndicate covering transaction. The
underwriters will deliver a prospectus in connection with these short
sales. Purchasers of shares sold short by the underwriters are entitled
to the same remedies under the federal securities laws as any other
purchaser of shares covered by the registration statement.

- Syndicate covering transactions are bids for or purchases of our common
stock on the open market by the representatives on behalf of the
underwriters in order to reduce a short position incurred by the
representatives on behalf of the underwriters.

- A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession that would otherwise accrue to an underwriter if
the common stock originally sold by that underwriter was later
repurchased by the representatives and therefore was not effectively sold
to the public by such underwriter.

If the underwriters commence these activities, they may discontinue them at any
time without notice. The underwriters may carry out these transactions on the
NASDAQ SmallCap Market, in the over-the-counter market or otherwise.

Passive Market Making. Prior to the pricing of this offering, and until
the commencement of any stabilizing bid, underwriters and dealers who are
qualified market makers on the NASDAQ SmallCap Market may engage in passive
market making transactions. Passive market making is allowed during the period
when the SEC's rules would otherwise prohibit market activity by the
underwriters and dealers who are participating in this offering. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for our common stock; but if
all independent bids are lowered below the passive market maker's bid, the
passive market maker must also lower its bid once it exceeds specified purchase
limits. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in our common stock during a specified period and must be discontinued when such
limit is reached. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.

41
<PAGE> 43

LEGAL MATTERS

The validity of the securities being offered hereby will be passed upon on
our behalf by Morse Zelnick Rose and Lander, LLP, 450 Park Avenue, New York, New
York 10022-2605. Partners of Morse Zelnick Rose and Lander LLP own, in the
aggregate, 82,371 shares of our common stock. Legal matters relating to this
offering will be passed upon for the underwriters by Stoel Rives LLP, Portland,
Oregon 97204.

EXPERTS

The financial statements as of December 31, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999, included in this prospectus have been
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

AVAILABLE INFORMATION

We have filed a registration statement on Form SB-2 under the Securities
Act with the Securities and Exchange Commission with respect to the units
offered hereby. This prospectus filed as a part of the registration statement
does not contain all of the information contained in the registration statements
and exhibits and reference is hereby made to such omitted information.
Statements made in this registration statement are summaries of the terms of
these referenced contracts, agreements or documents and are not necessarily
complete. Reference is made to each exhibit for a more complete description of
the matters involved and these statements shall be deemed qualified in their
entirety by the reference. The registration statement and the exhibits and
schedules filed with the Securities and Exchange Commission may be inspected by
you at the Securities and Exchange Commission's principal office in Washington,
D.C. Copies of all or any part of the registration statement may be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the commission's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 11400,
Chicago, Illinois 60661. The commission also maintains a website
(http://www.sec.gov) that contains reports, proxy statements and information
statements and other information regarding registrants that file electronically
with the Commission. For further information pertaining to us and the units
offered by this prospectus, reference is made to the registration statement.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants.

42
<PAGE> 44

INDEX TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and 1999 and June
30, 2000 (unaudited)................................... F-3
Statements of Operations for each of the three years in
the period ended December 31, 1999, and the six-month
periods ended June 30, 1999 and 2000 (unaudited)....... F-4
Statements of Stockholders' Equity (Deficit) for each of
the three years in the period ended December 31, 1999,
and the six-month period ended June 30, 2000
(unaudited)............................................ F-5
Statements of Cash Flows for each of the three years in
the period ended December 31, 1999, and the six-month
periods ended June 30, 1999 and 2000 (unaudited)....... F-6
Notes to Financial Statements............................. F-7
</TABLE>

F-1
<PAGE> 45

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ADSTAR.COM, INC.

In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of AdStar.com, Inc.
(the "Company") as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 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 the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

Woodland Hills, California
February 18, 2000

F-2
<PAGE> 46

ADSTAR.COM, INC.

BALANCE SHEETS
(INFORMATION WITH RESPECT TO JUNE 30, 2000 IS UNAUDITED)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 90,007 $5,602,493 $1,662,991
Accounts receivable................................. 125,313 460,477 187,697
Receivable from the sale of stock................... 26,300 -- --
Prepaids and other current assets................... 16,763 136,814 140,310
-------- ---------- ----------
Total current assets............................. 258,383 6,199,784 1,990,998
Property and equipment, net........................... 77,561 424,819 765,738
Intangible assets, net................................ -- 162,785 143,251
Other assets.......................................... 3,203 22,584 24,863
-------- ---------- ----------
$339,147 $6,809,972 $2,924,850
======== ========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $177,929 $1,128,815 $ 269,568
Accrued expenses.................................... 275,019 453,417 241,700
Deferred revenue.................................... 34,656 107,000 77,469
Dividends payable................................... 20,750 -- --
Notes payable....................................... 15,000 749,466 --
Capital lease obligations........................... 6,833 4,964 16,032
-------- ---------- ----------
Total current liabilities................... 530,187 2,443,662 604,769
Notes payable......................................... -- 1,100,000 1,100,000
Interest payable...................................... -- -- 45,532
Capital lease obligations............................. 4,964 -- 53,877
-------- ---------- ----------
Total liabilities................................ 535,151 3,543,662 1,804,178
Commitments and contingencies (Note 9)
Stockholders' equity (deficit)
Preferred stock, par value $0.0001; authorized
5,000,000 shares; none issued and outstanding.... -- -- --
Common stock, par value $0.0001; authorized
10,000,000 shares; issued and outstanding
1,479,664 at December 31, 1998, 2,820,264 at
December 31, 1999 and 2,833,185 at June 30,
2000............................................. 28,300 282 283
Additional paid-in capital.......................... -- 5,713,151 5,963,020
Deferred compensation............................... -- -- (112,948)
Accumulated deficit................................. (224,304) (2,447,123) (4,729,683)
-------- ---------- ----------
Total stockholders' equity (deficit)............. (196,004) 3,266,310 1,120,672
-------- ---------- ----------
Total liabilities and stockholders' equity
(deficit)...................................... $339,147 $6,809,972 $2,924,850
======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 47

ADSTAR.COM, INC.

STATEMENTS OF OPERATIONS
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
IS UNAUDITED)

<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................... $1,148,233 $1,559,361 $ 1,685,144 $ 781,043 $ 1,192,093
Cost of revenues........... 565,329 800,532 1,020,882 489,817 1,016,630
---------- ---------- ----------- --------- -----------
Gross profit............. 582,904 758,829 664,262 291,226 175,463
Sales and administrative
expenses................. 634,029 820,574 2,118,857 662,625 1,729,116
Development costs.......... -- -- 904,009 -- 760,804
Abandoned offering
expenses, net............ -- -- 171,854 -- --
---------- ---------- ----------- --------- -----------
Loss from operations..... (51,125) (61,745) (2,530,458) (371,399) (2,314,457)
Interest income (expense),
net...................... (7,873) (4,518) (333,464) (45,800) 32,297
---------- ---------- ----------- --------- -----------
Loss before taxes........ (58,998) (66,263) (2,863,922) (417,119) (2,282,160)
Provision for income
taxes.................... (823) (2,760) (800) (400) (400)
---------- ---------- ----------- --------- -----------
Net loss................. $ (59,821) $ (69,023) $(2,864,722) $(417,599) $(2,282,560)
========== ========== =========== ========= ===========
Loss per share -- basic and
diluted.................. $ (0.04) $ (0.05) $ (1.90) $ (0.28) $ (0.81)
Weighted average number of
shares -- basic and
diluted.................. 1,405,723 1,458,393 1,510,093 1,479,664 2,829,673
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 48

ADSTAR.COM, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 2000 IS
UNAUDITED)

<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------------- PAID-IN DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
--------- -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996... 1,405,723 $ 2,000 $ -- $ -- $ (68,861) $ (66,861)
Net loss................... -- -- -- -- (59,821) (59,821)
Dividends.................. -- -- -- -- (1,000) (1,000)
--------- -------- ----------- --------- ----------- -----------
Balance, December 31, 1997... 1,405,723 2,000 -- -- (129,682) (127,682)
Net loss................... -- -- -- -- (69,023) (69,023)
Sale of common stock....... 73,941 26,300 -- -- -- 26,300
Dividends.................. -- -- -- -- (25,599) (25,599)
--------- -------- ----------- --------- ----------- -----------
Balance, December 31, 1998... 1,479,664 28,300 -- -- (224,304) (196,004)
Net loss................... -- -- -- -- (2,864,722) (2,864,722)
Repurchase of option....... -- -- -- -- (447,935) (447,935)
Reclassfication of deficit
due to termination of S
Corporation election.... -- -- (1,094,611) -- 1,094,611 --
Warrants issued for
services................ -- -- 146,600 -- -- 146,600
Contribution of common
stock................... (63,848) (6) 6 -- -- --
Net proceeds from initial
public offering......... 1,150,000 115 5,390,526 -- -- 5,390,641
Reincorporation in Delaware
and change in par
value................... -- (28,152) 28,152 -- -- --
Dividends.................. -- -- -- -- (4,773) (4,773)
Conversion of redeemable
common stock............ 22,534 2 137,534 -- -- 137,536
Conversion of convertible
notes and accrued
interest................ 231,914 23 1,104,944 -- -- 1,104,967
--------- -------- ----------- --------- ----------- -----------
Balance, December 31, 1999... 2,820,264 282 5,713,151 -- (2,447,123) 3,266,310
Stock issued for services
(unaudited)............. 12,921 1 92,461 (32,000) -- 60,462
Stock options issued for
services (unaudited).... -- -- 157,408 (157,408) -- --
Amortization of deferred
compensation
(unaudited)............. -- -- -- 76,460 -- 76,460
Net loss (unaudited)....... -- -- -- -- (2,282,560) (2,282,560)
--------- -------- ----------- --------- ----------- -----------
Balance, June 30, 2000
(unaudited)................ 2,833,185 $ 283 $ 5,963,020 $(112,948) $(4,729,683) $ 1,120,672
========= ======== =========== ========= =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 49

ADSTAR.COM, INC.

STATEMENTS OF CASH FLOWS
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
IS UNAUDITED)

<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(59,821) $(69,023) $(2,864,722) $(417,599) $(2,282,560)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization...................... 23,523 21,032 91,426 28,433 80,656
Amortization of debt discount...................... -- -- 137,536 -- --
Stock-based charges................................ -- -- 146,600 -- 136,922
Interest on convertible notes...................... -- -- 54,967 -- --
Changes in assets and liabilities:
Accounts receivable.............................. (25,567) (20,913) (335,164) (155,330) 272,780
Prepaids and other assets........................ 612 1,522 (139,432) (362,404) (5,775)
Accounts payable................................. 20,505 104,371 950,886 173,058 (859,247)
Accrued expenses................................. (21,578) 78,248 286,830 1,864 (211,717)
Deferred revenue................................. 49,500 (16,634) 72,344 (30,123) (29,531)
Interest payable................................. -- -- -- -- 45,532
-------- -------- ----------- --------- -----------
Net cash used in operating activities.............. (12,826) 98,603 (1,598,729) (762,101) (2,852,940)
-------- -------- ----------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment................... (12,902) (25,532) (406,126) (276,874) (402,041)
-------- -------- ----------- --------- -----------
Net cash used in investing activities.............. (12,902) (25,532) (406,126) (276,874) (402,041)
-------- -------- ----------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible notes
payable............................................ -- -- 1,050,000 1,050,000 --
Proceeds from leasing of property and equipment...... -- -- -- -- 68,303
Proceeds from issuance of notes payable.............. 2,500 -- 1,950,000 -- --
Repayment of notes payable........................... -- (22,500) (867,244) (6,260) (749,466)
Principal repayments on capital leases............... -- (3,203) (6,833) (3,416) (3,358)
Proceeds from sale of stock.......................... -- -- 26,300 26,300 --
Proceeds from initial public offering................ -- -- 5,390,641 -- --
Dividends paid....................................... (1,000) (4,849) (25,523) (4,773) --
-------- -------- ----------- --------- -----------
Net cash from (used in) financing activities....... 1,500 (30,552) 7,517,341 1,061,851 (684,521)
-------- -------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (24,228) 42,519 5,512,486 22,876 (3,939,502)
Cash and cash equivalents at beginning of period....... 71,716 47,488 90,007 90,007 5,602,493
-------- -------- ----------- --------- -----------
Cash and cash equivalents at end of period............. $ 47,488 $ 90,007 $ 5,602,493 $ 112,883 $ 1,662,991
======== ======== =========== ========= ===========
Supplemental cash flow disclosures:
Taxes paid........................................... $ 9,138 $ 6,052 $ 6,300 $ 2,588 $ 5,096
Interest paid........................................ $ 7,873 $ 4,518 $ 139,092 $ 15,639 $ 9,413
Non cash investing and financing activities
Purchase of intangible assets, cancellation of an
option and repayment of accrued liability by
issuance of a note payable......................... $ -- $ -- $ 751,710 $ 751,710 --
Issuance of redeemable shares in connection with note
payable............................................ -- -- 137,536 -- --
Issuance of common stock for note receivable......... -- 26,300 -- -- --
Property and equipment leases........................ -- 15,000 -- -- --
Dividends declared................................... -- 20,750 -- -- --
Conversion of notes payable and accrued interest to
common stock....................................... -- -- 1,104,967 -- --
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 50

ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS

AdStar.com, Inc. (the "Company") (formerly Ad-Star Services, Inc.) was
incorporated in the State of New York on June 29, 1991 as an S-Corporation under
the Internal Revenue Code. On August 31, 1999, the Company reincorporated in
Delaware by merging the New York predecessor corporation into the Delaware
corporation and issuing to each stockholder of the New York corporation, 25,303
shares of the Delaware corporation with a par value of $0.0001 per share for
each issued and outstanding share, no par value, of the New York corporation. On
December 13, 1999, the Company authorized and implemented a five-for-nine
reverse stock split. The share information in the accompanying financial
statements has been retroactively restated to reflect the effect of the stock
split. Effective July 1, 1999, the Company converted from an S-Corporation to a
C-Corporation. Had the accompanying statements of operations reflected a pro
forma tax provision for all periods presented, based upon pre-tax income (loss),
as if the Company had been subject to C-Corporation federal and state income
taxes, the net income or loss would not have been materially different from that
shown.

The Company's principal business has been the provision of software
services which allow for the direct entry of classified advertisements by large
commercial advertisers, on a dial-up basis through modems directly into the
publishing systems of the Company's customers. 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 online publishers, using one interface.

In December 1999, the Company completed its initial public offering and
raised net proceeds of approximately $5,391,000, through the issuance of
1,150,000 units, consisting of one share and one warrant to purchase one share
of the Company's common stock. The units traded for 30 days, after which the
shares and warrants traded separately.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements

The interim financial statements of the Company for the six-month periods
ended June 30, 1999 and 2000 included herein, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of June 30, 2000 and the
results of operations and its cash flows for the six-month periods ended June
30, 1999 and 2000.

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.

F-7
<PAGE> 51
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

Cash and Cash Equivalents

The Company considers all 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.

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.

For the year ended December 31, 1997, one customer accounted for 13% of the
Company's revenues, and for the year ended December 31, 1998, two different
customers accounted for 9% and 12% of the Company's revenues, respectively. As
of December 31, 1998, three customers accounted for 53% of the Company's
accounts receivable.

For the year ended December 31, 1999, one customer accounted for 14% of the
Company's revenues. As of December 31, 1999, four customers, in the aggregate,
accounted for 51% 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 classified advertisers.

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:

<TABLE>
<S> <C>
Furniture and fixtures.............................. 7 years
Computer equipment.................................. 3 to 5 years
Leasehold improvements.............................. Shorter of useful life or lease term
</TABLE>

Maintenance and minor replacements are charged to expense as incurred while
renewals and improvements are capitalized.

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
undiscounted future operating cash flows derived from such assets are less than
their carrying value. To date, no such impairment has been recorded.

F-8
<PAGE> 52
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, other assets, accounts
payable, deferred revenue, notes payable and accrued expenses are carried at
cost which approximates their fair value because of the short-term maturity of
these instruments.

Software Costs

Costs incurred to establish technological feasibility of software developed
by the Company are charged to expense as incurred. Costs incurred subsequent to
the achievement of technological feasibility are capitalized and amortized over
the estimated useful life of the software. Amortization of such costs commences
when the software is available for general release to customers. Through
December 31, 1999, no such costs have been capitalized, as costs incurred by the
Company between completion of the working model and the point at which the
product was ready for general release have been insignificant.

Revenue Recognition

The Company recognizes revenue from the sale of its software upon delivery
and customer acceptance and when collection of the resulting receivable is
probable. Maintenance, license fees and user support fees are recognized ratably
over the period to which they relate. To the extent that customers make advance
payments for installation fees, license fees, user support or maintenance fees,
the amount received is deferred until the revenue has been earned. Revenues are
recorded net of any discounts.

The Company also sells hardware to certain customers to support the
installation of its Ad-Star technology. The Company charges the customer a small
mark-up on the cost of the hardware and recognizes revenue on delivery to the
customer. For the years ended December 31, 1997, 1998 and 1999, and the six-
month periods ended June 30, 1999 and 2000, sales of hardware totaled
approximately $9,000, $94,000 and $132,000, and $88,300 and $51,000,
respectively.

In June 1999, the Company introduced a Web-based product, which permits
advertisers to plan, schedule, compose and purchase advertising from many print
and online publishers. The Company recognizes revenues on a per-transaction
basis. The manner in which these transaction revenues are recognized depends on
the service sold. With respect to ads composed directly on the Company's Web
site, and where the advertiser does not have a contract with the publisher, the
amount billed to the customer by the Company is recognized if, and when, the
Company accepts the customer's ad and charges the customer's credit card. In
these transactions, the Company is responsible for the resulting credit risk.
Credit card and debit card processing fees and amounts remitted to the publisher
on these transactions are recognized as a cost of sale. With respect to ads
placed through the Company's Web site, where the customer has a contract with
the publisher, the publisher collects the revenues and remits the transaction
fee to the Company. In these instances, these transaction fees are recognized
when the ad is placed through the Company's system and the collection from a
publisher of the resulting receivable is probable. For the year ended December
31, 1999, and the six-month period ended June 30, 2000, Internet revenues
totaled approximately $267,000 and $524,000, respectively.

The Company also recognizes revenue from banner advertising as the
impressions are displayed; carriage revenues are recognized as the services are
performed. To date, revenues from these services have been immaterial.

Research and Development Costs

Costs incurred in the research and development of products are expensed as
incurred.

F-9
<PAGE> 53
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

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.

Effective July 1, 1999, the Company is taxed as a C-Corporation.

The Company had elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code through June 30, 1999. As such, the Company was not
subject to income taxes at the corporate level and was subject to reduced
franchise tax; either based on a percentage of income or gross payroll costs,
which is provided for in the financial statements. The Company's income through
June 30, 1999 was included in the tax return of its stockholders and any
resultant liability thereon was the individual responsibility of the
stockholder.

Advertising Costs

The Company expenses the costs of advertising in the periods in which those
costs are incurred. Advertising expense was approximately $24,400, $58,800 and
$73,000 for the years ended December 31, 1997, 1998 and 1999, respectively.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing the net income
(loss) 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) 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, 1997, 1998 and 1999, diluted earnings
(loss) per share does not include 0, 0 and 1,727,769 options and warrants to
purchase common stock, as their inclusion is antidilutive.

For the six-month periods ended June 30, 1999 and 2000, diluted earnings
(loss) per share does not include 141,742 and 1,788,164 options and warrants to
purchase common stock and 220,126 and 0 shares issuable on the conversion of
notes payable, as their inclusion is antidilutive.

Comprehensive Income

In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and disclosure of
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. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997, and requires restatement of
earlier periods presented. SFAS No. 130 defines comprehensive income as net
income plus all other changes in equity from non-owner sources. The Company has
no other comprehensive income items and, accordingly, net income equals
comprehensive income for all periods presented.

F-10
<PAGE> 54
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

Segment Reporting

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," for the year ended December 31, 1998. SFAS
No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. 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
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 and Emerging Issues Task Force
("EITF") 96-18.

Recently Issued Accounting Pronouncements

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" which contains the SEC's views in applying
generally accepted accounting principles to selected revenue recognition issues.
SAB 101, as amended is effective in the fourth quarter of 2000. Management are
currently assessing the impact SAB 101 will have on the Company's financial
statements.

In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions
Involving Stock Based Compensation -- an interpretation of APB No. 25". FIN 44
clarifies the accounting for stock based compensation in certain issues.
Management do not believe that FIN 44 will have a material effect on the
Company's financial statements.

Reclassifications

Certain reclassifications have been made to prior years to conform with
current year presentation.

3. RECEIVABLE ON THE SALE OF STOCK

In April 1998, the Company sold 73,941 shares of common stock for aggregate
consideration of $26,300 by issuance of a note receivable bearing interest at
5.6% per annum. In April 1999, the Company received the proceeds in full on the
note receivable plus the then outstanding interest.

F-11
<PAGE> 55
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 1998 and
1999 and June 30, 2000:

<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software, includes equipment held
under capital lease of $15,000 (1998), $15,000 (1999)
and $22,000 (2000).................................... $ 164,752 $ 564,018 $ 904,102
Furniture and fixtures, includes items held under
capital lease of $61,000 (2000)....................... 26,752 36,466 98,423
Leasehold improvements.................................. 2,854 -- --
--------- --------- ----------
194,358 600,484 1,002,525
Less: accumulated depreciation and amortization,
includes accumulated depreciation and amortization on
assets held under capital leases of $3,000 (1998),
$10,000 (1999) and $13,500 (2,000).................... (116,797) (175,665) (236,787)
--------- --------- ----------
Net property and equipment.............................. $ 77,561 $ 424,819 $ 765,738
========= ========= ==========
</TABLE>

Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 was approximately $23,500, $21,000 and $59,000,
respectively.

5. INTANGIBLE ASSETS

At December 31, 1999 and June 30, 2000 intangible assets are comprised of:

<TABLE>
<CAPTION>
1999 2000
-------- -----------
(UNAUDITED)
<S> <C> <C>
Cost........................................................ $195,343 $195,343
Less: Accumulated amortization.............................. 32,558 52,092
-------- --------
$162,785 $143,251
======== ========
</TABLE>

In March 1999, the Company purchased the technology, related intellectual
property and software rights related to the AdStar technology for $752,000,
which includes amounts owed to the seller of approximately $108,000. The Company
formerly licensed these assets from the seller. As part of the transaction, the
seller also sold its option to purchase 15% of the Company's common stock back
to the Company. The net purchase price of approximately $643,000 has been
allocated to the technology, related intellectual property and software rights
and the option based on their relative fair values. The amount ascribed to the
option of approximately $448,000 has been recorded as an increase to
stockholders' deficit. The amount ascribed to the technology, related
intellectual property and software rights of approximately $195,000 is being
amortized over the estimated useful economic life of 5 years.

F-12
<PAGE> 56
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

6. NOTES PAYABLE

At December 31, 1998 and 1999, and June 30, 2000 notes payable consisted of
the following:

<TABLE>
<CAPTION>
1998 1999 2000
------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable bearing interest at 10% per annum, payable
semiannually. Repaid in full in January 2000........... $15,000 $ 15,000 $ --
Note payable bearing interest at 10% per annum, repayable
in monthly installments of $8,333 comprising principal
and interest. Repaid in full in January 2000........... -- 734,466 --
Note payable bearing interest at 6% per annum, due in
full in October 2001................................... -- 1,100,000 1,100,000
------- ---------- ----------
15,000 1,849,466 1,100,000
Less: short-term portion................................. 15,000 749,466 --
------- ---------- ----------
Notes payable, net of current portion.................... $ -- $1,100,000 $1,100,000
======= ========== ==========
</TABLE>

Convertible Unsecured Notes Payable

In March and April 1999, the Company issued $1,050,000 convertible
unsecured notes payable to certain individuals and corporations, bearing
interest at 12% per annum payable annually in arrears. The convertible notes and
accrued interest automatically converted on the closing of the Company's initial
public offering into 231,914 shares of common stock at a conversion price of
$4.77 per share.

Notes Payable

In July 1999, the Company entered into an $850,000 Loan Agreement with a
small business investment company. The note issued under the Loan Agreement bore
interest at 14% per annum, and was repayable in 54 equal monthly installments
commencing six months after the date of issuance. Pursuant to the Loan
Agreement, the small business investment company received 22,534 shares of
redeemable common stock for an aggregate consideration of $1,000. In accordance
with APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants," the amount ascribed to the relative value of the stock
of $137,536 was recorded as a discount to the note payable and was amortized
over the expected term of the note. The Company amortized $137,536 of the debt
discount during the year ended December 31,1999. The issuance of the common
stock was recorded as redeemable common stock, as the Company had the option to
repurchase the stock. On the initial public offering, this option lapsed and the
redeemable common stock was transferred to common stock. On the closing of the
Company's initial public offering in December 1999, the Company repaid the
$850,000 in full.

On October 21, 1999, the parent company of Paulson Investment Company, the
underwriter in the Company's initial public offering, Paulson Capital
Corporation, lent the Company $1,100,000 evidenced by a promissory note due on
October 21, 2001 bearing interest at 6% per annum payable at maturity.

In September 1999, a proposed public offering of the Company's securities
was declared effective but did not close. On October 21, 1999, in full
settlement of the Company's claims, if any, against Paulson Investment Company,
the representative of the underwriters in that offering, the Company received
$500,000 for the reimbursement of expenses incurred in connection with the
offering. During the year ended December 31, 1999, the Company incurred
approximately $672,000 of expenses related to the abandoned offering. The actual
expenses incurred have been recorded net of the reimbursement in the statement
of operations for the year ended December 31, 1999.

F-13
<PAGE> 57
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

7. 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 consisted of the following at December 31, 1999:

<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 786,000
Depreciation and amortization............................. 8,000
Deferred revenue.......................................... 14,000
Other..................................................... 113,000
Less: Valuation allowance................................. (921,000)
---------
Net deferred tax asset................................. $ --
=========
</TABLE>

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, 1999, the Company has federal and state net operating
loss carryforwards of approximately $2,124,000 and $1,062,000, respectively. 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.

The provision for income taxes for the year ended December 31, 1999 differs
from the amount that would result from applying the federal statutory rate as
follows:

<TABLE>
<S> <C>
Statutory regular federal income tax rate................... (34.0)%
Change in valuation allowance............................... 37.5%
State taxes, net of federal benefit......................... (3.4)%
-----
Other....................................................... (0.1)%
=====
</TABLE>

8. CAPITALIZATION

Preferred Stock

Under the Company's certificate of incorporation, the Board of Directors is
authorized, subject to certain limitations, to issue up to an aggregate of
5,000,000 shares of preferred stock. The preferred stock may be issued in one or
more series, with each series having different rights, preferences and
designations relating to dividends, conversion, voting, redemption and other
features. No shares of preferred stock have been issued at December 31, 1998 and
1999 and June 30, 2000.

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. An aggregate of 500,000
shares of common stock has been authorized for issuance under the Plan.

F-14
<PAGE> 58
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

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. 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 ten years from the
date of grant unless otherwise determined by the committee that administers the
Plan. All options granted in 1999 have a five-year term.

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

The following table summarizes activity under the Plan for the year ended
December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at December 31, 1998............................ -- --
Granted................................................... 327,768 $5.73
Exercised................................................. -- --
Forfeited................................................. -- --
------- -----
Outstanding at December 31, 1999............................ 327,768 $5.73
------- -----
Options exercisable at December 31, 1999.................... 103,673 $5.41
Options available for future grant.......................... 172,232
Weighted average fair value of options granted in the
period.................................................... $0.99
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT
DECEMBER 31, 1999 OPTIONS EXERCISABLE AT
------------------------------------- DECEMBER 31, 1999
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.77 141,742 4.33 $4.77 64,657 $4.77
$6.00 115,667 4.96 $6.00 23,461 $6.00
$7.20 70,359 4.50 $7.20 15,555 $7.20
------- -------
327,768 103,673
======= =======
</TABLE>

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.
The Company calculated the fair value of each option granted

F-15
<PAGE> 59
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

on the date of grant using the minimum value method as prescribed by SFAS No.
123 using the following assumptions:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Risk-free interest rate..................................... 5.5%
Expected lives (years)...................................... 3.5
Dividend yield.............................................. 0.0%
Expected volatility......................................... 0.0%
</TABLE>

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 would have increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net loss -- as reported..................................... $2,864,722
pro forma....................................... 2,942,893
Loss per share -- as reported............................... $1.90
pro forma................................ $1.95
</TABLE>

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

During 1999, the Company granted to three individuals warrants to purchase
an aggregate of 50,001 shares of common stock at an exercise price of $6.00 per
share. 33,334 of the warrants expire on June 30, 2002 and 16,667 expire on
December 15, 2002. The warrants are exercisable from the date of grant. The
Company recorded a non-cash charge of $146,600 representing the deemed value of
the warrants using the Black-Scholes option-pricing model.

In connection with the Company's initial public offering, the Company
issued 1,150,000 warrants as part of the unit offering. The warrants have an
exercise price of $7.20 per share until September 2000 and $9.00 per share
thereafter. The warrants expire in December 2004. The Company may redeem the
warrants for $0.25 per share commencing June 2000, if the closing price of the
Company's stock is greater than or equal to $12.00 per share for 10 consecutive
trading days.

Sale of Company Stock

In July 1999, a stockholder of the Company sold his entire stockholding of
281,144 shares of common stock to a third party for $500,000. The third party
contributed 63,848 of the 281,144 shares of common stock to the Company's
capitalization. Pursuant to this agreement, the stockholder agreed to provide
technical services to the Company for one year for $100,000.

9. COMMITMENTS AND CONTINGENCIES

The Company has certain noncancelable operating lease obligations for
office space and capital lease obligations for computer equipment. The operating
leases are for office space located in New York and in California and expire
through March 2005. The leases contain certain escalation clauses based on
certain

F-16
<PAGE> 60
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

charges that the landlord of the properties may incur over the base year, as
defined in the lease agreements. Future minimum lease payments under the
noncancelable operating and capital leases as of December 31, 1999 are as
follows:

<TABLE>
<CAPTION>
YEARS ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ ---------- -------
<S> <C> <C>
2000........................................................ $ 203,322 $ 6,066
2001........................................................ 235,494 --
2002........................................................ 216,667 --
2003........................................................ 193,049 --
2004........................................................ 196,877 --
---------- -------
Total minimum obligations................................. $1,045,409 6,066
==========
Less: Amounts representing interest......................... (1,102)
-------
Present value of minimum obligations........................ 4,964
Less: Current portion....................................... (4,964)
-------
Noncurrent portion.......................................... $ --
=======
</TABLE>

Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $49,700, $50,600 and $78,100, respectively, including
month-to-month rentals. Through June 1999, the Company subleased a portion of
its office space to a third party on a month-to-month basis. For the years ended
December 31, 1997, 1998 and 1999, the Company received approximately $17,500,
$15,900 and $7,600, respectively, of sublease income.

Employment Agreements

In July 1999, the Company entered into two employment agreements with two
officers of the Company. The agreements provide for base salaries of $200,000
per annum effective upon the closing of a qualified initial public offering and
certain fringe benefits and are effective through June 30, 2002. The agreements
provide that on termination of employment by the Company without cause, or by
the employee for good reason, the Company is obligated to pay severance costs
based on the higher of the remaining term of the agreement or 12 months.

License Agreement

In April 1996, the Company entered into an exclusive license agreement with
a software company that developed the facsimile technology. 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 year ended December 31, 1997, 1998 and 1999, the Company
paid royalties of approximately $50,000, $140,000 and $17,000, respectively.

Agency Relationship

In a listing agreement with the managing underwriter of the Company's
initial public offering, IPO.COM was authorized to include the Company's
prospectus on the IPO.COM Web site. The listing agreement neither authorized nor
requested that any additional information about the Company be provided.
However, IPO.COM provided, on other pages reachable from its Web site home page,
summary material that it extracted from the Company's prospectus, relating to
the Company and its initial public offering. Those pages also provided a direct
link to the Company's Web site. Although the managing underwriter did not
authorize

F-17
<PAGE> 61
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

IPO.COM to do anything other than provide the Company's prospectus, and was not
aware that it had done so, the listing agreement may have created an agency
relationship with the managing underwriter and, through the managing underwriter
with the Company. It may further be possible to argue that the IPO.COM agency so
created extended to all of IPO.COM's actions. If that argument is valid, then
the summary material contained on the IPO.COM Web site and the information
contained in the Company's Web site could be deemed to constitute a prospectus
that does not meet the requirements of the Securities Act of 1933. However, the
Company and the managing underwriter believe that no agency was created, or,
even if an agency relationship is established, IPO.COM was acting outside the
scope of its agency authority in posting information on its Web site other than
the Company's Prospectus. They also believe that neither the managing
underwriter nor the Company is responsible for that material. Additionally,
investors in the initial public offering were cautioned not to rely on the
Company's Web site as part of the initial public offering prospectus. Even if an
agency relationship and responsibility for this other material is established,
the other information on the Web site would constitute a violation of the
Securities Act only if it is considered without regard to the Company's complete
prospectus which also appears on that same Web site. Taken in context with the
prospectus the extracts would, in the Company's view, still be considered a
preliminary prospectus meeting the requirements of the Securities Act.

If there is a violation of the Securities Act, then for a period of one
year from the date of their purchase of units, investors in the initial public
offering could bring a claim against the Company and the underwriters to obtain
recovery of the consideration they paid for their units or, if these persons had
already sold the units, for damages resulting from their purchase and sale of
securities. Recovery would be based on the theory that the summary materials or
the materials contained in the Company's Web site were offering materials for
which the Company is responsible and which constitute a violation of the
Securities Act. If plaintiffs were to prevail, then damages could total up to
$6,900,000, plus interest, based on the initial public offering price of $6.00
per unit for 1,150,000 units and further assuming investors seek recovery of
damages after a loss of their entire investment and all purchasers in the
offering are entitled to this recovery. The Company expects that investors would
not be inclined to assert a claim for rescission or damages unless, during the
one-year period following the date of their purchase of securities, the trading
prices of the securities fall significantly below the initial public offering
price. If litigation was instituted and if the plaintiffs were to prevail, the
Company's business, results of operations and financial condition would be
harmed. However, upon the advice of counsel, the Company believes it has no
material liability and would contest any action of this kind vigorously.
Further, upon the advice of counsel, the Company believes that only persons who
purchased securities on the basis of the material on the IPO.COM Web site, other
than the Company's prospectus, would be able to prevail in those actions and
then only if they could establish that those other materials did not comply with
the Securities Act. Although the Company cannot be certain of the ultimate
disposition of this matter, it is the opinion of the Company's management, based
upon the advice of counsel and the information available to it, that in the
event of an assertion of a claim, if any, for violation of the Securities Act of
1933 related to the IPO.COM Web site or the materials contained in the Company's
Web site based on the agency theory above, the likelihood of a recovery is
remote. Consequently, based on the advice of counsel, the Company's management
believes that the expected outcome of this matter will not significant affect
the results of operations and financial condition of the Company.

10. SUBSEQUENT EVENTS (UNAUDITED)

In March 2000, the Company granted to a consultant, warrants to purchase in
aggregate 40,000 shares of common stock at an exercise price of $10.00 per
share. The warrants expire in March 2005 and are exercisable upon vesting.
25,000 of the warrants vest immediately and 15,000 of them vest when the
consultant achieves certain performance goals or, if not then vested, on the
fifth anniversary of the date of grant, provided the consultant is still
providing services to the Company. In connection with the 25,000 warrants, the
Company recorded deferred compensation of $157,408 representing the fair value
of the warrants using the Black-
F-18
<PAGE> 62
ADSTAR.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 2000 IS UNAUDITED)

Scholes option-pricing model. For the six-month period ended June 30, 2000,
approximately $52,500 of the deferred compensation was charged to expense. The
Company will record additional non-cash charges associated with the remaining
15,000 options over the service period. To date such charges have been
immaterial.

The Company established a vendor compensation plan whereby it may
compensate vendors in shares of its common stock in lieu of cash. Under the
plan, 200,000 shares are available for issuance. In the six-month period ended
June 30, 2000, 12,921 shares were issued to vendors under the plan representing
compensation of approximately $92,500. Of that amount, approximately $84,500 was
expensed in the six-month period. The balance is deferred and amortized over
periods of three or eleven months.

In April 2000, the Company entered into an equipment leasing agreement with
a commercial bank, which provides up to $100,000 for financing of capital
equipment. As of June 30, 2000, the Company had financed asset purchases of
approximately $68,000 under the agreement.

For the six-month period ended June 30, 2000, the Company granted stock
options to employees to purchase 34,639 shares of common stock at an average
exercise price of $6.24 per share. In addition, options to purchase 13,974
shares were forfeited. As of June 30, 2000, the Company has stock options
outstanding to purchase 348,163 shares of common stock.

F-19
<PAGE> 63

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

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF THE
UNITS MEANS THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER
THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THE UNITS IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3

Risk Factors.......................... 6

Use of Proceeds....................... 12

Price Range of Common Stock........... 13

Dividend Policy....................... 13

Capitalization........................ 14

Selected Financial Data............... 15

Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16

Business.............................. 22

Management............................ 30

Certain Transactions.................. 33

Principal Stockholders................ 34

Description of Securities............. 35

Shares Eligible for Future Sale....... 37

Underwriting.......................... 39

Legal Matters......................... 42

Experts............................... 42

Available Information................. 42

Index to Financial Statements......... F-1
</TABLE>

------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,400,000 SHARES
COMMON STOCK

[ADSTAR.COM LOGO]
----------

PROSPECTUS
----------
PAULSON INVESTMENT
COMPANY, INC.
, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 64

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes a Delaware corporation to indemnify its officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.

Section 102(b) of the Delaware General corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct of
knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the company or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.

Article EIGHTH of the Registrant's Certificate of Incorporation provides
that the personal liability of the directors of the Registrant be eliminated to
the fullest extent permitted under Section 102(b) of the Delaware General
Corporation law.

Article NINTH of the Registrant's Certificate of Incorporation and the
Registrant's By-laws provides that all persons whom the Registrant is empowered
to indemnify pursuant to the provisions of Section 145 of the Delaware General
Corporation law (or any similar provision or provisions of applicable law at the
time in effect), shall be indemnified by the Registrant to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.

Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefor unenforceable.

Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses (other than the underwriting
discounts and commissions and the representative's non-accountable expense
allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered. All of such expenses are
estimates, other than the filing fees payable to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.

II-1
<PAGE> 65

<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee............... $ 1,174
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 1,000
Nasdaq Additional Listing Fee............................... 7,500
Accounting Fees............................................. 15,000
Legal Fees.................................................. 40,000
Printing and Engraving Expenses............................. 50,000
Blue Sky Fees and Expenses.................................. 17,000
Transfer and Warrant Agent fees............................. 1,500
Miscellaneous Expenses...................................... 26,826
--------
Total..................................................... $160,000
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Since July 1997 the Registrant has issued securities without registration
under the Securities Act in the following transactions:

1. In March 1999 we purchased the technology, intellectual property
and software rights related to the AdStar technology for $751,710 by the
issuance of our 10% note payable in monthly installments of $8,333 and
prepayable on the consummation of our initial public offering. The note was
paid at the closing of our initial public offering in December 1999.

2. On April 15, 1998 Registrant issued 73,941 shares to Adam Left, an
officer of the Company, for a purchase price of $26,300.

3. During the period from March 1999 through April 30, 1999 the
Registrant issued convertible notes in the aggregate principal amount of
$1,050,000 to eight investors entitling the holders to purchase an
aggregate of 231,914 shares of common stock. The notes were converted on
the effective date of our initial public offering in December 1999.

4. In July 1999 the Registrant issued 22,534 shares to a small
business investment company in connection with an $850,000 loan by it to
the Registrant.

5. On July 15, 1999 the Registrant issued three year warrants to
Jonathan Cohen and PS Capital to purchase an aggregate of 33,334 shares of
common stock at the initial public offering price per share.

6. In October 1999 the Registrant issued a $1.1 million 6% promissory
note due October 2001 to Paulson Capital Corporation.

7. On December 16, 1999 the Registrant issued three year warrants to
Net Catalyst LLC to purchase 16,667 shares of common stock at $6.00 per
share.

8. In March 2000 the Registrant issued five year warrants to a
consultant to purchase 40,000 shares of common stock at $10.00 per share.

9. In March 2000 the Registrant established a vendor compensation plan
whereby it may compensate vendors in shares of its common stock in lieu of
cash. Under the plan, 200,000 shares are available for issuance. In the
six-month period ended June 30, 2000, 12,921 shares were issued to four
vendors under the plan.

The sales and issuances of the common stock, warrants, promissory note and
convertible notes described Item 1 through 6 and above were deemed to be exempt
from registration under the Securities Act in reliance upon Section 4(6) as
transactions not involving a public offering. In addition, we also relied on
Regulation 701 as exempting the issuance of shares described in Item 2 above and
4(2) in exempting the issuance of shares described in Items 2 through 9 above,
from registration. The Registrant made a determination that each of the

II-2
<PAGE> 66

purchasers was a sophisticated investor. The purchasers in these private
offerings represented their intention to acquire the securities for investment
only and not with a view to their distribution. Appropriate legends were affixed
to the stock certificates and warrants issued in these transactions. All
purchasers had adequate access, to sufficient information about the Registrant
to make an informed investment decision. None of the securities was sold through
an underwriter and, accordingly, there were no underwriting discounts or
commissions involved.

II-3
<PAGE> 67

ITEM 27. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Company(1)
3.1a -- Proposed Amendment to Certificate of Incorporation(1)
3.2 -- By-Laws of the Company(1)
3.3 -- Agreement and Plan of Merger(1)
4.1 -- Specimen Stock Certificate(1)
4.2 -- Form of Underwriter's Warrant
5.1 -- Opinion of Morse; Zelnick, Rose & Lander, LLP
10.1 -- 1999 Stock Option Plan(1)
10.4 -- Employment Agreement between the Company and Leslie
Bernhard(1)
10.5 -- Employment Agreement between the Company and Eli Rousso(1)
10.6 -- Memorandum of Agreement between the Company and
CareerPath.com LLC dated March 11, 1999(1)
10.7 -- Distribution and Service Agreement dated February 9, 1999 by
and between the Company and PowerAdz(1)
10.8 -- Distribution and Service Agreement dated November 19, 1998
by and between the Company and AdOne Classified Network,
Inc.(1)
10.9 -- Agreement dated March 16, 1999 by and between James E. Mann
and the Company(1)
10.10 -- Form of warrant to purchase 16,667 shares of Common Stock
issued to Jonathan Cohen and Ronald Posner(1)
10.12 -- Loan and Subscription Agreement dated July 13, 1999 by and
between the Company and Interequity Capital Partners L.P.(1)
10.13 -- Form of Subscription Agreement for 12% Convertible
Subordinated Unsecured Promissory Note(1)
10.14 -- Form of 12% Convertible Subordinated Unsecured Promissory
Note(1)
10.15 -- Form of Shareholders' Agreement by and among the Company,
its principal stockholders and certain investors(1)
10.16 -- Employment Agreement dated July 20, 1998 between Adam Left
and the Company and amendment dated July 15, 1999(1)
10.17 -- Employment Agreement dated as of April 12, 1999 between
Michael Kline and the Company(1)
10.18 -- Promissory Note issued to Paulson Capital Corporation(1)
10.19 -- Distribution and Service Agreement dated as of September 3,
1999 by and between the Company and Landon Media Group,
Inc.(2)
10.20 -- Distribution and Service Agreement dated as of August 30,
1999 by and between the Company and Career Engine(2)
10.21 -- Distribution and Service Agreement dated as of August 27,
1999 by and between the Company and CareerPath.com(2)
10.22 -- INTENTIONALLY LEFT BLANK
10.23 -- Engagement Agreement, dated March 7, 2000, between RCG
Capital Markets Group and the Company(3)
10.24 -- First Amendment of Office Lease and Parking License
Agreement, dated December 13, 1999, between TIAA Realty,
Inc. and the Company.(3)
</TABLE>

II-4
<PAGE> 68

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
10.25 -- Second Amendment of Office Lease and Parking License
Agreement, dated March 24, 2000, between TIAA Realty, Inc.
and the Company(3)
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1).
24. -- Power of Attorney (included in signature page).
</TABLE>

---------------
(1) Filed as an exhibit with the same number to Registration Statement No.
333-84209, and incorporated herein by reference.

(2) Filed as an exhibit with the same number to Registration Statement 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.

ITEM 28. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to:

(1) file, during any period in which it offers or sells securities, a
post effective amendment to this Registration Statement to:

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

(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and

(iii) include any additional or changed material information on the
plan of distribution;

(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities then being offered, and the offering of Such securities at that
time shall be deemed to be the initial bonafide offering of such
securities.

(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.

The undersigned Registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement
herein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.

II-5
<PAGE> 69

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Los Angeles, State of California on August 9, 2000.

ADSTAR.COM, INC.

By: /s/ LESLIE BERNHARD
------------------------------------
Leslie Bernhard, President

ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Leslie Bernhard and Stephen A. Zelnick, or any one of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all pre- or post-effective amendments to
this Registration Statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any one of them, or
their or his substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities indicated on August 9, 2000.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ LESLIE BERNHARD President, Chief Executive Officer and
----------------------------------------------------- Director
Leslie Bernhard

/s/ ELI ROUSSO Executive Vice President, Chief Technology
----------------------------------------------------- Officer and Director
Eli Rousso

/s/ BENJAMIN J. DOUEK Senior Vice President, Chief Financial Officer
----------------------------------------------------- and Director
Benjamin J. Douek

Director
-----------------------------------------------------
Arthur Salzfass

Director
-----------------------------------------------------
Chris A. Karkenny
</TABLE>

II-6
<PAGE> 70

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO.
------- DESCRIPTION
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Company(1)
3.1a -- Proposed Amendment to Certificate of Incorporation(1)
3.2 -- By-Laws of the Company(1)
3.3 -- Agreement and Plan of Merger(1)
4.1 -- Specimen Stock Certificate(1)
4.2 -- Form of Underwriter's Warrant
5.1 -- Opinion of Morse; Zelnick, Rose & Lander, LLP
10.1 -- 1999 Stock Option Plan(1)
10.4 -- Employment Agreement between the Company and Leslie
Bernhard(1)
10.5 -- Employment Agreement between the Company and Eli Rousso(1)
10.6 -- Memorandum of Agreement between the Company and
CareerPath.com LLC dated March 11, 1999(1)
10.7 -- Distribution and Service Agreement dated February 9, 1999 by
and between the Company and PowerAdz(1)
10.8 -- Distribution and Service Agreement dated November 19, 1998
by and between the Company and AdOne Classified Network,
Inc.(1)
10.9 -- Agreement dated March 16, 1999 by and between James E. Mann
and the Company(1)
10.10 -- Form of warrant to purchase 16,667 shares of Common Stock
issued to Jonathan Cohen and Ronald Posner(1)
10.12 -- Loan and Subscription Agreement dated July 13, 1999 by and
between the Company and Interequity Capital Partners L.P.(1)
10.13 -- Form of Subscription Agreement for 12% Convertible
Subordinated Unsecured Promissory Note(1)
10.14 -- Form of 12% Convertible Subordinated Unsecured Promissory
Note(1)
10.15 -- Form of Shareholders' Agreement by and among the Company,
its principal stockholders and certain investors(1)
10.16 -- Employment Agreement dated July 20, 1998 between Adam Left
and the Company and amendment dated July 15, 1999(1)
10.17 -- Employment Agreement dated as of April 12, 1999 between
Michael Kline and the Company(1)
10.18 -- Promissory Note issued to Paulson Capital Corporation(1)
10.19 -- Distribution and Service Agreement dated as of September 3,
1999 by and between the Company and Landon Media Group,
Inc.(2)
10.20 -- Distribution and Service Agreement dated as of August 30,
1999 by and between the Company and Career Engine(2)
10.21 -- Distribution and Service Agreement dated as of August 27,
1999 by and between the Company and CareerPath.com(2)
10.22 -- INTENTIONALLY LEFT BLANK
10.23 -- Engagement Agreement, dated March 7, 2000, between RCG
Capital Markets Group and the Company(3)
</TABLE>
<PAGE> 71

<TABLE>
<CAPTION>
EXHIBIT
NO.
------- DESCRIPTION
<C> <C> <S>
10.24 -- First Amendment of Office Lease and Parking License
Agreement, dated December 13, 1999, between TIAA Realty,
Inc. and the Company.(3)
10.25 -- Second Amendment of Office Lease and Parking License
Agreement, dated March 24, 2000, between TIAA Realty, Inc.
and the Company(3)
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1).
24. -- Power of Attorney (included in signature page).
</TABLE>

---------------
(1) Filed as an exhibit with the same number to Registration Statement No.
333-84209, and incorporated herein by reference.

(2) Filed as an exhibit with the same number to Registration Statement 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.