e10qsb

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from to

Commission file number 001-15363

AdStar, Inc.

(Exact name of small business issuer as specified in its charter)


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

4553 Glencoe Avenue, Suite 300, Marina del Rey, California 90292
(Address of principal executive offices)

(310) 577-8255
(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 7, 2005 the issuer had outstanding 16,157,273 shares of its common stock

Transitional Small Business Disclosure Format (Check one): Yes o No þ

AdStar, Inc. and Subsidiary

Consolidated Balance Sheet

September 30, 2005 (unaudited)


Assets

Current assets:
Cash and cash equivalents	$	1,449,893
Accounts receivable, net of allowance for doubtful accounts and sales returns of $78,000		626,951
Notes receivable from officers – current portion		8,363
Prepaid and other current assets		124,582

Total current assets		2,209,789

Notes receivable from officers, net of current portion		218,019
Property and equipment, net		127,918
Capitalized and purchased software, net		1,168,485
Intangible assets, net		1,328,650
Goodwill		2,132,219
Other assets		30,194

Total assets	$	7,215,274


Liabilities and Stockholders’ Equity

Current liabilities:
Due to publications	$	1,573,685
Accounts payable and accrued expenses		739,501
Deferred revenue and customer deposits – current portion		147,932
Loans from stockholders, current portion		21,000
Capital lease obligations		305

Total current liabilities		2,482,423

Deferred revenue – net of current portion		30,012
Loans from stockholders, net of current portion		10,500
Convertible note		211,702

Total liabilities		2,734,637

Commitments and contingencies

Stockholders’ equity:
Convertible Preferred stock, par value $0.0001; authorized 5,000,000 shares; Series B-2, 2,000,000 issued and outstanding; liquidation preference of $1,800,417		1,342,404
Common stock, par value $0.0001; authorized 40,000,000 shares; 15,953,929 shares issued and outstanding		1,595
Additional paid-in capital		21,771,255
Treasury stock, par value $0.0001; 67,796 shares		(67,796	)
Accumulated deficit		(18,566,821	)

Total stockholders’ equity		4,480,637


Total liabilities and stockholders’ equity	$	7,215,274

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

AdStar, Inc. and Subsidiary

Statements of Operations

For the three and nine months ended
September 30, 2004 and 2005 (unaudited)


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2005			2004			2005
ASP, net	$	440,282		$	491,152		$	1,253,420		$	1,390,567
Licensing and software		551,118			639,771			1,664,972			1,930,598
Customization and other		272,437			262,151			781,956			649,846

Net Revenues		1,263,837			1,393,074			3,700,348			3,971,011

Cost of revenues, including depreciation and amortization of $151,980, $147,919, $477,707 and $471,724		549,105			470,141			1,484,288			1,369,962


Gross profit		714,732			922,933			2,216,060			2,601,049

General and administrative expense		479,498			477,472			1,384,194			1,418,826
Selling and marketing expense		322,417			161,296			977,881			519,953
Product maintenance and development expenses		331,068			210,627			972,026			656,938
Amortization		22,059			22,059			66,172			66,176


Income (loss) from operations		(440,310	)		51,479			(1,184,213	)		(60,844	)

Beneficial interest, amortization of financing fees and additional non-cash interest on convertible note		(67,451	)		(408,197	)		(231,122	)		(543,570	)
Interest income (expense), net		(10,170	)		(11,617	)		(21,507	)		(39,393	)


Loss before taxes		(517,931	)		(368,335	)		(1,436,842	)		(643,807	)

Provision for income taxes		3,463			3,300			14,544			10,013


Net loss	$	(521,394	)	$	(371,635	)	$	(1,451,386	)	$	(653,820	)

Deemed dividends on exercise of warrants		—			—			—			(98,399	)


Net loss applicable to common stockholders	$	(521,394	)	$	(371,635	)	$	(1,451,386	)	$	(752,219	)


Loss per share – basic and diluted	$	(0.04	)	$	(0.02	)	$	(0.11	)	$	(0.05	)

Weighted average number of shares – basic and diluted		14,491,204			15,483,143			13,889,859			15,337,215

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

Statements of Cash Flows

For the nine months ended
September 30, 2004 and 2005 (unaudited)


	2004			2005
Cash flows from operating activities:
Net loss	$	(1,451,386	)	$	(653,821	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		595,180			573,807
Beneficial interest and amortization of financing fees on convertible note		228,121			543,570
Stock based vendor payments		80,057			93,087
Allowance for doubtful accounts		25,000			(5,540	)
Changes in assets and liabilities:
Accounts receivable		(232,861	)		(36,757	)
Prepaid and other assets		(223,668	)		30,735
Due to publications		659,049			274,756
Accounts payable and accrued expenses		(348,839	)		(649,651	)
Deferred revenue and customer deposits		156,914			(182,374	)

Net cash used in operating activities		(512,433	)		(12,188	)


Cash flows from investing activities:
Purchase of Edgil Associates, Inc.		(85,000	)		—
Additions to capitalized and purchased software		(423,964	)		(78,497	)
Purchase of property and equipment		(26,578	)		(39,176	)
Additions to intangible assets		(6,003	)		—
Principal repayments of shareholder notes receivable		5,653			5,975

Net cash used in investing activities		(535,892	)		(111,698	)


Cash flows from financing activities:
Proceeds from issuance of convertible note payable		1,348,514			—
Principal repayments of convertible debt		(45,454	)		(411,360	)
Proceeds from exercises of options and warrants		167,579			920,613
Costs of conversion of Series A preferred stock		(30,181	)		—
Principal repayments of notes payable		(10,500	)		(10,500	)
Principal repayments on capital leases		(24,833	)		(17,980	)


Net cash provided by financing activities		1,405,125			480,773


Net increase in cash and cash equivalents		356,800			356,887

Cash and cash equivalents at beginning of period		2,092,477			1,093,006


Cash and cash equivalents at end of period	$	2,449,277		$	1,449,893


Supplemental cash flow disclosure:
Taxes paid	$	3,548		$	16,795
Interest paid	$	32,008		$	67,624
Non cash investing and financing activities
Conversion of 1,443,457 shares of convertible preferred stock into equivalent shares of common stock – Note 4	$	1,697,840		$	—
Conversion of convertible note into shares of common stock – Note 5	$	225,000		$	470,000
Issuance of common stock to financial consultants	$	32,000		$	93,087
Issuance of common stock to technical consultants	$	80,087		$	—

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

AdStar, Inc. and Subsidiary

Notes To Interim Financial Statements

(Unaudited)

	1.		General

			The interim financial statements for AdStar, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-QSB and Item 10 of Regulation S-B. Accordingly they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 2004.

			The accompanying financial statements have been prepared assuming the Company will have liquidity to maintain its required minimum level of operations. At September 30, 2005, we had an accumulated deficit of $18,466,000. We have incurred significant recurring net losses. For the years ended December 2003 and 2004 we had net losses of $2,842,000 and $3,648,000, respectively and for the three and nine months ended September 30, 2005 we had a net losses from operations of $372,000 and $653,000, respectively, and a net cash outlay from operations of $12,000. Our 2003 and 2004 net losses were principally attributable to our continued shift of focus from an on-line business to an ASP business; in addition our 2004 net losses included a one-time $1,203,000 loss from abandoned acquisitions, recorded in the fourth quarter 2004. At September 30, 2005, the Company had negative working capital of $273,000 compared to $1,535,000 at December 31, 2004. The negative working capital is primarily a result of the 2004 net loss described above and funding of the convertible note during 2005. Net proceeds from the convertible note were primarily used to fund the 2004 loss from abandoned acquisitions.

			We expect to continue to incur losses until we are able to increase revenues significantly from fees based on the number of purchases transacted through our ASP product. Although there can be no assurance we believe that the cash on hand of $1,450,000 at September 30, 2005, the expected increase in cash flows from operations and a decrease in cash outlays of approximately $576,000 over the next 12 months from savings on principal and interest payments as a result of the conversion of the convertible note into equity will be sufficient to meet our anticipated working capital needs through September 30, 2006. We expect cash flows from operations to increase as a result of: operational cost cutting strategies, including a reduction in staff during the fourth quarter of 2004, a 5% decrease in the compensation of the Chief Executive, Technology and Operating Officers effective January 1, 2005; curtailment of our acquisition strategy and development projects; a reduction in cash outlays for previously accrued losses on abandoned acquisitions ending in December 2005; coupled with our ability to reduce contracted professionals and an expected increase in revenues. We believe the additional $597,000 in gross proceeds raised through the exercise of 702,850 warrants on January 5, 2005, the $341,000 in gross proceeds as a result of the exercise of 360,084 in incentive stock options primarily exercised during third quarter 2005 and the addition of 4 new publications utilizing

our credit card processing services on a go forward basis, are sufficient to offset short term cash deficiencies created as a result of our abandoned acquisition strategy during 2004, the one time fourth quarter cash payments from credit card processing totaling $268,000 in due to publications as a result of the loss of five publications during the quarter ended September 30, 2005 and up front costs to complete major new contracts. In addition the Company continues to seek additional financings.

As a result, we believe that we will be in a position to take advantage of additional strategic acquisitions and revenue sharing arrangements should they present themselves. We are optimistic that our growing ASP business will continue to be accepted in the marketplace. However, our ability to sell ASP business products and service offerings during the current year may be hampered by the current unstable climate in the advertising market, the geo-political climate, including the war in Iraq, and state of the economy in general. These factors, coupled with possible competition from other vendors, the extended selling cycle in our industry, and customer delays in customization and implementations, could delay our ability to increase revenue to a level sufficient to cover our expenses. There is no assurance that management will be successful with its operating plan and, if events and circumstances occur such that we do not meet our plan as expected, and we are unable to raise additional financing, we may be required to further reduce certain discretionary spending, which could have a material adverse effect on AdStar’s ability to achieve our intended business objectives.

In February 2005, we received a letter from Nasdaq putting us on notice that the bid price of our Common Stock had fallen below their $1.00 per share minimum. Pursuant to applicable NASDAQ rules, we were provided a 180-day grace period until August 17, 2005 to regain compliance by having the bid price of our Common Stock close at $1.00 per share or more for a minimum of 10 consecutive business days. On July 18, 2005 NASDAQ notified the Company that it had regained compliance.

	2.		Summary of Significant Accounting Policies

			Concentration of Credit Risk and Major Customers

			Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable.

			For the nine months ended September 30, 2005 and 2004, one customer accounted for 10.0% and one customer accounted for 10.1% of the Company’s revenues,

respectively. At September 30, 2005, three customers in the aggregate accounted for 26.7% of the Company’s accounts receivable. The majority of the Company’s customers have historically consisted of newspapers and publishers of classified advertisements.

			Principles of Consolidation

			The accompanying consolidated financial statements include the accounts of AdStar, Inc. and its wholly owned subsidiary Edgil Associates, Inc. All intercompany transactions and balances have been eliminated in consolidation.

			Computation of Earnings Per Share

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

			For the nine months ended September 30, 2005 the weighted averages shares outstanding as used in the calculation of diluted loss per share does not include 1,463,047 and 327,620 respectively, of options and warrants to purchase common stock and 2,000,000 shares of common stock issuable upon the conversion of series B-2 preferred stock to common stock, as their inclusion would be antidilutive.

			Software Development Costs

			Costs to establish the technological feasibility of software applications developed by us are charged to expense as incurred. Certain costs incurred subsequent to achieving technological feasibility are capitalized. Accordingly, we capitalize a portion of the internal labor costs and external consulting costs associated with essential Web site development and enhancement activities. Costs associated with conceptual design and feasibility assessments as well as maintenance and routine changes are expensed as incurred. Capitalized costs are amortized based on current or future revenue for each product with an annual minimum equal to the straight-line basis over the estimated economic lives of the applications, not to exceed 5 years. During the three and nine months ended September 30, 2005 we capitalized $6,000 and $47,000, and amortized $121,000 and $391,000 in capitalized software costs, respectively. During the three and nine months ended September 30, 2005 we expensed $211,000 and $657,000 in software development and maintenance costs.

			Reclassifications

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

			New accounting pronouncements

			In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” and APB Opinion No. 25, “Accounting for Stock Issued to

			Employees.” This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company is currently assessing the impact of this accounting standard on the Company’s results of operations and financial position.

			In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Statement No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of Statement No. 153 will have material impact on our results of operations or financial condition.

			In March 2005, the FASB issued FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt the standard as of the effective date and does not expect the adoption of FIN 47 to have a material effect on the Company’s financial position, cash flows or results of operations for the year ending December 31, 2005.

			In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement. “ The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The

			Company will adopt the standard as of the effective date and is currently evaluating the impact, if any, on the Company’s results of operations, financial position or cash flows.

	3.		Goodwill

			In accordance with SFAS No. 142, the Company recorded goodwill of $2,132,219 from the purchase of Edgil Associates, Inc. In accordance with SFAS 142 the Company does not amortize goodwill. However the Company will evaluate goodwill at least on an annual basis for impairment or when there are indications of impairment. In future periods if goodwill is determined to be impaired, the Company will recognize a non-cash charge equal to the excess of the carrying value over the fair value. There can be no assurance that future evaluations of goodwill will not result in impairment and a charge to earnings.

			The Company completed its annual impairment analysis including obtaining an independent outside appraisal and such analysis indicated that the amount of goodwill is fairly stated.

	4.		Significant Contracts

			On March 18, 2002, the Company entered into a series of agreements with Tribune Company (“Tribune”) and sold 1,443,457 shares of Series A convertible preferred stock for approximately $1.8 million. The Company recorded the $1.8 million investment in Series A convertible Preferred Stock at cost, which approximated fair value. The Company converted the Series A convertible preferred stock into an equivalent number of the Company’s common stock on April 1, 2004.

			In December 2002 the Company entered into an agreement with Tribune Company for an additional investment by Tribune of $1,500,000. As part of the transaction, AdStar developed additional features that expand the capabilities of its generic service and the customized services that were launched in August 2002. The investment is in the form of an initial purchase by Tribune of 1,200,000 shares of Series B-1 Preferred Stock for $900,000 funded in December 2002 and a subsequent purchase of 800,000 shares of Series B-2 Preferred Stock for $600,000. In addition, on the second closing, the series B-1 shares, plus additional shares issued for accrued dividends on Series B-1 converted to series B-2. The purchase price for each share of the Series B-1 and Series B-2 Preferred Stock was $0.75 at or below the fair market value of AdStar Common Stock at the time of the respective closing. These shares carry a liquidation preference that includes a dividend of 7% per year available only upon liquidation and currently convert on a 1:1 basis. Holders of Series B Preferred Stock are entitled to vote on all matters submitted to the stockholders for vote and vote as a single class with the shareholders of our Common Stock. The holders of Series B Preferred Stock are entitled to one vote for each share of common issuable upon conversion.

			As of December 31, 2003, $294,063 in development and customization costs associated with the FlexAds application have been capitalized net of a write down of $316,462 (Note 2). As of December 31, 2003 the Company had launched the FlexAds service on eight Tribune newspapers and commenced full amortization of the cost of the development and customization effort over the maximum 5-year period of the contract. Under the terms of the agreement the Company received $7,500 minimum monthly payments for up to 60 months comprised of a 36-month contract with two 12-month options which automatically renew unless Tribune

			provides 180-day notice. The Company commenced recognition of revenue from the $7,500 minimum monthly fee under the agreement on a straight-line basis during August 2002. In October 2004 the company received formal notification from CareerBuilder terminating the contract at the end of the initial contract period, August 2005.

			The monthly transactions have not exceeded the contracted minimums during any month since inception and have stabilized at less than 20% of the guaranteed minimum resulting in amortization exceeding revenues recognized by $13,778. In November 2003, Tribune Company indicated to AdStar that a significant change in the programming was required to meet their internal requirements. Under the terms of the agreement, AdStar was to provide up to 2 full time equivalent programmers for such modifications at no additional charge. In accordance with Company policy management determined the carrying value of the FlexAd software application (Note 2) and the related service contract have a permanent impairment in value. As such during December 2003 management estimated that the expected future revenues were never likely to exceed total costs, and that under the existing transaction levels there is no assurance that Tribune would exercise its options to extend the contract. As such, we recorded an additional $170,000 in estimated costs to complete the additional programming requirement. In March 2005 the Company received final notification from CareerBuilder terminating the contract effective as of August 2005. During September 2005, as part of it’s ongoing quarterly analysis of the estimated costs to complete the additional programming requirement management reduced the remaining estimated costs to complete by $58,000 reducing to $0.00 the remaining accrual on the balance sheet at September 30, 2005. In addition during the three and nine months ended September 30, 2005 the Company incurred $5,000 and $22,000, respectively, in costs recorded against the estimated costs to complete additional programming. Upon termination of the contract in August 2005 the Company is no longer obligated to provide the 2 full time equivalent programmers.

	5.		Convertible Note

			On April 12, 2004, the Company closed a $1.5 million private placement of a 3-year secured convertible note (the “Note”) and 7-year warrants to purchase 200,000 shares (the “Warrants”) of our common stock (the “Common Stock”) with Laurus Master Fund, Ltd., a New York City based institutional fund and an accredited investor (“Laurus Master Fund”). The Note bears interest at the prime rate minus one percentage point and is convertible into Common Stock at an initial fixed conversion price of $2.25 per share (the “Fixed Conversion Price”), 105% of the average closing price of the Common Stock (“Average Closing Price”) during the 22 trading days preceding the closing date.

			The Company allocated the purchase price based on fair value and recorded a debt discount of approximately $734,000 consisting of the intrinsic value of the beneficial conversion of approximately $467,000 and the portion of the proceeds allocated to the warrants issued to the lenders of approximately $267,000, using the Black-Scholes option pricing model, based on the relative fair values of the warrants and the notes. The debt discount is being amortized as interest expense over the three-year term of the notes using the interest method.

			Beginning on July 1, 2004 and recurring on the first day of each succeeding month thereafter, until the maturity date, April 12, 2007, the Company will make minimum monthly principal payments of $45,455 on the note, together with any accrued and unpaid interest that are due. Any principal amount that remains outstanding on the

			Maturity Date shall be due and payable on the Maturity Date. The net proceeds from the financing were primarily used to pursue the Company’s strategic acquisition strategy. The strategy was abandoned in December 2004.

			On September 23, 2005 AdStar offered Laurus Master Fund the opportunity to convert the balance (approximately $820,000, including principal and unpaid interest) of its convertible note at a price of $1.88 (82.5% of the closing price on the date of offer) per share during the 20 trading day period commencing on the delivery of the offer but, without AdStar’s written consent, no more than 250,000 shares during the first 10 trading days following such delivery. The offer was cancelable or deferrable by AdStar prior to the end of the initial 10-day period with respect to the second 10-day period. Under the terms of the offer Laurus Master Fund opted to convert $470,000 in note principal into 250,000 shares of AdStar common stock through September 30, 2005 and converted the remaining note principal balance of $348,000 during October 2005 (see Note 14).

			During the nine month period ending September 30, 2005, approximately $203,000 of prepaid financing fees and debt discount was amortized as interest expense, including a non-cash portion of approximately $164,000. The non-cash portion was comprised of approximately $156,000 debt discount and $8,000 in prepaid finder fees amortized during the period. In addition, during September 30, 2005 the conversion of $470,000 in principal accelerated the realization of approximately 240,000 of prepaid financing fees and debt discount as interest expense, including a non-cash portion of approximately $195,000. The non-cash portion was comprised of approximately $184,000 debt discount and $11,000 in prepaid finder fees. The future non-cash debt discount and prepaid finder fees to be amortized as interest expense over the remaining 8 months of amortization are approximately $178,000, which was subsequently expensed in October 2005 upon conversion of the remaining convertible note principal balance during October 2005 (see Note 14).

			The Company offered an inducement to its convertible note holders to convert their note into shares of AdStar common stock at a price of $1.88, which was below the fair market value at the closing price of the Company’s stock on the dates of conversion during September 2005. As such the Company recorded additional non-cash interest expense of approximately $100,000 on the dates of conversion. The Company calculated the additional non-cash interest as the difference between the fair market value of the Company’s common stock and the fixed conversion price (82.5% of the closing price on the date of offer) of the convertible note on the dates the Company received and accepted the conversion notices.

	6.		Exercise of warrants

			In January 2005 the Company raised $597,423 from the exercise of 702,850 warrants at $0.85 per warrant. The warrants had been issued to Paulson Investment Company, or certain of its officers and employees, primarily as compensation for their services in prior securities offerings and originally had exercise prices ranging from $0.75 to $1.87 and expiration dates ranging from September 25, 2005 to March 31, 2009. On January 3, 2005, the Company offered an inducement to its warrant holders to exercise their warrants at a price of $.85, which was below the fair market value of $.99 per share at the closing price of the Company’s stock on January 4, 2005. As this offer only benefited a selected group of common shareholders and was not broadly available to all common shareholders, the Company determined that the deemed dividend treatment was most appropriate. As such, this deemed dividend is treated in a manner similar to the preferred dividend. The Company calculated the

			deemed dividend as the difference between the fair market value of the Company’s common stock and the exercise price of the warrants on the date of conversion notice was accepted and signed. Therefore, in accordance with FASB 128, paragraph 9, a preferred (deemed) dividend is required to be added to net loss applicable to common shareholders. The company recorded a deemed dividend of approximately $98,000 as the fair market value of the Company’s common stock exceeded the exercise price on the date of conversion.

	7.		Notes payable

			Pursuant to the Merger agreement the notes payable to the two former stockholders of Edgil were restated whereby each stockholder received $51,500 in principal payments upon the closing and the remaining $31,500 note balance, for each Stockholder, is to be repaid in six equal payments of principal along with all interest at a rate of 8% per annum, with the first payment to be made on the nine month anniversary of the Effective Date (October 21, 2003) and each of the next five payments to be paid each nine months thereafter, with the final payment to be made on the third anniversary of the Closing Date. Accordingly $10,500 in minimum principal pay downs are due during October 2005, March and October 2006.

	8.		Officers notes receivable

			In July 2002, AdStar entered into a loan transaction with Leslie Bernhard, President and Chief Executive Officer and Eli Rousso, Executive Vice President and Chief Technical Officer for $110,434 and $100,000, respectively. As part of the transaction, Ms. Bernhard and Mr. Rousso each issued to AdStar an unsecured, non-negotiable promissory note bearing interest at 5.56% with monthly principal and interest payments of $763 and $691, respectively. The note is payable on a monthly basis, with all remaining outstanding principal and interest amounts due on July 31, 2022. Concurrently, an outstanding note from Ms. Bernhard in the amount of $39,566 was restructured under the same terms and conditions as the aforementioned new note. The loans are forgiven if there is a change in control in AdStar or if the loan maker is dismissed for other than cause as defined by the loan and employment agreements. At September 30, 2005 the outstanding notes receivable balance was $226,400.

	9.		Due to publications

			The Company processes credit cards on behalf of certain of its customers as part of ASP services provided. Due to publications is a result of contractual customer arrangements whereby we receive net proceeds daily on behalf of these customers for third party ads placed via credit card. These transactions are collected, reconciled monthly and submitted to the publication, net of processing fees, generally within 35 days from the month end. We have been providing this service at virtually no charge to customers since approximately December 2000.

			During the quarter ended September 30, 2005 we added one new publication and five publications terminated our service. In the fourth quarter we expect 3 additional new publications to go online using our credit card processing service. The new publication resulted in a one-time increase in cash and the related due to publications liability of approximately $65,000 offset by a reduction in cash inflows from credit card processing services of $268,000 and related decrease in due to publications during the quarter ended September 30, 2005. In addition we will incur a one time payout of approximately $268,000 in aggregate to the five terminated customers

			during the fourth quarter 2005 which will be partially offset by the one-time inflow of cash, the amount of which cannot be estimated at this time, from the three new publications expected to launch during the fourth quarter 2005 and an expected additional $100,000 increase from the new publication launched in September 2005.

	10.		Stock based compensation

			The Company has adopted the disclosure only provisions of SFAS No. 123. If compensation cost associated with the Company’s stock-based compensation plan had been determined using the fair value prescribed by SFAS No. 123, the Company’s net loss for the nine months ended September 30, 2004 and 2005 would have increased to the pro forma amounts indicated below:


		Nine months ended September 30,
		2004			2005
Net loss – applicable to common stockholders	As reported	$	(1,451,386	)	$	(752,219	)
	Add: Stock based employee compensation included in reported loss		-0-			-0-
	Deduct: Employee compensation expense		(225,615	)		(154,684	)

	pro forma	$	(1,677,001	)	$	(906,903	)

Loss per share -	As reported	$	(0.11	)	$	(0.05	)
	pro forma	$	(0.12	)	$	(0.06	)

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.

	11.		Related party transactions

			During the nine months ended September 30, 2004 and 2005 the Company’s total revenues derived from related parties were $557,000 and $607,000 respectively.

	12.		Noncash operating activities

			During April 2005 the Company issued 127,449 shares of common stock as payment for $95,587 in outstanding accounts payable for legal services performed during 2004.

			During September 2005 Laurus Master Fund opted to convert $470,000 in note principal into 250,000 shares of AdStar common stock.

	13.		Commitments and Contingencies

			Limitation of Directors’ Liability and Indemnification

			The Delaware General Corporation Law (the “DGCL”) authorizes corporations to limit or eliminate the personal liability of directors to corporations and their

			shareholders for monetary damages for breach of directors’ fiduciary duty of care. The AdStar Certificate of Incorporation limits the liability of its directors to AdStar or its stockholders to the fullest extent permitted by Delaware law.

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

			Warranties and Product Liability

			The Company warrants that its products conform to their respective functional specifications. The Company’s customized software products, ASP application products and Software License Agreements are warranted to perform as designed. Such warranties are extended throughout the term of extended service agreements that clients enter into with the Company. Direct costs associated with the initial period of service have been insignificant and are generally covered by upfront fees. At December 31, 2003 and 2004 all costs associated with contract service were recorded directly into cost of revenues.

			We currently carry product liability insurance. We believe the amount of insurance is adequate to cover our risks. To further mitigate our risks, our standard service agreement expressly limits its liabilities and warranties of its products and services in accordance with accepted provisions of the Uniform Commercial Code as adopted in most states.

	14.		Subsequent event

			On September 23, 2005 AdStar offered Laurus Master Fund the opportunity to convert the balance (approximately $820,000, including principal and unpaid interest) of its convertible note at a price of $1.88 (82.5% of the closing price on the date of offer) per share during the 20 trading day period commencing on the delivery of the offer but, without AdStar’s written consent, no more than 250,000 shares during the first 10 trading days following such delivery. The offer was cancelable or deferrable by AdStar prior to the end of the initial 10-day period with respect to the second 10-day period.

			Under the terms of the offer Laurus Master Fund opted to convert $470,000 in note principal into 250,000 shares of AdStar common stock through September 30, 2005 and converted the remaining $348,000 in principal balance into 185,205 shares of AdStar common stock from October 1 through October 12, 2005. The October 2005 conversion will accelerate the realization of the remaining 178,000 of prepaid financing fees and debt discount as interest expense during the fourth quarter 2005, including a non-cash portion of approximately $144,000. The non-cash portion is comprised of approximately $136,000 debt discount and $8,000 in prepaid finder fees. Note 5. The Company offered an inducement to its convertible note holders to convert their note into shares of AdStar common stock at a price of $1.88, which was below the

Item 2. Management’s Discussion and Analysis or Plan of Operation

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this quarterly report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and are subject to the “Risk Factors” included in our Annual Report on Form 10-KSB/A for our fiscal year ended December 31, 2004. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

General

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

The AdStar Software Solution

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

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

•

Professional software – This technology is designed for use by the professional marketplace. Specifically, the applications accept transmissions from classified advertising agencies and large corporations using advanced Web-based technology. The software includes sophisticated pricing algorithms to provide for maximum flexibility and intricate design resources to provide unlimited creative capabilities.

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

	•		XML Gateway (Application Programming Interface) — This technology allows third parties, internal newspaper applications, and niche Web publishers to facilitate the processing of classified advertising. Use of AdStar’s infrastructure and incorporating Web based ad taking for print, or for print in combination with an online ad, into their applications.

	•		Credit Card Processing - With the acquisition of Edgil Associates in October of 2003, we have added the ability to offer to newspapers credit card processing for use in phone rooms accepting classified ads, subscription departments or for any other transaction that requires a credit card. Edgil offers system integration services, installation support, training and customer service. Edgil’s proprietary “EdgCapture” payment processing software processes over 12 million newspaper advertising and circulation transactions annually for Tribune Company, Gannett Company, Inc., Knight-Ridder, Inc., Copley Press, Inc., the New York Times, Advance Publications, Inc., Cox Enterprises, Inc., and Village Voice Media, Inc. as well as many independent daily and specialty publications. Edgil’s product strategy focuses on providing newspapers with the financial benefits afforded by reduced labor costs and lower credit card processing discount rates. Edgil’s experience with integration services has given the “EdgCapture” product line the technical differentiation to meet the specific credit card processing requirements of the publishing industry.

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

Edgil’s credit card processing application currently operates in a license mode with installation fees and ongoing license and support fees. We plan to develop a transaction model for credit card processing hosted on AdStar’s infrastructure to be made available to both existing and new accounts.

Recent developments

During the third quarter we moved forward with our implementation of Manheim’s Dealer Advertising System. Adstar’s technology allows dealers to use Manheim’s application to create and deliver classified ads for publication in print version of newspapers and on newspaper-owned web sites. A beta test was conducted with a select number of Manheim dealers, who were able to place classified advertising directly into the publishing system of the Atlanta Journal Constitution, Cox Media’s flagship newspaper. As discussed in press releases, full rollout is expected in the Atlanta market in November for all Manheim dealers, followed by other Cox markets i.e. West Palm Beach, Austin and Dayton. National rollout expected to commence in 2006

Results of Operations

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

Three and nine month periods ended September 30, 2005 and 2004


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2005			2004			2005
ASP, net		35	%		35	%		34	%		35	%
Licensing and software		43	%		46	%		45	%		49	%
Customization and other		22	%		19	%		21	%		16	%

Net revenues		100	%		100	%		100	%		100	%
Cost of revenues		43	%		34	%		40	%		34	%

Gross profit		57	%		66	%		60	%		66	%

General and administrative expense		38	%		34	%		37	%		36	%
Selling and marketing expense		26	%		12	%		27	%		13	%
Product maintenance and Development expenses		26	%		15	%		26	%		17	%
Amortization		2	%		2	%		2	%		2	%

Income (Loss) from operations		-35	%		4	%		-32	%		-2	%

Beneficial interest, amortization of financing fees and additional non-cash interest on convertible note		-5	%		-29	%		-6	%		-14	%
Interest expense		-1	%		-1	%		-1	%		-1	%

Loss before taxes		-41	%		-26	%		-39	%		-16	%

Provision for income taxes		—			—			—			—

Net loss		-41	%		-26	%		-39	%		-16	%

Deemed dividends on exercise of warrants and conversion of convertible debt to equity		—			—			—			-3	%


Net loss applicable to common stockholders		-41	%		-26	%		-39	%		-19	%

Revenues

Net revenues for the three months ended September 30, 2005 increased to $1,393,000 in 2005 from $1,264,000 in 2004, a net increase of $129,000 or 10%. The increase is comprised of a

net increase of $89,000 or 16% in Licensing and software revenues, a net increase of $50,000 or 12% in ASP revenues, partially offset by a net decrease of $10,000 or 4% in Customization & other revenues.

The increase in Licensing & Software revenues for the three months ended September 30, 2005 compared to the three months ended September 30, 2004 is primarily related to an increase in revenues from our EdgCapture software product line of which a net increase of 4 new publications accounted for $40,000, offset by 4 publications terminating their use of older Edgil products which accounted for a $7,000 decrease, a $72,000 increase on existing EdgCapture publications primarily as a result of a 3% across the board increase in annual support, maintenance and transaction volume fees, and a decrease of $16,000 due to the termination of 3 publications using the older AdStar license products. The increase of $50,000 in ASP revenue for the three months ended September 30, 2005 compared to the three months ended September 30, 2004 is comprised of a $46,000 increase in transaction volumes from existing publications, $34,000 from the addition of 20 new publications, partially offset by a net decrease of $29,000 due to the loss of 6 publications (of which 5 are Knight-Ridder, Inc (KRI) owned publications, we continue to provide various software services to 10 KRI publications ). Customization & Other remained relatively constant with a decrease of $10,000. During the third quarter of 2004, customization revenues were primarily derived from the automotive component of the customization project for the Atlanta Journal-Constitution (“AJC”). During the third quarter of 2005, the largest component of customization revenue was derived from a major customization to internationalize and train Os Diários Associados, one of Brazil’s largest media organizations, to host and license our web based ad-taking product. Additionally, the real estate component of the AJC project commenced and is expected to continue into the fourth quarter with the general merchandise component to commence as real estate winds down.

Net revenues for the nine months ended September 30, 2005 increased to $3,971,000 from $3,700,000 for 2004, a net increase of $271,000 or 7%. The increase is comprised of a net increase of $266,000 or 16% in licensing and software revenues, a net increase of $137,000 or 11% in ASP revenues, partially offset by a decrease of $132,000 or 17% in customization and other revenues.

The increase in Licensing & Software revenues of $266,000 during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 is primarily related to an increase in revenues from our EdgCapture software product line of which a net increase of 4 new publications accounted for $117,000, offset by 5 publications terminating their use of older Edgil products which accounted for a $19,000 decrease, a $189,000 increase on existing EdgCapture publications primarily as a result of a 3% across the board increase in annual support, maintenance and transaction volume fees, and a decrease of $20,000 due to the termination of 4 publications using the older AdStar license products. The increase of $137,000 in ASP revenue for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 is comprised of a $90,000 increase in transaction volumes from existing publications, $70,000 from the addition of 20 new publications, partially offset by a decrease of $30,000 due to the termination of 6 publications. The decrease in customization and other revenues of $132,000 is primarily a result of a decrease of $152,000 offset by a $20,000 increase in customization projects related to the Edgil and AdStar software product lines respectively during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. The $152,000 decrease was due to a reduction in both the number and value of customization projects. While the $20,000 increase was primarily due to the larger number of smaller dollar value projects in 2005 offsetting the revenue from two major projects in 2004. During the nine month period ended September 30, 2004 we had several major customization projects in process for publications such as The Washington Post, the Atlanta Journal-Constitution and The Boston Globe as compared to three smaller value projects relating to the MediaNews Group Interactive (MNGi), AJC and Associados during the comparable period of 2005.

We expect that revenues from our ASP product will continue to increase as we sign on new customers and continue to convert existing customers to adopt our XML Gateway (such as AJC, Manheim Interactive, Inc. and MNGi) along with the expected related increase in transaction volume we process on behalf of those customers.

Cost of revenues

Cost of revenues consists primarily of the costs to customize and install software applications, configure end-user software, install Web-based ad-taking software, provide technical customer training and end-user support, amortization of internally developed application modules, depreciation of production servers and related software, royalties, and co-location costs. Costs of revenues decreased 14% to $470,000 for the three months ended September 30, 2005 compared with $549,000 for the three months ended September 30, 2004. The $79,000 decrease is primarily due to an overall $18,000 decrease in direct labor and overhead and a $61,000 net relief of labor accruals of which $52,000 relates to an adjustment to the estimated loss recorded on the Tribune Company contract during the forth quarter 2003. The Tribune agreement expired in August 2005 and, accordingly, we have written off the remaining accrual during the quarter ended September 30, 2005. As a result of the accrual adjustments our gross profit margin increased to 66% for the three months ended September 30, 2005 from 57% for the three months ended September 30, 2004.

Cost of revenues for the nine months ended September 30, 2005 decreased by 8% to $1,370,000 from $1,484,000 for the nine months ended September 30, 2005. The $114,000 decrease is primarily due to a $177,000 relief of labor accruals of which $137,000 relates to an adjustment to the estimated loss recorded on the Tribune Company contract during the fourth quarter 2003 and a $31,000 adjustment to contingent pre-acquisition contract costs on the Edgil software product line, offset by an overall $63,000 increase in direct labor and overhead. As a result of the accrual adjustments our gross profit margin increased to 66% for the nine months ended September 30, 2005 from 60% for the nine months ended September 30, 2004.

General and administrative expense

General and administrative expense consists primarily of the cost of executive, administrative, accounting, finance, and personnel along with professional fees and public company related expenses. General and administrative expenses remained relatively constant; decreasing from $479,000 to $477,000 during the three months ended September 30, 2005 compared with the comparable period during 2004.

General and administrative expenses increased from $1,384,000 to $1,419,000 or 3% during the nine months ended September 30, 2005 compared the comparable period during 2004. The $35,000 increase is primarily comprised of $72,000 in consulting fees in connection with the our plan to obtain compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and contractual obligations to obtain Statement on Accounting Standards number 70 (“SAS 70”) certification as part of our customers’ compliance with Sarbanes-Oxley requirements, offset by an aggregate net decrease of $37,000 of all other costs. The deadline for companies that are not accelerated filers (companies with market capitalization under $75 million) to comply with the requirements of Section 404 of Sarbanes-Oxley has been extended by one year to the first fiscal year ending on or after July 15, 2006.

Management believes that our existing executive staffing levels are sufficient to allow for significant growth without the need to add personnel and related costs for the foreseeable future. However, the impact of complying with and maintaining compliance with Sarbanes-Oxley and

SAS 70 has not been fully analyzed at this time and may require the addition of personnel and/or systems to adequately meet the requirements

Selling and marketing expense

Selling and marketing expense consists primarily of direct charges for advertising, sales promotion, marketing, trade shows, customer service, and business development. Selling expense decreased 50% during the three months ended September 30, 2005 to $161,000 from $322,000 during the three months ended September 30, 2004. The $161,000 decrease during 2005 is primarily comprised of a net decrease of $54,000 or 17% attributable to the termination of our Senior Vice President of Sales and Marketing, net decrease of $51,000 or 16% due to international expansion costs during the third quarter of 2004 that were reclassified as Abandoned Acquisition Costs in the fourth quarter of 2004, $33,000 or 10% as a result of the reduction of two full time sales and marketing support employees that serviced the EdgCapture and EdgFlow software lines and $15,000 attributable to several one-time advertising and marketing costs and related consultants during the third quarter of 2004 with no similar costs or consultants during the same period of 2005.

Selling expense decreased 47% during the nine months ended September 30, 2005 to $520,000 from $978,000 during the nine months ended September 30, 2005. The $458,000 decrease is primarily comprised a net decrease of $133,000 or 14% attributable to the termination of our Senior Vice President of Sales and Marketing, $101,000 or 10% net decrease from several one-time advertising and marketing costs and related consultants during the second quarter of 2004 with no similar costs or consultants in the same period of 2005, a $97,000 or 10% net decrease due to a reduction of two full time sales and marketing support employees that serviced the EdgeCapture and EdgFlow software lines and a decrease of $52,000 or 5% due to international expansion costs during 2004 that were reclassified as Abandoned Acquisition Costs in the fourth quarter of 2004.

During the first quarter 200 our former Senior Vice President of Sales and Marketing opted to start his own sales and marketing company but agreed to continue to sell our product line via a commission plan. Since we are in a cost cutting and containment mode the Senior Vice President position is currently not contemplated to be replaced, and those duties will now be shared by, among others our Vice President of Sales and Marketing, Chief Operating Officer and Chief Executive Officer. During July 2005 we reached an agreement whereby our former Senior Vice President of Sales and Marketing has agreed to become our full time Vice President of enterprise solutions under a new compensation plan whereby we pay his medical costs and the remainder of his compensation is on a commission only basis. We will continue the development and implementation of our strategic marketing plan and continue to build upon our existing relationships with Tribune Company, Cox Newspapers, Inc., MediaNews Group interactive and other current and potential strategic partners.

Product maintenance and development costs

Product maintenance and development expenses consist of expenses to identify functional requirements, to plan, identify and conceptually design and test the required technical infrastructure, and to perform software and Web-site maintenance, and other general routine fixes. The costs consist primarily of personnel related expenses for technical and design personnel, equipment maintenance and outside consultants. Product maintenance and development expenses for the three months ended September 30, 2005 decreased 36% to $211,000 from $331,000 during the three months ended September 30, 2004. The $120,000 decrease is primarily the result of net reductions in technical staffing levels and wages when comparing the third quarters of 2005 to 2004.

Product maintenance and development expenses for the nine months ended September 30, 2005 decreased 32% to $656,000 from $972,000 for the nine months ended September 30, 2004. The $316,000 decrease is primarily the result of reductions in technical staffing levels and wages when comparing the first nine months of 2005 to 2004.

During June 2005, due to increased customer demand for customization and integration projects, we increased salaries on technical and design personnel who received the 5% salary reduction effective January 1, 2005 to reinstate their wages to pre-reduction salary levels. We also increased technical staffing by two full-time equivalents. We utilized contract labor during the third quarter of one full-time equivalent. We expect the increased costs to be offset by revenues generated from the customization and integration projects as well as the ongoing revenues expected to be derived from an increase in transaction volume.

Amortization of customer list

Amortization of customer list consists of straight-line amortization of the Customer List purchased as part of the acquisition of Edgil on October 21, 2003. The Customer List is recorded at a valuation of $1,500,000, obtained by use of an independent valuation expert, and is being amortized over its estimated 17-year life. Amortization remained constant at approximately $22,000 and $66,000, respectively during the three-month and nine-month periods ended September 30, 2005 compared to the same period in 2004.

Beneficial interest, amortization of financing fees and additional non-interest on convertible note.

Beneficial interest expense and amortization of financing fees consists of the straight-line amortization of the beneficial conversion and financing fees associated with the Convertible Note. On April 12, 2004, we closed a $1.5 million private placement of a 3-year secured convertible note (the “Laurus Note”) and 7-year warrants to purchase 200,000 shares of our Common Stock with Laurus Master Fund, Ltd., a New York City based institutional fund and an accredited investor. Additional interest is comprised of non-cash interest the Company records during the period its convertible note holders convert their note into shares of AdStar common stock at a price below the fair market value.

We recorded a debt discount of approximately $734,000 consisting of the intrinsic value of the beneficial conversion of approximately $467,000 and the portion of the proceeds allocated to the warrants issued to the lenders of approximately $267,000, using the Black-Scholes option pricing model, based on the relative fair values of the warrants and the notes. The debt discount is being amortized as interest expense over the three-year term of the notes using the interest method.

On September 23, 2005 AdStar offered Laurus Master Fund the opportunity to convert the balance (approximately $820,000, including principal and unpaid interest) of its convertible note at a price of $1.88 (82.5% of the closing price on the date of offer) per share during the 20 trading day period commencing on the delivery of the offer but, without AdStar’s written consent, no more than 250,000 shares during the first 10 trading days following such delivery. The offer was cancelable or deferrable by AdStar prior to the end of the initial 10-day period with respect to the second 10-day period. Under the terms of the offer Laurus Master Fund opted to convert $470,000 in note principal into 250,000 shares of AdStar common stock through September 30, 2005 and converted the remaining note principal balance of $348,000 during October.

During the three-month period ending September 30, 2005, approximately $68,000 of prepaid financing fees and debt discount was amortized as interest expense, including a non-cash portion of approximately $55,000. The non-cash portion was comprised of approximately

$52,000 debt discount and $3,000 in prepaid finder fees amortized during the period. During September 2005 the conversion of $470,000 in principal accelerated the realization of approximately 240,000 of prepaid financing fees and debt discount as interest expense, including a non-cash portion of approximately $195,000. The non-cash portion was comprised of approximately $184,000 debt discount and $11,000 in prepaid finder fees amortized during the period. In addition, the conversions were below the fair market value at the closing price of the Company’s stock on the dates of conversion during September 2005. As such the Company recorded additional non-cash interest expense of approximately $100,000 on the dates of conversion. The Company calculated the additional non-cash interest as the difference between the fair market value of the Company’s common stock and the fixed conversion price (82.5% of the closing price on the date of offer) of the convertible note on the dates the Company received and accepted the conversion notices.

During the nine-month period ending September 30, 2005, approximately $203,000 of prepaid financing fees and debt discount was amortized as interest expense, including a non-cash portion of approximately $164,000. The non-cash portion was comprised of approximately $156,000 debt discount and $8,000 in prepaid finder fees amortized during the period. During September 2005 the conversion of $470,000 in principal accelerated the realization of approximately 240,000 of prepaid financing fees and debt discount as interest expense, including a non-cash portion of approximately $195,000. The non-cash portion was comprised of approximately $184,000 debt discount and $11,000 in prepaid finder fees. In addition, the conversions were below the fair market value at the closing price of the Company’s stock on the dates of conversion during September 2005. As such the Company recorded additional non-cash interest expense of approximately $100,000 on the dates of conversion.

Under the terms of the offer Laurus Master Fund opted to convert $470,000 in note principal into 250,000 shares of AdStar common stock through September 30, 2005 and converted the remaining $348,000 in principal balance into 185,205 shares of AdStar common stock from October 1 through October 12, 2005. The October 2005 conversion will accelerate the realization of the remaining 178,000 of prepaid financing fees and debt discount as interest expense during the fourth quarter 2005, including a non-cash portion of approximately $144,000. The non-cash portion is comprised of approximately $136,000 debt discount and $8,000 in prepaid finder fees. In addition the conversions during October 2005 were below the fair market value at the closing price of the Company’s stock on the dates of conversion. As such the Company will record additional non-cash interest expense of approximately $80,000 during the fourth quarter

Interest income (expense), net

Interest Expense (net) was approximately $12,000 and $39,000 during the three months and nine months ended September 30, 2005, respectively, compared to $10,000 and $22,000 in comparable periods in 2004. The increase is primarily due to interest expense of $14,000 and $44,000 during the three and nine months ended September 30, 2005 related to the Laurus Convertible Note which was funded in April 2004 compared to $11,000 and $22,000 in the comparable periods in 2004. The Laurus convertible note has an interest rate of Prime minus 1%. Interest income has historically been attained by maintaining excess cash in an overnight investment sweep account. During 2004, it was determined that the fees to maintain the investment sweep account exceeded the interest received due to the historically low overnight interest rates, accordingly we temporarily closed the investment sweep account and now only receive interest income from notes receivable from officers and a minor certificate of deposit account maintained as security on certain credit cards.

Provision for income taxes

The provision for income taxes is comprised primarily of state taxes for Edgil. Federal income taxes are consolidated and, due to the nature of the merger agreement, AdStar and Edgil are treated as separate taxable entities for State income taxes. AdStar is currently in a loss carry-forward position for federal income taxes, primarily due to the operating losses incurred through December 31, 2004. The federal net operating loss carry-forwards balance as of December 31, 2004 was approximately $16,036,000, compared to $15,431,000 in the prior year. The net operating loss carry-forward is available to offset future taxable income through 2017.

Our net operating loss carry forwards may be limited due to ownership changes as defined under section 382 of the internal revenue code of 1986.

The major temporary tax differences that are expected to reverse next year are deferred revenue, allowance for doubtful accounts, and accrued vacation. However, we expect new temporary differences to be established in these years, which will either reduce or exceed the reversing temporary differences.

Liquidity and Capital Resources

At September 30, 2005, we had an accumulated deficit of $18,466,000. We have incurred significant recurring net losses. For the years ended December 2003 and 2004 we had net losses of $2,842,000 and $3,648,000, respectively and for the three and nine months ended September 30, 2005 we had net losses of $271,000 and $652,000, respectively. Our 2003 and 2004 net losses were principally attributable to our ongoing shift in focus from an on-line business to an ASP business with an expanded suite of products and our abandoned acquisition costs of $1,203,000 during 2004. We expect to continue to incur losses until we are able to increase revenues significantly from fees based on the number of purchases transacted through our ASP and payment processing products. The revenues from EdgCapture and related customization services reflected in our 2003 results consist only of activity from October 21 through December 31, since these services for our customer base were added through our acquisition of Edgil Associates on October 21, 2003.

Although there can be no assurance we believe that the cash on hand of $1,450,000 at September 30, 2005, the expected increase in cash flows from operations and a decrease in cash outlays of approximately $576,000 over the next 12 months from savings on principal and interest payments as a result of the conversion of the convertible note into equity will be sufficient to meet our anticipated working capital needs through September 30, 2006. We expect cash flows from operations to increase as a result of: operational cost cutting strategies, including a reduction in staff during the fourth quarter of 2004, a 5% decrease in the compensation of the Chief Executive, Technology and Operating Officers effective January 1, 2005; curtailment of our acquisition strategy and development projects; a reduction in cash outlays for previously accrued losses on abandoned acquisitions ending in December 2005; coupled with our ability to reduce contracted professionals and an expected increase in revenues. We believe the additional $597,000 in gross proceeds raised through the exercise of 702,850 warrants on January 5, 2005, the $341,000 in gross proceeds as a result of the exercise of 360,084 in incentive stock options primarily exercised during third quarter 2005 and the addition of 4 new publications utilizing our credit card processing services on a go forward basis, are sufficient to offset short term cash deficiencies created as a result of our abandoned acquisition strategy during 2004, the one time fourth quarter cash payments from credit card processing totaling $268,000 in due to publications as a result of the loss of five publications during the quarter ended September 30, 2005 and up front costs to complete major new contracts. In addition the Company continues to seek additional financings.

We have historically financed our business through a combination of cash generated from operations and debt and equity financings. At September 30, 2005, the Company had negative working capital of $273,000 compared to $1,535,000 at December 31, 2004 a $1,262,000 improvement. The improvement in working capital is primarily a result of the impact of our cost cutting measures, as discussed above, the pay-down of accrued expenses related to international expansion, the reduction of estimated accruals on loss contracts and pre-acquisition contingent labor costs, combined with $597,000 in proceeds from the exercise of 702,850 warrants in January 2005 and the $341,000 in proceeds as a result of the exercise of 360,084 in incentive stock options.

As of September 30, 2005, we had cash and cash equivalents of approximately $1,450,000 compared to $1,093,000 as of December 31, 2004 a net increase of $357,000. The net increase in cash and cash equivalents was the result of $481,000 provided by financing activities offset by $112,000 used in investing activities and $12,000 used in operating activities.

Net cash used in operations during the nine months ended September 30, 2005 was approximately $12,000 compared with $512,000 used in operations during the nine months ended September 30, 2004, a $500,000 improvement. Net cash used in operating activities was primarily the result of a net loss of $553,000 less non-cash charges of $574,000 in depreciation and amortization, $443,000 in beneficial interest and amortization of financing fees on the convertible note, $93,000 in stock based vendor compensation, and a $6,000 non-cash benefit in allowance for doubtful accounts, net of a $36,000 increase in accounts receivable, a $31,000 decrease in prepaids and other assets, a $275,000 increase in due to publications, a $650,000 reduction in accounts payable and accrued expenses, and a $182,000 decrease in deferred revenue and customer deposits.

The increase in accounts receivable is primarily due to the increased billings related to one-time customization projects. The increase in due to publications was caused by a seasonal increase in the quantity of ads by placed through our system and the addition of one new publication offset by the loss of five publications utilizing our credit card processing services. The new customer resulted in a one-time increase in cash and the related due to publications liability of approximately $65,000 offset by a reduction in cash inflows from credit card processing services of $268,000 and related decrease in due to publications during the quarter ended September 30, 2005. In addition we will incur a one time payout of approximately $268,000 in aggregate to the five terminated customers during the fourth quarter 2005 which will be partially offset by the one-time inflow, in an as yet to be determined amount, of cash from the three new publications expected to launch during the fourth quarter 2005 and an expected additional $100,000 increase from the new publication launched in September 2005. Historically, the seasonal nature of the classified advertising industry is comprised of greater volumes of newspaper ads placed in the first three quarters of the calendar year with a material drop-off in the

fourth quarter. Due to publications is a result of contractual customer arrangements whereby we receive net proceeds daily on behalf of these customers for third party ads placed via credit card. These transactions are collected, reconciled monthly and submitted to the publication, net of processing fees, generally within 35 days from the month end. We have been providing this service at virtually no charge to customers since approximately December 2000. The decrease in accounts payable and accrued expenses is primarily due to the pay-down of accrued expenses related to international expansion, the reduction of estimated accruals on loss contracts payments associated with the abandoned acquisitions and pre-acquisition contingent costs.

Net cash used in investing activities decreased to $112,000 during the nine months ended September 30, 2005 compared with $536,000 during the nine months ended September 30, 2004. The decrease of $424,000 is primarily the result of a $345,000 decrease in spending on capitalized and purchased software and a $85,000 decrease in costs associated with the acquisition of Edgil during 2005 compared to 2004. The reduction in spending on capitalized and purchased software is part of a conscious effort to reduce software enhancement projects to be more in line with a focused marketing based approach, the delay of certain development projects as a result of shifting certain technical staff from development projects to servicing major service contracts such as the Atlanta Journal-Constitution and MediaNews Group Interactive projects, addressing technical matters related to SAS 70 compliance and the overall reduction in our technical staffing levels. We anticipate delayed development projects as well as SAS 70 type II certification to commence late in the fourth quarter of 2005.

Net cash provided by financing activities decreased to $481,000 during the nine months ended September 30, 2005 compared with $1,405,000 during the nine months ended September 30, 2004. The $924,000 decrease is primarily comprised of a financing during the nine months ended September 30, 2004 whereby we received $1,348,000 in net proceeds from the Laurus Master Fund convertible note with no comparable financing during 2005, $411,000 in principal repayments on the Laurus Master Fund convertible note during the nine months ended September 30, 2005 compared to $45,000 during the nine months ended September 30, 2004 offset by net proceeds of $580,000 from the exercise of warrants in January 2005 and proceeds of $341,000 as a result of the exercise of incentive stock options, primarily in the third quarter 2005, compared to $109,000 in warrants and $58,000 in options during the nine months ended September 30, 2004. During 2005 and 2004 the funds from financing activities were primarily used in operations.

On July 1, 2004, and recurring on the first day of each succeeding month thereafter until the maturity date April 12, 2007, we began making the monthly installment payments consisting of $45,454.55 of principal and any accrued and unpaid interest on the Laurus Master Fund Note. On September 23, 2005 AdStar offered Laurus Master Fund the opportunity to convert the balance (approximately $820,000, including principal and unpaid interest) of its convertible note at a price of $1.88 (82.5% of the closing price on the date of offer) per share during the 20 trading day period commencing on the delivery of the offer but, without AdStar’s written consent, no more than 250,000 shares during the first 10 trading days following such delivery. The offer was cancelable or deferrable by AdStar prior to the end of the initial 10-day period with respect to the second 10-day period.

minimum of 10 consecutive business days. On July 18, 2005 NASDAQ notified the Company that it had regained compliance.

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

We derive revenue from several products and services as follows:

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

Web site revenue – The Company receives revenue from fees charged to customers who transact business on the Advertise123.com Web site. This site permits the general public to plan, schedule, compose and purchase advertising from many print and on-line publishers. Under the guidance provided by the Securities Exchange Commission Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition” and the Emerging Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”), we are, in substance, acting as an agent for the publishers and therefore recognize as revenue only the net fees realized on the transactions. We recognize revenue on a per-transaction basis when the ad is placed through their system and collection from the customer is probable.

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

Deferred revenue consists primarily of deferred revenues from long-term license and software contracts, PCS maintenance arrangements prepaid annually and customization and other revenues billed and paid in advance. Revenue from upfront license fees, monthly fees and PCS under software maintenance arrangements is based upon renewal rates and is recognized ratably over the term of the arrangement. Licenses and maintenance generally range from month–to-month up to 10 years on historical AdStar and 25 years and 1 to 5 years on historical Edgil, respectively. Since AdStar acquired Edgil all newly signed license and software contracts are generally 1 to 3 years in duration. Deferred revenues on the 25-year license arrangements were approximately $30,000, and on PCS contracts paid in advance and prepaid customer deposits are $148,000 as of September 30, 2005. Revenue from software customization services is recognized upon the completion of services. As part of the integration of Edgil into AdStar’s business model we are currently offering new Edgil contracts on terms and conditions similar to AdStar, generally one year or less in duration.

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

Software Development Costs

Costs to establish the technological feasibility of software applications developed by us are charged to expense as incurred. Certain costs incurred subsequent to achieving technological feasibility are capitalized. Accordingly, we capitalize a portion of the internal labor costs and external consulting costs associated with essential Web site development and enhancement activities. Costs associated with conceptual design and feasibility assessments as well as maintenance and routine changes are expensed as incurred. Capitalized costs are amortized based on current or future revenue for

each product with an annual minimum equal to the straight-line basis over the estimated economic lives of the applications, not to exceed 5 years. During the three and nine months ended September 30, 2005 we capitalized $6,000 and $47,000, and amortized $121,000 and $391,000 in capitalized software costs, respectively. During the three and nine months ended September 30, 2005 we expensed $211,000 and $657,000 in software development and maintenance costs.

Warranties and Product liability

We warrant that our products conform to their respective functional specifications. Our customized software products, ASP application products and Software License Agreements are warranted to perform as designed. Such warranties are extended throughout the term of extended service agreements that clients enter into with us. Direct costs associated with the initial period of service have been insignificant and are generally covered by upfront fees.

We currently carry product liability insurance to reduce our exposure to risks. To further mitigate our exposure to risks, our standard service agreement expressly limits our liabilities and warranties of our products and services in accordance with accepted provisions of the Uniform Commercial Code as adopted in most states.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts using estimates that we make based on factors we believe appropriate such as the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness and current economic trends. If we used different assumptions, or if the financial condition of the customers were to deteriorate, resulting in an impairment of their ability to make payments, additional provisions for doubtful accounts would be required and would increase our bad debt expense.

Contractual Obligations, Commitments and Contingencies

We have contractual obligations and commitments primarily with regards to employment agreements for 3 of our current and 1 of our former executives, a convertible note due in equal monthly principal installments payable over a 33 month period commencing July, 2004, certain non-cancelable operating lease obligations for office space and equipment, and capital lease obligations for computer equipment.

The following table aggregates our expected contractual obligations and commitments subsequent to September 30, 2005:


	Payments due by Periods for one year ending September 30,
							Beyond
Contractual obligations	2006		2007		2008		2009		Total
Employment agreements (1)	$	391,007	$	—	$	—	$	—	$	391,007
Convertible debt		348,185		—		—		—		348,185
Interest on convertible debt		4,160		—		—		—		53,977
Capital lease commitments		305		—		—		—		3,822
Operating lease commitments		220,378		134,332		137,391		154,911		647,012
Notes payable to former stockholders		21,000		10,500		—		—		31,500

	$	985,035	$	144,832	$	137,391	$	154,911	$	1,422,169


(1)		Includes a temporary reduction in compensation for the 3 executives with employment agreements. On December 31, 2004 as part of a company wide cost cutting strategy, all employees and officers with annual salaries greater then $50,000 who have been employed for greater than 1 year agreed to a temporary 5% reduction in compensation, commencing January 1, 2005. On June 1, 2005 all employees, except the 3 executives under contract, had their compensation returned to the December 31, 2005 rates. There are no accruals or repayment provisions for the reduction in compensation, although it is our intention to reinstate the compensation on a go-forward basis sometime in the future. For purposes of the future payments as defined below and elsewhere in this document we assume the reduction will be reinstated on September 30, 2006 although no formal decision has been made as to a reinstatement date, if any, at this time.

Item 3. Controls And Procedures

Evaluation of Disclosure Controls and Procedures. AdStar’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the AdStar’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, AdStar’s disclosure controls and procedures are effective to ensure that information required to be disclosed by AdStar in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in AdStar’s internal controls over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, AdStar’s internal control over financial reporting.

PART II

Item 6. Exhibits

Exhibits:


Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


		AdStar, Inc
		(Registrant)

Date November 14, 2005		/s/ Leslie Bernhard
		President & CEO

Date November 14, 2005		/s/ Anthony J. Fidaleo
		Chief Financial Officer
		(Principal Financial Officer)

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