-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IdAudxxCXymPUzU65hHbQzlcSkiRxAYvgAIRxRm7VGZAJPwFzzr/kG9crOV/WNhQ QsQR5aEyafpr6IfjXYu7vQ== 0000912057-02-013116.txt : 20020415 0000912057-02-013116.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-013116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAM INC CENTRAL INDEX KEY: 0000863650 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 581878070 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26962 FILM NUMBER: 02598485 BUSINESS ADDRESS: STREET 1: 1600 RIVEREDGE PARKWAY STREET 2: STE 800 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 7709800888 MAIL ADDRESS: STREET 1: 1600 RIVEREDGE PKWY STREET 2: STE 800 CITY: ATLANTA STATE: GA ZIP: 30328 FORMER COMPANY: FORMER CONFORMED NAME: A D A M SOFTWARE INC DATE OF NAME CHANGE: 19950919 10-K 1 a2075447z10-k.htm 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2001
		OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from

Commission File Number 0-26962

A.D.A.M., INC.

(Exact name of registrant as specified in its charter)

Georgia
(State of incorporation)

58-1878070
(IRS Employer Identification No.)

1600 RiverEdge Parkway, Suite 800
Atlanta, Georgia 30328
(Address of Principal Executive Offices, Zip Code)

Registrant's telephone number, including area code:
(770) 980-0888

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, par value $.01		NASDAQ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the Registrant) as of March 27, 2002 (based on the closing sale price of the Registrant's common stock, par value $.01, as reported on the Nasdaq National Market on such date) was $24,005,721. As of March 27, 2001, 7,599,102 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

		Page
PART I.
Item 1.	Business	1
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
PART II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	15
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8.	Consolidated Financial Statements and Supplementary Data	30
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	30
PART III.
Item 10.	Directors and Executive Officers of the Registrant	31
Item 11.	Executive Compensation	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management	36
Item 13.	Certain Relationships and Related Transactions	37
PART IV.
Item 14.	Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K	38

PART I.

ITEM 1. BUSINESS

In this report, the terms "A.D.A.M.," "the Company" and "we" refer to A.D.A.M., Inc. In addition, the term "calendar 2001", unless otherwise specifically indicated, refers to the twelve-month period ending December 31, 2001 and the term "calendar 2000" will refer to the twelve-month period ended December 31, 2000. The transition reporting period from April 1, 1999 to December 31, 1999 will be referred to as "the nine months ended December 31, 1999."

Overview

A.D.A.M. serves healthcare organizations, medical professionals, health-interested consumers and students as a leading publisher of visually engaging health and medical information products. A.D.A.M. products are used for learning about health, wellness, disease, clinical treatments, alternative medicine, nutrition, anatomy and general medical reference in both the healthcare and education markets. A.D.A.M. products contain physician-reviewed text, in-house developed medical graphics and multimedia interactivity to create health information solutions that offer a unique "visual learning" experience. Today, A.D.A.M. employs a growing range of media, including Internet, software, CD-ROM, television and print, to deploy its proprietary content assets and products.

The Company's proprietary content library, more than 16 years in the making, includes:

•: a physician reviewed Health Encyclopedia that covers approximately 3,800 diseases and medical conditions;
•: approximately 40,000 medical illustrations that have been drawn and compiled by A.D.A.M.;
•: an extensive library of 3D models developed from the Visible Human Project;
•: thousands of web-enabled animations depicting disease states and other medical conditions and topics, many of which are broadcast-quality;
•: interactive tools,
•: unique technology for viewing the human body's anatomy; and
•: an advanced content management system the Company is implementing.

Collectively, the Company believes these assets represent the single largest database of proprietary health and medical related content anywhere in the world.

A.D.A.M. believes that pictures are worth a thousand words and illustrated approaches to explaining complex medical conditions has a significant impact on the way people understand their bodies and medical situations. A.D.A.M. also believes that its products will have an impact on the way patient education information is delivered and used in personal health management, prevention, disease management, and after care applications. The Company believes it has the potential to capture a significant share of the consumer-patient health education market with its high-quality, medically-accurate, visual and text based information—whether it is being distributed over the Internet, as a component of point-of-care applications within the health care system or as printed products that can be sold and disseminated in a variety of ways including subscriptions and "information prescriptions" given during patient-provider contacts.

taking an active role with their healthcare provider in their personal care management, the Company believes that its products will play a more important role in the product offerings of healthcare providers (particularly hospitals), the pharmaceutical industry, and the health insurance and managed care industries. These organizations are actively looking for ways to improve efficiencies, reduce clinical costs, increase patient encounters, communicate better with patients and plan members, and remain competitive in an environment that is becoming more crowded with direct-to-consumer marketing. Healthcare organizations must also deal with broader technical and compliancy issues such as HIPAA (the Health Insurance Portability and Accountability Act) and other federal regulations that could have an impact on the usage of health content and patient education.

In addition, A.D.A.M. has recognized the important role its products can have with the growing U.S. Hispanic population. With more than 34 million Spanish-speaking consumers in the U.S., the Company believes that there will be a growing need to provide health information to this fast growing demographic segment. New legislation requiring federally funded organizations, such as hospitals and other healthcare providers, to translate information into other languages for people with limited English proficiency, will fuel opportunities for Spanish versions of A.D.A.M.'s health information products. A.D.A.M. completed the Spanish translation of its Health Illustrated Encyclopedia, Pregnancy Health Center and Surgeries and Procedures products in 2001. The Company maintains a translation relationship with a third party vendor for editorial updates to the Spanish products.

A.D.A.M. currently provides its health content products to a broad range of customers whose profile has shifted since the Company began licensing its health content products in 1998. Originally, the Company's focus for licensed products was in the Internet portal market. At that time, healthcare organizations had not fully developed their web strategies and eBusiness initiatives that used health content as a significant driver. While A.D.A.M.'s sales and marketing focus is now more aligned to the healthcare market, the Company still has active contracts with major Internet portals and will continue to seek new opportunities in this market as they become available. In the healthcare market, the Company has developed a growing license business in the hospital, pharmaceutical and managed care areas. In calendar 2001, the Company signed 14 contracts directly with hospitals and several more indirectly through use of its reseller relationships. In total, more than 120 hospitals were using A.D.A.M. content products at the end of calendar 2001. The Company has signed a number of new contracts with hospitals in the first quarter of 2002, and expects the number of hospitals using A.D.A.M. products to continue to grow in 2002.

Besides the hospital sector, the Company has signed new or renewed contracts with several leading pharmaceutical companies and other healthcare-related organizations as well as the National Library of Medicine. Through this licensing network, A.D.A.M.'s products are searched and viewed by millions of consumers around the world. Because of the size and breadth of the Company's distribution network, the Company believes it is the single largest provider of health related information on the Internet.

A.D.A.M. was incorporated in 1990 as A.D.A.M. Software, Inc. The Company changed its name to adam.com, Inc. in 1999 and to A.D.A.M., Inc. in 2001. The Company is headquartered in Atlanta, Georgia and maintains an office in Newton, Massachusetts.

Acquisitions

In December 2001, the Company acquired Integrative Medicine Communications, Inc. ("IMC"), a leading developer and publisher of health content in the complimentary and alternative medicine ("CAM") field. The products, which include a comprehensive, web-enabled database of condition, herbal and supplemental monographs, are designed for use by both the professional clinician and the consumer.

CAM is a growing industry in healthcare. Many healthcare providers are developing CAM departments to address the needs of their physicians and patients requesting information on alternative medical treatments. As a result, the Company plans to integrate the CAM products as part of a larger portfolio of content products that will be offered to the healthcare industry. In addition, IMC publishes a

weekly online newsletter and a monthly newsletter targeted to physicians on issues and news surrounding the use of CAM. Currently, there are approximately 1,500 subscribers to the newsletter. The Company plans to aggressively expand the subscriber base through direct marketing efforts.

In February 2002, the Company acquired Nidus Information Services, Inc. ("Nidus"). Nidus was a privately held provider of in-depth patient education reports on common health conditions and diseases. Nidus's core product, the WELL-CONNECTED™ patient education report library, is written by experienced medical writers and reviewed for accuracy by a board of physicians who have faculty positions at Harvard Medical School and Massachusetts General Hospital. The reports are distinguished from other information sources by their detail of information, quality and currency, including rigorous editorial review. The reports are available through print or web subscriptions and online licensing agreements with major healthcare providers and web portals, health content resellers and medical libraries.

Industry

For the past several years, consumer demand for accurate, credible health information has been increasing at a rapid pace. As the Internet has emerged as a significant global communications medium, it has fueled the consumer's ability to better understand, manage and play a more active role in their personal health. According to a recent Harris Interactive survey, in 2001 nearly 100 million Americans were going online in search of health information.

Results from other recent surveys showed that large portions of these "health seekers" believe that the ability to find credible health information on the Internet empowers them to make more informed personal health choices. In the Harris survey for, 70% of the survey respondents took additional healthcare actions by making a personal treatment decision, urging a family member or friend to visit a doctor, or changing their lifestyle habits.

The rapid growth of the Internet as a tool for information research and the increasing appetite consumers have for health information has resulted in a proliferation of web sites offering health-related content. While this proliferation has had a positive effect for consumers, it has also raised concerns over the credibility and accuracy of the information being made available. The combined effect of consumers having access to large amounts of information that may or may not be credible is further taxing healthcare providers as they struggle to answer patient's questions or spend additional time redirecting them to other information sources.

The trend for healthcare organizations today is to use health information in two ways:

•: to increase the number of encounters with their organization by providing content that connects a consumer or patient directly to a facility's services or products; and,
•: to improve the efficiency of the provider-patient relationship by providing relevant, credible information.

A.D.A.M. believes it is well positioned in the market as the demand for health information grows and as content becomes an increasingly important driver for business growth within the healthcare industry. The Company has put in place rigorous editorial review and quality assurance processes to insure the accuracy of the products it publishes. In addition, A.D.A.M. has undertaken technological initiatives to enable its products to be used in broader applications within the healthcare industry such as wireless healthcare delivery, electronic medical records and other point-of-care applications.

Products and Services

A.D.A.M. offers a comprehensive suite of informative, web-enabled products that are designed to explain complex medical issues in a way that can be easily understood by the non-medical consumer or patient. The Company also develops and sells a line of CD ROM products that are sold primarily to the K

through 12 and higher education markets. In the past several years, the Company has seen a growing interest from the educational market in web-enabled versions of these products, and continues to consider migrating certain of its educational products to the web. Currently, the Company offers its popular anatomical dissection application on the web through an online subscription that is bundled with a traditional anatomy textbook. The bundled textbook product is sold through the Company's network of educational resellers and publishers.

The following chart summarizes A.D.A.M.'s principal products and who might use them:

PRODUCT	CUSTOMER OR USER	DESCRIPTION
A.D.A.M. Health Illustrated Encyclopedia	Hospitals, health systems, physicians, Internet portals, consumers, patients with pre-diagnostic or after-care information needs. Also translated into Spanish and Portuguese.	A web-based product of approximately 3,800 articles relating to diseases and health conditions, medical tests, symptoms, injury, treatment options, surgical procedures and nutrition. The content is organized by topic or condition and is enhanced with numerous graphical illustrations.

WELL-CONNECTED™ In-Depth Disease/Condition Reports	Hospitals, health systems, physicians, consumers, patients with pre-diagnostic or after-care information needs, medical libraries. Online version translated into in Spanish.	Available as a bundled content library sold generally by Internet subscription or sold to physicians by disease specialty. The Company plans to also offer the product in a content suite.

Integrative Medicine's ACCESS database of complementary and alternative medicine and subscription products	Hospitals, health systems, Internet portals, specialty web sites catering to alternative medicine, consumer, physicians and consumers	Web and print based information written for both the professional and consumer level providing medically reviewed information on the integration of alternative therapies with traditional medicine. Includes 170 health conditions, 120 herbs (380 German E Commission) and supplements, 20 monographs on complementary treatments, and 1,600 drug monographs.

A.D.A.M. Body Guide	Hospitals, pharmaceutical and managed care organizations.	A web-based visual orientation map of the body's primary physiological systems. Users can point and click on various body systems where they are presented with relevant medical content either from A.D.A.M.'s products or the hosting customer.


A.D.A.M. Pregnancy Health Center	Consumers, expectant mothers, parents	A web-based product that provides topical health information and interactive tools on pregnancy, from pre-conception to post-partum.

A.D.A.M. Child Safety Health Center	Parents	A web-based product that covers a variety of topics related to first aid, home and indoor safety, food and nutrition.

A.D.A.M. Outdoor Health Center	Consumers, hikers, outdoor and sports enthusiasts, campers	A web-based product that addresses over 400 topics relating to outdoor health and safety.

A.D.A.M. Surgeries and Procedures	Consumers, patients for pre- and after-care treatment and self education	A web-based product that explains various surgeries and medical procedures using step-by-step, easy-to-understand language supplemented by medical illustrations, diagrams and imagery.

A.D.A.M. Interactive Anatomy	Undergraduate anatomy and physiology students, physicians	A CD-ROM product that simulates human anatomical dissection of both male and female bodies. More than 22,000 anatomical structures can be identified.

A.D.A.M. Online Anatomy	Undergraduate anatomy and physiology students, physicians, remote or eLearning students	A web-enabled version of A.D.A.M. Interactive Anatomy.

A.D.A.M. At Home Series School Editions	K-12 students and teachers	A series of CD ROM products including A.D.A.M. The Inside Story, Nine Month Miracle and Life's Greatest Mysteries coupled with curriculum guides for teachers.

A.D.A.M. Health Image Catalog	Students, teachers, healthcare professionals, media organizations, legal professionals	A web-based database of medical images depicting normal anatomy, trauma, medical procedures and pathologies.

A.D.A.M. also offer its customers various custom and professional services including medical illustration, multimedia and animation development and engineering. The Company's ability to provide its customers with these types of professional services is an important component to the Company's position as a full-service solution provider. The Company also believes that in order to provide full-service solutions to its customers, it must provide flexibility in the way its products are configured and delivered.

The Company has begun the implementation of an advanced content management system that will enable it to take full advantage of the Company's diverse content assets. The new system is intended to enable A.D.A.M. to produce new content products with minimal development costs, access assets more effectively, and deliver products to customers in a more efficient manner. The new system will also streamline the Company's ability to update and maintain its products by providing more real-time update tools to its internal and external reviewers. In calendar 2001, the Company signed a license agreement with Interwoven, a leading content infrastructure company, which provides A.D.A.M. with key technology components for this new system. The Company expects to implement the new system in the second quarter of 2002.

Markets

A.D.A.M. operates in one segment comprised of two markets: healthcare and education. The Company publishes healthcare and related information to institutions, healthcare professionals, consumer-oriented Internet web sites and students in a variety of mediums including: through the Internet, through printed products such as newsletters, and on CD ROMs. The Company defines its target markets in the following way:

Healthcare

The Health Provider Market. The health provider market includes hospitals, hospital systems, integrated delivery networks, and large physician practice groups that are providing healthcare services to consumers. Hospitals are the first area in the health provider market the Company has actively targeted. Out of approximately 6,000 hospitals in the U.S., the Company's primary revenue opportunities are with those approximately 2,000 facilities that exceed 200 beds. There are two underlying reasons why the Company believes this market is important:

•: providers are seeking to enhance their web sites with content, tools and services that will increase the number of "encounters" by consumers and patients in their service area; and
•: providers are evolving their web sites to offer more point-of-care services including the effective use of personalized health information as part of patient education and risk management.

The Health Insurance and Managed Care Market. This market includes a broad range of health insurance companies, managed care organizations, and large employers who are self-insured or who are moving from defined benefit programs to defined contribution programs. A.D.A.M. believes that each of these organizations will want to help their plan members and employees better understand healthcare issues of interest to them. The Company further believes that its health information products are well suited to assist these organizations in two important aspects:

•: the recognition and identification of disease for early health intervention; and
•: demand management of plan members and employees to seek health intervention when appropriate or as necessary.

By providing information on relevant healthcare issues, end users can make more informed healthcare decisions. Payers are also interested in building closer relationships with their constituents that can improve member retention and employee health and productivity. The Company believes this market will need medically-sound health and wellness information that can serve to educate consumers about their health status and improve the appropriate utilization of healthcare resources.

The Pharmaceutical/Biotech/Medical Device Market. Another change to the healthcare industry has been the relaxation of pharmaceutical marketing regulations by the Food and Drug Administration in 1997. These changes have led to the proliferation of Direct to Consumer ("DTC") advertising by the pharmaceutical companies. In calendar 2000, the overall promotion expenditure by pharmaceutical companies was $15.8 billion of which DTC represented 15.7%. This dramatic increase in spending, along with other types of promotional activities these organizations are engaging in, has created new market opportunities for customized health content that supports these efforts. A.D.A.M. currently has several leading pharmaceutical organizations that license its content products, and the Company believes that there is significant potential to expand these relationships as well as pursue additional content opportunities to support the promotional activities of organizations in this industry.

National Internet and Media Web Sites. This market includes national Internet portals and large media-related web sites that host a variety of consumer-oriented content and services. These web sites use A.D.A.M.'s health content either exclusively or as part of a larger health channel offering to serve as a driver for advertising revenue. Exceptions would include government-sponsored web sites such as the licensing agreement the Company has with the National Library of Medicine. The Company still derives significant amounts of revenues from this market; however, the number of license agreements the Company has completed has diminished as the larger web sites continue to grow and the number of smaller, more specialized health sites have either shut down or have been acquired. A.D.A.M. currently views this market as an important component in its revenue strategy and will continue to pursue opportunities as they become available. The Company is actively leveraging existing relationships to provide more content products and professional services.

Print Publishing and Professional Subscriptions. The recent acquisitions of IMC and Nidus included print-based products such as The Complete German Commission E Monographs, Herbal Medicine, and The Integrative Medicine Consult, a professional monthly newsletter marketed to physicians and healthcare professionals. In addition to these new products, A.D.A.M. believes that it also has the opportunity to publish other content products in print formats that can be sold as patient education materials at point-of-care or in retail outlets such as drug stores. Importantly, the Company views its ability to provide print-based products as a strategic ingredient in developing new sources of revenue and in providing full service solutions to its existing customers. A.D.A.M. plans to increase its marketing efforts for its print-based products, particularly attempting to increase subscriptions for IMC's Consult newsletter.

Education

The Educational/eLearning Market. The educational/eLearning market includes; higher education, K-12, and allied health markets. Historically, A.D.A.M. has serviced this market with its CD ROM-based products. The Company continues to experience a steady revenue stream from the sale of its CD ROMs and is currently evaluating plans to update its line of CD ROMs to better meet the demands of its education customers. The Company believes that the educational market is a complimentary extension to its broader content strategy in healthcare and continues to look for ways to expand its presence in the education market. For example, in calendar 2001, the Company released its flagship product for education, A.D.A.M. Interactive Anatomy, as an online product that is currently being bundled with traditional textbook offerings for the undergraduate market as well as being sold via online subscriptions to students and educational institutions through several of its education reseller partners.

Customer Support and Client Services

The Company believes that a high level of customer support is absolutely necessary to attract and retain customers, and therefore provides several levels of customer support for both its CD-ROM end users and its license customers. The Company provides, toll-free telephone technical support for its CD-ROM customers, and through A.D.A.M.'s client services team, it maintains direct and ongoing relationships with its license customers for technical support, integration issues, content updates, and maintenance.

Platform, Product and Content Development

The Company's content platform is designed to handle content creation, management and distribution. The Company is currently implementing a new, more robust content management system. The enhanced system will further the Company's ability to leverage its diverse content assets, produce products more efficiently with minimal development costs, and deliver products to customers faster and more efficiently. Also, the new system will better enable the Company to customize its content. The Company has also implemented the use of standard medical lexicons such as ICD-9 and MESH as part of its content management system so that healthcare organizations can easily integrate A.D.A.M.'s content into their own content products and clinical systems. Development of these enabling technologies will allow A.D.A.M. to create highly targeted products with broad application within the healthcare continuum. The Company provides its products directly to its customers via CD ROM or through File Transfer Protocol (FTP). In addition, the Company can also host content for customers through an Application Services Provider model. A.D.A.M.'s platform technology and servers are located in a secure data center with built in redundancies at its corporate offices in Atlanta, Georgia and its satellite facilities in Newton, Massachusetts and New York, New York. The Company is currently working on a plan to consolidate all of its content assets at its corporate offices in Atlanta, Georgia.

With the creation of the new content management system, and through the development of additional content, products and technologies, A.D.A.M. expects to expand its licensing network with new customers and derive additional revenues from its current license customers. The Company is also developing complimentary products that are derived from its content database and from content and products that are acquired in strategic transactions. The Company believes that the combination of the size and breadth of its health information assets, a vast majority of which the Company considers to be "evergreen" in nature, and a tightly integrated content management system will allow A.D.A.M. to achieve a considerable competitive advantage in our targeted markets.

Editorial Excellence

A.D.A.M.'s health information products are developed and maintained to the highest degree of completeness, relevancy and medical accuracy. Our editorial process is divided into five areas:

•: Development. Medical writers, health practitioners and medical illustrators develop the Company's content. Previously published content is reviewed and internally evaluated for completeness and relevancy. Also, textual content is evaluated for enhancement with new and appropriate visuals.
•: Review. A.D.A.M.'s Content Review Board ("CRB") evaluates the accuracy of the text and visual content. The CRB consists of physicians who are specialists in their field that provide input on the medical accuracy, relevancy and completeness of the information.
•: Editorial. A.D.A.M.'s editorial staff reviews all content, both textual and visual, for grammar, style and consistency. A content quality assurance check is also performed. Acquired content, which has demonstrated adherence to the criteria of the CRB and to the editorial standards, may enter the editorial process at this stage.

•: Production. The content is indexed, stored in a data management environment, coded and tagged for presentation. Another level of technical and content quality assurance checks are also performed during this step.
•: Publication. This is the stage the Company distributes the content or product to customers. Customers either purchase printed versions, CD-ROMs or integrate the products with their Internet sites and provide feedback to the editorial process in the form of customer inquiries. A.D.A.M.'s health information is regularly updated and, in most cases, this update cycle is repeated quarterly. Upon receipt of editorially reviewed and updated information, customers are contractually obligated to implement the updated content on their site.

In December of 2001, A.D.A.M. announced that it was one of the first companies to receive the URAC seal of approval for health information. The URAC seal indicates that A.D.A.M.'s Health Illustrated Encyclopedia is in compliance with 53 rigorous standards of quality and accountability, verified by independent audit of the American Accreditation HealthCare Commission. The Company believes that the URAC accreditation for its health content products provides it with a competitive advantage and plans to bring its other health content products before the URAC accreditation board in the first half of 2002. Additionally, the Company is working to receive URAC accreditation for the CAM monographs acquired from IMC in December 2001, and the Well-Connected patient education library that was acquired from Nidus in February 2002.

Sales and Marketing

A.D.A.M.'s sales force consists of an enterprise sales group that focuses on the development of health provider accounts, a business development group that develops account relationships with pharmaceutical organizations, managed care organizations, and non-healthcare related business, and an educational sales group focused on the development of its education markets. The Company markets its products and services through direct sales contacts, its reseller network, consulting groups that provide professional services such as web strategy to our target markets, by participating in major industry trade shows and by leveraging its existing customer base.

The Company has also established certain strategic relationships in order to expand its sales and distribution of international products. For example, we have partnered with an organization that has translated our Health Illustrated Encyclopedia and several other content products into both Spanish and Portuguese. The Company believes that with the rising Hispanic population in the U.S and the federal legislation requiring federally funded organizations, such as hospitals and other healthcare providers, to translate information into other languages for people with limited English proficiency, the Company's Spanish language products will be an important driver for future revenues.

Manufacturing

The production of A.D.A.M.'s software products includes CD-ROM pressing, assembly of purchased product components, printing of product packaging and user manuals and shipping of finished goods, which is performed by third-party vendors in accordance with the Company's specifications and forecasts. A.D.A.M. believes that there are alternate sources of these services that could be implemented without material delay, if necessary.

Proprietary Rights and Licenses

The Company regards its software publications and the A.D.A.M. content assets as proprietary. The Company relies primarily on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. The Company has obtained U.S. federal registrations of the trademarks and the logos for the "A.D.A.M." marks, as well as numerous other trademarks, which identify its products. The Company has also obtained registrations of

the "A.D.A.M." trademark in Australia, Austria, Benelux, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Korea, Malaysia, New Zealand, Norway, Portugal, South Africa, Sweden, Switzerland and Taiwan. The Company has also acquired and is using a number of registered and unregistered trademarks to identify its products. The Company uses the "A.D.A.M." mark in Japan under license with Kataken Seiko K.K. and Hihon Novell K.K. The Company is also the owner of a number of domain name registrations.

The Company has applied for and/or obtained numerous U.S. Copyright Registrations for its software, publication and content products, including Health Illustrated Encyclopedia, Adam Interactive Anatomy, Online Anatomy and Pregnancy Health Center. The Company does not currently hold any patents or have any patent applications pending. There can be no assurance that these protections will be adequate to protect the intellectual property rights or that A.D.A.M.'s competitors will not independently develop technologies that are substantially equivalent or superior to its technologies. The Company further believes that due to the rapid pace of innovation within the multimedia and software industries, factors such as the technological and creative skills of A.D.A.M. personnel and the quality of the content of its products are as important in establishing and maintaining a leadership position within the industry as the various legal protections for the Company's technology.

A.D.A.M. believes that its products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties and to date no third party has filed an infringement claim against the Company. However, as the number of products in our industry increases and the functionality of these products overlap, content providers may become increasingly subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against A.D.A.M. in the future with respect to current or future products, trademarks or other works of A.D.A.M. or that any assertion will not require the Company to enter into royalty arrangements or result in costly litigation.

Competition

The market in which we operate is highly competitive and continually evolving. There are a number of health content service providers offering products in various pre-packaged and customized ways, including:

•: online content providers, portals or Web sites targeting the healthcare industry or healthcare consumers, such as WellMed, Inc., InteliHealth, Inc., WebMD Corporation, and HealthGate Data Corporation;
•: public sector and non-profit organizations that provide healthcare information without advertising or commercial sponsorships such as the American Medical Association, LaurusHealth.com and Healthwise, Inc.;
•: publishers and distributors of traditional offline media, including those targeting healthcare professionals, many of which have established or may establish Web sites such as Krames, and Health Ink & Vitality;
•: healthcare consulting and Web development companies such as Greystone.net;
•: healthcare information system vendors such as McKesson Corporation, Cerner Corporation and IDX; and
•: vendors of healthcare information, products and services distributed through other means, including direct sales, mail and fax messaging.

Many of our competitors have greater technical, product development, marketing, financial and other resources than we do. These organizations may have longer operating histories, greater brand recognition and larger customer bases. We believe other competitive factors in our markets include ease of implementation and use, pricing, features and quality of customer support.

A.D.A.M. believes its principal competitive advantages are:

•: ownership of all A.D.A.M.-labeled assets;
•: rigorous editorial review processes;
•: industry compliance for certain products with the American Accreditation HealthCare Commission (URAC) accreditation program; and
•: unique visual content assets.

Employees

As of December 31, 2001, A.D.A.M. had 57 employees, including ten employees added as a result of the IMC acquisition. Of these employees, 30 were engaged primarily in editorial management and product development, 18 in sales and marketing and 9 in finance and administration. Management currently intends to keep most of the current IMC staff to take advantage of the editorial expertise of these employees in managing the IMC products.

Our employees are not covered by a collective bargaining agreement and we have experienced no work stoppages. We consider our employee relations to be good. We believe that our future growth and success will depend upon our ability to retain and continue to attract highly skilled and motivated personnel in all areas of our operations.

Disclosure Regarding Forward Looking Statements

Certain statements made in this report, and other written or oral statements made by or on behalf of A.D.A.M., may constitute "forward-looking statements" within the meaning of the federal securities laws. When used in this report, the words "believes," "expects," "estimates," "intends," "will" and similar expressions are intended to identify forward-looking statements. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, intentions, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of such statements in this report include descriptions of our plans and strategies with respect to developing certain market opportunities, our overall business plan, our plans to develop additional strategic partnerships, our intention to develop our products and platform technologies, our continuing growth and our ability to contain our operating expenses. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. We believe that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

In addition to other factors addressed elsewhere in this report, the following are certain of the factors that could cause our actual results to differ materially from the expected results described in the our forward-looking statements:

Although we reported net income in calendar 2001, we have incurred substantial losses throughout our history. In calendar 2001 we recorded net income of $1,597,000. Net income for calendar 2001 was largely provided through the sale of assets and not through operations. Prior to this we experienced losses of $7,854,000 for calendar 2000, $9,579,000 for the nine months ended December 31, 1999 and $2,180,000 for the twelve months ended March 31, 1999. We cannot guarantee that we will be able to sustain profitability.

We may be unable to obtain sufficient capital to pursue our growth and market development strategies, which would hurt our financial results. Since inception we have funded operations with debt and equity capital. A.D.A.M.'s total operating costs and expenses decreased to $8,769,000 in calendar 2001

compared to $14,257,000 in calendar 2000, and $13,056,000 for the nine months ended December 31, 1999. Management projects that total operating costs and expenses will increase modestly in the twelve months ending December 31, 2002, and cannot assure that future operating losses will not occur. There is no assurance that our revenues will be sufficient to cover our expenses or that capital will be available to us on satisfactory terms or at all, to fund any shortfall in these costs and revenues.

We may be unable to compete effectively with other online providers of healthcare information, which could cause our growth and market development strategies to be unsuccessful. The market for providing healthcare information is intensely competitive, and competition could increase in the future. As this market develops, we expect our sensitivity to competitive pressures to be especially strong as we continue to attract and retain customers. We may not be able to compete effectively against these companies, and if we fail to compete effectively we may suffer reduced gross margins and loss of market share.

The healthcare information market is rapidly evolving and subject to rapid technological change. Certain companies could enter this market that could be larger and more established than we are. These competitors could have advantages over us because of their longer operating histories, greater name recognition, or greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They could also devote greater resources to the promotion and sale of their products or services. Furthermore, mergers and acquisitions among other companies could intensify our existing competition or create new competitors.

We have relied and continue to rely on a limited number of customers for a significant portion of our revenues. Losing one or more of these customers may adversely affect our revenues and financial results. We generate a significant portion of our revenues from a limited number of customers and we expect that this will continue for the foreseeable future. For example, during calendar 2001, two customers accounted for approximately 26% and 12% of our net revenues, respectively. These same two customers accounted for 33% and 13% of our net revenues, respectively, for calendar 2000. In calendar 2002, as a result of a bankruptcy filing in December 2001 by our second largest customer, we expect approximately 19% of our revenues to be generated from only one customer. If we lose any more of our large customers, or if we are unable to add new large customers, then our revenues may decline or not increase as expected.

We face technological challenges in our ability to deliver customized information in the rapidly changing healthcare industry, which may limit our ability to maintain existing customer or attract new customers. We believe that health information will become more customized to an individual's personal health management needs. As a result, we will need to have adequate technology infrastructure that will allow us to deliver in a cost effective manner portions of our content assets based on each customer's requirements. We will be required to utilize, without significant prior experience, technologies related to content management and content distribution. A failure to develop or obtain this technology could adversely affect our ability to maintain market share or acquire new customers.

We may be unable to successfully identify, acquire, manage or integrate complementary businesses. As evidenced by our recent acquisitions of IMC and Nidus, part of our immediate growth strategy includes acquiring businesses with complementary products, technologies or professional services. Moving forward, we may not be successful in acquiring other complementary businesses or assimilating their personnel and operations into our Company. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Future acquisitions may also cause us to incur expenses such as in-process research and development expenses, which may negatively affect our earnings. We cannot be certain that we will successfully overcome these risks with respect to any future acquisitions. In addition, in the past, we have paid a portion of the consideration for some our acquisitions by issuing common

stock. The issuance of additional common stock or other securities convertible into common stock in connection with future acquisitions could dilute the ownership interests of our existing shareholders.

We may be unable to attract new personnel, which would adversely affect implementation of our overall business strategy. In order to promote the development of our target markets, we will need to identify, attract and retain software engineers, web designers, sales and marketing professionals and other key personnel. We will compete with other companies both within and outside our markets for such employees and we may be unable to attract these employees. If we do not succeed in attracting these types of new employees, we may be unable to fully implement our growth and market development strategies and our business will suffer.

Our stock price is extremely volatile and could decline significantly. Since our initial public offering in 1995, there has been significant volatility in the price of our common stock. This volatility has often been unrelated to our operating performance. There can be no assurance that the market price of our common stock will be maintained or that the volume of trading in our shares will not decrease.

Furthermore, following periods of volatility in the market price of a company's securities, securities class action claims frequently are brought against the subject company. To the extent that the market price of our shares falls dramatically in any period of time, shareholders may bring claims, with or without merit, against us. Such litigation would be expensive to defend and would divert management attention and resources regardless of outcome.

We are not compliant with the new Nasdaq National Market listing maintenance requirements as of December 31, 2001, as it relates to net equity, and we could fall out of compliance with other listing requirements. Effective June 29, 2001, the SEC approved a change to the Nasdaq Stock Market Marketplace Rules concerning quantitative listing standards for initial and continued inclusion on the Nasdaq National and SmallCap Markets. While the Company currently meets the old maintenance standard for continued inclusion on the Nasdaq National Market, as it relates to net tangible assets, we are not compliant with the new standard, as it relates to net equity. The new standard requires that for companies to remain listed on the Nasdaq National Market, they should have net equity of $10,000,000. As of December 31, 2001, A.DA.M. had net equity of approximately $7,173,000. We have until November 1, 2002 to become compliant with the new standard.

While management plans to become compliant with the new standard by November 1, 2002, significant changes to the Company's balance sheet as a result of operating losses could affect our listing status, which could result in the Company being delisted. We believe that there are measures currently available to us that could be implemented to become compliant by the November 1, 2002 deadline. These measures include the sale of additional shares of common stock, and acquisitions of other companies, both of which could result in dilution to our existing shareholders. Should we be delisted from the Nasdaq National Market, the Company currently qualifies for listing on the Nasdaq SmallCap Market under the new standard.

We have adopted certain anti-takeover provisions that may deter a takeover. Our articles of incorporation and bylaws contain the following provisions that may deter a takeover, including a takeover on terms that many of our shareholders might consider favorable, such as:

•: the authority of our board of directors to issue common stock and preferred stock and to determine the price, rights (including voting rights), preferences, privileges and restrictions of each series of preferred stock, without any vote or action by our shareholders;
•: the existence of large amounts of authorized but unissued common stock and preferred stock;
•: staggered, three-year terms for our board of directors; and
•: advance notice requirements for board of directors nominations and for shareholder proposals.

The rights and preferences of any series of preferred stock could include a preference over the common stock on the distribution of our assets upon a liquidation or sale of our Company, preferential dividends, redemption rights, the right to elect one or more directors and other voting rights. The rights of the holders of any series of preferred stock that may be issued in the future may adversely affect the rights of the holders of the common stock. We have no current plans to issue preferred stock. In addition, certain provisions of Georgia law and our stock option plan may also discourage, delay or prevent a change in control of our Company or unsolicited acquisition proposals.

A significant number of un-issued shares are registered for future sale and could adversely affect the market price of our common stock. If our shareholders, option holders, or warrant holders exercise their rights to sell substantial amounts of our common shares in the public market, the market price of our common stock could fall. Given the unpredictable transaction volumes for A.D.A.M. shares, the sale of a significant amount of these shares at any given time could cause the market price of our common stock to decline or otherwise be highly volatile. Such sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price when we deem conditions to be more favorable.

Our principal shareholders have substantial influence and their interest may differ from those of our remaining shareholders. As of December 31, 2001, our executive officers, directors and persons who beneficially own more than 5% of our outstanding common stock controlled approximately 26.6% of the combined outstanding voting power of our common stock. As a result, these holders exert substantial influence with respect to all matters submitted to a vote of holders of common stock, including election of our directors. If our remaining shareholders have interests that differ from these holders, their needs may not be met.

ITEM 2. PROPERTIES

Our headquarters are located in approximately 26,000 square feet of leased office space in Atlanta, Georgia. The space is leased for a term ending in June 2002. As of December 31, 2001, we sublease approximately 3,600 square feet of space to a company whose president is a director of A.D.A.M. We are currently in negotiations to sign a lease for approximately 15,000 square feet of new leased office space in or around Atlanta, Georgia for a term of approximately eight years.

During 2001 the Company acquired IMC, which is located in Newton, Massachusetts. IMC currently leases two small offices consisting of approximately 5,100 and 1,900 square feet of space, respectively. Both spaces are leased for a term ending in December 2003. We have engaged a real estate agent to dispose of the larger space and, at present, we intend to keep the smaller Newton office open to take advantage of the editorial expertise of the IMC employees in managing the IMC products.

If additional facilities are required, we believe that suitable facilities will be available at market rates.

ITEM 3. LEGAL PROCEEDINGS

On April 25, 1996, a shareholders' class action lawsuit was filed in Fulton County Superior Court in Atlanta, Georgia against A.D.A.M. (formerly A.D.A.M. Software, Inc.) and certain of our then officers and directors. The complaint alleges violations of sections 11, 12(2) and 15 of the Securities Act of 1933, violations of the Georgia Securities Act and negligent misrepresentation arising out of alleged disclosure deficiencies in connection with our initial public offering of common stock, which was completed on November 10, 1995. The complaint seeks compensatory damages and reimbursements for plaintiff's fees and expenses. We, and the other named defendants, have filed a motion to dismiss the claim, which is pending. A Notice of Status Conference has been scheduled for May 15, 2002 where A.D.A.M. intends to ask the court to take up our motion to dismiss.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the last quarter of calendar 2001.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the Nasdaq National Market under the symbol "ADAM." The following table sets forth the high and low sales prices of our common stock as reported by the Nasdaq National Market for each quarter in the twelve months ended December 31, 2000 and 2001.

	High		Low
Twelve Months Ended December 31, 2000
Quarter ended March 30, 2000	$	16.63	$	8.38
Quarter ended June 30, 2000	$	14.00	$	3.25
Quarter ended September 30, 2000	$	5.50	$	3.44
Quarter ended December 31, 2000	$	3.81	$	1.00
Twelve Months Ended December 31, 2001
Quarter ended March 30, 2001	$	2.38	$	1.72
Quarter ended June 30, 2001	$	3.15	$	1.35
Quarter ended September 30, 2001	$	2.80	$	1.90
Quarter ended December 31, 2001	$	3.15	$	2.00

At March 27, 2002 there were 164 record holders of our common stock.

We have never paid or declared any cash dividends on our common stock and we do not intend to pay dividends on our common stock in the near future. We presently expect to retain any future earnings to fund continuing development and growth of our business. The payment by A.D.A.M. of dividends, if any, on our common stock in the future is subject to the discretion of our board of directors and will depend on our earnings, financial condition, capital requirements and other relevant factors.

ITEM 6. SELECTED FINANCIAL DATA

In 1999, the Company changed its fiscal year end from March 31 to December 31. The selected historical balance sheet and statement of operations presented below for the years ended December 31, 2001 and 2000, the nine months ended December 31, 1999, and the years ended March 31, 1999 and 1998, have been derived from the Company's audited consolidated financial statements.

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein.

		Twelve Months ended December 31,						Nine Months ended December 31,			Twelve Months ended March 31,
		2001			2000			1999			1999			1998
		(In thousands, except per share data)
STATEMENT OF OPERATIONS:
	Net revenues	$	8,946		$	8,621		$	3,144		$	5,242		$	6,888
	Costs and expenses:
	Costs of revenues		1,588			742			551			1,408			1,167
	General and administrative		2,156			3,323			2,997			1,508			1,212
	Product and content development		2,243			4,091			5,015			1,924			1,344
	Sales and marketing		1,961			2,958			2,680			2,581			2,671
	Depreciation and amortization		820			2,410			764			349			367
	Restructuring		—			733			1,049			47			—

	Total costs and expenses		8,768			14,257			13,056			7,817			6,761

	Operating income (loss)		178			(5,636	)		(9,912	)		(2,575	)		127
	Interest income (expense), net		99			(987	)		158			395			526
	Realized loss and impairment of investment securities		(146	)		(1,105	)		—			—			—
	Realized gain on sale of assets, net		1,808			—			—			—			—

	Income (loss) before income taxes, minority interest and equity in net losses of affiliate	$	1,939		$	(7,728	)	$	(9,754	)	$	(2,180	)	$	653
	Income taxes		—			—			—			—			(75	)

	Income (loss) before minority interest and equity in net losses of affiliate	$	1,939		$	(7,728	)	$	(9,754	)	$	(2,180	)	$	578

	Minority interest in consolidated subsidiary		—			—			175			—			—
	Equity in net losses of affiliate		(342	)		(126	)		—			—			—

	Net income (loss)	$	1,597		$	(7,854	)	$	(9,579	)	$	(2,180	)	$	578

	Basic net income (loss) per share		$0.25			$(1.42	)		$(2.04	)		$(0.48	)		$0.12

	Weighted average number of common shares and share equivalents outstanding, basic		6,453			5,536			4,707			4,528			4,916

	Diluted net income (loss) per share		$0.24			$(1.42	)		$(2.04	)		$(0.48	)		$0.12

	Weighted average number of common shares and share equivalents outstanding, diluted		6,555			5,536			4,707			4,528			4,959

		December 31,								March 31,
		2001		2000			1999			1999		1998
		(In thousands)
BALANCE SHEET DATA:
	Cash and short term investments	$	2,878	$	1,666		$	1,477		$	6,161	$	8,334
	Accounts receivable-net		1,949		1,046			828			950		1,221
	Total current assets		5,436		3,259			3,544			7,567		10,198
	Goodwill		1,474		—			—			—		—
	Total assets		9,861		6,817			7,736			8,970		11,900
	Deferred revenue		1,621		2,479			731			105		22
	Short-term debt		34		188			733			—		—
	Total liabilities		2,688		4,162			4,359			1,174		1,187
	Total shareholders' equity		7,173		2,655			3,377			7,796		10,713
	Working capital (deficiency)		2,756		(903	)		(815	)		6,393		9,011

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto presented elsewhere in this Annual Report on Form 10-K.

Overview

The Company's proprietary content library, more than 16 years in the making, includes:

•: a physician reviewed Health Encyclopedia that covers approximately 3,800 diseases and medical conditions;
•: approximately 40,000 medical illustrations that have been drawn and compiled by A.D.A.M.;
•: an extensive library of 3D models developed from the Visible Human Project;
•: thousands of web-enabled animations depicting disease states and other medical conditions and topics, many of which are broadcast-quality;
•: interactive tools,
•: unique technology for viewing the human body's anatomy; and
•: an advanced content management system the Company is implementing.

Collectively, the Company believes these assets represent the single largest database of proprietary health and medical related content anywhere in the world.

A.D.A.M. believes that pictures are worth a thousand words and illustrated approaches to explaining complex medical conditions has a significant impact on the way people understand their bodies and medical situations. A.D.A.M. believes that its products will have an impact in the way patient education information is delivered and used in personal health management, prevention, disease management, and after care applications. The Company believes it has the potential to capture a significant share of the consumer-patient health education market with its high-quality, medically accurate, visual and text based information—whether it is being distributed over the Internet, as a component of point-of-care applications within the health care system or as printed products that can be sold and disseminated in a variety of ways including subscriptions and "information prescriptions" given during patient-provider contacts.

Consumer appetite for health information continues to grow as shown by the dramatic increase in the number of searches conducted by consumers over the Internet in the last three years. Today, more than 50 million "health seekers" are online at least monthly, seeking information to manage their own conditions and the health of their family and friends." (Health Information Technology in the New Millenium 2001, Russell C. Coile, Editor) With this consumer demand, and the proliferation of patients taking an active role with their healthcare provider in their personal care management, the Company believes that its products will play an increasing role in the product offerings of healthcare providers (particularly hospitals), the pharmaceutical industry, and the health insurance and managed care industries. These organizations are actively looking for ways to improve efficiencies, reduce clinical costs, increase patient encounters, communicate better with patients and plan members, and remain competitive

in an environment that is increasingly becoming more crowded with direct-to-consumer marketing. Healthcare organizations must also deal with broader technical and compliancy issues such as HIPAA (the Health Insurance Portability and Accountability Act) and other federal regulations that could have an impact on the usage of health content and patient education.

In addition, A.D.A.M. has recognized the important role its products can have with the growing U.S. Hispanic population. With more than 34 million Spanish-speaking consumers in the U.S., the Company believes that there will be an increasing need to provide health information to this fast growing demographic segment. New legislation requiring federally funded organizations, such as hospitals and other healthcare providers, to translate information into other languages for people with limited English proficiency, will fuel opportunities for Spanish versions of A.D.A.M.'s health information products. A.D.A.M. completed the translation of its Health Illustrated Encyclopedia, Pregnancy Health Center and Surgeries and Procedures products in 2001. The Company maintains a translation relationship with a third party vendor for editorial updates to the Spanish products.

A.D.A.M. currently provides its health content products to a broad range of customers whose profile has shifted since the Company began licensing its health content products in 1998. Originally, the Company's focus for licensed products was in the Internet portal market. At that time, healthcare organizations had not fully developed their web strategies and eBusiness initiatives that used health content as a significant driver. While A.D.A.M.'s sales and marketing focus is now more aligned to the healthcare market, the Company still has active contracts with major Internet portals and will continue to seek new opportunities in this market as they become available. In the healthcare market, the Company has developed a growing license business in the hospital, pharmaceutical and managed care areas. In calendar 2001, the Company signed 14 contracts directly with hospitals and several more indirectly through use of its reseller relationships. In total, more than 120 hospitals were using A.D.A.M. content products at the end of calendar 2001. The Company has already signed a number of new contracts in the first quarter of 2002, and expects the number of hospitals using A.D.A.M. products to rise at a faster pace than 2001.

Besides the hospital sector, the Company has signed new or renewed contracts with several leading pharmaceutical companies and other healthcare-related organizations as well as the National Library of Medicine. Through this licensing network, A.D.A.M.'s products are searched and viewed by millions of consumers around the world. Because of size and breadth of the Company's distribution network, the Company believes it is the single largest provider of health related information on the Internet.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

•: Revenue Recognition.

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

The Company generates revenues mainly in two ways—Internet-based licensing and shipped product sales. Internet revenues consist primarily of platform license fees that usually consist of an annual, up-front charge that is recognized ratably over the term of the license agreement beginning upon customer acceptance. Revenues from licensing arrangements are recognized after delivery has occurred, when the Company has determined that the fees from the agreement are fixed and determinable and there are no significant return or acceptance provisions. Fees billed in advance of the performance of services are recorded as deferred revenue and are recognized as the services are performed. Payments, or installment invoices for licensing arrangements, received in advance of shipments are recorded as deferred revenue and are recognized as revenue when the related software is shipped and all other revenue recognition criteria have been met. Product revenues represent the sales of software products and revenues earned under certain royalty agreements. Revenues from product sales are generally recognized at the time title passes to customers, distributors or resellers. Revenues from royalty agreements are recognized as earned based upon performance or product shipment.

•: Sales Returns Allowances and Allowance for Doubtful Accounts

Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Management must make estimates of potential future product returns related to current period product revenue. Allowances for estimated product returns are provided at the time of sale. The Company evaluates the adequacy of allowances for returns primarily based upon its evaluation of historical and expected sales experience and by channel of distribution. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

Similarly, management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes account receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

•: Capitalized Software Development Costs

We capitalize internal software development costs in accordance with Financial and Accounting Standards Board ("FASB") Statement No. 86 ("FAS 86"), "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. We cease capitalization of internally developed software when the product is made available for general release

to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. We amortize such capitalized costs as cost of sales on a product-by-product basis using the straight-line method over a period of two years. We continually evaluate the recoverability of capitalized costs and if the successes of new product releases are less that we anticipate then a material write down of capitalized costs could adversely affect any reporting period in which the write down occurs.

We also capitalize internal software development costs in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement specifies that computer software development costs for computer software intended for internal use occurs in three stages: (1) the preliminary project stage, where costs are expensed as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage, where again costs are expense as incurred. We cease capitalization of developed software for internal use when the software is ready for its intended use and placed in service. We amortize such capitalized costs as cost of sales on a product-by-product basis using the straight-line method over a period of three years. We continually evaluate the usability of the products that make up our capitalized costs and if certain circumstances arise such as the introduction of new technology in the marketplace that management intends to use in place of the capitalized project, then a material write down of capitalized costs could adversely affect any reporting period in which the write down occurs.

•: Inventory

The Company records reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

•: Legal Contingencies

The Company is subject to certain legal proceedings as discussed elsewhere in this report. Currently the Company does not believe that these matters will have a material impact on its financial results or financial position. This conclusion is based primarily on the Company's insurance coverage for these matters. It is possible, however, that future results of operations for any particular quarter or annual period could be materially affected by changes in assumptions or other circumstances involving these legal matters.

•: Goodwill and Intangible Assets

As described in Note 2 to the consolidated financial statements the Company has recorded goodwill in connection with its acquisition of IMC in 2001. In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."

SFAS No. 141 requires the purchase method of accounting for all business combinations and that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. We have applied SFAS No. 141 in our allocation of the purchase price to the IMC acquisition.

SFAS No. 142 requires that goodwill and other intangibles that have an indefinite life are no longer to be amortized but are to be tested for impairment at least annually. In assessing impairment the Company must make judgments and assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective net assets. Other factors that could cause impairment could result from a significant decline in our stock price for a sustained period and our market capitalization relative to net book value. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment charge for the recorded

goodwill. We currently do not expect to record an impairment charge upon completion of the annual impairment review in 2002. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded. Since the Company did not have any goodwill recorded prior to the IMC acquisition, the provision of SFAS 142 requiring companies to stop amortizing goodwill will have no impact on the ongoing operating results of the Company or the comparability of such results with prior periods.

•: Variable Stock Options

In March 2000, the FASB issued Financial Interpretations No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25)." This opinion provides guidance on the accounting for certain stock option transactions and subsequent amendments to stock option transactions. FIN 44 was effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. We have from time to time since 1991 granted stock options to our employees to purchase shares of our common stock. Certain of these options were canceled at the option of their holders on January 14, 1999, and then replaced that day on a one-for-one basis with new options with an exercise price equal to the closing market price that day.

The adoption of FIN 44 did not have a material impact on A.D.A.M.'s financial position or results of operations for calendar 2001. This interpretation requires variable accounting treatment for options that have been modified from their original terms. Accordingly, compensation cost shall be adjusted for increases or decreases in the intrinsic value of the modified awards in subsequent periods and until the awards have been exercised, forfeited, or expired. As of December 31, 2001, the Company has 221,200 outstanding options with an exercise price of $5.25 that are considered variable under this interpretation. Because the stock price since the effective date of July 1, 2000 has been below $5.25, the Company has not recorded any compensation cost related to the repriced options issued on January 14, 1999. Should our stock price climb above $5.25 our operating results will be affected until the stock options are either exercised or forfeited and could adversely affect any reporting period in which the variable accounting is required. Any charges that result from these variable options would be non-cash operating expenses and will be reported on a separate line item.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 141 and SFAS 142. SFAS 141 is effective for any business combinations initiated after June 30, 2001, while SFAS 142 becomes effective for the Company commencing January 1, 2002.

•: SFAS 141 generally requires the Company to use the purchase method to account for its acquisitions, if any. The Company does not believe that SFAS 141 will have a significant impact on its financial position or results of operations. We have applied SFAS No. 141 in our allocation of the purchase price to the IMC acquisition.
•: SFAS 142 affects how the Company accounts for goodwill and other intangible assets acquired in both previous and any future acquisitions. SFAS 142 prohibits the amortization of goodwill associated with acquisitions made after June 30, 2001. SFAS 142 also requires an impairment test on goodwill be performed at least annually beginning in 2002. The Company will perform the impairment test during 2002, the test is expected to be based on cash flow and earnings projections, and is not expected to result in an impairment charge. Since the Company did not have any goodwill recorded prior to the IMC acquisition, the provision of SFAS 142 requiring companies to stop amortizing goodwill will have no impact on the ongoing operating results of the Company or the comparability of such results with prior periods.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment

of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", but retains its fundamental provisions for recognition and measurement of the impairment of long-lived assets to be held and used and those to be disposed of by sale. The Company must adopt this standard in 2002. The Company is evaluating the effect that this standard will have on its results of operations and financial condition.

Results of Operations

The following table sets forth for the periods indicated the percentages of our net revenues represented by each line item.

		Twelve Months ended December 31, 2001		Twelve Months ended December 31, 2000		Nine Months ended December 31, 1999
		(In thousands)
Net revenues		100	%	100	%	100	%
Cost and expenses:
	Cost of revenues	17.8		8.6		17.5
	General and administrative	24.1		38.5		95.3
	Product and content development	25.1		47.5		159.6
	Sales and marketing	21.9		34.3		85.2
	Depreciation and amortization	9.1		28.0		24.3
	Restructuring	—		8.5		33.4

	Total costs and expenses	98.0		165.4		415.3

Operating income (loss)		2.0	%	(65.4	%)	(315.3	%)

Twelve months ended December 31, 2001 compared to twelve months ended December 31, 2000

Total net revenues increased $325,000, or 3.8%, to $8,946,000 for calendar year 2001 compared to $8,621,000 for calendar year 2000. The increase is primarily attributable to a $709,000 increase in net revenues from the healthcare market as a result of our focus on this market in calendar 2001, partially offset by a decrease in net revenues from the education market.

Net revenues from the healthcare market increased $709,000, or 11.4% to $6,924,000 for calendar 2001 compared to $6,215,000 for calendar 2000. The increase is primarily attributable to increases in the health provider, pharmaceutical and managed care areas of the healthcare market. Revenues from national Internet and media web sites were essentially flat for calendar 2001. As a percent of total net revenues, net revenues from the healthcare market increased to 77.4% for calendar 2001 compared to 72.1% for calendar 2000.

Net revenues from the education market decreased $171,000, or 8.0%, to $1,979,000 for calendar 2001 compared to $2,150,000 for calendar 2000. The education market revenues consist primarily of CD-ROM based product sales. This decrease is primarily attributable to increased sales and marketing focus on the healthcare market during calendar 2001. As a percent of total net revenues, net revenues from the education market decreased to 22.1% for calendar 2001 compared to 24.9% for the calendar 2000.

Cost of revenues increased $846,000, or 114.0%, to $1,588,000 for calendar 2001 compared to $742,000 for calendar 2000. Cost of revenues includes the cost of support, shipped product component costs, packaging, documentation, royalties and amortization of capitalized software development costs. This increase is primarily the result of the amortization and write off of older technology acquired in calendar 2000. As a percent of total net revenues, cost of revenues increased to 17.8% for calendar 2001 compared to 8.6% for calendar 2000.

General and administrative expenses decreased $1,167,000, or 35.1%, to $2,156,000 for calendar 2001 from $3,323,000 for calendar 2000. This decrease is primarily attributable to continued aggressive cost control measures enacted in calendar 2000 and continued in calendar 2001. In particular, the Company realized significant savings in the areas of consulting, legal and accounting fees, and other professional service fees. Also, approximately $370,000 of the decrease is attributed to the costs saved by closing our San Francisco office in 2000. These decreases in general and administrative expenses were partially offset by a non-cash stock compensation charge of $141,000 in calendar 2001. As a percent of total net revenues, general and administrative costs decreased to 24.1% for calendar 2001 compared to 38.5% for calendar 2000.

Product and content development costs decreased $1,848,000, or 45.2%, to $2,243,000 for calendar 2001 from $4,091,000 for calendar 2000. We capitalized product development expenditures of $896,000 in calendar 2001 and $1,631,000 during calendar 2000, which represented 28.5% of total product development expenditures for each respective period. This decrease is primarily attributable to continued aggressive cost control measures enacted in calendar 2000 and continued in calendar 2001. In particular, the Company incurred significantly lower costs for outside consultants and content acquisition. Also, product expenses related to the operation of the DrGreene.com web site, which was discontinued during the third quarter of calendar 2000, decreased $357,000 for calendar 2001 compared to calendar 2000. Additionally, we merged production of our LIDO.com web site with our general ADAM production efforts, and the resulting synergies decreased product and content development costs by $147,000 when comparing calendar 2001 to calendar 2000. These decreases were offset by an increase in editorial expenses of $611,000 incurred to keep our content products updated. As a percent of total net revenues, product development costs decreased to 25.1% for calendar 2001 compared to 47.5% for calendar 2000.

Sales and marketing expenses decreased $997,000, or 33.7%, to $1,961,000 for calendar 2001 from $2,958,000 for calendar 2000. This decrease is attributable to aggressive cost control measures enacted in calendar 2000 and continued in calendar 2001. In particular the Company realized significant savings in the areas of advertising, trade shows, travel, and marketing co-op development funds. Also, this decrease is partially attributable to a decrease of $333,000 resulting from the combination of sales and marketing activities related to the LIDO.com web site with our general ADAM sales and marketing efforts. Additionally, we reduced our resources on the development of our web page, which serves primarily as a marketing tool for the Company during calendar 2001 resulting in a $216,000 decrease in expenses. As a percent of total net revenues, sales and marketing expenses decreased to 21.9% for calendar 2001 compared to 34.3% for calendar 2000.

Depreciation and amortization expenses decreased $1,590,000, or 66.0%, to $820,000 for calendar 2001 from $2,410,000 for calendar 2000. This decrease is primarily the result of (1) a $415,000 amortization charge in calendar 2000 related to expenses associated with the $6,000,000 debenture sold to Fusion Capital I, LLC and (2) a decrease of $1,336,000 in amortization expense and the write-down in calendar 2000 of the DrGreene.com assets acquired during the nine months ended December 31, 1999. This decrease for calendar 2001 was partially offset by a $227,000 increase in amortization expense due to the write off of the Informational Medical Systems, Inc. asset, a collection of patient consent forms for surgical procedures purchased in 1999. As a percent of total net revenues, depreciation and amortization expenses decreased to 9.2% for calendar 2001 compared to 28.0% for calendar 2000.

Interest expense, net, decreased $1,086,000, or 110.1%, to interest income of $99,000 for calendar 2001, as compared to interest expense $987,000 for calendar 2000. This decrease was primarily attributable to a $750,000 non-cash charge related to the beneficial conversion feature associated with the $6,000,000

debenture from Fusion Capital Fund I, LLC, $71,000 of interest payable to the holders of the notes payable and $337,000 representing amortization associated with the warrants issued in connection with the notes payable for calendar 2000.

During calendar 2001, the Company sold its 50 percent ownership interest in the intellectual property rights associated with the A.D.A.M./Benjamin Cummings Interactive Physiology Series to Pearson Education, Inc. for $1,950,000 in cash resulting in a net gain of $1,808,000 after expenses. There were no gains on the sale of assets during calendar 2000.

For calendar 2001 and calendar 2000, no provision has been estimated for income taxes. The Company has sufficient net operating loss carry forwards to offset regular taxable income. Additionally, the Company anticipates meeting the requirements for the small corporation exemption for Alternative Minimum Tax purposes. As of December 31, 2001, the Company continues to maintain a valuation allowance against its total net deferred tax asset balance.

The Company recorded an investment loss of $146,000 during calendar 2001 due to the difference in the book value of investment securities held at the end of calendar 2000 and the amount realized from their sale in calendar 2001. During calendar 2000, the Company recorded an investment loss of $1,105,000 as a result of a decline in the fair value of its investment securities. Management determined the decline to be "other than temporary". As of December 31, 2001, the Company holds no investment securities.

During calendar 2001, the Company invested $275,000 in a software development company, ThePort Network, Inc. (formerly ThePort.com, Inc.) ("ThePort"). The results of operations of this entity have been accounted for as an equity investment during calendar 2001 and accordingly the Company records its share of the results of operations in the consolidated financial statements of the Company. For calendar 2001, the Company recorded its share of ThePort's losses of $342,000. At December 31, 2001, the carrying value of this investment was $40,000. During calendar 2000, the Company, also accounted for its investment using the equity method and recorded its share of ThePort's losses of $126,000. At December 31, 2000, the carrying value of this investment was $107,000.

As a result of the above, we had net income of $1,597,000 for calendar 2001 compared to a net loss of $7,854,000 for calendar 2000.

Twelve months ended December 31, 2000 compared to nine months ended December 31, 1999

Total net revenues increased $5,477,000, or 174.2%, to $8,621,000 for calendar 2000 compared to $3,144,000 for the nine months ended December 31, 1999. The increase is primarily attributable to a $5,361,000 increase in net revenues from the healthcare market as a result of our focus on this market in calendar 2000. A significant portion of the Company's revenue increase during calendar 2000 is attributable to contracts with subscription-based licensee customers finalized during the last quarter of 1999. Additionally, the increases in total net revenues are the result of three additional months of operations included in calendar 2000.

Net revenues from the healthcare market increased $5,361,000, or 627.8% to $6,215,000 for calendar 2000 compared to $854,000 for the nine months ended December 31, 1999. The Company entered the healthcare market during the nine months ended December 31, 1999, resulting in substantial growth in the number of subscription-based licensee customers from national Internet and media web sites during calendar 2000. Additional product offerings during calendar 2000 in the healthcare market resulted in a larger licensee customer base as compared to the nine months ended December 31, 1999. As a percent of total net revenues, net revenues from the healthcare market increased to 72.1% for calendar 2000 compared to 27.2% for the nine months ended December 31, 1999.

Net revenues from the education market decreased $72,000, or 3.2%, to $2,150,000 for calendar 2000 compared to $2,222,000 for the nine months ended December 31, 1999. The education market revenues consist primarily of CD-ROM based product sales. This decrease is primarily attributable to increased

sales and marketing focus on the healthcare market during calendar 2000. As a percent of total net revenues, net revenues from the education market decreased to 24.9% for calendar 2000 compared to 70.7% for the nine months ended December 31, 1999.

Average net revenue for the 52,000 units of software sold during calendar 2000 decreased to approximately $33.00 per unit compared with approximately $61.00 per unit for 30,000 units sold for the nine months ended December 31, 1999. The lower average price per unit is due to (1) increased sales in calendar 2000 to resellers at a discount of standard retail price as compared to direct sales at retail price during the nine months ended December 31, 1999, (2) increased unit sales of lower priced K-12 products in calendar 2000 as compared to higher priced higher education products sold in the nine months ended December 31, 1999, and (3) increased granting of promotional discounts (usually 10%) to resellers for higher volume orders in calendar 2000. Approximately 20.0% of revenues for calendar 2000 were derived from product shipments, compared to 58.5% for the nine months ended December 31, 1999. We expect future sales of our CD-ROM products to decrease as we focus our sales and marketing efforts on our online market and growth strategies.

Cost of revenues increased $191,000, or 34.7%, to $742,000 for calendar 2000 compared to $551,000 for the nine months ended December 31, 1999. This increase is predominately attributable to the change in the Company's fiscal year partially offset by a $105,000 increase in amortization of software development costs. Cost of revenues includes the cost of support, packaging, documentation, royalties and amortization of capitalized software development costs. As a percent of total net revenues, cost of revenues decreased to 8.6% for calendar 2000 compared to 17.5% for the nine months ended December 31, 1999. This decrease is the result of the significant increase in higher margin subscription-based revenues during calendar 2000. In calendar 2000, subscription-based licensing revenue accounted for 66.5% of total net revenue as compared to 23.3% in the nine months ended December 31, 1999. Conversely, lower margin CD-ROM revenue accounted for 20.0% of total net revenue compared to 58.5% in the nine months ended December 31, 1999.

General and administrative expenses increased $326,000, or 10.9%, to $3,323,000 for calendar 2000 from $2,997,000 for the nine months ended December 31, 1999. As a percent of total net revenues, general and administrative costs decreased to 38.5% for calendar 2000 compared to 95.3% for the nine months ended December 31, 1999. This decrease as a percent of total net revenue is primarily a result of the increase in net revenues. Further, the decrease is the result of decreased rent and compensation costs, related to the closure of our San Francisco office during the first quarter of calendar 2000.

Product and content development costs decreased $924,000, or 18.4%, to $4,091,000 for calendar 2000 from $5,015,000 for the nine months ended December 31, 1999. We capitalized product development expenditures of $1,631,000 in calendar 2000 and $4,000 during the nine months ended December 31, 1999, which represented 28.5% and 0.1% of total product development expenditures for each respective period. The expense decrease for calendar 2000 was partially offset by increases in costs related to a web site that served our legal customers, the DrGreene.com web site purchase in July 1999, and other increased levels of non-capitalized production costs in calendar 2000. As a percent of total net revenues, product development costs decreased to 47.5% for calendar 2000 compared to 159.6% for the nine months ended December 31, 1999. Total expenditures for product development, including capitalized expense, increased 14.0% to $5,722,000 in calendar 2000 compared to $5,019,000 for the nine months ended December 31, 1999.

Sales and marketing expenses increased $278,000, or 10.4%, to $2,958,000 for calendar 2000 from $2,680,000 for the nine months ended December 31, 1999. As a percent of total net revenues, sales and marketing expenses decreased to 34.3% for calendar 2000 compared to 85.2% for the nine months ended December 31, 1999. This decrease as a percent of total net revenue is primarily a result of increased net revenues. Further, the decrease is the result of (1) a $149,000 decrease in advertising expense from

discontinued promotion of our consumer portal web site in calendar 2000, and (2) a $219,000 decrease during calendar 2000 in sales and marketing expenses related to a web site that served our legal customers.

Depreciation and amortization expenses increased $1,646,000, or 215.4%, to $2,410,000 for calendar 2000 from $764,000 for the nine months ended December 31, 1999. This increase is the result of (1) a $415,000 amortization charge in calendar 2000 related to expenses associated with the $6,000,000 debenture sold to Fusion Capital I, LLC, (2) an increase of $1,233,000 in amortization expense in calendar 2000 related to twelve months of amortization expense for calendar 2000 compared to five months for the nine months ended December 31, 1999, including the write-down in calendar 2000 of the DrGreene.com assets acquired during the nine months ended December 31, 1999. As a percent of total net revenues, depreciation and amortization expenses increased to 28.0% for calendar 2000 compared to 24.3% for the nine months ended December 31, 1999.

During calendar 2000, the Company recorded a restructuring charge of $733,000 reflecting costs associated with certain obsolete contracts, non-cash stock compensation paid to former employees and leasehold improvement costs and accrual of lease obligations related to the closure of our California office. During the nine months ended December 31, 1999, the Company recorded a restructuring charge of $1,049,000 resulting from the cost of severance agreements, principally expense of $690,000 caused by modification of employee stock options, for several executives that were released due to our re-focused Internet strategy.

Interest expense, net, increased $1,145,000, or 724.7%, to $987,000 for calendar 2000 from interest income, net, of $158,000 for the nine months ended December 31, 1999. This increase was due to a $750,000 non-cash charge related to the beneficial conversion feature associated with the $6,000,000 debenture from Fusion Capital Fund I, LLC, $71,000 of interest payable to the holders of the notes payable issued December 31, 1999 and $337,000 representing amortization associated with the warrants issued in connection with the notes payable.

The Company recorded an investment loss of $1,105,000 during calendar 2000 as a result of a decline in the fair value of its investment securities. Management has determined the decline to be "other than temporary".

During the nine months ended December 31, 1999, the Company invested $250,000 in a software development company, ThePort. For the nine months ended December 31, 1999, ThePort incurred operating losses of $383,000. The Company consolidated the operations on our financial statements due to our control through voting shares and other means. The financial statements for the nine months ended December 31, 1999 reflect a $175,000 benefit in minority interest in consolidated subsidiary to account for the other shareholders' share of the operating losses. Due to significant reductions in the Company's ownership interest during calendar 2000, the Company accounted for this investment using the equity method as of January 1, 2000. Accordingly, the accompanying financial statements reflect losses from an affiliate of $126,000 and increases in the investment balance of $191,000 resulting from cash investments by third parties to ThePort.

As a result of the above, we incurred a net loss of $7,854,000 for calendar 2000 compared to a net loss of $9,579,000 for the nine months ended December 31, 1999.

Liquidity and Capital Resources

As of December 31, 2001, the Company had cash and cash equivalents of $2,878,000 and working capital of $2,756,000.

Cash used by operating activities decreased to $874,000 during calendar 2001 as compared to $2,840,000 during calendar 2000. The improvement was due to improved operational results. The Company recorded net earnings during calendar 2001 of $1,597,000, as compared to net losses of $7,854,000 during calendar 2000. This conversion from net losses to net earnings is attributable to

continued aggressive cost control measures enacted in calendar 2000 and continued in calendar 2001. An increase to accounts receivable, prepaid expenses and other assets, combined with a decrease in accounts payable, accrued liabilities and deferred revenue offset the benefits of our cost controls measures as it relates to operating cash flows.

Cash provided by investing activities was $1,250,000 during calendar 2001 as compared to cash used by investing activities of $2,184,000 during calendar 2000. This improvement was due primarily to the sale of the Company's 50% ownership interest in the A.D.A.M./Benjamin Cummings Interactive Physiology Series of products for $1,950,000, the receipt of scheduled payments on our notes receivable, the sale of all its holdings in drkoop.com, Inc. common stock, decreases in capital expenditures for equipment and decreases in software development expenditures of software products for internal use or sale during calendar 2001. The cash provided by investing activities in calendar 2001 was offset by an equity investment of $275,000 in ThePort with no comparable activity in calendar 2000.

Cash provided by financing activities decreased to $1,260,000 during calendar 2001 as compared to $4,789,000 during calendar 2000. In calendar 2001, the primary financing activity impacting cash flows relate to additional common stock sales under the Common Stock Purchase Agreement entered into in calendar 2000, which resulted in $1,373,000 of cash. The primary financing activities impacting cash flows in calendar 2000 relate to the sale by the Company of a $6,000,000 convertible debenture, which yielded a net cash inflow of $5,202,000, and the execution of a common stock purchase agreement, which resulted in common stock sales of $997,000. As of December 31, 2001, the Company has neither a convertible debenture nor a common stock purchase agreement in effect. Cash provided by financing activities was offset by the repayment of $205,000 of notes payable during calendar 2001and $797,000 of notes payable during calendar 2000.

A.D.A.M. also uses working capital to finance ongoing operations, fund the development and introduction of new business strategies and internally developed software, acquire complementary businesses and acquire capital equipment. Deferred revenue decreased $858,000 for the twelve months ended December 31, 2001, primarily due to the recognition of $1,043,000 of revenue from net advance payments recorded in August 2000 from one customer, while net accounts payable and accrued expenses have been reduced by $470,000. Notes payable decreased by $188,000 to $0 for calendar 2001.

The Company received 70,464 shares of our common stock during the twelve months ended December 31, 2001 as liquidation of a note receivable from an employee. The Company reissued all of these Treasury shares during calendar 2001 to employees who exercised stock options during the period.

On September 5, 2000, A.D.A.M. entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC, an affiliate of Fusion Capital Fund I, LLC. Pursuant to the Common Stock Purchase Agreement, Fusion Capital agreed to purchase up to $12,000,000 of the Company's common stock in two rounds of $6,000,000 each. The purchase price of the Company's common stock is based upon the future market price of the common stock. The Company determines the month of purchase based on its cash requirements. At the time of the sale, A.D.A.M. estimated that the maximum number of shares the Company would issue to be 1,200,000. Should the Company be required to issue 20% or more of its outstanding shares, measured as of the date of the agreement, then shareholder approval will be required. Total shares outstanding on September 5, 2000 were 5,627,127. The Company has the right to terminate the agreement at any time if more than 1,200,000 shares are issuable under the first tranche of the Common Stock Purchase Agreement. In conjunction with this transaction, the Company issued 154,286 shares of common stock that had a fair value equal to approximately $549,000 as a fee. Additional fees payable in shares with a fair value of $480,000 are required to be issued if the Company elects to enter into the second round. As of December 31, 2001, the Company has sold 963,920 shares of common stock pursuant to the agreement and received cash totaling approximately $2,370,000, including 663,920 shares for $1,373,000 in calendar 2001. As of December 31, 2001, the Common Stock Purchase Agreement with Fusion Capital Fund II has expired.

On December 31, 1999, the Company issued notes payable in exchange for $500,000 each from our Chief Executive Officer and a commercial bank. These notes accrued interest at 10% per annum with principal and interest due initially on December 31, 2000. The terms of these notes allowed for an extension of six months, to June 30, 2001 at the option of the holders. The Company issued warrants to purchase 85,000 shares of common stock to the lenders in conjunction with the issuance of the notes and the related extensions pursuant to the original terms of the notes. The warrants are exercisable at any time at the option of the holders through December 31, 2005 and entitled the holders to purchase an equal number of common shares at a weighted-average price of $7.63 per share. The Company paid the note and interest earned in full to the commercial bank by June 30, 2000 and paid the note and interest earned in full to the Chief Executive Officer of the Company by June 30, 2001.

During calendar 2001, the Company acquired an additional preferred stock interest in ThePort, for $275,000 in cash, resulting in an approximate 25% voting interest as of December 31, 2001. In connection with the preferred stock investment, the Company entered into a five-year agreement whereby the Company will have exclusive distribution rights to ThePort's products within the healthcare industry. As of December 31, 2001, A.D.A.M. has pre-paid $125,000 of the contract fee to be applied against future subscription fees. The Company has committed to generate $1,500,000 in subscription fees during the initial term of the agreement. In calendar 2001, the Company's Chief Operating Officer was appointed to the Board of Directors of ThePort. A.D.A.M.'s Chief Executive Officer currently serves on the Board of Directors of ThePort, acquired an approximately 19% voting interest in ThePort in the nine months ended December 1999 and accepted a convertible note from ThePort for $425,000 in calendar 2001. The results of operations of this entity have been accounted for as an equity investment and accordingly, the Company records its share of the results of operations in the consolidated financial statements of the Company. For the year ended December 31, 2001, the Company recorded its share of ThePort's losses of $342,000. At December 31, 2001, the carrying value of this investment was $40,000.

For calendar 2001, A.D.A.M. had income as a result of increased revenue and continuing expense control and the sale of Company assets. Operating expense levels, excluding potential non-recurring, non-cash charges, have been decreasing as reflected in the results of operations for the twelve months ended December 31, 2001 and we expect costs to continue at their current levels in relation to revenues for the foreseeable future. We anticipate continued current levels of investment for content development, improvement of existing and development of new technologies, infrastructure development and product marketing and sales efforts. However, we will also continue to evaluate opportunities that create efficiencies, consolidate operating costs and reduce overhead such that overall operating expense levels remain controlled.

The Company has contractual obligations at December 31, 2001, relating to real estate, capital and operating lease arrangements. The Company does not have any other significant purchase obligations or commitments at December 31, 2001, except as mentioned above for the $1,500,000 in subscription fees for ThePort. The Company does not have any investments in joint ventures or special purpose entities, and does not guarantee the debt of any third parties. The Company's subsidiary is 100% owned by the Company and is included in its consolidated financial statements. Our headquarters are located in approximately 26,000 square feet of leased office space in Atlanta, Georgia. The space is leased for a term ending in June 2002. We are currently in negotiations to sign a lease for approximately 15,000 square feet of leased office space in or around Atlanta, Georgia for a term of approximately eight years. During calendar 2002 we expect to incur approximately $75,000 of moving expenses and $125,000 of leasehold

improvements in association with our move to new leased space. Total payments due and estimated under real estate, operating and capital leases are listed below:

Year	Real Estate Leases			Operating Leases		Capital Leases		Total
2002	$	345,686		$	102,035	$	33,757	$	481,478
2003		272,843	(1)		48,909		8,309		330,061
2004		315,000	(2)		23,478		0		338,478
2005		315,000	(2)		555		0		315,555
2006		315,000	(2)		0		0		315,000
Thereafter		1,102,500	(2)		0		0		1,102,500

(1): Includes an estimate of $157,500 for the lease expense associated with the new office space.
(2): Represents an estimate of the lease expense associated with the new office space.

Effective June 29, 2001, the SEC approved a change to the Nasdaq Stock Market Marketplace Rules concerning quantitative listing standards for initial and continued inclusion on the Nasdaq National and SmallCap Markets. While the Company currently meets the old maintenance standard for continued inclusion on the Nasdaq National Market, as it relates to net tangible assets ($4,000,000), we are not in compliance with the new standard, as it relates to net equity ($10,000,000). We have until November 1, 2002 to become compliant with the new standard. Management plans to become compliant with the new standard by that date, although there can be no guarantee that this will occur. As of December 31, 2001, ADAM had net equity of approximately $7,173,000.

Management believes that cash on hand, together with anticipated cash flow from operations, together with the proceeds already realized from the Common Stock Purchase Agreement described above, will be sufficient to meet the Company's working capital needs through December 31, 2002 and beyond. However, we may be required to raise additional funds in order to accelerate development of new and existing services and products, to respond to competitive pressures or to possibly acquire complementary products, businesses or technologies. There can be no assurance that any required additional financing will be available on terms favorable to us, or at all. If additional funds are raised by the issuance of equity securities, our shareholders may experience dilution of their ownership interest and these securities may have rights senior to those of the holders of the common stock. If additional funds are raised by the issuance of debt securities, we may be subject to certain limitations on our operations, including limitations on the payment of dividends. If adequate funds are not available or not available on acceptable terms, we may be unable to take advantage of acquisition opportunities, develop or enhance services or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations, and intentions are subject to change at any time at the discretion of the Company, (ii) the Company's plans and results of operations will be affected by the Company's ability to manage its growth and inventory, and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2001, the Company had cash and cash equivalents of $2,878,000 invested in liquid money market funds or bank accounts. The cash and cash equivalents are subject to interest rate risk and we may receive higher or lower interest income if market interest rates increase or decrease. A hypothetical increase or decrease in market interest rates by 10 percent from levels at December 31, 2001 would not have a material impact on our future earnings, fair values or cash flows.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This information is set forth under Item 14(a)(1) and (2).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As of March 27, 2002, our directors and executive officers are as follows:

Name	Age	Position
Robert S. Cramer, Jr.	41	Chairman of the Board, Chief Executive Officer and Director
Kevin S. Noland	39	Chief Operating Officer
Daniel S. Howe	41	Director
John W. McClaugherty	42	Director
Francis J. Tedesco, M.D.	58	Director
Mark Kishel, M.D.	56	Director

Robert S. Cramer, Jr. Mr. Cramer, a co-founder of the Company, has served as Chairman of the Board and a Director since the Company's inception in March 1990, and Chief Executive Officer since September 1996. Mr. Cramer currently serves on the Board of Directors of ThePort, an Internet technology company he co-founded in 1999. Mr. Cramer also serves as Chairman of the Board of the Atlanta Task Force for the Homeless, a community-wide non-profit organization working with and on the behalf of homeless people.

Kevin S. Noland. Since joining the Company in 1994, Mr. Noland has been extensively involved in marketing, communications and brand building for A.D.A.M. From 1994 to 1996, Mr. Noland was strategic in A.D.A.M.'s development and growth of its consumer retail products group. He served as Director of Marketing from 1996 to 1998 and was named Vice President of Marketing and Corporate Communications in 1999. Mr. Noland has served as A.D.A.M.'s Chief Operating Officer since September 2000. Mr. Noland has extensive background in sales, marketing and operations with leading technology companies, including General Electric and Borland International and several successful technology start-ups.

Daniel S. Howe. Mr. Howe has been a Director of the Company since December 1996. Mr. Howe is President of DSH Enterprises, Inc., a real estate and investment company, and has served in that capacity since January 1990. DSH Enterprises focuses on shopping centers, freestanding drug stores and other commercial development property in the South Eastern United States.

John W. McClaugherty. Mr. McClaugherty, a co-founder of the Company, has served as a Director of the Company since its inception in March 1990. Currently, Mr. McClaugherty serves as President of beBetter Networks, Inc., a human resource productivity company. He has served as its president since its inception in September 1999. Prior thereto, Mr. McClaugherty served as President of J.S.K., Inc., a medical illustration company from 1994 to 1999. Mr. McClaugherty served as Chief Executive Officer of the Company from its inception until March 1994.

Francis J. Tedesco, M.D. Dr. Tedesco has been a Director of the Company since July 1996. In January 2001, Dr. Tedesco was appointed as President Emeritus of the Medical College of Georgia ("MCG") and Professor Emeritus of Medicine, Surgery, School of Graduate Studies of the MCG. Prior to this Dr. Tedesco served as Chief Executive Officer of Health Sciences University and as President of the MCG from 1988-2001, and was a Professor of Medicine at MCG from 1981-2001. He has been a consultant to Dwight David Eisenhower Medical Center-Fort Gordon, Georgia; Veterans Administration Medical Center-Augusta, Georgia and Walter Reed Army Medical Center-Washington, D.C. Prior to coming to MCG in 1978, Dr. Tedesco held academic appointments beginning in 1971 at the Hospital of the University of Pennsylvania; Washington University School of Medicine, St. Louis, Missouri; and University of Miami School of Medicine. Dr. Tedesco currently serves on the Board of Directors and is Vice President of the Georgia Division of the American Cancer Society, is chairman of BeBetter Networks Inc, is a member of

the CDC Foundation Board of Visitors, serves on the Ty Cobb Foundation Scholarship Board and serves on VerifyMD.com, Inc. Board of Directors.

Mark Kishel, M.D. Dr. Kishel joined A.D.A.M.'s Board of Directors in November 2001. Dr. Kishel currently serves on the Board of Directors of Immucor, Inc. (Nasdaq NM: BLUD), an international in vitro diagnostic company and is a healthcare consultant through his company, E-Medicine Solutions. Inc. Dr. Kishel was Executive Vice President and Chief Medical Officer for Blue Cross Blue Shield of Georgia from 1993 until its acquisition by Wellpoint in 2001. Dr. Kishel is a board certified pediatrician and a Fellow of the American Academy of Pediatrics. He has practiced pediatrics and family medicine, and over the years, has served in executive medical director roles for several national insurance carriers, including Travelers, HealthAmerica and Lincoln National. He has served on the Blue Cross Blue Shield Association's National Medical Council. Dr. Kishel also served as a director and founder of the Center for Healthcare Improvement, a collaborative research venture between the Medical College of Georgia and Blue Cross and Blue Shield of Georgia, and is currently a director of the Boys and Girls Club of Metro Atlanta.

ELECTION TO THE BOARD

Under our Articles of Incorporation, directors are elected to the Board for three-year terms, and one-third of the Board members stand for election each year. Currently, the terms of Messrs. Cramer and McClaugherty are scheduled to expire at the annual meeting of shareholders in 2002, the term of Dr. Tedesco is scheduled to expire at the annual meeting of shareholders in 2003 and the term of Mr. Howe is scheduled to expire at the annual meeting of shareholders in 2004. Effective March 20, 2002, Linda B. Davis, whose term was to expire at the annual meeting of shareholders in 2003, resigned from the Board. Because Dr. Kishel was elected to the Board in November 2001, under our bylaws, he will be nominated to stand for election at the annual meeting of shareholders in 2002 for a term will that will expire at the annual meeting of shareholders in 2004.

MEETINGS OF THE BOARD OF DIRECTORS

During calendar 2001, the Board held nine meetings. Each director that served during calendar 2001 attended at least 75% of all Board meetings and the aggregate number of meetings held by all committees on which the individual director served in calendar 2001, except for Ms. Davis who missed three of nine board meetings.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board has standing Audit, Stock Repurchase and Compensation/Stock Option Committees that assist it in discharging its responsibilities. These committees, their members and functions are discussed below.

The Audit Committee, which held one meeting during calendar 2001, is responsible for recommending independent accountants, reviewing with the accountants the scope and results of the audit engagement, and consulting with independent accountants and management with regard to A.D.A.M.'s accounting methods and control procedures. At the beginning of calendar 2001, the Audit Committee was composed of Messrs. Howe (Chairman) and McClaugherty. At a February 26, 2001 Board Meeting, the Board voted to change the composition of this committee in order to comply with the rules of the Nasdaq National Market. As a result, the Audit Committee is currently compised of Messrs. Howe (Chairman) and McClaugherty and Dr. Tedesco.

The Stock Repurchase Committee, which held no meetings in calendar 2001, is responsible for A.D.A.M.'s repurchase of its own shares pursuant to any stock repurchase program implemented by the Board. There is no current stock repurchase program approved by the Board. The Stock Repurchase Committee is composed of Messrs. Cramer (Chairman) and Howe.

The Compensation/Stock Option Committee, which held one meeting during calendar 2001, is responsible for reviewing recommendations from the Chairman of the Board of Directors with regard to the compensation of officers of A.D.A.M. and reporting to the Board of Directors its recommendations with regard to such compensation and is responsible for operating and administering A.D.A.M.'s 1991 Employee Stock Option Plan, its Amended and Restated 1992 Stock Option Plan and its 2002 Stock Incentive Plan. The Compensation/Stock Option Committee is comprised of Dr. Tedesco (Chairman) and Mr. McClaugherty.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who beneficially own more than ten percent of our common stock to file with the Securities and Exchange Commission certain reports, and to furnish copies thereof to us, with respect to each such person's beneficial ownership of our equity securities. Based solely upon a review of the copies of such reports furnished to us, and certain representations of such persons, all such persons have complied with the applicable reporting requirements for calendar 2001.

ITEM 11. EXECUTIVE COMPENSATION

The table below sets forth certain information relating to the compensation earned during calendar 2001, calendar 2000 and the nine months ended December 31, 1999, by our Chief Executive Officer and each of the other highest paid executive officers whose total annual salary and bonus exceeded $100,000 during calendar 2001 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

		Annual Compensation							Long Term Compensation
Name and Principal Position	Period (1)	Salary ($)		Bonus ($)		Other Annual Compensation ($)			Securities Underlying Options (#)		All Other Compensation ($)
Robert S. Cramer, Jr. Chief Executive Officer	CY01 CY00 TP99	$ $ $	250,027 225,000 140,082	$	60,000 — —	$	141,000 — —	(2)	490,000 200,000 40,000	(4)	$ $	1,856 1,906 1,906	(3) (3) (3)
Kevin S. Noland Chief Operating Officer	CY01 CY00 TP99	$ $ $	143,750 101,600 69,000	$ $ $	11,840 11,400 6,965		— — —		75,000 69,375 12,000			— — —

(1): "CY01" represents calendar 2001, "CY00" represents calendar 2000, and "TP99" represents the nine months ended December 31, 1999.
(2): Represents gains from the sale of stock upon exercise of in-the-money stock options.
(3): Represents life insurance premiums paid on behalf of such executive officer.
(4): During calendar 2001, Mr. Cramer forfeited his rights to 145,000 of these options as well as 195,000 options issued in January 1999.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information regarding stock options granted to the Named Executive Officers during calendar 2001.

Individual Grants
Individual Grants								Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (1)
	Number of Securities Underlying Options Granted (#)		% of Total Options Granted To Employees In Fiscal Year
Name					Exercise or Base Price ($/ Share)(1)		Expiration Date
Name					Exercise or Base Price ($/ Share)(1)		Expiration Date	5% ($)		10% ($)
Robert S. Cramer, Jr.	150,000	(2)	12.8	%	$	1.94	01/01/2011	$	474,008	$	754,779
Robert S. Cramer, Jr. (3).	340,000		29.1	%	$	2.14	09/05/2011		1,185,184		1,887,207
Kevin S. Noland	75,000		6.4	%	$	1.94	01/01/2011		237,004		377,390

(1): The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the common stock over the term of the options. These numbers do not take into account plan provisions providing for termination of the option following termination of employment or non-transferability.
(2): Prior to the end of calendar 2001, Mr. Cramer exercised these options.
(3): In calendar 2001, Mr. Cramer forfeited his rights to 340,000 previously granted options.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE TABLE

The following table shows the number and value of exercisable and unexercisable options held by A.D.A.M.'s Named Executive Officers as of the end of calendar 2001. No stock appreciation rights were outstanding during calendar 2001.

	Number of Securities Underlying Unexercised Options/SARs at Fiscal Year End (#)	Value of Unexercised In-The-Money Options/SARs at Fiscal Year End ($)
Name	Exercisable/ Unexercisable	Exercisable/ Unexercisable (2)
Robert S. Cramer, Jr. (1)	447,167 / 43,333	$292,400 / $ 0.00
Kevin S. Noland	101,208 / 95,667	$ 26,000 / $79,500

(1): Does not include warrants to purchase 60,000 shares of common stock issued in connection with the loan by Mr. Cramer to A.D.A.M. of $500,000 on December 31, 1999.
(2): The closing price of our common stock on December 31, 2001 was $3.00.

We have not awarded stock appreciation rights to any employee, we have no long-term incentive plans, as that term is defined in SEC regulations, and we have no defined benefit or actuarial plans covering any of our employees.

COMPENSATION OF DIRECTORS

To date, directors have not received cash compensation for their services as directors of A.D.A.M. On January 2, 2001, each non-employee director of A.D.A.M. was awarded an option to purchase 25,000 shares of A.D.A.M. common stock. Such options have a term of ten years from the date of grant and vest one year from the date of grant. Each option has an exercise price of $1.94 per share.

EMPLOYMENT AGREEMENTS

We have entered into an employment agreement with Robert S. Cramer, Jr. that is currently scheduled to expire on December 31, 2002 (the "Expiration Date") and is automatically renewable for

successive one-year periods unless either party gives written notice of non-renewal. This agreement also may be terminated by us with or without cause or upon Mr. Cramer's death or inability to perform his duties due to disability for a period of twelve consecutive months. If the agreement is terminated prior to the Expiration Date for any reason, except by Mr. Cramer, by us for cause or upon Mr. Cramer's death or disability, we must continue to pay Mr. Cramer's base salary and bonus either (1) for the period from the date of termination through the Expiration Date if the agreement is terminated prior to the first anniversary thereof or (2) for the two year period following the date of termination if the agreement is terminated after the first anniversary thereof. If the agreement is terminated because of the death or disability of Mr. Cramer, we must pay Mr. Cramer or his beneficiaries his base salary and bonus for a period of one year following the date of termination; provided, however, that in the case of termination for disability, we may elect, in lieu of making such payments, to provide Mr. Cramer with disability insurance coverage. The agreement provides for a minimum annual base salary of $120,000 and for annual discretionary bonuses. The agreement also contains a two-year noncompetition, customer and employee nonsolicitation and confidentiality provision.

We have entered into an employment agreement with Kevin S. Noland that shall continue indefinitely until terminated in accordance with the agreement. This agreement may be terminated by us with or without cause, by Mr. Noland for good reason or without good reason or upon Mr. Noland's death or inability to perform her duties due to disability for a period of three consecutive months. If we terminate the agreement prior to the expiration date for cause, by Mr. Noland without good reason or by the death of Mr. Noland, then all obligations of the Company to provide compensation and benefits under this Agreement shall cease on that date. If we terminate the agreement prior to the expiration date without cause, by Mr. Noland for good reason, or because of the disability of Mr. Noland, then we must continue to pay Ms. Noland's base salary for the period from the date of termination for up to twelve months. The agreement provides for a minimum annual base salary of $150,000. The agreement also contains a one-year noncompetition and nonsolicitation of customers, and a two-year nonsolicitation of employees as well as confidentiality provisions.

We have executed Employee Confidentiality, Nondisclosure and Noncompetition Agreements with all executive officers and senior management.

REPORT ON REPRICING OF OPTIONS

We have from time to time since 1991 granted stock options to our employees to purchase shares of our common stock. Certain of these options were canceled at the option of their holders on January 14, 1999, and then replaced that day on a one-for-one basis with new options with an exercise price equal to the closing market price that day. The repricing of options reflects the consistent application of our policy as determined by our Compensation/Stock Option Committee of the Board of Directors. The Compensation/Stock Option Committee and Board of Directors believe that incentive options should be granted at exercise prices equal to or not materially in excess of the market price of our common stock in order to provide maximum incentive to employees, including senior executives.

FIN44 was issued in March 2000. This opinion provides guidance on the accounting for certain stock option transactions and subsequent amendments to stock option transactions. FIN 44 was effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on A.D.A.M.'s financial position or results of operations for calendar 2001. This interpretation requires variable accounting treatment for options that have been modified from their original terms. Accordingly, compensation cost shall be adjusted for increases or decreases in the intrinsic value of the modified awards in subsequent periods and until the awards have been exercised, forfeited, or expired. As of December 31, 2001, the Company has 221,200 outstanding options with an exercise price of $5.25 that are considered variable under this interpretation. Because the stock price since the effective date of July 1, 2000 has been below $5.25, the Company has not recorded any compensation cost related to the repriced options issued on January 14, 1999

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During calendar 2001, Dr. Tedesco and Mr. McClaugherty were members of the Compensation/Stock Option Committee. During calendar 2001, we entered into a sublease agreement with BeBetter Networks, Inc., a company that McClaugherty serves as president. BeBetter pays A.D.A.M. approximately 8,333 common shares of BeBetter Network's stock per month with a fair value of $3,511 as rent. We did not engage in any transactions with Dr. Tedesco during calendar 2001. Dr. Tedesco is also a board member of BeBetter Networks. Mr. McClaugherty was formerly an officer of A.D.A.M. from its inception until March 1994.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT

The following table sets forth the beneficial ownership of shares of common stock as of March 27, 2001 for (1) directors of A.D.A.M., (2) the Named Executive Officers, (3) the directors and executive officers of A.D.A.M. as a group and (4) each shareholder of A.D.A.M. holding more than a 5% interest in A.D.A.M. Unless otherwise indicated in the footnotes, all of such interests are owned directly, and the indicated person or entity has sole voting and disposition power.

Name and Address of Beneficial Owners (1)	Number of Shares Beneficially Owned	Percent of Class (2)
Robert S. Cramer (3)	1,130,053	13.9%
Addison Wesley Longman, Inc. (4)	700,000	9.2%
Kevin S. Noland (5)	130,708	1.7%
Dan Howe (6)	80,416	1.0%
Francis J. Tedesco, M.D. (7).	67,583	*
John W. McClaugherty (8)	57,702	*
Mark Kishel, M.D.	0	*
All executive officers and director as a group (6 persons)(9)	1,466,462	17.4%

*: Less than 1%
(1): Unless otherwise indicated, the address of the persons listed is c/o A.D.A.M., 1600 RiverEdge Parkway, Suite 800, Atlanta, Georgia 30328-4658.
(2): Based on 7,336,602 shares outstanding. Except as indicated in the footnotes set forth below, the persons named in the table, to A.D.A.M.'s knowledge, have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares shown as owned by, and the voting power of, individual shareholders include shares which are not currently outstanding but which such shareholders are entitled to acquire or will be entitled to acquire within 60 days. Such shares are deemed to be outstanding for the purpose of computing the percentage of outstanding common stock owned by the particular shareholder, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
(3): Includes 460,500 shares issuable upon exercise of outstanding options and 60,000 shares issuable upon exercise of outstanding warrants.
(4): The address of this shareholder is Addison Wesley Longman, Inc., 1330 Avenue of the Americas, New York NY, 10019.
(5): Includes 130,208 shares issuable upon exercise of outstanding options.
(6): Includes 62,416 shares issuable upon exercise of outstanding options.
(7): Includes 57,916 shares issuable upon exercise of outstanding options.
(8): Includes 54,500 shares issuable upon exercise of outstanding options.

(9): Includes 765,540 shares issuable upon exercise of outstanding options and 60,000 shares issuable upon exercise of outstanding warrants.

ITEM 13. CERTAIN TRANSACTIONS

During calendar 2001 and calendar 2000, the Company sold approximately $112,000 and $92,000, respectively, of a product to a company, which owns shares in the Company. During calendar 2001 and calendar 2000, the Company sold approximately $25,000 and $6,000, respectively, of product to a subsidiary of the company which owns shares in A.D.A.M. The Company earned royalty revenues of approximately $367,000 and $372,000, respectively, related to this subsidiary during calendar 2001 and calendar 2000. Additionally, the Company purchased approximately $13,000 and $15,000, respectively of product from this subsidiary during calendar 2001 and calendar 2000, and recorded royalty expenses of approximately of $130,000 and $170,000, respectively.

On June 22, 2001, A.D.A.M. sold its 50 percent ownership interest in the intellectual property rights associated with the A.D.A.M./Benjamin Cummings Interactive Physiology Series to Pearson Education, Inc. for $1,950,000 in cash resulting in a net gain $1,808,000 after expenses. The purchase price was determined through arms' length negotiations. Pearson Education, Inc. jointly developed and co-owned the A.D.A.M./Benjamin Cummings Interactive Physiology Series with ADAM. The A.D.A.M./Benjamin Cummings Interactive Physiology Series is a learning tool available in both CD-ROM and Web-enabled versions that educates students on physiological concepts and processes associated with the human body's major systems. Linda B. Davis, an A.D.A.M. board member until her resignation on March 20, 2002, is an officer of Benjamin Cummings, a publishing imprint of Addison Wesley Longman, Inc.

During calendar 2001, the Company acquired an additional preferred stock interest in ThePort, for $275,000 in cash, resulting in an approximate 25% voting interest as of December 31, 2001. In connection with the preferred stock investment, the Company entered into a five-year agreement whereby the Company will have exclusive distribution rights to ThePort's products within the healthcare industry. As of December 31, 2001, A.D.A.M. has pre-paid $125,000 of the contract fee to be applied against future subscription fees. The Company has committed to generate $1,500,000 in subscription fees during the initial term of the agreement. In calendar 2001, the Company's Chief Operating Officer was appointed to the Board of Directors of ThePort. A.D.A.M.'s Chief Executive Officer currently serves on the Board of Directors of ThePort, acquired an approximate 19% voting interest in ThePort in the nine months ended December 1999 and accepted a convertible note from ThePort for $425,000 in calendar 2001. The results of operations of this entity have been accounted for as an equity investment and accordingly, the Company records its share of the results of operations in the consolidated financial statements of the Company. For the year ended December 31, 2001, the Company recorded its share of ThePort's losses of $342,000. At December 31, 2001, the carrying value of this investment was $40,000.

On December 31, 1999, the Company issued a note in exchange for $500,000 to the Company's Chief Executive Officer. The note accrued interest at 10% per annum and matured on June 30, 2001. In conjunction with the issuance of this note, the Company issued the officer warrants to purchase 60,000 shares of its common stock. The warrants are exercisable at any time through December 31, 2005 and entitle the holder to purchase an equal number of common shares at a weighted-average price of $6.18 per share. The Company repaid the principal of the note and all accrued interest during the quarter ended June 30, 2001.

On May 30, 2001, the Company received a full-recourse promissory note from its Chief Executive Officer for approximately $341,000. The note earns interest of 6.25% per annum and is due in full on or before May 29, 2006. Part of the note, or $291,000, is secured by 150,000 shares of A.D.A.M.'s common stock owned by this executive. As of December 31, 2001, approximately $12,000 of interest has been earned and recorded on this note and the unpaid balance was approximately $353,000.

PART IV.

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a): The following documents are included as part of this report:

		Page
(1) Financial Statements:
Report of Independent Accountants		F-1
Consolidated Balance Sheets at December 31, 2001 and December 31, 2000		F-2
Consolidated Statements of Operations for the twelve months ended December 31, 2001, the twelve months ended December 31, 2000 and the nine months ended December 31, 1999		F-3
Consolidated Statements of Changes in Shareholders' Equity for the twelve months ended December 31, 2001, the twelve months ended December 31, 2000 and the nine months ended December 31, 1999		F-4
Consolidated Statements of Cash Flows for the twelve months ended December 31, 2001, the twelve months ended December 31, 2000 and the nine months ended December 31, 1999		F-5
Notes to Consolidated Financial Statements		F-6
(2) Consolidated Financial Statement Schedule:
For the twelve months ended December 31, 2001, the twelve months ended December 31, 2000 and the nine months ended December 31, 1999
II—Valuation and Qualifying Accounts

All other schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

(b): Exhibits. The following exhibits are filed as part of, or are incorporated by reference into, this report on Form 10-K:

The Company hereby agrees to furnish to the Commission upon request any additional instruments defining the rights of the holders of long-term debt of the Company.

Exhibit No.		Description
3.1(a)		Articles of Restatement of the Articles of Incorporation of A.D.A.M. Software, Inc.
3.2(a)		Amendment to the Articles of Incorporation of A.D.A.M. Software, Inc. filed September 30, 1999
3.2(b)		Amended and Restated By-Laws of the Company.
4.1		Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1).
4.2		Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2).
4.3(g)		Specimen Common Stock Certificate
4.4(b)		Form of Option Certificate relating to the Company's 1992 Stock Option Plan
4.5(b)		Form of Warrants to Purchase shares of Common Stock, dated April through November 1994
4.7(e)		Form of Warrant issued to Union Street Partners, L.P and Robert S. Cramer, Jr.
10.1(b)		Amended and Restated 1992 Stock Option Plan
10.2(b)		401(k) Adoption Agreement and Trust.

10.3(b)		Employment Agreement between the Company and Robert S. Cramer, Jr., dated December 21, 1994.
10.4		Employment Agreement between the Company and Kevin S. Noland., dated December 21, 2001.
10.4(b)(d)		Software Reseller Agreement among the Company, Addison Wesley Longman, through its Addison Wesley/Benjamin Cummings Group Sales Force Division, Benjamin/Cummings, and Addison Wesley Publishers Ltd., dated as of August 4, 1994.
10.5(b)(d)		Software Reseller Agreement among the Company and Addison Wesley Longman, through its Addison Wesley School Division, dated as of February 9,1995.
10.6(c)		Securities Purchase Agreement dated as of November 15, 1999, between the Company and Fusion Capital Fund I, LLC
10.7(e)		Bridge Note and Warrant Purchase Agreement between Union Street Partners, L.P and Robert S. Cramer, Jr. and the Company dated December 31, 1999
10.8(e)		Registration Rights Agreement between Union Street Partners, L.P and Robert S. Cramer, Jr. and the Company dated December 31, 1999
10.9(f)		Common Stock Purchase Agreement dated September 5, 2000 between the Company and Fusion Capital Fund II, LLC
10.10(g)		Asset Purchase and Sale Agreement dated January 31, 2001 between the Company and Alan Greene, M.D. and Cheryl Lorraine Greene
10.11(h)		Agreement and Plan of Merger dated December 3, 2001 between the Company and Integrative Medicine Communications
21.1		Subsidiaries of the Company
23.1		Consent of PricewaterhouseCoopers LLP

(a): Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
(b): Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-96864, dated September 12, 1995, as amended.
(c): Incorporated by reference to the Company's Current Report on Form 8-K filed November 30, 1999
(d): The Company has been granted confidential treatment of portions of this Exhibit. Accordingly, portions thereof have been omitted and filed separately.
(e): Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
(f): Incorporated by reference to the Company's Registration Statement of Form S-3, File No. 333-45294, dated September 7, 2000, as amended.
(g): Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(h): Incorporated by reference to the Company's Current Report on Form 8-K filed December 5, 2001.

(c) Reports on Form 8-K

During the fourth quarter ended December 31, 2001, the Company filed the following current reports on Form 8-K:

•: The Company filed a report on Form 8-K on November 1, 2001 relating to the November 1, 2001 press release announcing its financial results for the three and nine months ended September 30, 2001.
•: The Company filed a report on Form 8-K on December 5, 2001 relating to the December 3, 2001 merger by and among A.D.A.M., Inc, IM Acquisition Sub, Inc. and Integrative Medicine Communications, Inc.

SIGNATURES

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

Date: April 1, 2002		A.D.A.M., INC. (Registrant)
		By:	/s/ ROBERT S. CRAMER, JR. Robert S. Cramer, Jr. Chairman of the Board, Co-Founder, Chief Executive Officer, and Director

KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Robert S. Cramer, Jr. and Kevin S. Noland, and each of them, his or her true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution, from such person and in each person's name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 28, 2001.

Signature		Title
/s/ ROBERT S. CRAMER, JR. Robert S. Cramer, Jr.		Chairman of the Board, Co-Founder, Chief Executive Officer, and Director (Principal Executive Officer)
/s/ KEVIN S. NOLAND Kevin S. Noland		Chief Operating Officer
/s/ RAFE D. PAYNE Rafe D. Payne		Corporate Secretary and Controller (Principal Financial and Accounting Officer)
/s/ DANIEL S. HOWE Daniel S. Howe		Director
/s/ JOHN W. MCCLAUGHERTY John W. McClaugherty		Director
/s/ FRANCIS J. TEDESCO, M.D. Francis J. Tedesco, M.D.		Director
/s/ MARK KISHEL, M.D. Mark Kishel, M.D.		Director

Report of Independent Accountants

To the Board of Directors and Shareholders of
A.D.A.M, Inc.;

In our opinion, the consolidated financial statements listed in the index appearing under item 14(a)(1) on page 38 present fairly, in all material respects, the financial position of A.D.A.M., Inc. and its subsidiary (the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000, and the nine months ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 14(a)(2) on page 38 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

By: /s/ PricewaterhouseCoopers LLP

Atlanta, Georgia
March 14, 2002

F-1

A.D.A.M., Inc.

Consolidated Balance Sheets

(In thousands, except share data)

			December 31,
			2001			2000
Assets
Current assets
	Cash and cash equivalents		$	2,878		$	1,242
	Restricted time deposits			61			—
	Investment securities			—			424
	Accounts receivable, net of allowances of $86 and $106			1,949			1,046
	Inventories, net			147			139
	Note receivable from related party			—			134
	Non-interest bearing note receivable, net of unamortized discount of $13 and $28			128			113
	Prepaids and other assets			273			161

		Total current assets		5,436			3,259
Property and equipment, net				459			959
Intangible assets, net				2,136			1,818
Goodwill				1,473			—
Restricted time deposits				187			348
Non-interest bearing note receivable, net of unamortized discount of $5 and $14				18			163
Note receivable from related party				62			—
Other non-current assets				90			270

		Total assets	$	9,861		$	6,817

Liabilities and Shareholders' Equity
Current liabilities
	Accounts payable and accrued expenses		$	1,025		$	1,495
	Deferred revenue			1,621			2,479
	Current portion of capital lease obligations			34			—
	Note payable to related party			—			188

		Total current liabilities		2,680			4,162

Capital lease obligations, net of current portion				8			—

		Total liabilities		2,688			4,162

Commitments and contingencies
Shareholders' equity
	Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding
	Common stock, $.01 par value; 20,000,000 shares authorized; 7,295,602 and 6,081,413 shares issued and outstanding, respectively			73			61
	Common stock warrants			353			353
	Additional paid-in capital			46,991			43,804
	Unrealized loss on investments			—			(13	)
	Note receivable from shareholder			(291	)		—
	Accumulated deficit			(39,953	)		(41,550	)

		Total shareholders' equity		7,173			2,655

		Total liabilities and shareholders' equity	$	9,861		$	6,817

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

F-2

A.D.A.M., Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

			Year Ended December 31, 2001			Year Ended December 31, 2000			Nine Months Ended December 31, 1999
Operating revenues, net			$	8,946		$	8,621		$	3,144

Costs and expenses
	Cost of revenues			1,588			742			551
	General and administrative			2,156			3,323			2,997
	Product and content development			2,243			4,091			5,015
	Sales and marketing			1,961			2,958			2,680
	Depreciation and amortization			820			2,410			764
	Restructuring charges			—			733			1,049

				8,768			14,257			13,056

		Operating income (loss)		178			(5,636	)		(9,912	)
Interest income (expense), net				99			(987	)		158
Realized loss and impairment of investment securities				(146	)		(1,105	)		—
Realized gain on sale of intellectual property				1,808			—			—

		Income (loss) before minority interest and equity in net losses of affiliate		1,939			(7,728	)		(9,754	)
Minority interest in consolidated subsidiary				—			—			175
Equity in losses of affiliate				(342	)		(126	)		—

		Net income (loss)	$	1,597		$	(7,854	)	$	(9,579	)

Basic net income (loss) per common share			$	0.25		$	(1.42	)	$	(2.04	)

Basic weighted average number of common shares outstanding				6,453			5,536			4,707

Diluted net income (loss) per common share			$	0.24		$	(1.42	)	$	(2.04	)

Diluted weighted average number of common shares outstanding				6,555			5,536			4,707

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

F-3

A.D.A.M., Inc.

Consolidated Statements of Changes in Shareholders' Equity

(In thousands, except share data)

			Common Stock												Accumulated Other Comprehensive Income						Note Receivable from Shareholder
			Common Stock			Additional Paid-in Capital			Common Stock Warrants			Accumulated Deficit						Treasury Stock
			Shares	Amount		Additional Paid-in Capital			Common Stock Warrants			Accumulated Deficit						Treasury Stock						Total
Balance at March 31, 1999			5,285,747	$	53	$	33,911		$	135		$	(24,117	)	$	—		$	(2,186	)	$	—		$	7,796
	Net loss		—		—		—			—			(9,579	)		—			—			—			(9,579	)
	Exercise of common stock options and warrants		114,834		1		1,540			(36	)		—			—			620			—			2,125
	Issuance of common stock warrants		—		—		—			267			—			—			—			—			267
	Issuance of treasury stock		—		—		1,797			—			—			—			281			—			2,078
	Modifications to common stock options		—		—		690			—			—			—			—			—			690

Balance at December 31, 1999			5,400,581		54		37,938			366			(33,696	)		—			(1,285	)		—			3,377
	Net loss		—		—		—			—			(7,854	)		—			—			—			(7,854	)
	Other comprehensive loss, net of tax
	Net unrealized loss on investment		—		—		—			—			—			(13	)		—			—			(13	)

		Total comprehensive loss	—		—		—			—			(7,854	)		(13	)		—			—			(7,867	)
	Sale of stock by equity affiliate		—		—		191			—			—			—			—			—			191
	Exercise of common stock options and warrants		28,500		—		162			(7	)		—			—			114			—			269
	Donation of common stock		5,000		—		20			—			—			—			—			—			20
	Issuance of common stock warrants in connection with note payable to related party		—		—		—			86			—			—			—			—			86
	Forfeiture of common stock warrants		—		—		92			(92	)		—			—			—			—			—
	Senior secured convertible debentures
		Beneficial conversion feature	—		—		750			—			—			—			—			—			750
		Issuance of commitment shares	—		—		627			—			—			—			153			—			780
		Conversions	193,046		2		3,499			—			—			—			1,018			—			4,519
	Common stock issued and cash fees paid in connection with equity purchase agreement		154,286		2		(555	)		—			—			—			—			—			(553	)
	Sale of common stock under equity purchase agreement		300,000		3		994			—			—			—			—			—			997
	Stock compensation		—		—		86			—			—			—			—			—			86

Balance at December 31, 2000			6,081,413		61		43,804			353			(41,550	)		(13	)		—			—			2,655
	Net loss		—		—		—			—			1,597			—			—			—			1,597
	Other comprehensive income, net of tax
		Net realized loss on investment	—		—		—			—			—			13			—			—			13

		Total comprehensive income	—		—		—			—			1,597			—			—			—			1,610
	Exercise of common stock options		80,269		1		151			—			—			—			141			(291	)		2
	Net capital contribution from shareholder		—		—		90			—			—			—			—			—			90
	Stock issuance in connection with acquisition		470,000		4		1,439			—			—			—			—			—			1,443
	Sale of common stock under equity purchase agreement		663,920		7		1,366			—			—			—			—			—			1,373
	Treasury stock returned		—		—		—			—			—			—			(141	)		—			(141	)
	Stock compensation		—		—		141			—			—			—			—			—			141

Balance at December 31, 2001			7,295,602	$	73	$	46,991		$	353		$	(39,953	)	$	—		$	—		$	(291	)	$	7,173

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

F-4

A.D.A.M., Inc.

Consolidated Statements of Cash Flows

(In thousands)

					Year Ended December 31, 2001			Year Ended December 31, 2000			Nine Months Ended December 31, 1999
Cash flows from operating activities
	Net income (loss)				$	1,597		$	(7,854	)	$	(9,579	)
	Adjustments to reconcile net income (loss) to net cash used in operating activities
		Depreciation and amortization				1,949			3,638			883
		Gain on sale of intellectual property				(1,808	)		—			—
		Loss on sale of assets				94			244			106
		Minority interest share of loss				—			—			(175	)
		Stock compensation charges				141			106			730
		Loss on note receivable				—			191			—
		Realized loss and impairment of investment securities				146			1,105			—
		Equity in net loss of affiliate				342			126			—
		Changes in assets and liabilities
			Accounts receivable			(640	)		(214	)		122
			Inventories			16			175			(22	)
			Prepaids and other assets			(7	)		816			(451	)
			Accounts payable and accrued liabilities			(1,339	)		(1,362	)		1,395
			Deferred revenue			(1,365	)		189			626

				Net cash used in operating activities		(874	)		(2,840	)		(6,365	)

Cash flows from investing activities
	Investment in affiliate					(275	)		—			—
	Proceeds from short-term investments					283			—			3,762
	Purchases of property and equipment					(81	)		(415	)		(1,589	)
	Note receivable issued to related party					—			(325	)		—
	Repayments on note receivable					153			106			—
	Redemption of restricted time deposit					583			433			345
	Purchase of restricted time deposit					(474	)		(331	)		(271	)
	Software development costs					(896	)		(1,631	)		(4	)
	Proceeds from sale of intellectual property					1,950			—			—
	Content acquisition					—			—			(52	)
	Acquisition, net of cash acquired					7			—			—
	Other					—			(21	)		—

				Net cash provided by (used in) investing activities		1,250			(2,184	)		2,191

Cash flows from financing activities
	Proceeds from related party for interest in consolidated subsidiary					—			—			175
	Proceeds received upon conversion of senior secured convertible debentures					—			5,202			—
	Proceeds from sales of common stock					1,373			997			—
	Debt and equity issuance costs					—			(872	)		—
	Proceeds from exercise of common stock options and warrants					2			259			2,107
	Capital contribution from shareholder, net of expenses					90			—			—
	Proceeds from (payments of) notes payable					(205	)		(797	)		1,000

				Net cash provided by (used in) financing activities		1,260			4,789			3,282

Increase (decrease) in cash and cash equivalents						1,636			(235	)		(892	)
Cash and cash equivalents, beginning of period						1,242			1,477			2,369

Cash and cash equivalents, end of period					$	2,878		$	1,242		$	1,477

Interest paid					$	15		$	88		$	4

Assumed debt of acquired business					$	42		$	—		$	—
Settlement of note receivable					$	134		$	—		$	—
Sale of assets for note receivable					$	—		$	425		$	—
Increase in deferred revenue for investment security received					$	—		$	1,542		$	—

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

F-5

A.D.A.M., Inc.

Notes to Consolidated Financial Statements

1. Description of Business and Summary of Significant Accounting Policies

A.D.A.M., Inc. ("A.D.A.M." or the "Company") is a leading developer of health and medical information products. A.D.A.M. serves healthcare organizations, medical professionals, health-interested consumers and students as a leading publisher of visually engaging health and medical information products. A.D.A.M. products are used for learning about health, wellness, disease, clinical treatments, alternative medicine, nutrition, anatomy and general medical reference in both the healthcare and education markets. A.D.A.M.'s products contain physician-reviewed text, in-house developed medical graphics and multimedia interactivity to create health information solutions that offer a unique "visual learning" experience. A.D.A.M. employs a wide range of media, including Internet, software, CD-ROM, television and print, to deploy its proprietary content assets and products.

Basis of presentation

Change in fiscal year-end

In 1999, the Company changed its fiscal year end from March 31 to December 31.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated.

Equity investment

For the year ended December 31, 1999, the Company accounted for its interest in ThePort Network, Inc. (formerly ThePort.com) ("ThePort"), a private Internet software company, under the consolidation method. For the year ended December 31, 1999, ThePort reported no revenues and a net loss of $383,000.

During the year ended December 31, 2000, due to additional third party investments into ThePort, the Company accounted for its interest under the equity method. As a result, ThePort was deconsolidated as of January 1, 2000. During the year ended December 31, 2000, the Company recorded its share of ThePort's losses of $126,000.

During the year ended December 31, 2001, the Company acquired an additional preferred stock interest in ThePort for $275,000 in cash, resulting in approximately 25% voting interest as of December 31, 2001. The results of operations of ThePort have been accounted for as an equity investment and accordingly, the Company records its share of the results of operations in the financial statements of the Company. For the year ended December 31, 2001, the Company recorded its share of ThePort's losses of $342,000. At December 31, 2001, the carrying value of this investment is $40,000.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-6

Revenue recognition

The Company generates revenues primarily from Internet related sales and product sales. Internet revenues consist primarily of platform license fees where customers license the right to use the Company's proprietary web based content and applications over the term of the license, generally one to three years. Platform license fees are recognized ratably over the term of the license agreement commencing upon customer acceptance. Fees billed in advance of the performance of services are recorded as deferred revenue and are recognized as the services are performed. Product revenues represent the sales of software products and books and revenues earned under certain royalty agreements. Revenues from product sales are generally recognized at the time title passes to customers, distributors or resellers. Revenues from royalty agreements are recognized as earned based upon performance or product shipment. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, fees are fixed and determinable, collectibility is probable and there are no significant return or acceptance provisions.

Allowances for estimated product returns and bad debts are provided at the time of sale. The Company evaluates the adequacy of allowances for returns and doubtful accounts based upon its evaluation of historical and expected sales experience and by channel of distribution. As certain conditions change, such as sell-through experience, channels of distribution, and general economic conditions, the estimated reserves required for returns and allowances may also change.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade receivables. For the year ended December 31, 2001, two customers accounted for approximately 26% and 12% of net revenues, respectively. For the year ended December 31, 2000, these same two customers accounted for approximately 33% and 13% of net revenues, respectively. For the nine months ended December 31, 1999, the Company had sales to a single customer, which totaled 17% of net revenues.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities, approximate fair value due to their short maturities.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and deposit and highly liquid investments with an original maturity of three months or less.

Inventories

Inventories consist principally of computer software media, books and related shipping materials and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Property and equipment

Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Property and equipment held under capital leases, which involve a transfer of ownership, are amortized over the estimated useful life of the asset. Other property and equipment held under capital leases and leasehold improvements are amortized over the shorter of the lease term or the

F-7

estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

Investment securities

The Company accounts for investment securities in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This standard requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. For securities classified as "available-for-sale", unrealized market value gains and losses are generally charged or credited to a separate component of shareholders' equity.

During the year ended December 31, 2001, the Company sold all of its investment securities, which consisted of 1,927,079 shares of common stock of a single company. A.D.A.M.'s results of operations included a $146,000 realized loss on the sale of this stock.

Intangible assets

Intangible assets consist of purchased intellectual content, purchased customer contracts, capitalized software development costs for products to be sold, leased or otherwise marketed, and software development costs for internal use software.

For the year ended December 31, 2000, purchased intellectual content represents intangible assets acquired in 1999 from the Company's Informational Medical Solutions, Inc. asset acquisition.

For the year ended December 31, 2001, purchased intellectual content and purchased customer contracts represents intangible assets acquired in 2001 from Integrative Medicine Communications, Inc. ("IMC") (Note 3).

Capitalized software development costs for products to be sold, leased or otherwise marketed consist principally of salaries and certain other expenses directly related to the development and modifications of software products capitalized in accordance with the provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Amortization of capitalized software development costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which the Company has determined to generally be twenty-four months.

In accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", the Company expenses costs incurred in the preliminary project planning stage, and thereafter, capitalizes costs incurred in the developing or obtaining of internal use software. Costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized over their estimated useful lives which is three years.

Impairment of long-lived assets

The Company evaluates impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets would be based on discounted cash flows and the fair value of the asset.

F-8

Product and content development expenditures

Product and content development expenditures include costs incurred in the development, enhancement and maintenance of the Company's content and technology. These costs have been charged to expense as incurred.

Restricted time deposits

In connection with the Company's noncancelable operating leases for its office space and telephone system, the Company is required to purchase time deposits to secure letters of credit with the bank guaranteeing payments under the leases. The time deposits bear interest at an average rate of approximately 3.30% and are carried at cost which approximates fair value. The classification of these investments is determined based on the expected term of the collateral requirement and not necessarily the maturity date of the underlying securities.

Income taxes

The Company accounts for income taxes utilizing the liability method and deferred income taxes are determined based on the estimated future tax effects of differences between the financial reporting and income tax basis of assets and liabilities given the provisions of the enacted tax laws. A valuation allowance is provided against deferred tax assets for which it is more likely than not that the asset will not be realized.

Stock-based compensation

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations and provides the disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

Income (loss) per share

The computation of basic income (loss) per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted income per share is based on the weighted average number of common shares outstanding plus, when their effect is dilutive, potential common stock consisting of shares subject to stock options and stock warrants.

Comprehensive income (loss)

SFAS No. 130, "Reporting Comprehensive Income", requires that all items which are to be recognized as components of comprehensive income (loss) be reported on a financial statement that is displayed with the same prominence as net income (loss). The component of comprehensive income (loss) other than net income (loss) includes unrealized losses on investment securities. Comprehensive income (loss) is presented as a component on the Company's statements of shareholders' equity.

Reclassifications

Certain comparative amounts have been reclassified to conform with current year presentation.

F-9

Recent accounting pronouncements

In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 is effective for any business combinations initiated after June 30, 2001, while SFAS 142 becomes effective for the Company commencing January 1, 2002.

SFAS 141 generally requires the Company to use the purchase method to account for its acquisitions, if any. The Company does not believe that SFAS 141 will have a significant impact on its financial position or results of operations. The Company has applied SFAS No. 141 in the allocation of the purchase price to the IMC acquisition (Note 3).

SFAS 142 affects how the Company accounts for goodwill and other intangible assets acquired in both previous and any future acquisitions. SFAS 142 eliminates the amortization of goodwill associated with acquisitions made after June 30, 2001. SFAS 142 also requires an impairment test on goodwill be performed at least annually beginning in 2002. The Company will perform the impairment test during 2002. The test is expected to be based on cash flow and earnings projections, and is not expected to result in an impairment charge. Since the Company did not have any goodwill recorded prior to the IMC acquisition, the provision of SFAS 142 requiring companies to stop amortizing goodwill will have no impact on the ongoing operating results of the Company or the comparability of such results with prior periods.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", but retains its fundamental provisions for recognition and measurement of the impairment of long-lived assets to be held and used and those to be disposed of by sale. The Company must adopt this standard in 2002. The Company is evaluating the effect that this standard will have on its results of operations and financial condition.

2. Liquidity

The financial statements have been prepared assuming the Company will continue as a going concern. While A.D.A.M. did record net income for 2001, the Company has experienced recurring losses during 2000, 1999 and 1998, and could generate additional losses in 2002. In addition to working capital generated from operations, the Company has raised funds through the sale of debt and equity securities and may require additional financing before maintaining profitability. The additional financing would be required to expand the infrastructure needed to manage the Company's growth, and to further expand existing services into new markets and to expand new product and service offerings into existing markets. Management believes that the cash on hand together with anticipated cash flows from operations will be sufficient to meet the Company's working capital needs for the year ending December 31, 2002.

3. Acquisition of Integrative Medicine Communications, Inc.

On December 3, 2001, under the terms of an Agreement and Plan of Merger (the "Agreement") by and among A.D.A.M., IM Acquisition Sub, Inc. and IMC, A.D.A.M. acquired 100% of the outstanding common stock of IMC. IMC was a privately held provider of science-based information on wellness and alternative medicine to healthcare professionals and consumers. Based in Newton, Massachusetts, IMC is one of the leading providers of health information in the rapidly emerging field of integrative medicine. IMC's customer base is broad, and includes large hospital systems, prominent website destinations, and major pharmaceutical and managed care organizations. IMC's core product, Access 2.0, is a non-biased, peer-reviewed information database that bridges the gap between conventional and alternative medicine and provides a foundation for patients and consumers to dialog with their healthcare providers. Access 2.0 includes information on conditions and treatment modalities as well as herbal, supplemental and

F-10

conventional medicine remedies. The results of IMC's operations have been included in the financial statements since December 3, 2001.

In accordance with SFAS No. 141, the total purchase price was allocated to the net tangible assets and intangible assets, including goodwill, acquired based on the estimated fair value at the date of acquisition.

The aggregate purchase price of $1,572,000 consists of 470,000 shares of A.D.A.M.'s common stock with a fair value of $1,284,000; 59,000 vested and unvested stock options with a fair value of $160,000; and direct transaction costs of $128,000. The 470,000 shares of A.D.A.M.'s common stock issued was the initial number stated in the Agreement, which is subject to reduction based on the terms of the Agreement. Adjustments to the number of shares will cause a corresponding decrease in goodwill. The value of the 470,000 common shares issued was determined based on the average market price of A.D.A.M.'s common shares over the 2-day period before and after the terms of the acquisition were agreed to and announced. The fair value of the common stock options was calculated using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.85%, expected life of 10 years, expected dividend rate of 0%, and volatility of 114%.

The following table summarizes the allocation of the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Current assets		$	315
Property and equipment			26
Intangible assets			1,053
Goodwill			1,473

	Total assets acquired		2,867

Current liabilities			(776	)
Deferred revenue			(511	)
Long-term liabilities			(8	)

	Total liabilities assumed		(1,295	)

Net assets acquired		$	1,572

The following table shows the allocation of the purchase price to intangibles with a definite life and their amortization period (in thousands):

				Amortization
	Allocated Purchase Price		Amortization Period	Amortization
Assets	Allocated Purchase Price		Amortization Period	2001		2002		2003		2004
Purchased intellectual content	$	807	3 Years	$	22	$	269	$	269	$	247
Purchased customer contracts	$	246	2 Years	$	10	$	123	$	113	$	—

In accordance with SFAS No. 142, the Company will perform the impairment test during 2002. The test is expected to be based on cash flows, earnings projections and the Company's market capitalization relative to net book value and the Company currently does not expect to incur an impairment charge.

The following unaudited pro forma financial information reflects the results of operations for the years ended December 31, 2001 and 2000, as if the acquisition had occurred on January 1, 2000. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on January 1,

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2000 and may not be indicative of future operating results. The unaudited pro forma results are summarized as follows (in thousands, except per share amounts):

	Year Ended December 31, 2001		Year Ended December 31, 2000
Net income (loss)	$	275	$	(12,075	)
Basic net income (loss) per share	$	0.04	$	(2.09	)
Diluted net income (loss) per share	$	0.04	$	(2.09	)

4. Property and Equipment

Property and equipment is summarized as follows (in thousands):

		December 31,
	Estimated Useful Life (Years)	December 31,
	Estimated Useful Life (Years)	2001			2000
Computers	3	$	1,788		$	1,868
Equipment	5		431			484
Furniture and fixtures	5		533			545
Leasehold improvements	7		181			199

			2,933			3,096
Less – accumulated depreciation and amortization			(2,474	)		(2,137	)

		$	459		$	959

Depreciation and amortization expense for the years end December 31, 2001 and 2000 was $499,000 and $578,000, respectively.

5. Product and Content Development Expenditures

Product and content development expenditures are summarized as follows (in thousands):

	Year Ended December 31, 2001			Year Ended December 31, 2000
Total development expenditures	$	3,139		$	5,722
Less: additions to capitalized software development		(896	)		(1,631	)

Product development expense	$	2,243		$	4,091

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6. Intangible Assets

Intangible assets are summarized as follows (in thousands):

			December 31,
		Estimated amortizable lives (years)	December 31,
		Estimated amortizable lives (years)	2001			2000
Capitalized software products to be sold, leased or otherwise marketed		2	$	1,972		$	2,652
Software developed for internal use		3		300			723
Purchased intellectual content		3 – 5		807			402
Purchased customer contracts		2		246			—

				3,325			3,777
Less accumulated amortization				(1,189	)		(1,959	)

	Intangible assets, net		$	2,136		$	1,818

Amortization expense for the years end December 31, 2001 and 2000 was $883,000 and $924,000, respectively.

During the years ended December 31, 2001 and 2000, the Company recognized an impairment charge of approximately $255,000 and $717,000, respectively, to reduce certain purchased intellectual content to its net realizable value.

During the year ended December 31, 2001, the Company recognized an impairment charge of approximately $362,000 to reduce certain internally developed software to its net realizable value.

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consists of the following (in thousands):

	December 31,
	2001		2000
Accounts payable	$	116	$	436
Accrued professional fees		263		358
Accrued financing costs		—		150
Accrued compensation and employee benefits		173		127
Deferred rent		25		74
Accrued severance costs		44		24
Other accrued expenses		404		326

	$	1,025	$	1,495

8. Debt

On December 31, 1999, the Company issued notes payable in exchange for $500,000 each from the Company's Chief Executive Officer and a commercial bank. These notes accrued interest at 10% per annum with principal and interest due initially on December 31, 2000. The terms of these notes allowed for an extension of six months, to June 30, 2001, at the option of the holders. The Company issued warrants to

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purchase 85,000 shares of common stock to the lenders in conjunction with the issuance of the notes and the related extensions pursuant to the original terms of the notes. The warrants are exercisable at any time at the option of the holders through December 31, 2005 and entitle the holders to purchase 85,000 common shares at a weighted-average price of $7.63 per share. The Company paid the note and interest earned in full to the commercial bank by June 30, 2000 and paid the note and interest earned in full to the Chief Executive Officer of the Company by June 30, 2001.

Senior secured convertible debenture

On January 28, 2000, the Company issued a 0% Senior Secured Convertible Debenture (the "Debenture") in the amount of $6,000,000. The Debenture was convertible into shares of common stock of the Company at a price equal to the lessor of (1) 130% of the fair value at the time of issuance ($17.55 per share), (2) the closing bid price at the date of conversion, or (3) the average of the two lowest closing bid prices for the Company's common stock during the 10 trading days prior to a conversion of the Debenture. In conjunction with this transaction, the Company issued 59,542 shares of common stock with a fair value of approximately $780,000 as a commitment fee. This amount includes shares with a fair value of $180,000 as consideration for the purchaser's commitment to purchase a second $6,000,000 debenture.

Through July 28, 2000, the maturity date of the Debenture, the Company issued 587,339 shares of its common stock at an average conversion price of $8.86 to satisfy the conversion of $5,202,000 of the principal amount of the Debenture. Upon maturity, the remaining balance of the Debenture, which was held as restricted cash, was returned to the issuer. The Company elected not to exercise its option to require the issuance of the second $6,000,000 debenture.

9. Income Taxes

The provision for income taxes differs from the amount computed by applying the applicable U.S. statutory federal income tax rate of 34 percent to income (loss) before income taxes as a result of the following (in thousands):

	Year Ended December 31, 2001			Year Ended December 31, 2000
Federal tax provision (benefit) on income (loss) before income taxes at statutory federal income tax rate	$	659		$	(2,628	)
Change in valuation allowance		(749	)		2,689
State taxes, net of federal benefit		86			(306	)
Research and development credits		—			(208	)
Equity issuance costs		—			412
Stock compensation charges		—			(56	)
Other		4			97

	$	—		$	—

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The components of the Company's deferred tax assets and liabilities are as follows (in thousands):

		December 31,
		2001			2000
Deferred tax assets
	Accrued expenses and other liabilities	$	172		$	686
	Allowance for doubtful accounts		33			40
	Intangible assets		592			580
	Fixed assets		267			218
	Research and development credits		739			746
	Capitalized development		1,646			—
	Net operating loss carryforwards		12,976			14,270

			16,425			16,540

Deferred tax liabilities
	Software development costs		(548	)		(581	)

			(548	)		(581	)

Net deferred tax asset before valuation allowance			15,877			15,959
Valuation allowance			(15,877	)		(15,959	)

		$	—		$	—

At December 31, 2001, the Company had net operating loss and general business credit carryforwards available for tax purposes of approximately $34,147,000 and $739,000, respectively, which will expire in years 2003 through 2022 and 2007 through 2022, respectively. Under the Tax Reform Act of 1986, the amounts of, and the benefit from net operating loss carryforwards may be impaired or limited in certain circumstances, including ownership changes (as defined by the Internal Revenue Service). At December 31, 2001 and 2000, the Company has recorded a valuation allowance equal to its net deferred tax assets as management believes it is more likely than not that the net deferred tax assets will not be realized.

10. Equity Purchase Agreement

On September 5, 2000, A.D.A.M. entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to the Common Stock Purchase Agreement, Fusion Capital agreed to purchase up to $12,000,000 of the Company's common stock in two rounds of $6,000,000 each. The purchase price of the Company's common stock is based upon the future market price of the common stock. The Company determines the month of purchase based on its cash requirements. At the time of the sale, A.D.A.M. estimated that the maximum number of shares the Company would issue to be 1,200,000. Should the Company be required to issue 20% or more of its outstanding shares, measured as of the date of the agreement, then shareholder approval will be required. Total Company shares outstanding on September 5, 2000 were 5,627,127. The Company has the right to terminate the agreement at any time if more than 1,200,000 shares are issuable under the first tranche of the Common Stock Purchase Agreement. In conjunction with this transaction, the Company issued 154,286 shares of common stock that had a fair value equal to approximately $549,000 as a fee. Additional fees payable in shares with a fair value of $480,000 are required to be issued if the Company elects to enter into the second round. As of December 31, 2001, the Company has sold 963,920 shares of common stock pursuant to the agreement and

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received cash totaling approximately $2,370,000, including 663,920 shares for $1,373,000 in the year ended December 31, 2001. As of December 31, 2001, the Common Stock Purchase Agreement with Fusion Capital Fund II has expired.

11. Treasury Stock

In April 1997, the Company's Board of Directors adopted a stock repurchase program. The program authorized repurchase of the Company's common stock from time to time in open market transactions on the Nasdaq Stock market. During the year ended March 31, 1999, the Company repurchased common stock at various times with an aggregate cost of $766,000. The Company used cash on hand to fund the repurchase program. The repurchased stock was held as treasury stock. There were no repurchases of common stock during the nine month period ended December 31, 1999 or the years ended December 31, 2000 and 2001. During 1999 and 2000, the Company has reissued all of the shares of treasury stock previously acquired to satisfy the exercise of common stock options, the conversion of the senior secured convertible debenture (Note 8) and shares issued under the equity purchase agreement (Note 10). During the year ended December 31, 2001, the Company received 70,464 shares of common stock from an employee of the Company as repayment for a note receivable entered into in March 2000. All of these shares were reissued during the year ended December 31, 2001 to employees that exercised stock options.

12. Common Stock Options and Warrants

The Company has two stock option plans (the 1992 Option Plan and the 1991 Option Plan) under which the Company may grant incentive or non-qualified stock options to full-time employees and key persons. Options are granted at an exercise price as determined by the Company's Board of Directors which is not less than fair market value of the Company's common stock and the options generally vest ratably over a three-year period. Options granted under the 1992 Option Plan expire ten years from the date of grant. With respect to the 1991 Option Plan, all options granted under the plan have been exercised or expired. No further grants under the 1991 Option Plan are authorized.

The Company has reserved 4,500,000 shares of common stock for issuance under the 1992 Option Plan.

The Company's 1992 plan expired in 2002 and the Board has approved a new plan that will be voted on at the 2002 annual shareholder's meeting. The Company has reserved 1,500,000 shares of common stock for issuance under the new plan.

During 2000, 75,875 warrants with an exercise price of $8.00 per share issued in connection with various debt and equity financings of the Company consummated prior to March 31, 1998, expired.

The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation cost for the Company's stock option grants been determined based on the fair value at the grant date for awards in the years ended December 31, 2001 and 2000, and the nine months ended December 31, 1999 consistent with the provisions of SFAS 123, the

F-16

Company's net income (loss) and net income (loss) per share would have increased to the pro forma amounts indicated below (in thousands, except per share amounts):

		Year Ended December 31, 2001			Year Ended December 31, 2000			Nine Months Ended December 31, 1999
Net income (loss)
	As reported	$	1,597		$	(7,854	)	$	(9,579	)
	Pro forma		(993	)		(11,189	)		(11,189	)
Basic net income (loss) per share
	As reported	$	0.25		$	(1.42	)	$	(2.04	)
	Pro forma		(0.15	)		(2.02	)		(2.15	)
Diluted net income (loss) per share
	As reported	$	0.24		$	(1.42	)	$	(2.04	)
	Pro forma		(0.15	)		(2.02	)		(2.15	)

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 2001 and 2000 and the nine months ended December 31, 1999, respectively: Dividend yield of 0% for all periods; expected volatility of 114%, 115% and 81%, respectively; average risk-free interest rates of 4.20%, 6.47% and 5.74%, respectively; and an expected life of 3.5 for all periods with the exception of options granted during 2001, 2000 and 1999 with one-year vesting periods, which have an expected life of two years.

F-17

The following table summarizes stock option activity for the years ended December 31, 2001 and 2000 and the nine months ended December 31, 1999:

		Shares		Exercise Price Per Share	Weighted Average Exercise Price		Weighted Average Fair Value
Outstanding at March 31, 1999		1,098,200		2.00-12.00	$	5.37	$	—
	Granted	701,750		7.94-21.00		12.13		6.65
	Exercised	(222,101	)	2.00-8.00		4.65		—
	Canceled or expired	(196,527	)	13.00-20.63		15.25		—

Outstanding at December 31, 1999		1,381,322		2.00-21.00		6.81		—
	Granted	1,016,556		3.50-15.00		8.97		5.70
	Exercised	(67,252	)	2.13-5.25		3.18		—
	Canceled or expired	(470,924	)	2.13-21.00		10.02		—

Outstanding at December 31, 2000		1,859,702		2.00-20.63		7.27		—
	Granted	1,169,221		0.46-2.97		2.16		1.55
	Exercised	(150,733	)	1.94-2.63		1.94		—
	Canceled or expired	(690,277	)	1.94-20.00		6.49		—

Outstanding at December 31, 2001		2,187,913		0.46-20.63		5.77		—

Options exercisable at December 31, 2001		1,504,208

The following table summarizes additional information about stock options outstanding at December 31, 2001:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding at December 31, 2001	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at December 31, 2001	Weighted Average Exercise Price
$0.46	30,000	9.92	$	0.46	30,000	$	0.46
$1.94 to 2.94	912,118	8.78		2.30	475,691		2.51
$3.25 to 4.75	270,218	7.93		3.89	146,746		3.80
$5.00 to 5.91	433,561	6.76		5.45	430,282		5.45
$7.00 to 12.75	334,044	6.63		8.65	241,063		8.66
$13.00 to 20.63	207,972	7.96		13.78	180,426		13.76

	2,187,913	7.89	$	5.16	1,504,208	$	5.77

During January 2000, the Company modified the terms of 22,900 options that had been granted to several employees. As a result of these modifications, the Company recognized approximately $86,000 of compensation expense for the year ended December 31, 2000 based on the fair value of the modified awards.

In January 1999, the Company provided employee holders of options with exercise prices from $3.50 and higher the opportunity to cancel such options in exchange for an equal number of options with a vesting period of one year at the then current market price of $5.25. As a result of this election, 423,400 options were canceled and reissued in January 1999. As of December 31, 2001, the Company has 221,200

F-18

outstanding options with an exercise price of $5.25 that are considered variable. The new option exercise price equals the market price on the date of the repricing and, correspondingly, compensation expense was not recognized. The vesting period of these options is one year. As a result of the issuance of FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25", these options are being treated as variable awards. Accordingly, compensation cost shall be adjusted for increases in the fair value of the awards past $5.25 until these options are either exercised or forfeited. As of December 31, 2001, no compensation cost has been recognized for these options, as the fair value of the Company's common stock has not exceeded $5.25 per share.

13. Employee Benefit Plan

The Company sponsors a defined contribution plan that provides all permanent employees of the Company an opportunity to accumulate funds for their retirement. In January 1999, the Company began to match the contributions of participating employees to the extent of 50% of the first 6% contributed by the participant. Company matching contributions to the plan were approximately $69,000 and $83,000 for the years ended December 31, 2001 and 2000, respectively.

14. Related Party Transactions

During March 2000, the Company entered into a note receivable in the amount of $325,000 with an employee of the Company. In January 2001, the employee transferred 70,464 shares of common stock to the Company as settlement of the note. The Company recognized a loss of $191,000 on this transaction during the year ended December 31, 2000.

On April 2, 2001, for a term beginning on January 1, 2001, the Company signed an 18-month sublease agreement with a company whose president is an A.D.A.M. board member. The Company is due 8,333 shares of the tenant's common stock monthly over the term of the agreement. The shares are valued at the fair market value of the leased space and are recorded on the Company's balance sheet as a long-term asset. The Company evaluates the asset for impairment at the end of each reporting period. Additionally, the Company received warrants to purchase 25,000 common shares of the tenant that fully vested on January 1, 2002.

On May 30, 2001, the Company received a full-recourse Promissory Note from its Chief Executive Officer for approximately $341,000. The note earns interest of 6.25% per annum and is due in full on or before May 29, 2006. Part of the note, $291,000, is secured by 150,000 shares of A.D.A.M.'s common stock and is recorded in shareholders' equity. As of December 31, 2001, approximately $12,000 of interest has been earned and recorded on this note.

During the year ended December 31, 2001, the Company acquired an additional preferred stock interest in ThePort, for $275,000 in cash, resulting in approximately 25% voting interest as of December 31, 2001. In connection with the preferred stock investment, the Company entered into a five-year agreement whereby the Company will have exclusive distribution rights to ThePort's products within the healthcare industry. As of December 31, 2001, A.D.A.M. has pre-paid $125,000 of the contract fee to be applied against future subscription fees. The Company has committed to generate $1,500,000 in subscription fees during the initial term of the agreement. During the year ended December 31, 2001, the Company's Chief Operating Officer was appointed to the Board of Directors of ThePort. The Company's Chief Executive Officer currently serves on the Board of Directors of ThePort, acquired an approximate 19% voting interest in ThePort in the nine months ended December 31, 1999 and accepted a convertible note from ThePort for $425,000 during the year ended December 31, 2001. The results of operations of

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this entity have been accounted for as an equity investment and accordingly, the Company records its share of the results of operations in the financial statements of the Company. For the year ended December 31, 2001, the Company recorded its share of ThePort's losses of $342,000. At December 31, 2001, the carrying value of this investment was $40,000.

During the years ended December 31, 2001 and 2000, the Company sold approximately $112,000 and $92,000, respectively, of a product to a company which owns shares in the Company. During the years ended December 31, 2001 and 2000, the Company sold approximately $25,000 and $6,000, respectively, of product to a subsidiary of the company which owns shares in the Company. The Company earned royalty revenues of approximately $367,000 and $372,000, respectively, related to this subsidiary during the years ended December 31, 2001 and 2000. Additionally, the Company purchased approximately $13,000 and $15,000, respectively, of product from this subsidiary during the years ended December 31, 2001 and 2000 and recorded royalty expenses of approximately of $130,000 and $170,000, respectively.

On June 22, 2001, A.D.A.M. sold its 50 percent ownership interest in the intellectual property rights associated with the A.D.A.M./Benjamin Cummings Interactive Physiology Series to Pearson Education, Inc. for $1,950,000 in cash resulting in a net gain $1,808,000 after expenses. The purchase price was determined through arms' length negotiations. Pearson Education, Inc. jointly developed and co-owned the A.D.A.M./Benjamin Cummings Interactive Physiology Series with A.D.A.M. The A.D.A.M./Benjamin Cummings Interactive Physiology Series is a learning tool available in both CD-ROM and Web-enabled versions that educates students on physiological concepts and processes associated with the human body's major systems.

15. Commitments and Contingencies

The Company leases office space and equipment under noncancelable lease agreements expiring on various dates through 2005. The Company also has capital lease commitments for certain equipment. At December 31, 2001, future minimum rentals for noncancelable leases with terms in excess of one year were as follows (in thousands):

Year Ending December 31,		Operating Lease		Capital Lease
2002		$	448	$	38
2003			164		8
2004			23		—
2005			1		—

	Total future minimum lease payments	$	636		46

Less – amounts representing interest					(4	)

Present value of future minimum lease payments					42
Less – current portion					34

				$	8

Rent expense for the years ended December 31, 2001 and 2000 were $421,000 and $736,000, respectively.

The Company's current operating lease for its office headquarters ends in June 2002. The Company is currently in negotiations to sign a new lease in a new location for an approximate term of 8 years. During the year ended December 31, 2002, the Company expects to incur approximately $75,000 of moving expenses and $125,000 of leasehold improvements in association with the move to the new leased space.

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On April 25, 1996 the Company and certain of its officers and directors were named in a class action lawsuit. The complaint alleges violations of Section 11, 12(2) and 15 of the Securities Act of 1933, violations of the Georgia Securities Act and negligent misrepresentation arising out of alleged disclosure deficiencies in connection with the Company's initial public offering which was completed on November 10, 1995. The complaint seeks compensatory damages and reimbursements for plaintiff's fees and expenses. A motion to dismiss is pending and the Company and its officers and directors are vigorously defending against the allegations.

The Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business. Management believes, based upon the advice of counsel, that ultimate resolution of these matters will not have a material adverse effect on the financial statements taken as a whole.

The Company is party to employment agreements with certain executives which provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances.

16. Segment Information

Management operates in a single segment that is focused on the development and distribution of health/medical content.

The Company exports its products through agreements which grant territorial rights to international and domestic distributors. During the years ended December 31, 2001 and 2000 and for the nine months ended December 31, 1999, the Company had net revenues from international sales of approximately $324,000, $418,000, and $222,000, respectively. A summary of revenues based on geographic location of customers is as follows (in thousands):

	Year Ended December 31, 2001		Year Ended December 31, 2000		Nine Months Ended December 31, 1999
United States	$	8,622	$	8,203	$	2,922
Europe		69		58		105
Pacific Rim and Asia		86		110		36
Other		169		250		81

	$	8,946	$	8,621	$	3,144

Two customers contributed greater than 10% of total revenues for the years ended December 31, 2001 and 2000. One customer contributed greater than 10% of total revenue for the nine months ended December 31, 1999. The breakdown of revenues from each of these customers is as follows:

	Revenue for the Year Ended December 31, 2001			Revenue for the Year Ended December 31, 2000			Revenue for the Nine Months Ended December 31, 1999
Customer 1	$	2,302	26%	$	2,844	33%	$	532	17%
Customer 2		1,048	12%		1,114	13%		—	0%
All Other		5,596	62%		4,663	54%		2,612	83%

	$	8,946	100%	$	8,621	100%	$	3,144	100%

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17. Restructuring Charges

The Company began a restructuring plan during the last quarter of the nine months ended December 31, 1999. This plan resulted in the separation of three key executives, termination of various production employees located at the Company's San Francisco facility, the disposal of assets located at the San Francisco facility, and the disposal of obsolete consumer Web-related service arrangements and content that no longer had a future benefit. This restructuring resulted in a pre-tax charge of approximately $1,049,000 for the nine months ended December 31, 1999, including approximately $690,000 of non-cash charges for modified employee stock options. For the year ended December 31, 2000, the Company incurred approximately $733,000 of charges resulting from the completion of this plan, including approximately $86,000 of non-cash compensation charges for stock option modifications.

18. Quarterly Financial Information (unaudited)

	2001 Three Months Ended
	March 31		June 30		September 30		December 31
	(in thousands, except per share data)
Operating revenues	$	2,076	$	2,394	$	2,351	$	2,125
Operating income (loss)		99		24		339		(284	)
Net income (loss)		44		1,717		281		(445	)
Earnings per share – basic	$	0.01	$	0.27	$	0.04	$	(0.07	)
Earnings per share – diluted	$	0.01	$	0.26	$	0.04	$	(0.07	)

	2000 Three Months Ended
	March 31			June 30			September 30			December 31
	(in thousands, except per share data)
Operating revenues	$	1,426		$	2,083		$	2,852		$	2,260
Operating income (loss)(a)		(3,350	)		(1,357	)		(936	)		7
Net loss(a)		(4,177	)		(1,462	)		(1,024	)		(1,191	)
Earnings per share basic and diluted	$	(0.82	)	$	(0.27	)	$	(0.18	)	$	(0.20	)

(a): During the third quarter of 2000, we deconsolidated our investment in thePort.com. Losses incurred during the first and second quarter of 2000 have been adjusted as if this change occurred on January 1, 2000.

19. Subsequent Events

On February 14, 2002, under the terms of an Agreement and Plan of Merger (the "Agreement") by and among A.D.A.M., NIS Acquisition Corp., Nidus Information Services, Inc. ("Nidus") and the stockholders of Nidus, A.D.A.M. completed the purchase of all of the outstanding common stock of Nidus. The total purchase price for the shares was 260,000 shares of A.D.A.M.'s common stock. Nidus was a privately held provider of in-depth reports on common health conditions and diseases. Nidus's core product, The Well-Connected reports, is written by experienced medical writers and is reviewed for accuracy by a board of physicians who have faculty positions at Harvard Medical School and Massachusetts General Hospital. The reports are distinguished from other information sources by their detail of information, quality and currency, including a rigorous editorial review schedule. The reports are available through print or web subscriptions and online licensing agreements to major healthcare providers and web portals, health content resellers and medical libraries.

F-22

SCHEDULE II

A.D.A.M., INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

For the Twelve Months Ended December 31, 2001

Description	Balance at beginning of Period		Charged to Costs and Expenses			Accounts Written Off			Acquisitions		Balance at end of Period
	(Thousands of Dollars)
Allowance for doubtful accounts and product returns	$	106	$	65		$	(99	)	$	14	$	86

Valuation allowance for deferred taxes	$	15,959	$	(749	)	$	—		$	667	$	15,877

For the Twelve Months Ended December 31, 2000

Description	Balance at beginning of Period		Charged to Costs and Expenses		Accounts Written Off			Acquisitions		Balance at end of Period
	(Thousands of Dollars)
Allowance for doubtful accounts and product returns	$	103	$	137	$	(134	)	$	—	$	106

Valuation allowance for deferred taxes	$	13,270	$	2,689	$	—		$	—	$	15,959

For the Nine Months Ended December 31, 1999

Description	Balance at beginning of Period		Charged to Costs and Expenses		Accounts Written Off			Acquisitions		Balance at end of Period
	(Thousands of Dollars)
Allowance for doubtful accounts and product returns	$	373	$	115	$	(385	)	$	—	$	103

Valuation allowance for deferred taxes	$	9,818	$	3,452	$	—		$	—	$	13,270

QuickLinks

TABLE OF CONTENTS
PART I.

ITEM 1. BUSINESS

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT

ITEM 13. CERTAIN TRANSACTIONS

PART IV.

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

SIGNATURES
Report of Independent Accountants
A.D.A.M., Inc. Consolidated Balance Sheets (In thousands, except share data)
A.D.A.M., Inc. Consolidated Statements of Operations (In thousands, except per share data)
A.D.A.M., Inc. Consolidated Statements of Changes in Shareholders' Equity (In thousands, except share data)
A.D.A.M., Inc. Consolidated Statements of Cash Flows (In thousands)
A.D.A.M., Inc. Notes to Consolidated Financial Statements

SCHEDULE II

A.D.A.M., INC. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Twelve Months Ended December 31, 2001
For the Twelve Months Ended December 31, 2000
For the Nine Months Ended December 31, 1999
EX-10.4 3 a2075447zex-10_4.htm EX 10.4
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Exhibit 10.4

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of the 21^st day of February 2002, by and between Kevin S. Noland, an individual resident of the State of Georgia (the "Employee"), and A.D.A.M., Inc., a Georgia corporation (the "Company").

W I T N E S S E T H:

WHEREAS, the Company is engaged in the business of producing, marketing, promoting, distributing and licensing anatomical, health and medical content (including without limitation, products designed for educational markets and consumer markets and complementary and alternative medicine markets) (the "Company's Business"); and

WHEREAS, the Company desires to employ the Employee as its Chief Operating Officer ("COO"), and Employee desires to accept such employment with the Company, all in accordance with the terms and conditions hereinafter set forth;

NOW, THEREFORE, for and in consideration of the above premises, the mutual covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows:

1. Employment and Duties.

(a) Subject to the terms and conditions set forth in this Agreement, the Company hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Company, as the COO of the Company. In performing his duties hereunder, the Employee shall report to and be directly responsible to the Chief Executive Officer ("CEO").

(b) During the term of this Agreement, the Employee shall, for the benefit of the Company, use his skills, knowledge, and specialized training to perform the duties and exercise the powers, functions, and discretion's incident to his position as COO of the Company or which from time to time, consistent with such position, may be assigned to or vested in him by the CEO or Board of Directors, in an efficient and competent manner and on such terms and subject to such restrictions as the CEO or Board of Directors may from time to time impose.

(c) During the term of this Agreement, the Employee shall perform his duties hereunder at the Company's then current headquarters or as otherwise directed by the CEO or Board of Directors from time to time.

(d) During the term of this Agreement, the Employee agrees to devote his full business time, energy, and skill to the business of the Company, and to the fulfillment of the Employee's obligations under this Agreement. In addition to the foregoing and not in limitation thereof, during the term hereof, the Employee shall not carry on, engage in, or otherwise be interested in, directly or indirectly, any other business or activity that would result in a conflict of interest with the Company's business or that would materially adversely affect the Employee's ability to perform his duties as set forth in this Agreement.

2. Term. The Employee's term of employment pursuant to this Agreement shall commence on the date hereof and shall continue indefinitely until terminated in accordance with this Agreement. Either the Company or Employee may terminate Employee's employment under this Agreement at any time by notice to the other; provided, however, that if such termination by the Company is Without Cause (as hereinafter defined) or if Employee's resignation is With Good Reason (as hereinafter defined) then, subject to Section 6(b) below, the Employee shall be entitled to continue to receive twelve (12) months of the Employee's base salary at the same rate as provided to Employee as of the date of termination, such base salary to be paid on the same installment basis as provided for in Section 3(a). Notwithstanding the foregoing, Employee agrees that he will not terminate his

employment upon less than sixty (60) days' prior written notice unless such termination is With Good Reason. Employee acknowledges and agrees that after the Company's receipt of any notice of termination from the Employee, the Company may, at its sole option, elect an earlier effective date for the termination of Employee's employment by giving written notice of such earlier date to Employee at any time prior to the date of termination initially established by Employee. Company agrees that Employee's election to terminate his employment hereunder shall not constitute a sufficient basis upon which the Company can terminate Employee's employment With Cause.

3. Compensation.

(a) Subject to the terms of this Agreement, as base compensation for Employee's services, the Company shall pay Employee so long as he shall be employed under this Agreement a base salary that will accrue at a rate of not less than one-hundred fifty-thousand Dollars ($150,000) per annum. It being agreed, however, that Employee's salary shall be subject to all withholdings pursuant to applicable law or regulation. Employee's base salary shall be payable to Employee on the regularly reoccurring pay period established by the Company, but in no event in less than monthly installments. The CEO or Board will annually review the base salary of Employee; however, such base salary will not at any time be subject to reduction to any amount less than the dollar amount set forth in this Section 3(a).

(b) In addition to the annual base salary payable to Employee under paragraph 3(a), Employee will be eligible to participate in grants of stock options from time to time established for employees of the Company in accordance with the terms and conditions of such plans (or any successor stock option plan adopted by the Company during the term hereof). In the event that Employee's employment is terminated With Good Reason (as hereinafter defined) or Without Cause (as hereinafter defined) then the Employee's then vested amount of stock options (or any portion of a stock option grant that has vested according to that grant's vesting schedule) at the time of Employee's termination shall be carried to their full term by the Employee upon termination. For example, if Employee receives a stock option grant of 15,000 shares with a three-year vesting schedule and a ten-year term, and the Employee is terminated during the second year of the three-year vesting schedule, Employee will be entitled to carry to term 5,000 options, or one-third of the stock option grant.

(c) The Employee hereby acknowledges that the Employee may be required to work beyond standard working hours in order to perform his duties hereunder. The Employee shall not be entitled to compensation for overtime or extra hours worked in performance of his duties hereunder except as required by law.

(d) In addition to the compensation described in this Agreement, the Employee shall be entitled to reimbursement by the Company for all actual, reasonable, and direct expenses incurred by him in the performance of his duties hereunder, provided such expenses were incurred only in accordance with the policies and procedures established by the Company from time to time.

4. Employment Benefits.

(a) The Employee shall have the right to participate in any and all employee benefit programs established or maintained by the Company from time to time, in accordance with the terms and conditions of such employee benefit programs, including, without limitation, such medical and dental plans, retirement, pension, profit sharing, stock bonus, or stock option plans as may be established from time to time by the Company. The Company reserves the right, in its sole discretion, to alter, amend, or discontinue any of such employee benefit programs at any time.

(b) In addition to such public holidays as are observed by the Company, the Employee shall be entitled to vacation days or paid time off in accordance with the Company's then current policies, which the Company reserves the right, in its sole discretion, to alter, amend, or discontinue at any time.

(c) The Employee acknowledges that the Company may promulgate employee handbooks, policies, and procedures from time to time, and the Employee agrees to adhere to the terms of any handbook, policy, or procedures that the Company may promulgate from time to time. The Company reserves the right, in its sole discretion, to alter, amend, or terminate any handbook, policy, or procedure.

5. Illness, Incapacity or Death During Employment.

(a) If by reason of illness, injury or incapacity, the Employee is unable, despite reasonable accommodation, to perform his services or discharge his duties hereunder on a full time basis for ninety (90) or more consecutive days or one hundred twenty (120) days in the aggregate during any twelve (12) month period (or any such longer periods as may be required by law), then the Company may terminate the employment of the Employee by written notice to Employee, and, thereupon, subject to Section 6(b) below, the Employee will be entitled to receive Employee's base salary, paid in equal monthly installments, for a period of twelve (12) months following the date of such termination. Notwithstanding the foregoing, if the Company maintains a disability insurance policy for the benefit of the Employee and the Employee qualifies for the payments under such policy, the Company shall be obligated to pay to the Employee only the difference, if any, between Employee's base salary and the payments under such policy.

(b) In the event of the Employee's death, all obligations of the Company under this Agreement shall terminate, other than the Employee's rights with respect to the payment of that portion of the base salary earned by the Employee to the date of death, plus reimbursement of all pre-approved expenses that were reasonably incurred by the Employee in performing his responsibilities and duties for the Company prior to and including such date.

6. Termination of Employment.

(a) If Company terminates Employee's employment hereunder With Cause (as hereinafter defined) or pursuant to Section 5 or Employee resigns Without Good Reason (as hereinafter defined), all obligations of Company to provide compensation and benefits under this Agreement shall cease, and Employee shall have no claim against the Company for damages or otherwise by reason of such termination. Company's election to terminate Employee's employment With Cause shall be without prejudice to any remedy the Company may have against Employee for the breach or non-performance of any of the provisions of this Agreement.

(b) If Company terminates Employee's employment hereunder Without Cause (as hereinafter defined) or Employee resigns With Good Reason (as hereinafter defined), the Company shall:

(1): continue to pay Employee's annual base salary (as in effect on the date Employee's employment so terminates) under Section 3(a) of this Agreement and pursuant to Section 2;
(2): pursuant to Section 2, for a twelve (12) month period following Employee's termination, pay the COBRA premiums necessary for Employee to continue the same medical coverage Employee carried while an active employee provided that the Company shall not be required to make more than the maximum number of payments allowed under COBRA.

(i) any act or omission which constitutes a material breach by Employee of his obligations under this Agreement;

(ii) the commission by Employee of a felony or any crime involving moral turpitude, fraud or dishonesty;

(iii) the perpetration by Employee of any act of dishonest whether relating to the Company, the Company's employee or otherwise;

(iv) the use of illegal drugs by the Employee, or drunkenness or substance abuse by the Employee which interferes with the performance of his duties hereunder;

(v) gross incompetence on the part of Employee in the performance of his duties hereunder;

(vi) the issuance of a final consent decree, cease and desist or similar order against Employee by a regulatory agency relating to violations or alleged violations of any federal or state law or regulation governing the conduct of the business of the Company; or

(vii) any other act or omission (other than an act or omission resulting from the exercise by Employee of good faith business judgment) which materially impairs the financial condition or business reputation of the Company.

(d) "Without Cause" means the termination of employment resulting from any reason other than those enumerated in subsection (c) above or Section 5 of this Agreement.

(e) "With Good Reason" means the Employee's termination of his employment with the Company as a result of:

(i) the assignment to Employee of any duties materially and adversely inconsistent with the Employee's position as specified in Section 1 hereof (or such other position to which he may be promoted), including status, offices, responsibilities or persons to whom the Employee reports as contemplated under Section 1 of this Agreement, or any other action by Company which results in a material adverse change in such position, status, offices, titles, or responsibilities;

(ii) relocation of the Company's principal executive offices outside of the metropolitan Atlanta area as the CEO or Board of Directors of the Company may designate, and Employee elects not to accept such reassignment by notifying the Company in writing within 45 days of such reassignment, or;

(iii) any other material breach of this Agreement by Company, including the failure to pay Employee on a timely basis the amounts to which he is entitled under this Agreement, after written notification from the Employee of such breach, setting forth in detail the matters involved, and the Company's failure to cure the problem resulting in such breach within fifteen (15) days thereafter.

(f) "Without Good Reason" means the Employee's termination of his employment with the Company for any reason other than those enumerated in subsection (e) above.

7. Employee's Obligations upon Termination of Employment. Upon the termination of his employment hereunder for whatever reason Employee shall:

(a) tender his resignation from any directorship or office he may hold in the Company or any of its subsidiaries or affiliates, and not at any time represent himself still to be connected with or to have any connection with the Company or its subsidiaries or affiliates; and

(b) observe all post-employment covenants set forth in this Agreement.

8. Effect of Termination. The provisions of Sections 6(c), 7, 9 through 15 and 22 of this Agreement shall survive the termination of this Agreement and the termination of Employee's employment with the Company to the extent required to give full effect to the covenants and agreements contained therein.

9. Confidentiality.

(a) The Employee agrees that, both during his employment and for the applicable period described in Section 9(b) below after termination of his employment for any reason, the Employee will hold in a fiduciary capacity for the benefit of the Company, and shall not directly or indirectly use or disclose, except as set forth in Section 9(c) below or as authorized by the Company in connection with the performance of the Employee's duties, any Confidential Information (as hereinafter defined) that the Employee may have or acquire (whether or not developed or compiled by the Employee and whether or not the Employee has been authorized to have access to such Confidential Information) during his employment with the Company. Moreover, in the absence of Company's prior written consent, the Employee agrees not to make or cause to be made known to any third party any correlation or identity which may exist between the Confidential Information that the Employee may have or acquire on the one hand, and, on the other hand, any other information now or hereafter made available to the Employee. The term "Confidential Information" as used in this Agreement shall mean and include any information, data, and know-how relating to the business of the Company that is disclosed to the Employee by the Company or known by the Employee as a result of the Employee's relationship with the Company and not generally within the public domain (whether constituting a trade secret or not), including, without limitation, the following information:

(i) technical information, such as formulas, patterns, devices, computer program source and object codes, compositions, inventions, processes, specifications, research, methods, technique, software, or engineering or technical specification, and any know-how relating to any of the foregoing, and methods of delivery, whether owned by the Company or utilized by the Company under license from a third party, in each case to the extent that such information is not generally known to the public;

(ii) financial information, such as the Company's earnings, assets, debts, cost-price information, product mark-ups, gross margins, fee structures, volumes of purchases or sales, or financial data or information that should not be disclosed to its customers or competitors, whether relating to the Company generally, or to particular services, geographic areas, or time periods;

(iii) supply and service information, such as information concerning the goods and services utilized or purchased by the Company, the names or addresses of suppliers, terms of supply or service contracts, or of particular transactions, or related information about potential suppliers, to the extent that such information is not generally known to the public, and to the extent that the combination of suppliers or use of a particular supplier, though generally known or available, yields advantages to Company and the details of which are not generally known;

(iv) marketing information, such as details about ongoing or proposed marketing programs or agreements by or on behalf of the Company, marketing forecasts or results of marketing efforts or information about impending transactions;

(v) personnel information, such as employees' personal or medical histories, compensation or other terms of employment, actual or proposed promotions, hirings, resignations, disciplinary actions, terminations or reasons therefor, training methods, performance, or other employee information;

(vi) customer information, such as any compilation of past, existing, or prospective customers, customer proposals or agreements between customers and the Company, status of customer accounts or credit, or related information about actual or prospective customers; and

(vii) information that was provided to the Company in confidence or that that Company is otherwise required to maintain in confidence due to a legal or contractual obligation.

The term "Confidential Information" does not include information that has become a part of the public domain by the act of one who has the right to disclose such information without violating any right of the Company or the customer to which such information pertains. Confidential Information which is specific as to techniques, methods, or the like shall not be deemed to be in the public domain merely because such information is embraced by more general disclosures in the public domain, and any combination of features shall not be deemed within the foregoing exception merely because individual features are in the public domain if the combination itself and its principles of operation are not in the public domain.

(b) The covenants contained in this Section 9 shall survive the termination of the Employee's employment with the Company for any reason for a period of two (2) years; provided, however, that with respect to those items of Confidential Information which constitute a trade secret under applicable law, the Employee's obligations of confidentiality and non-disclosure as set forth in this Section 9 shall continue to survive after said two-year period to the greatest extent permitted by applicable law. These rights of the Company are in addition to those rights the Company has under the common law or applicable statutes for the protection of trade secrets.

(c) In the event that the Employee becomes legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process) to disclose any of the Confidential Information, the Employee shall provide the Company with prompt written notice of such requirement prior to complying therewith so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Agreement. In the event that such protective order or other remedy is not obtained or the Company waives compliance with the provisions hereof, the Employee agrees to furnish only that portion of the Confidential Information that is legally required and to exercise reasonable efforts to obtain an assurance that confidential treatment will be accorded such Confidential Information.

(d) All writings, tapes, recordings, computer programs, Internet websites and other works in any tangible medium of expression, regardless of the form of medium, which have been or are prepared by the Employee, or to which the Employee contributes in any way to such preparation, in connection with the Employee's employment by the Company (collectively, the "Works"), and all copyrights and other rights, titles and interests whatsoever in and to the Works, belong solely and exclusively to the Company as works made for hire; moreover, if and to the extent any court or agency should conclude that the Works (or any of them) do not constitute or qualify as a "work made for hire," the Employee hereby assigns, grants and delivers, solely and exclusively unto the Company, all copyrights and other rights, titles, and interests whatsoever in and to the Works.

10. Non-Solicitation of Employees. The Employee agrees that he will, for so long as he is employed by the Company and for a period of two (2) years after termination of his employment for any reason, (i) not solicit, entice, persuade, or induce any other employee of the Company to leave the Company's employ, and (ii) refrain from recruiting or hiring, or attempting to recruit or hire, directly or by assisting others, any other employee of the Company who is employed by or doing business with the Company at the time of the attempted recruiting or hiring.

11. Non-Solicitation of Customers. The Employee will, for so long as he is employed by the Company and for a period of one (1) year after termination of his employment Without Cause or With Good Reason, refrain from soliciting, or attempting to solicit, directly or by assisting others, any business from any of the customers, including actively sought prospective customers, with whom the Employee had material contact within the last twelve months of Employee's employment hereunder, for purposes of providing products or services that are similar to or competitive with those provided by the Company, if the Company is also then still engaged in such business.

12. Non-Competition. Employee expressly covenants and agrees that during the term of his employment hereunder and for a period of twelve (12) months after termination of his employment

and subject to the provisions set forth under Section 2 and Section 3(a) for termination Without Cause, With Good Reason or With Cause as defined herein, he will not, directly or indirectly, seek, obtain, or accept a "Competitive Position" in the "Restricted Territory" with a "Competitor" of the Company (as such terms are hereafter defined). For purposes of this Agreement, a "Competitor" of the Company means any business, individual, partnership, joint venture, association, firm, corporation or other entity engaged, whose primary business is in the production, marketing, promotion or distribution of products or services that are the same as, or similar to, or competitive with, the products or services that are produced, marketed, promoted, or distributed by Company in connection with the Company's Business; a "Competitive Position" means any employment with any Competitor of the Company whereby Employee has duties for such Competitor that are similar to those actually performed by him pursuant to the terms hereof; and the "Restricted Territory" means the following geographical area: U.S. Employee acknowledges and agrees that he has been or will be working within the Restricted Territory as defined above or has had or will have material contact with customers or actively sought prospective customers of the Company located within such areas. The parties agree to review the geographical area included within the Restricted Territory from time to time at either party's request in order that the Restricted Territory may be reformed so that its coverage upon Employee's termination will extend only to the geographical area in which the Employee is working at such time, including any area where any operations performed, supervised, or assisted in by the Employee are conducted and any area where customers or actively sought prospective customers of the Company with whom the Employee had material contact are present. Any reformation to be evidenced only by written amendment to this Agreement.

13. Severability. Except as noted below, should any provision of this Agreement be declared or determined by any court of competent jurisdiction or arbitrator to be unenforceable or invalid for any reason, the validity of the remaining parts, terms, or provisions of this Agreement shall not be affected thereby and the invalid or unenforceable part, term, or provision shall be deemed not to be a part of this Agreement. The covenants set forth in this Agreement are to be reformed pursuant to Section 14 if held to be unreasonable or unenforceable, in whole or in part, and, as written and as reformed, shall be deemed to be part of this Agreement.

14. Reformation. If any of the covenants or promises of this Agreement are determined by any court of law or equity or arbitrator, with jurisdiction over this matter, to be unreasonable or unenforceable, in whole or in part, as written, Employee hereby consents to and affirmatively requests that said court or arbitrator, to the extent legally permissible, reform the covenant or promise so as to be reasonable and enforceable and that said court or arbitrator enforce the covenant or promise as so reformed.

15. Injunctive Relief. The Employee understands, acknowledges and agrees that in the event of a breach or threatened breach of any of the covenants and promises contained in Sections 9, 10, 11, and 12, the Company will suffer irreparable injury for which there is no adequate remedy at law and the Company will therefore be entitled to obtain, without bond, injunctive relief enjoining said breach or threatened breach. Employee further acknowledges, however, that the Company shall have the right to seek a remedy at law as well as or in lieu of equitable relief in the event of any such breach.

16. Assignment. The terms and provisions of this Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, and upon Employee and his heirs and personal representatives. The term "Company" as used in this Agreement shall be deemed to include the successors and assigns of the original or any subsequent entity constituting the Company as well as any and all divisions, subsidiaries, or affiliates thereof.

17. Waiver. The waiver by any party to this Agreement of a breach of any of the provisions of this Agreement shall not operate or be construed as a waiver of any subsequent or simultaneous breach.

18. Applicable Law. This Agreement has been entered into in and shall be governed by and construed under the laws of the State of Georgia (U.S.A.), without regard to conflicts of laws principles.

19. Headings and Captions. The headings and captions used in this Agreement are for convenience of reference only, and shall in no way define, limit, expand, or otherwise affect the meaning or construction of any provision of this Agreement.

20. Notice. Any notice required or permitted to be given pursuant to this Agreement shall be deemed sufficiently given when delivered in person, by courier service in which the party acknowledges receipt in writing, or three (3) days after deposit in the United States mail, postage prepaid, for delivery as registered or certified mail addressed, in the case of the Employee, to him at his residential address as reflected on the records of the Company, and in the case of the Company to the corporate headquarters of the Company, attention of the CEO, or to such other address as the Employee or the Company may designate in writing at any time or from time to time to the other party. In lieu of personal notice or notice by deposit in the US mail, a party may be given notice by fax or telex or other similar electronic method so long as receipt is verified.

21. Gender. All pronouns or any variations thereof contained in this Agreement refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.

22. Arbitration. The parties hereto agree to submit any controversy or claim arising out of or relating to Employee's employment by the Company, or the termination thereof, or this Agreement, or the breach thereof (including, without limitation, any claim that any provision of this Agreement or any obligation of Employee is illegal or otherwise unenforceable or voidable under law, ordinance, or ruling or that Employee's employment by the Company was illegally terminated) for arbitration at the office of the American Arbitration Association in Atlanta, Georgia, in accordance with the United States Arbitration Act (9 U.S.C. § 1 et seq.) and the rules of the American Arbitration Association. Company and Employee each consents and submits to the personal jurisdiction and venue of the trial courts of Fulton County, Georgia, and also to the personal jurisdiction and venue of the United States District Court for the Northern District of Georgia for purposes of enforcing this provision. All awards of the arbitration shall be binding and non-appealable except as otherwise provided in the United States Arbitration Act. Judgment upon the award of the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall take place at a time noticed by the American Arbitration Association regardless of whether one of the parties fails or refuses to participate. The arbitrator shall have no authority to award punitive damages, but will otherwise have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, specific performance of any obligation created under this Agreement, the issuance of an injunction or other provisional relief, or the imposition of sanctions for abuse or frustration of the arbitration process. The parties shall be entitled to engage in reasonable discovery, including a request for the production of relevant documents. Depositions may be ordered by the arbitrator upon a showing of need. The foregoing provisions shall not preclude either party from bringing an action in any court of competent jurisdiction for injunctive or other provisional relief as a party may determine is necessary or appropriate.

23. ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE COMPANY AND EMPLOYEE WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT AND SUPERSEDES ANY PRIOR AGREEMENTS OR UNDERSTANDINGS BETWEEN THE COMPANY AND EMPLOYEE WITH RESPECT TO SUCH SUBJECT MATTER. NO AMENDMENT OR WAIVER OF THIS AGREEMENT OR ANY PROVISION HEREOF SHALL BE EFFECTIVE UNLESS IN WRITING SIGNED BY THE PARTY TO BE SO BOUND.

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

		COMPANY:
		A.D.A.M., INC.
		By:
		Title:
		EMPLOYEE:
		KEVIN S. NOLAND

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EMPLOYMENT AGREEMENT
EX-21.1 4 a2075447zex-21_1.htm EX 21.1

Exhibit 21.1

SUBSIDIARIES OF THE COMPANY

Name		State of Incorporation
Integrative Medicine Communications, Inc.		Massachusetts

Nidus Information Services, Inc.		Delaware

EX-23.1 5 a2075447zex-23_1.htm EX 23.1
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Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-07785, No. 333-65452, and No. 333-92403) and Form S-3 (No. 333-45294 and No. 333-65452) of A.D.A.M., Inc. and of our report dated March 14, 2002, relating to the financial statements and financial statement schedules, which appears in this Form 10-K.

By: /s/ PricewaterhouseCoopers LLP

Atlanta, Georgia
April 1, 2002

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CONSENT OF INDEPENDENT ACCOUNTANTS
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