10QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

ýQUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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	58-1878070
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1600 RiverEdge Parkway, Suite 100
Atlanta, Georgia 30328-4696

(Address of Principal Executive Offices, Zip Code)

N/A

(Former Name or Former Address, if changed since last report)

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

As of August 16, 2004 there were 7,932,209 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

Transitional Small Business Disclosure Format. YES  o   NO  ý

A.D.A.M., Inc.

Index

Form 10-QSB for the Quarter Ended June 30, 2004

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.D.A.M., Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

	June 30, 2004			December 31, 2003
Assets
Current assets
Cash and cash equivalents	$	2,568		$	4,554
Investments, short term	1,627			—
Accounts receivable, net of allowances of $69 and $111, respectively	2,169			1,407
Inventories, net	60			66
Interest bearing note receivable	50			50
Prepaids and other assets	425			278
Total current assets	6,899			6,355
Property and equipment, net	179			185
Investment, long term	1,000			—
Intangible assets, net	1,631			1,636
Goodwill	2,043			2,043
Restricted time deposits	115			238
Note receivable from related party	49			39
Total assets	$	11,916		$	10,496
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued expenses	$	627		$	634
Deferred revenue	3,109			2,295
Current portion of capital lease obligation	11			11
Total current liabilities	3,747			2,940
Capital lease obligation, net of current portion	30			36
Total liabilities	3,777			2,976
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; 7,925,776 and 7,710,728 shares issued, respectively; 7,904,876 and 7,710,728 shares outstanding, respectively	79			77
Common stock warrants	353			353
Treasury stock, at cost, 20,900 and 0 shares, respectively	(46		)	—
Additional paid-in capital	48,392			48,306
Note receivable from shareholder	(291		)	(291		)
Deferred compensation for services	(13		)	(50		)
Accumulated deficit	(40,335		)	(40,875		)
Total shareholders’ equity	8,139			7,520
Total liabilities and shareholders’ equity	$	11,916		$	10,496

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

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A.D.A.M., Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Total revenues	$	1,933	$	1,934	$	3,684	$	4,278
Operating expenses:
Cost of revenues	361		411		729		876
General and administrative	400		454		747		825
Product and content development	336		339		600		843
Sales and marketing	385		437		797		960
Depreciation and amortization	146		180		297		372
Total operating expenses	1,628		1,821		3,170		3,876
Operating income	305		113		514		402
Interest income (expense), net	10		13		26		23
Net income	$	315	$	126	$	540	$	425
Basic net income per common share	$	0.04	$	0.02	$	0.07	$	0.06
Basic weighted average number of common shares outstanding	7,914		7,129		7,870		7,050
Diluted net income per common share	$	0.04	$	0.02	$	0.06	$	0.05
Diluted weighted average number of common shares outstanding	8,693		7,943		8,635		7,785

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

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A.D.A.M., Inc.

Condensed Consolidated Statement of Changes in Shareholders' Equity

(In thousands, except share data)

(Unaudited)

					Additional Paid-in Capital		Treasury Stock			Common Stock Warrants		Accumulated Deficit			Note Receivable from Shareholder			Deferred Compensation for Services			Total
	Common Stock
	Shares		Amount
Balance at December 31, 2003	7,710,728		$	77	$	48,306	$	—		$	353	$	(40,875	)	$	(291	)	$	(50	)	$	7,520
Net income	—		—		—		—			—		540			—			—			540
Stock compensation for services	—		—		—		—			—		—			—			37			37
Treasury Stock purchased	(20,900	)	—		—		(46		)	—		—			—			—			(46		)
Exercise of common stock options	215,048		2		86		—			—		—			—			—			88
Balance at June 30, 2004	7,904,876		$	79	$	48,392	$	(46	)	$	353	$	(40,335	)	$	(291	)	$	(13	)	$	8,139

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

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A.D.A.M., Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
Net cash provided by operating activities	$	982		$	1,375
Cash Flows from investing activities
Purchases of property and equipment	(46		)	(55		)
Proceeds from sale of property and equipment	—			6
Net change in restricted time deposits	123			1
Repayments on notes receivable	—			57
Software product and content development costs	(462		)	(126		)
Purchase of investments	(2,620		)	—
Net cash used in investing activities	(3,005		)	(117		)
Cash flows from financing activities
Repayments on capital leases	(5		)	(13		)
Proceeds from sales of common stock	—			355
Repurchase of common stock to be held as treasury stock	(46		)	—
Proceeds from exercise of common stock options and warrants	88			14
Net cash provided by financing activities	37			356
(Decrease) increase in cash and cash equivalents	(1,986		)	1,614
Cash and cash equivalents, beginning of period	4,554			2,220
Cash and cash equivalents, end of period	$	2,568		$	3,834
Interest paid	$	2		$	6

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

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A.D.A.M., Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

June 30, 2004

1. BUSINESS AND BASIS OF PRESENTATION

Business

We specialize in the creation and delivery of interactive health information and decision support tools primarily marketed to the healthcare industry and for educational applications that are primarily sold to the K through 12 and undergraduate educational markets. Our products for healthcare are designed to educate and inform the healthcare consumer on various aspects of their health and wellness. They can be used for learning about general health concerns, specific diseases and treatments, surgical procedures, drug information, specialty health subjects (such as women’s health and children’s health), nutrition, alternative medicine and more. Our products for the education market include applications designed to teach students gross anatomy and physiology as well as allowing educators to use the products to develop interactive, multimedia-based classroom curriculum.

We sell our health products and decision support tools primarily through annual licensing agreements to many different types of healthcare and health-related organizations including hospitals, health plans, pharmaceutical companies, disease management vendors, health-oriented Internet websites, healthcare technology companies and large employers. Our health information and tools can be incorporated into a customer’s website, imbedded in healthcare applications such as an electronic medical record or disease management application, contained in a printed format, or combined with other products that may be offered to a healthcare consumer.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the general instructions to Form 10-QSB. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or any future period.

2. STOCK BASED COMPENSATION

We account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and we provide the disclosures as required by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount an employee must pay to acquire the stock.

We did not expense any employee stock option compensation cost during the three and six months ended June 30, 2004 or 2003. Had we determined employee compensation costs using a fair value based methodology at the grant date for our stock options under SFAS 123, our pro forma consolidated net income (loss) would have been as follows (in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income as reported	$	315		$	126		$	540		$	425
Deduct total stock-based employeecompensation expense determined under fair-value base method	(121		)	(234		)	(244		)	(478		)
Pro forma net income (loss)	$	194		$	(108	)	$	296		$	(53	)
Basic net income (loss) per share
As reported	$	0.04		$	0.02		$	0.07		$	0.06
Pro forma	$	0.02		$	(0.02	)	$	0.04		$	(0.01	)
Diluted net income (loss) per share
As reported	$	0.04		$	0.02		$	0.06		$	0.05
Pro forma	$	0.02		$	(0.02	)	$	0.03		$	(0.01	)

3. INVESTMENTS

During the quarter ended June 30, 2004, we invested $1,000,000 in a short term floating fund, which matures within twelve months. This investment earns interest at an annual rate of approximately 2.6%, which is paid to us monthly. We also invested $1,000,000 in a long-term bond, which earns interest at an annual rate of approximately 4.5% and matures July 2006.

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Interest is paid to us on a quarterly basis.

During the quarter ended June 30, 2004, we invested $126,000 and $500,000 in short-term certificates of deposit, which mature within 12 and 6 months, respectively. These certificates earn interest at an annual rate of approximately 1.6% and 1.25%, respectively.

4. TREASURY STOCK

During the quarter ended June 30, 2004, we repurchased 20,900 shares of our common stock to be held by us as Treasury Stock recorded at cost for a total purchase price of $46,000.

5. CONSULTING AGREEMENT

On February 15, 2003, we entered into a Restricted Common Stock Purchase Agreement with James T. Atenhan and Victor P. Thompson (each a “Purchaser”) in connection with a consulting agreement with a financial services firm controlled by the Purchasers. Each Purchaser acquired 37,500 shares of our common stock at a purchase price of $.40 per share. The purchase price of our common stock was discounted from the $.78 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $28,500. This deferred compensation expense was expensed over the six-month service period.

On August 1, 2003, we entered into a second Restricted Common Stock Purchase Agreement with the Purchasers in connection with a twelve-month extension of the consulting contract. Each Purchaser acquired 38,889 shares of our common stock at a purchase price of $.90 per share. The purchase price of our common stock was discounted from the $1.86 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $74,667. This deferred compensation expense is being expensed over the twelve-month service period, which began September 1, 2003. As of June 30, 2004, the remaining deferred compensation expense for services was approximately $13,000.

6. COMPREHENSIVE INCOME

Our comprehensive income for the three and six months ended June 30, 2004 and 2003, as required to be reported by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 130, was identical to the actual income reported for those periods.

7. INTANGIBLE ASSETS

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

Purchased intellectual content and purchased customer contracts represent intangible assets acquired in December 2001 from Integrative Medicine Communications, Inc. (“IMC”) and in February 2002 from Nidus Information Services, Inc. (“Nidus”). Purchased intellectual content also includes assets that were purchased from HIP International, Inc. (“HIP”) in January 2002. The following table shows the allocation of the purchase price to intangibles with a definite life, their amortization period and the total amortization for the remainder of 2004 and beyond (in thousands):

Assets	Purchase Price		Amortization Period	2004		2005
IMC
Purchased intellectual content	$	807	3 Years	$	112	$	—
Purchased customer contracts	$	246	2 Years	—		—
NIDUS
Purchased intellectual content	$	472	3 Years	78		20
Purchased customer contracts	$	88	2 Years	—		—
HIP
Purchased intellectual content	$	152	3 Years	26		50
				$	216	$	70

Capitalized software product and content 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 and content 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 product and content 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 we have 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,” we expense costs incurred in the preliminary project planning stage, and thereafter, capitalize costs incurred in developing or obtaining 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.

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Intangible assets are summarized as follows (in thousands):

	Estimated amortizable lives (years)	June 30, 2004			December 31, 2003
Capitalized software products and content to be sold, leased or otherwise marketed	2	$	3,449		$	3,048
Software developed for internal use	3	586			525
Purchased intellectual content	3 - 5	1,431			1,431
Purchased customer contracts	2	333			333
Intangible assets, gross		5,799			5,337
Less accumulated amortization:
Capitalized software products and content to be sold, leased or otherwise marketed		(2,402		)	(2,246		)
Software developed for internal use		(289		)	(222		)
Purchased intellectual content		(1,144		)	(906		)
Purchased customer contracts		(333		)	(327		)
Accumulated amortization		(4,168		)	(3,701		)
Intangible assets, net		$	1,631		$	1,636

Amortization expense, which includes the amortization of capitalized software reported in cost of revenues, for the three months ended June 30, 2004 and 2003 was $219,000 and $327,000, respectively. Amortization expense for the six months ended June 30, 2004 and 2003 was $467,000 and $657,000, respectively.

8. EQUITY PURCHASE AGREEMENT

On May 22, 2002, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to this agreement, Fusion Capital agreed to purchase up to an aggregate of $12,000,000 of our common stock. We have the right to sell up to $15,000 of our common stock per trading day under this agreement unless our stock price equals or exceeds $7.00, in which case the daily amount may be increased at our option. Fusion Capital is not obligated to purchase any shares of our common stock on any trading days that the market price of our common stock is less than $1.00. Since we registered the sale of 3,500,000 shares to Fusion Capital pursuant to the agreement, the selling price of our common stock to Fusion Capital will have to average at least $3.43 per share for us to receive the maximum proceeds of $12,000,000 without registering additional shares of common stock, which we have the right but not the obligation to do. Assuming a purchase price of $1.00 per share and the purchase by Fusion Capital of the full 3,500,000 shares under the agreement, proceeds to us would be $3,500,000. If we decided to sell more than the 1,352,100 shares to Fusion Capital (19.99% of our outstanding shares as of May 22, 2002, the date of the agreement, exclusive of the 160,000 shares issued to Fusion Capital as a commitment fee), we would first be required to seek shareholder approval of the agreement in order to comply with Nasdaq rules. We may, but are under no obligation to, request our shareholders to approve the transaction contemplated by the agreement. We may terminate the agreement at any time, and Fusion Capital may terminate the agreement at any time after approximately 40 months following the date the purchase obligation under the agreement became effective. During the year ended December 31, 2003, we sold 486,566 shares for aggregate proceeds of $733,000 under this agreement.  During the three and six months ended June 30, 2004, there were no transactions under this agreement.

9. EARNINGS PER COMMON SHARE

Net income per share is computed in accordance with SFAS No. 128, “Earnings Per Share.” We compute basic income per share by dividing net income by the weighted average number of issued and outstanding common shares for each period. Diluted income per share is based upon the addition of the effect of common stock equivalents (stock options and warrants) to the denominator of the basic income per share calculation using the treasury stock method, if their effect is dilutive. The computation of income per share for the three and six months ended June 30, 2004 and 2003 is as follows (in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Net income	$	315	$	126	$	540	$	425
Weighted average common shares outstanding	7,914		7,129		7,870		7,050
Weighted average common share equivalents (stock options and warrants)	779		814		765		735
Weighted average diluted common shares outstanding	8,693		7,943		8,635		7,785
Net income per share:
Basic	$	0.04	$	0.02	$	0.07	$	0.06
Diluted	$	0.04	$	0.02	$	0.06	$	0.05

We had a weighted average 1,785,701 and 2,624,676 options and warrants outstanding that were anti-dilutive for the three months ended June 30, 2004 and 2003, respectively. We had a weighted average 2,163,901 and 2,624,676 options and warrants outstanding that were anti-dilutive for the six months ended June 30, 2004 and 2003, respectively.

10. NON-CONSOLIDATED AFFILIATE

We have one non-consolidated affiliate, ThePort Network, Inc. (formerly ThePort.com, Inc.) (“ThePort”). As of June 30, 2004, we had an approximate 34% voting interest in ThePort and this investment was accounted for under the equity method. As of June 30, 2004 and December 31, 2003, the carrying value of this investment was $0. We have no future obligations to fund ThePort.

11. RELATED PARTY TRANSACTIONS

Sublease with A.D.A.M. Board Member

On April 2, 2001, for a term beginning on January 1, 2001, we signed an 18-month sublease agreement with a company whose Chief Executive Officer is an A.D.A.M. board member. We received 8,333 shares of the tenant’s common stock monthly over the term of the agreement, which ended June 30, 2002. From June 30, 2002 through December 31, 2002, we continued to sublease space to this company on a month-to-month basis for the same monthly consideration. The shares were valued at the fair

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market value of the rent on the leased space and were recorded on our balance sheet as a long-term asset. As of June 30, 2004 and December 31, 2003, the shares were valued at $0. Additionally, we received warrants to purchase 25,000 common shares of the tenant that became fully exercisable on January 1, 2002. From December 2002 through September 2003, we allowed the tenant to occupy this space and did not collect any lease payments. Beginning in October 2003, we began collecting cash lease payments of $785 per month from the tenant to occupy this space. Under the terms of an amendment to the lease agreement, we have the right to require the tenant to vacate the space upon 30 days notice. As of June 30, 2004 our Chief Executive Officer had an approximate 3% voting interest in the tenant company.

Promissory Note with A.D.A.M’S Chief Executive Officer

On May 30, 2001, we received a full-recourse promissory note from our Chief Executive Officer for approximately $341,000 (the “Exercise Note”) for the exercise of 150,000 options at $1.94 per share and a $50,000 promissory note (the “Tax Note”) in connection with a loan to our Chief Executive Officer to pay taxes related to the stock exercise. The notes accrue interest of 6.25% per annum and are due in full on or before May 29, 2006. Part of the Exercise Note, $291,000, is secured by 150,000 shares of our common stock and is recorded in shareholders’ equity. As of June 30, 2004, approximately $65,000 of interest had been accrued on both notes, of which $55,000 had been paid, and $11,000 of principal had been paid with respect to the Tax Note, leaving a remaining balance of $39,000 (see paragraph below).

On October 1, 2002, we entered into an employment agreement with our Chief Executive Officer, which was amended on March 17, 2004. The employment agreement as amended provides for bonuses in an aggregate amount of approximately $289,000 through May 2006. Under the terms of the agreement, these bonuses will be paid by reducing the amounts outstanding under the Exercise Note and Tax Note. During the year ended December 31, 2003, our Chief Executive Officer earned bonus payments totaling $78,866 under the agreement. The net bonus payments of approximately $60,000, after withholding taxes, were applied towards accrued interest ($49,000) and the outstanding principal balance ($11,000) on the Tax Note.

Investment and Sublease with ThePort Network, Inc.

On April 10, 2002, for a term beginning on November 1, 2001, we entered into an 8-month sublease agreement with ThePort. We received 14,044 shares of ThePort’s common stock monthly over the term of the agreement, which ended on June 30, 2002. The shares were valued at the fair market value of the rent of the leased space. As of June 30, 2004 and December 31, 2003, the carrying value of this investment was $0. After the expiration of the sublease on June 30, 2002, we continued to sublease this space to ThePort on a month-to-month basis for the same monthly consideration until December 31, 2002. Since then, we have not received any type of consideration as lease payments.

In connection with our preferred stock investment in ThePort during the year ended December 31, 2001, we entered into a five-year agreement whereby we had exclusive distribution rights to ThePort’s products within the healthcare industry. As of December 31, 2001, we had pre-paid $125,000 of the contract fee to be applied against future subscription fees. We had committed to generate $1,500,000 in subscription fees during the initial term of the original agreement. The initial term of the agreement commenced on August 20, 2001 and continued for five years from that date. On February 14, 2003, ThePort agreed to accept a payment of $125,000 from us to release us from the minimum guarantee in its entirety. ThePort retained the $125,000 pre-payment previously made and we were granted non-exclusive rights to ThePort’s products within the healthcare industry.

Our President and Chief Operating Officer served on the Board of Directors of ThePort from December 2001 through August 2002. Our Chief Executive Officer, who currently serves as the Chairman of the Board of Directors of ThePort, holds an approximate 10% voting interest in ThePort and holds a convertible note and loans from ThePort in the amount of approximately $919,000 at June 30, 2004. Two of our other directors also own equity interests in ThePort.

12. COMMITMENTS

We have entered into certain agreements to license content for services from various unrelated third parties. We also have contractual obligations at June 30, 2004 relating to real estate, capital and operating lease arrangements.

We do not have any investments in joint ventures or special purpose entities, and do not guarantee the debt of any third parties. Our subsidiaries are 100% owned by us and are included in our condensed consolidated financial statements. Our headquarters are located in approximately 12,000 square feet of leased office space in Atlanta, Georgia. The space is leased for a term ending in September 2008.

Total payments due and estimated under license agreements and real estate, operating and capital leases, and total bonus amounts due under an employment agreement (Note 11) for the remainder of 2004 and beyond are listed below (in thousands):

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	License Agreements		Annual Bonus		Real Estate Leases		Operating Lease		Capital Lease
2004	$	105	$	—	$	113	$	13	$	7
2005	100		105		229		3		15
2006	—		105		234		—		15
2007	—		—		239		—		11
2008	—		—		182		—		—
Total future payments	$	205	$	210	$	997	$	16	48
Less - amounts representing interest									(7		)
Present value of future minimum lease payments									41
Less - current portion									(11		)
Long term portion									$	30

13. CONCENTRATIONS

No customer accounted for more than 10% of our revenues during the three and six months ended June 30, 2004. For the three and six months ended June 30, 2003, one customer accounted for approximately 0% and 15% of revenues, respectively. This customer’s license agreement with us expired during March 2003 and we have not received any revenues from the customer since that time.

14. INCOME TAXES

No provision for income taxes has been reflected for the three and six months ended June 30, 2004 as we have sufficient net operating loss carry forwards to offset taxable income. As of June 30, 2004, we continue to maintain a valuation allowance against our total net deferred tax asset balance. If we achieve sustained profitability, we may be required to reverse the valuation allowance. We do not expect to reverse the valuation allowance during 2004.

15. LEGAL PROCEEDINGS

We may be subject to certain legal proceedings in the normal course of business. Currently, we do not believe that these matters would have a material impact on our financial results or financial position.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003.

We specialize in the creation and delivery of interactive health information and decision support tools primarily marketed to the healthcare industry and for educational applications that are primarily sold to the K through 12 and undergraduate educational markets. Our products for healthcare are designed to educate and inform the healthcare consumer on various aspects of their health and wellness. They can be used for learning about general health concerns, specific diseases and treatments, surgical procedures, drug information, specialty health subjects (such as women’s health and children’s health), nutrition, alternative medicine and more. Our products for the education market include applications designed to teach students gross anatomy and physiology as well as allowing educators to use the products to develop interactive, multimedia-based classroom curricula.

The health information that we develop or acquire from third parties meets rigorous editorial standards. We employ two physicians and use an extensive network of physicians and specialists who are continually reviewing and updating our information. We add to our content library when needed such as when important health issues arise or when our customers request specific products to support their product and service offerings. Our health information is accredited by URAC, a nationally recognized, non-profit organization committed to promoting healthcare quality through accreditation and certification programs. Also, we are a founding member of Hi-Ethics, a coalition of the most widely referenced health websites and information providers committed to developing industry standards for the quality of consumer health information.

We sell our health products and decision support tools primarily through annual licensing agreements to many different types of healthcare and health-related organizations including hospitals, health plans, pharmaceutical companies, disease management vendors, health-oriented Internet websites, healthcare technology companies and large employers. Our health information and tools can be incorporated into a customer’s website, imbedded in healthcare applications such as an electronic medical record or disease management application, contained in a printed format, or combined with other products that may be offered to a healthcare consumer.

We believe that the quality of our products, coupled with unique technology for exploring the human body, the depth and breadth of our proprietary health information database, and our specialized knowledge, expertise and brand-awareness position us well for future growth.

We market our products, tools and applications and derive revenues primarily in three areas:

•The healthcare industry;

•Public and restricted access Internet websites; and

•Educational institutions.

We were incorporated in 1990 as A.D.A.M. Software, Inc. We changed our name to adam.com, Inc. in 1999 and to A.D.A.M., Inc. in 2001. We are headquartered in Atlanta, Georgia.

CRITICAL ACCOUNTING POLICIES

Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to product returns, product and content development expenses, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on experience and on various assumptions that we believe 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.

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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB 101A and 101B and as revised by SAB 104, “Revenue Recognition” and Statement of Position No. 97-2, “Software Revenue Recognition.” Accordingly, we recognize revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) is 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.

We generate revenues mainly in two ways – through subscription-based licensing agreements and product sales. Subscription revenues consist primarily of license fees that usually consist of an annual, up-front fee that is initially recorded as deferred revenue. This revenue is recognized ratably over the term of the license agreement beginning after delivery has occurred, upon customer acceptance or live date and when we have determined that the fees from the agreement are fixed and determinable and there are no significant return or acceptance provisions. For license fees earned through our resellers, we do not recognize any revenue until an agreement has been finalized between the customer and our authorized reseller and the content has been delivered to the customer by our reseller. Revenue is not recognized under any circumstances, unless collectibility is deemed probable. Revenues from product sales represent the sales of CD ROM and other offline 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. We also recognize a portion of our revenues from royalty agreements. 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. We evaluate the adequacy of allowances for returns primarily based upon our evaluation of historical and expected sales experience and by channel of distribution. The judgments and estimates of management may have a material effect on the amount and timing of our revenue for any given period.

Similarly, management must make estimates of the uncollectibility of accounts receivable. Management specifically analyzes accounts receivable and 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 our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

Capitalized Software Product and Content Development Costs

We capitalize internal software product and content 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 software product and content development 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 software product and content development costs and if the successes of new product releases are less than we anticipate then a write-down of capitalized software product and content development costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

We also capitalize internal software product and content 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 product and content development costs for computer software intended for internal use occurs in three stages: (1) the preliminary project stage, where costs are expensed

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as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage, where again costs are expensed 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 software product and content development 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 software product and content development 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 write-down of capitalized software product and content development costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

Inventory

We record 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.

Goodwill and Intangible Assets

We have recorded goodwill in connection with our acquisition of Integrative Medicine Communications, Inc. (“IMC”) in 2001 and Nidus Information Services, Inc. (“Nidus”) in 2002. In July 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

SFAS 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 141 in our allocation of the purchase price to the IMC and Nidus acquisitions.

SFAS 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 we 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, we may be required to record an impairment charge for the recorded goodwill. We conducted the impairment test for fiscal 2003 and concluded no impairment had occurred. Since we did not have any goodwill recorded prior to the IMC and Nidus acquisitions, the provision of SFAS 142 requiring companies to stop amortizing goodwill did not have an impact on our ongoing operating results or the comparability of such results with prior periods.

Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the tax provision in the consolidated statement of operations.

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 our financial position or results of operations. 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 June 30, 2004, we have 231,438 outstanding options with

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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, we have 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.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2004 with the Three Months Ended June 30, 2003

Revenues

	Three Months Ended June 30,									2004 % of		2003 % of
	2004		2003		$ Change			% Change		Total Rev		Total Rev
Healthcare	$	1,316	$	1,129	$	187		16.6	%	68.1	%	58.4	%
Internet	$	374	$	450	$	(76	)	-16.9	%	19.3	%	23.3	%
Education	$	238	$	351	$	(113	)	-32.2	%	12.3	%	18.1	%
Other	$	5	$	4	$	1		25.0	%	0.3	%	0.2	%
Total Net Revenues	$	1,933	$	1,934	$	(1	)	-0.1	%	100.0	%	100.0	%

Total revenues decreased $1,000, or 0.1%, to $1,933,000 for the three months ended June 30, 2004 compared to $1,934,000 for the three months ended June 30, 2003.

Revenues from the healthcare market increased $187,000, or 16.6%, to $1,316,000 for the three months ended June 30, 2004 compared to $1,129,000 for the three months ended June 30, 2003. Our products for the healthcare industry target a broad range of businesses including hospitals and hospital systems, health plans, healthcare technology companies, and pharmaceutical companies. We believe we are well positioned to grow our business in healthcare as the demand for health information grows and as content becomes an increasingly important business driver within the healthcare industry. We have also undertaken technological initiatives to enable our content products to be used in broader applications within the healthcare industry such as electronic medical records and other point-of-care applications. These initiatives as well as our continuing efforts to expand our presence in the healthcare industry contributed to the increase in healthcare industry revenues during the three months ended June 30, 2004. As a percent of total revenues, revenues from the healthcare market increased to 68.1% for the three months ended June 30, 2004 compared to 58.4% for the three months ended June 30, 2003.

Revenues from the Internet market decreased $76,000, or 16.9%, to $374,000 for the three months ended June 30, 2004 compared to $450,000 for the three months June 30, 2003. The Internet market includes public and restricted access Internet portals and large media-related websites that host a variety of consumer-oriented content and services. The decrease in our Internet revenues was primarily due to the expiration of license agreements within the Internet market and due to our continuing efforts to expand our presence in the healthcare industry. As a percent of total revenues, revenues from the Internet market decreased to 19.3% for the three months ended June 30, 2004 compared to 23.3% for the three months ended June 30, 2003.

Revenues from the education market decreased $113,000, or 32.2%, to $238,000 for the three months ended June 30, 2004 compared to $351,000 for the three months ended June 30, 2003. Education market revenues consist primarily of CD ROM-based product sales. This decrease was primarily attributable to a $124,000 decrease in sales of our CD ROM-based products, primarily due to an aging product line. We are currently developing a major upgrade to our flagship product for education, A.D.A.M. Interactive Anatomy, which we expect to release during the third quarter of 2004. The decrease in sales of our CD ROM-based products is net of a $48,000 increase in sales of a new CD ROM-based product that we began selling during the fourth quarter of 2003 and a $17,000 increase in sales of our CD ROM-based products through a distributor. As a percent of total revenues, revenues from the education market decreased to 12.3% for the three months ended June 30, 2004 compared to 18.1% for the three months ended June 30, 2003.

Operating Expenses

	Three Months Ended June 30,									2004 % of		2003 % of
	2004		2003		$ Change			% Change		Total Rev		Total Rev
Costs of Revenues	$	361	$	411	$	(50	)	-12.2	%	18.7	%	21.3	%
General and Administration	$	400	$	454	$	(54	)	-11.9	%	20.7	%	23.5	%
Product and Content Development	$	336	$	339	$	(3	)	-0.9	%	17.4	%	17.5	%
Sales and Marketing	$	385	$	437	$	(52	)	-11.9	%	19.9	%	22.6	%
Depreciation and Amortization	$	146	$	180	$	(34	)	-18.9	%	7.6	%	9.3	%
Total Operating Expenses	$	1,628	$	1,821	$	(193	)	-10.6	%	84.1	%	94.2	%

Cost of revenues decreased $50,000, or 12.2%, to $361,000 for the three months ended June 30, 2004 compared to $411,000 for the three months ended June 30, 2003. Cost of revenues includes shipped product components, packaging and shipping costs, newsletter printing costs, distribution license fees, royalties and amortization of capitalized software product and content development costs. This decrease was primarily the result of a $79,000 decrease in software product and content development amortization due to certain capitalized products and content being fully amortized. This decrease was offset by a $28,000 net increase in distribution license fees from the sales of our Spanish language products, the sales of our third party licensing agreement products, and royalty expenses. As a percent of total revenues, cost of revenues decreased to 18.7% for the three months ended June 30, 2004 compared to 21.3% for the three months ended June 30, 2003.

General and administrative expenses decreased $54,000, or 11.9%, to $400,000 for the three months ended June 30, 2004 from $454,000 for the three months ended June 30, 2003. This decrease was primarily attributable to a $62,000 decrease in

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bad debt expense, a $26,000 decrease in investor relations expenses, a $16,000 decrease in general insurance costs, and a $10,000 decrease in rent expense due to the expiration of the building lease agreement in Boston. This decrease was offset by a $44,000 increase in legal and accounting expenses and an $18,000 increase in taxes and licenses. As a percent of total revenues, general and administrative expenses decreased to 20.7% for the three months ended June 30, 2004 compared to 23.5% for the three months ended June 30, 2003.

Product and content development expenses decreased $3,000, or 0.9%, to $336,000 for the three months ended June 30, 2004 from $339,000 for the three months ended June 30, 2003. This decrease was primarily attributable to a $96,000 decrease in research and development expenses due to amounts being capitalized. This decrease was offset by a $54,000 increase in capitalized expenses of internally developed products for resell and internal use, a $25,000 increase in editorial consulting expenses, and a $12,000 increase in salaries. As a percent of total revenues, product development expenses decreased to 17.4% for the three months ended June 30, 2004 compared to 17.5% for the three months ended June 30, 2003.

Sales and marketing expenses decreased $52,000, or 11.9%, to $385,000 for the three months ended June 30, 2004 from $437,000 for the three months ended June 30, 2003. This decrease was primarily attributable to a $44,000 decrease in commissions due to a change in commission programs and a decrease in headcount, a $21,000 decrease in salaries, a $4,000 decrease in advertising and a $9,000 decrease in dues and fees. This decrease was offset by a $26,000 increase in consulting expenses pertaining to the planned release of our major upgrade to A.D.A.M. Interactive Anatomy (see above). As a percent of total revenues, sales and marketing expenses decreased to 19.9% for the three months ended June 30, 2004 compared to 22.6% for the three months ended June 30, 2003.

Depreciation and amortization expenses decreased $34,000, or 18.9%, to $146,000 for the three months ended June 30, 2004 from $180,000 for the three months ended June 30, 2003. This decrease was primarily attributable to a $4,000 decrease in depreciation of assets and a net decrease of $30,000 of purchased contract and content acquisition amortization. As a percent of total revenues, depreciation and amortization expenses decreased to 7.6% for the three months ended June 30, 2004 compared to 9.3% for the three months ended June 30, 2003.

As a result of the factors described above, operating profit increased $192,000 to $305,000 for the three months ended June 30, 2004 compared to an operating profit of $113,000 for the three months ended June 30, 2003.

Other Expenses and Income

Interest income, net, was $10,000 and $13,000 for the three months ended June 30, 2004 and 2003, respectively.

For the three months ended June 30, 2003 no provision was estimated for income taxes.  We had sufficient net operating loss carry forwards to offset regular taxable income. As of June 30, 2004, we continue to maintain a valuation allowance against our total net deferred tax asset balance. If we achieve sustained profitability, we may be required to reverse the valuation allowance. We do not expect to reverse the valuation allowance during 2004.

As a result of the above, we had a net income of $315,000 for the three months ended June 30, 2004 compared to a net income of $126,000 for the three months ended June 30, 2003.

Comparison of the Six Months Ended June 30, 2004 with the Six Months Ended June 30, 2003

Revenues

	Six Months Ended June 30,									2004 % of		2003 % of
	2004		2003		$ Change			% Change		Total Rev		Total Rev
Healthcare	$	2,476	$	2,218	$	258		11.6	%	67.2	%	51.8	%
Internet	$	743	$	1,439	$	(696	)	-48.4	%	20.2	%	33.6	%
Education	$	458	$	614	$	(156	)	-25.4	%	12.4	%	14.4	%
Other	$	7	$	7	$	—		0.0	%	0.2	%	0.2	%
Total Net Revenues	$	3,684	$	4,278	$	(594	)	-13.9	%	100.0	%	100.0	%

Total revenues decreased $594,000, or 13.9%, to $3,684,000 for the six months ended June 30, 2004 compared to $4,278,000 for the six months ended June 30, 2003.

Revenues from the healthcare market increased $258,000, or 11.6%, to $2,476,000 for the six months ended June 30, 2004 compared to $2,218,000 for the six months ended June 30, 2003. We are 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. We have also undertaken technological initiatives to enable our content products to be used in broader applications within the healthcare industry such as electronic medical records and other point-of-care applications. These two factors and our continuing efforts to expand our presence in the healthcare market contributed to the increase in healthcare market revenues during the six months ended June 30, 2004. As a percent of total revenues, revenues from the healthcare market increased to 67.2% for the six months ended June 30, 2004 compared to 51.8% for the six months ended June 30, 2003.

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Revenues from the Internet market decreased $696,000, or 48.4%, to $743,000 for the six months ended June 30, 2004 compared to $1,439,000 for the six months ended June 30, 2003. The decrease in our Internet revenues was primarily due to the expiration of our largest customer’s license agreement during the first quarter of 2003, which accounted for approximately 15% of total revenues during the six months ended June 30, 2003 and a decrease of $74,000 of revenue from the IMC Consult Newsletter due to the transfer of subscription rights of the newsletter to another publisher. The decrease in our Internet revenues was also due to the expiration of other license agreements within the Internet market and due to our continuing efforts to expand our presence in the healthcare industry. As a percent of total revenues, revenues from the Internet market decreased to 20.2% for the six months ended June 30, 2004 compared to 33.6% for the six months ended June 30, 2003.

Revenues from the education market decreased $156,000, or 25.4%, to $458,000 for the six months ended June 30, 2004 compared to $614,000 for the six months ended June 30, 2003. This decrease was primarily attributable to a $145,000 decrease in sales of our CD ROM-based products, primarily due to an aging product line and a $11,000 decrease in revenue earned from license agreements. We are currently developing a major upgrade to our flagship product for education, A.D.A.M. Interactive Anatomy, which we expect to release during third quarter of 2004. The decrease in sales of our CD ROM-based products is net of a $91,000 increase in sales of a new CD ROM-based product that we began selling during the fourth quarter of 2003. As a percent of total revenues, revenues from the education market decreased to 12.4% for the six months ended June 30, 2004 compared to 14.4% for the six months ended June 30, 2003.

Operating Expenses

	Six Months Ended June 30,									2004 % of		2003 % of
	2004		2003		$ Change			% Change		Total Rev		Total Rev
Costs of Revenues	$	729	$	876	$	(147	)	-16.8	%	19.8	%	20.5	%
General and Administration	$	747	$	825	$	(78	)	-9.5	%	20.3	%	19.3	%
Product and Content Development	$	600	$	843	$	(243	)	-28.8	%	16.3	%	19.7	%
Sales and Marketing	$	797	$	960	$	(163	)	-17.0	%	21.6	%	22.4	%
Depreciation and Amortization	$	297	$	372	$	(75	)	-20.2	%	8.1	%	8.7	%
Total Operating Expenses	$	3,170	$	3,876	$	(706	)	-18.2	%	85.9	%	90.6	%

Cost of revenues decreased $147,000, or 16.8%, to $729,000 for the six months ended June 30, 2004 compared to $876,000 for the six months ended June 30, 2003. This decrease was primarily the result of a $138,000 decrease in software product and content development amortization due to certain capitalized products and content being fully amortized (net of a $33,000 increase in amortization due to the completion of new products during the six months ended June 30, 2004), an $18,000 decrease in cost of goods sold related to our CD ROM products, and a $9,000 decrease in fees for updates and printing expenses relating to our Well-Connected content. This decrease was offset by an $18,000 increase in distribution license fees from the sales of our Spanish language products, the sales of our third party licensing agreement products, and royalty expenses. As a percent of total revenues, cost of revenues decreased to 19.8% for the six months ended June 30, 2004 compared to 20.5% for the six months ended June 30, 2003.

General and administrative expenses decreased $78,000, or 9.5%, to $747,000 for the six months ended June 30, 2004 from $825,000 for the six months ended June 30, 2003. This decrease was primarily attributable to a $53,000 decrease in bad debt expense, a $31,000 decrease in general insurance costs, a $26,000 decrease in salaries, a $24,000 decrease in investor relations expenses, and a $19,000 decrease in our rent expense due to the expiration of a building lease agreement in Boston. This decrease was offset by a $46,000 increase in legal and accounting fees, a $17,000 increase in taxes and licenses and a $12,000 increase in overall general and administrative expenses. As a percent of total revenues, general and administrative costs decreased to 20.3% for the six months ended June 30, 2004 compared to 19.3% for the six months ended June 30, 2003.

Product and content development expenses decreased $243,000, or 28.8%, to $600,000 for the six months ended June 30, 2004 from $843,000 for the six months ended June 30, 2003. This decrease was primarily attributable to a $338,000 decrease in research and development expenses due to amounts being capitalized and a $24,000 decrease in editorial and overall product and content development expenses. This decrease was offset by a $79,000 increase in capitalized expenses of internally developed products for resell and internal use and a $40,000 increase in editorial consulting expenses. As a percent of total revenues, product development expenses decreased to 16.3% for the six months ended June 30, 2004 compared to 19.7% for the six months ended June 30, 2003.

Sales and marketing expenses decreased $163,000, or 17.0%, to $797,000 for the six months ended June 30, 2004 from $960,000 for the six months ended June 30, 2003. This decrease was primarily attributable to a $106,000 decrease in commissions due to a change in commission programs and a decrease in headcount, a $21,000 decrease in salaries, a $28,000 decrease in advertising, a $15,000 decrease in overall sales and marketing expenses, and a $9,000 decrease in dues and fees. This decrease was offset by a $16,000 increase in consulting expenses pertaining to the planned release of our major upgrade to

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A.D.A.M. Interactive Anatomy. As a percent of total revenues, sales and marketing expenses decreased to 21.6% for the six months ended June 30, 2004 compared to 22.4% for the six months ended June 30, 2003.

Depreciation and amortization expenses decreased $75,000, or 20.2%, to $297,000 for the six months ended June 30, 2004 from $372,000 for the six months ended June 30, 2003. This decrease was primarily attributable to a $22,000 decrease in depreciation of assets and a $53,000 net decrease of purchased contract and content acquisition amortization. As a percent of total revenues, depreciation and amortization expenses decreased to 8.1% for the six months ended June 30, 2004 compared to 8.7% for the six months ended June 30, 2003.

As a result of the factors described above, operating profit increased $112,000 to $514,000 for the six months ended June 30, 2004 compared to an operating profit of $402,000 for the six months ended June 30, 2003.

Other Expenses and Income

Interest income, net, was $26,000 and $23,000 for the six months ended June 30, 2004 and 2003, respectively.

For the six months ended June 30, 2004 no provision was estimated for income taxes.  We had sufficient net operating loss carry forwards to offset regular taxable income. As of June 30, 2004, we continue to maintain a valuation allowance against our total net deferred tax asset balance. If we achieve sustained profitability, we may be required to reverse the valuation allowance. We do not expect to reverse the valuation allowance during 2004.

As a result of the above, we had a net income of $540,000 for the six months ended June 30, 2004 compared to a net income of $425,000 for the six months ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2004, we had cash and cash equivalents of $2,568,000 and working capital of $3,152,000.

Cash provided by operating activities was $982,000 during the six months ended June 30, 2004 as compared to cash provided of $1,375,000 during the six months ended June 30, 2003. This decrease in cash provided was due primarily to increases in accounts receivable, prepaid expenses, and deferred revenue offset by an increase in net income.

Cash used in investing activities was $3,005,000 during the six months ended June 30, 2004 as compared to cash used of $117,000 during the six months ended June 30, 2003. This increase in cash used was due primarily to an increase in short-term and long-term investments and an increase in software content and product development.

Cash provided by financing activities decreased to $37,000 during the six months ended June 30, 2004 compared to cash provided by financing activities of $356,000 during the six months ended June 30, 2003. The decrease is mainly due to cash received from sales of stock from the equity purchase agreement in the six months ended June 30, 2003 with no comparable activity for the six months ended June 30, 2004.

We also use 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.

During the quarter ended June 30, 2004, we invested $1,000,000 in a short term floating fund, which matures within twelve months. This investment earns interest at an annual rate of approximately 2.6%, which is paid to us monthly. We also invested $1,000,000 in a long-term bond, which earns interest at an annual rate of approximately 4.5% and matures July 2006. Interest is paid to us on a quarterly basis.

During the quarter ended June 30, 2004, we invested $126,000 and $500,00 in short-term certificates of deposit, which mature within 12 and 6 months, respectively. These certificates earn interest at an annual rate of approximately 1.6% and 1.25%, respectively.

During the quarter ended June 30, 2004, we repurchased 20,900 shares of our common stock to be held by us as Treasury Stock recorded at cost for a total purchase price of $46,000.

On February 15, 2003, we entered into a Restricted Common Stock Purchase Agreement with James T. Atenhan and Victor P. Thompson (each a “Purchaser”) in connection with a consulting agreement with a financial services firm controlled by

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the Purchasers. Each Purchaser purchased 37,500 shares of our common stock at a purchase price of $.40 per share. The purchase price of our common stock was discounted from the $.78 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $28,500. This deferred compensation was expensed over the six-month service period.

On August 1, 2003, we entered into a second Restricted Common Stock Purchase Agreement with the Purchasers in connection with a twelve-month extension of the consulting contract. Each Purchaser purchased 38,889 shares of our common stock at a purchase price of $.90 per share. The purchase price of our common stock was discounted from the $1.86 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $74,667. This deferred compensation expense is being expensed over the twelve-month service period, which began September 1, 2003. As of June 30, 2004, the remaining deferred compensation expense for services was approximately $13,000.

On May 22, 2002, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to this agreement, Fusion Capital agreed to purchase up to an aggregate of $12,000,000 of our common stock. We have the right to sell up to $15,000 of our common stock per trading day under this agreement unless our stock price equals or exceeds $7.00, in which case the daily amount may be increased at our option. Fusion Capital is not obligated to purchase any shares of our common stock on any trading days that the market price of our common stock is less than $1.00. Since we registered 3,500,000 shares for sale to Fusion Capital pursuant to the agreement, the selling price of our common stock to Fusion Capital will have to average at least $3.43 per share for us to receive the maximum proceeds of $12,000,000 without registering additional shares of common stock, which we have the right but not the obligation to do. Assuming a purchase price of $1.00 per share and the purchase by Fusion Capital of the full 3,500,000 shares under the agreement, proceeds to us would be $3,500,000. If we decided to sell more than the 1,352,100 shares to Fusion Capital (19.99% of our outstanding shares as of May 22, 2002, the date of the agreement, exclusive of the 160,000 shares issued to Fusion Capital as a commitment fee), we would first be required to seek shareholder approval of the agreement in order to be in compliance with Nasdaq rules. We may, but shall be under no obligation to, request our shareholders to approve the transaction contemplated by the agreement. We may terminate the agreement at any time, and Fusion Capital may terminate the agreement at any time after approximately 40 months following the date the purchase obligation under the agreement became effective. During the year ended December 31, 2003, we sold 486,566 shares for $733,000 under this agreement. During the three months ended June 30, 2004, there were no transactions under this agreement, and at this time we do not expect to sell any shares of common stock under this agreement during the remainder of 2004.

On May 30, 2001, we received a full-recourse promissory note from our Chief Executive Officer for approximately $341,000 (the “Exercise Note”) for the exercise of 150,000 options at $1.94 per share and a $50,000 promissory note (the “Tax Note”) in connection with a loan to our Chief Executive Officer to pay taxes related to the stock exercise. The notes accrue interest of 6.25% per annum and are due in full on or before May 29, 2006. Part of the Exercise Note, $291,000, is secured by 150,000 shares of our common stock and is recorded in shareholders’ equity. As of June 30, 2004, approximately $65,000 of interest had been accrued on both notes, of which $55,000 had been paid, and $11,000 of principal had been paid with respect to the Tax Note, leaving a remaining balance of $39,000 (see paragraph below).

On October 1, 2002, we entered into an employment agreement with our Chief Executive Officer, which was amended and approved by the Compensation Committee on March 17, 2004. The employment agreement as amended provides for a base salary. The amended agreement also provides for bonuses of approximately $289,000 in the event that our Chief Executive Officer remains in our employment as of the bonus payment date through May 2006. Under the terms of the agreement, the bonus payments will be used to reduce the amounts outstanding under the Exercise Note and Tax Note. During the year ended December 31, 2003, our Chief Executive Officer earned bonus payments totaling $78,866 under the agreement. The net bonus payments of approximately $60,000, after withholding taxes, were applied towards accrued interest ($49,000) and the outstanding principal balance ($11,000) on the Tax Note balance.

We have also entered into certain agreements to license content for our services from various unrelated third parties. We also have contractual obligations at June 30, 2004 relating to real estate, capital and operating lease arrangements.

Total payments due and estimated under license agreements and real estate, operating and capital leases and total bonus amounts due under an employment agreement (see above) for the remainder of 2004 and beyond are listed below:

Year	License Agreements		Annual Bonus		Real Estate Leases		Operating Leases		Capital Leases		Total
2004	105,000		—		113,000		13,000		7,000		$	238,000
2005	100,000		105,000		229,000		3,000		15,000		$	452,000
2006	—		105,000		234,000		—		15,000		$	354,000
2007	—		—		239,000		—		11,000		$	250,000
2008	—		—		182,000		—		—		$	182,000
	$	205,000	$	210,000	$	997,000	$	16,000	$	48,000	$	1,476,000

Management believes that cash on hand, together with anticipated cash flows from operations, will be sufficient to meet our working capital needs for the next twelve months. 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 would 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

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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 and products or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

We do not have any material off-balance sheet arrangements.

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” 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 and our continuing growth. 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 our forward-looking statements:

•We experienced losses in two of the last four years, and we cannot offer any assurance that we will be able to sustain profitability in the future.

•We may be unable to obtain sufficient capital to pursue our growth and market development strategies, which would hurt our financial results. We can offer 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 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 our results of operations will be materially adversely affected.

•Some competitors 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.

•The loss of a significant customer could materially adversely affect our business. We derive a substantial portion of our revenues from license agreements and the non-renewal or loss of these agreements could significantly affect our business.

•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 customers or attract new customers. We believe that health information will become more personalized to individuals’ 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 our content assets based on a customer’s technical requirement. We will be required to utilize, potentially 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. Our long-term growth strategy may include 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. These difficulties could disrupt our ongoing business, distract our management and employees, increase

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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, we have historically 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 would 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 have adopted certain anti-takeover provisions that may deter a takeover. Our articles of incorporation and bylaws contain 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 members; 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 unissued shares are available 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 our common stock, 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 management and principal shareholders have substantial influence and their interests may differ from those of our other shareholders. As of June 30, 2004, our executive officers, directors and persons who beneficially own more than 5% of our outstanding common stock controlled approximately 14.7% 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.

•Our Stock Purchase Agreement with Fusion Capital Fund II, LLC may result in significant dilution of our other shareholders. On May 22, 2002, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to this agreement, Fusion Capital has agreed to purchase up to an aggregate of $12,000,000 of our common stock. We have the right to sell up to $15,000 of common stock per trading day under this agreement unless our stock price equals or exceeds $7.00, in which case the daily amount may be increased at our option. Fusion Capital is not obligated to purchase any shares of our common stock on any trading days that the market price of our common stock is less than $1.00. Sales of our common stock under this agreement would dilute the ownership of shareholders other than Fusion Capital. During the year ended December 31, 2003, we sold 486,566 shares for aggregate proceeds of $733,000 under this agreement.

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ITEM 3. CONTROLS AND PROCEDURES

Management has developed and implemented a policy and procedures for reviewing, on a quarterly basis, our disclosure controls and procedures and our internal control over financial reporting. Management, including our principal executive and financial officers, evaluated the effectiveness of the design and operation of disclosure controls and procedures as of June 30, 2004 and, based on their evaluation, our principal executive and financial officers have concluded that these controls and procedures are operating effectively. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2 – CHANGES IN SECURITIES AND REPURCHASES OF EQUITY SECURITIES

The following table provides information regarding our repurchases of shares of our common stock during the three months ended June 30, 2004:

Month	Shares Purchased	Average Price Paid Per Share		Shares Purchased as Part of Publicly Announced Programs(1)	Maximum Shares that May Yet be Purchased Under Publicly Announced Program(1)
April	0	0		0	500,000
May	16,400	$	2.22	16,400	483,600
June	4,500	$	2.21	4,500	479,100

(1) In May 2004, we announced a stock repurchase program under which we would repurchase up to 500,000 shares of our common stock.

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

We held our 2004 Annual Meeting of Shareholders on May 19, 2004. The following items were voted upon and the results of the voting were as follows:

(1)To elect two directors, Daniel S. Howe and Mark Kishel, to serve as Directors on our Board of Directors for terms of three years, expiring at the 2007 Annual Meeting of Shareholders, and until their successors are elected and qualified. There were 6,424,091 and 6,424,791 votes for, and 14,368 and 13,668 votes withheld, for Mr. Howe and Mr. Kishel, respectively. Directors remaining in office are Robert S. Cramer, Jr., John W. McClaugherty and Francis J. Tedesco.

(2)To ratify the appointment of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2004. The votes of the shareholders to ratify PricewaterhouseCoopers LLP as our independent auditors were as follows: 10,800 votes opposed, and 6,425,530 votes for.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

The following exhibits are filed with this report or incorporated herein by reference:

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Exhibit Number	Exhibit Description
3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
3.2	Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
3.3	Amended and Restated By-Laws (incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 33-96864, dated September 12, 1995, as amended).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

During the three months ended June 30, 2004, we furnished a Form 8-K on May 5, 2004 regarding our press release announcing first quarter results for 2004.

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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.

	A.D.A.M., Inc.
	(Registrant)
Date: August 16, 2004		By:	/s/ ROBERT S. CRAMER, JR.
		Robert S. Cramer, Jr.
		Chairman of the Board and Chief Executive Officer
Date: August 16,2004		By:	/s/ KEVIN S. NOLAND
		Kevin S. Noland
		President, Chief Operating Officer and Corporate Secretary (acting principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit Number	Exhibit Description
3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
3.2	Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
3.3	Amended and Restated By-Laws (incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 33-96864, dated September 12, 1995, as amended).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert S. Cramer, Jr. certify that:

1.I have reviewed this quarterly report on Form 10-QSB of A.D.A.M., Inc. (the “Company”) for the quarter ended June 30, 2004;

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

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

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

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)[Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

c)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:August 16, 2004

/s/ ROBERT S. CRAMER, JR.

Robert S. Cramer, Jr.

Chairman and Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kevin S. Noland certify that:

1.I have reviewed this quarterly report on Form 10-QSB of A.D.A.M., Inc. (the “Company”) for the quarter ended June 30, 2004;

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

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

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

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)[Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

c)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:August 16, 2004

/s/ KEVIN S. NOLAND

Kevin S. Noland

President, Chief Operating Officer and Corporate Secretary
(acting principal financial and accounting officer)

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of A.D.A.M., Inc. (the “Company”) on Form 10-QSB for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Robert S. Cramer, Jr., President and Chief Executive Officer of the Company, and Kevin S. Noland, President, Chief Operating Officer, Corporate Secretary and acting chief financial and accounting officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert S. Cramer, Jr.

Robert S. Cramer, Jr.

President and Chief Executive Officer

August 16, 2004

/s/  Kevin S. Noland

Kevin S. Noland

President, Chief Operating Officer and Corporate Secretary (acting chief financial and accounting officer)

August 16, 2004

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