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)

	March 31, 2005			December 31, 2004
Assets
Current assets
Cash	$	1,668		$	3,242
Investments, short term	6,000			2,726
Restricted time deposit	47			—
Accounts receivable, net of allowances of $67 and $103, respectively	1,405			2,112
Inventories, net	85			107
Note receivable from related party	39			39
Prepaids and other assets	571			398
Total current assets	9,815			8,624

Property and equipment, net	194			184
Investment, long term	1,000			1,000
Intangible assets, net	1,166			1,278
Goodwill	2,043			2,043
Restricted time deposit	68			115

Total assets	$	14,286		$	13,244

Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued expenses	$	802		$	726
Deferred revenue	3,834			3,615
Current portion of capital lease obligations	18			17
Total current liabilities	4,654			4,358

Capital lease obligations, net of current portion	33			37

Total liabilities	4,687			4,395

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; 8,414,905 and 8,040,906 shares issued at 3/31/05 and 12/31/04, respectively; 8,145,146 and 7,860,535 shares outstanding at 3/31/05 and 12/31/04, respectively	84			80
Common stock warrants	86			86
Treasury stock, at cost, 269,759 and 180,371 shares at 3/31/05 and 12/31/04, respectively	(1,088		)	(592		)
Additional paid-in capital	49,569			48,843
Note receivable from shareholder	(291		)	(291		)
Deferred compensation for services	(15		)	(23		)
Accumulated deficit	(38,746		)	(39,254		)

Total shareholders’ equity	9,599			8,849

Total liabilities and shareholders’ equity	$	14,286		$	13,244

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

A.D.A.M., Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2005		2004
Revenues, net	$	2,338	$	1,751

Operating costs and expenses:
Cost of revenues (exclusive of depreciation shown below)	498		367
General and administrative	594		348
Product and content development	319		264
Sales and marketing	401		412
Depreciation and amortization	54		151

Total operating costs and expenses	1,866		1,542

Operating income	472		209

Interest income, net	36		15

Net income	$	508	$	224

Basic net income per common share	$	0.06	$	0.03

Basic weighted average number of common shares outstanding	7,930		7,826

Diluted net income per common share	$	0.06	$	0.03

Diluted weighted average number of common shares outstanding	9,114		8,589

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

A.D.A.M., Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except share data)

(Unaudited)

													Note
				Common							Additional		Receivable			Deferred
	Common Stock			Stock		Treasury Stock					Paid-in		from			Compensation			Accumulated
	Shares	Amount		Warrants		Shares		Amount			Capital		Shareholder			for Services			Deficit			Total
Balance at December 31, 2004	8,040,906	$	80	$	86	(180,371	)	$	(592	)	$	48,843	$	(291	)	$	(23	)	$	(39,254	)	$	8,849
Net income	—	—		—				—			—		—			—			508			508
Stock compensation for services	—	—		—				—			—		—			8			—			8
Expense for variably priced options											93					—						93
Treasury Stock purchased				—		(89,388	)	(496		)	—		—			—			—			(496		)
Exercise of common stock options	373,999	4		—				—			633		—			—			—			637
Balance at March 31, 2005	8,414,905	$	84	$	86	(269,759	)	$	(1,088	)	$	49,569	$	(291	)	$	(15	)	$	(38,746	)	$	9,599

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

A.D.A.M., Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended
	March 31, 2005			March 31, 2004

Cash flows from operating activities
Net income	$	508		$	224
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	239			274
Gain on sale assets	(1		)	—
Stock compensation for services	8			19
Stock compensation for variable priced options	93			—
Other, net	—			(5		)
Changes in assets and liabilities
Accounts receivable	707			219
Inventories	23			(11		)
Prepaids and other assets	(173		)	(136		)
Accounts payable and accrued liabilities	77			41
Deferred revenue	219			361
Net cash provided by operating activities	1,700			986
Cash flows from investing activities
Purchases of property and equipment	(32		)	(2		)
Proceeds from sales of property and equipment	1			—
Net change in restricted time deposits	—			(2		)
Software product and content development costs	(106		)	(246		)
Proceeds from maturities of investments	226			—
Purchase of investments available for sale	(2,000		)	—
Purchase of investments held to maturity	(1,500		)	—
Net cash used in investing activities	(3,411		)	(250		)
Cash flows from financing activities
Proceeds from exercise of common stock options	637			84
Repurchase of common stock to be held as treasury stock	(496		)	—
Repayments of capital leases	(4		)	(2		)
Net cash provided by financing activities	137			82
Increase (decrease) in cash	(1,574		)	818
Cash, beginning of period	3,242			4,554
Cash, end of period	$	1,668		$	5,372
Interest paid	$	5		$	2

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

A.D.AM., Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

March 31, 2005

1. BUSINESS AND BASIS OF PRESENTATION

Business

We specialize in the creation and delivery of interactive health content and applications that can be used by a broad range of healthcare consumers – from those with low health literacy to those who play an active and ongoing role in their personal health management. Our health information can be used for learning about general health concerns, specific diseases, medical conditions and treatments, surgical procedures, drug information, specialty health subjects such as women’s and children’s health, nutrition, alternative medicine and more. Our health applications, such as our Health Risk Assessment library, allow consumers to learn more about their health by providing them with relevant feedback regarding their health condition to help in making better decisions.

Our health content products meet rigorous editorial and quality assurance standards. We use an extensive network of physicians and specialists who continually review and update the information in our products. 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, an industry leading accreditation organization, and 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.

Our products can be delivered to consumers in a variety of formats — from print to electronic delivery. We have also translated several of our core content products, including the Health Illustrated Encyclopedia, into Spanish.

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, 2004. 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 month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 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 (APB 25), “Accounting for Stock Issued to Employees,” and related Interpretations. In accordance with APB 25, 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. In general, we grant stock options at a grant price equal to the market price on the original grant date and therefore under APB 25 have no related compensation expense for the three months ended March 31, 2005 or 2004.

On January 14, 1999, certain grants were canceled at the option of their holders 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, $5.25. These options are accounted for in accordance with Financial Interpretations No. 44 (“FIN 44”), “Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB 25),” which provides guidance on the accounting for certain stock option transactions and subsequent amendments to stock option transactions. FIN 44 requires compensation cost for these variably priced options to be recorded to the extent that the current market price exceeds the options’ grant price. The expense is to 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. We had 224,638 and 231,438 variably priced options outstanding at March 31, 2005 and December 31, 2004 under this Interpretation. There were 6,800 variably priced options exercised during March 2005 when the market value of our stock was $7.08. At March 31, 2005, the market value of our stock was $5.61. In accordance with FIN 44, we have recorded stock compensation expense of approximately $93,000 and $0 for the three months ended March 31, 2005 and 2004, respectively.

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 would have been as follows (in thousands, except per share data):

	Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Net income as reported	$	508		$	224
Add stock-based compensation expense included in reported net income	93			—
Deduct total stock-based compensation expense determined under fair-value based method for all awards	(133		)	(123		)

Pro forma net income	$	468		$	101

Basic net income per share
As reported	$	0.06		$	0.03
Pro forma	$	0.06		$	0.01

Diluted net income per share
As reported	$	0.06		$	0.03
Pro forma	$	0.05		$	0.01

3. INVESTMENTS

Our short-term investments at March 31, 2005 included the following (in thousands):

Description	Balance		Purchased	Maturity	Yield at 3/31/2005
Time Deposit	$	1,000	8/8/2004	8/8/2005	2.33	%
Corporate Bond	500		3/18/2005	10/15/2005	4.48	%
Corporate Bond	700		3/28/2005	7/15/2005	7.44	%
Corporate Bond	300		3/28/2005	12/15/2005	5.27	%
Mutual Funds:
- Eaton Vance Floating Fund	1,000		6/15/2004	6/15/2005	3.02	%
- Eaton Vance Floating Fund	500		11/16/2004	11/16/2005	3.02	%
- Eaton Vance Floating Fund	2,000		3/17/2005	3/17/2006	3.02	%

Total Short-term Investments	$	6,000

Our short-term investments at December 31, 2004 included the following (in thousands):

Description	Balance		Purchased	Maturity	Yield at 12/31/2004
Time Deposit	$	1,000	8/8/2004	8/8/2005	2.33	%
Time Deposit	99		9/7/2004	3/7/2005	2.22	%
Time Deposit	127		2/24/2004	1/21/2005	1.61	%
Mutual Funds:
- Eaton Vance Floating Fund	1,000		6/15/2004	6/15/2005	3.54	%
- Eaton Vance Floating Fund	500		11/16/2004	11/16/2005	3.54	%

Total Short-term Investments	$	2,726

On June 15, 2004 we also purchased a long-term bond in the amount of $1,000,000. The bond matures on July 15, 2006 and earns interest at an annual rate of approximately 4.50%. Interest is paid to us on a semi-annual basis.

4. TREASURY STOCK

In May 2004 we announced a stock repurchase program to purchase up to 500,000 shares of our common stock. During the three months ended March 31, 2005, we repurchased 89,388 shares of our common stock to be held by us as Treasury Stock recorded at cost for a total purchase price of $496,000. In February 2005 we suspended this program.

5. CONSULTING AGREEMENTS

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 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 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 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 was expensed over the twelve-month service period.

On September 1, 2004, we extended the consulting contract for another twelve months and entered into a third Restricted Common Stock Purchase Agreement with the Purchasers. Each Purchaser purchased 25,000 shares of our common stock at a purchase price of $1.70 per share. The purchase price was discounted from the $2.40 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation expense for services of $35,000. This deferred compensation expense is being expensed over the twelve-month service period beginning September 1, 2004. As of March 31, 2005, the remaining deferred compensation expense for services was approximately $15,000.

6. COMPREHENSIVE INCOME

Our comprehensive income for the three months ended March 31, 2005 and 2004, as required to be reported by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 130, was identical to the actual net 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 to be sold, leased or otherwise marketed, and software development costs for internal use software.

Capitalized software product and content development costs 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 two years.

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 life, generally three years.

Intangible assets are summarized as follows (in thousands):

	Estimated amortizable lives (years)	March 31, 2005			December 31, 2004

Capitalized software products and content to be sold, leased or otherwise marketed	2	$	3,389		$	3,358
Software developed for internal use	3	339			352
Purchased intellectual content	3	1,431			1,431
Purchased customer contracts	2	333			333

Intangible assets, gross		5,492			5,474

Less accumulated amortization:
Capitalized software products and content to be sold, leased or otherwise marketed		(2,577		)	(2,426		)
Software developed for internal use		(23		)	(77		)
Purchased intellectual content		(1,393		)	(1,360		)
Purchased customer contracts		(333		)	(333		)

Accumulated amortization		(4,326		)	(4,196		)

Intangible assets, net		$	1,166		$	1,278

Amortization expense for the three months ended March 31, 2005 and 2004 was $218,000 and $248,000, respectively. This includes the amortization of capitalized software reported in cost of revenues of $185,000 and $123,000 for the three months ended March 31, 2005 and 2004, respectively.

8. RECENT ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” The approach to accounting for share-based payments in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and no longer allows pro forma disclosure as an alternative to financial statement recognition. We will be required to adopt Statement 123(R) on January 1, 2006.

We will adopt SFAS 123(R) using the modified prospective method and reflect compensation expense in accordance with the SFAS 123(R) transition provisions. Under the modified prospective method, prior periods are not restated to reflect the impact of adopting the new standard at earlier dates. Pro forma disclosures regarding the effect on our net income and net income per common share and , had we applied the fair value method of accounting for share-based compensation as prescribed by SFAS 123, are contained in the “Stock-based compensation” section of Note 2. Based on share-based compensation granted through March 31, 2005 and the fair values previously calculated under SFAS 123, we project we will record an immaterial amount of additional compensation expense in 2006 related to stock options upon the adoption of SFAS 123(R) compared to the existing accounting method under APB Opinion No. 25. We will continue to evaluate the impact this new standard will have on our Stock Incentive Plan.

9. 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 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 August 2005, 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. Since that time and through March 31, 2005, there have been no further transactions under this agreement.

10. NET INCOME PER COMMON SHARE

Net income per share is computed in accordance with SFAS No. 128, “Earnings Per Share.” We compute basic net income per share by dividing net income by the weighted average number of common shares outstanding for each period. Diluted net 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 net income per share calculation using the treasury stock method, if their effect is dilutive. The computation of net income per share for the three months ended March 31, 2005 and 2004 is as follows (in thousands, except per share data):

	Three Months Ended March 31,
	2005		2004

Net income	$	508	$	224
Weighted average common shares outstanding	7,930		7,826
Weighted average common share equivalents (stock options and warrants)	1,184		763
Weighted average diluted common shares outstanding	9,114		8,589
Net income per share:
Basic	$	0.06	$	0.03
Diluted	$	0.06	$	0.03

We had 635,675 options and warrants outstanding which were anti-dilutive as of March 31, 2005 and 2,143,317 options and warrants outstanding which were anti-dilutive as of March 31, 2004.

11. NON-CONSOLIDATED AFFILIATE

We have one non-consolidated affiliate, ThePort Network, Inc. (formerly ThePort.com, Inc.) (“ThePort”). As of March 31, 2005, we had an approximate 34% voting interest in ThePort and this investment was accounted for under the equity method. As of March 31, 2005 and December 31, 2004, the carrying value of this investment was $0. We have no future obligations to fund ThePort.

12. RELATED PARTY TRANSACTIONS

Promissory Note with Our 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. At March 31, 2005 and December 31, 2004, $291,000 of principal was owed under the Exercise Note and $39,000 of principal was owed under the Tax Note. At March 31, 2005 and December 31, 2004, there was also $26,000 and $21,000, respectively, in accrued interest outstanding. Bonuses accruing under the Chief Executive Officer’s employment agreement will be used to repay the notes (see Note 13).

Investment and Sublease with BeBetter Networks, Inc.

At March 31, 2005 and December 31, 2004, we had a 3% investment in BeBetter Networks, Inc. (“BeBetter”), a company whose president is an A.D.A.M. board member who held an approximate 15% voting interest in BeBetter at March 31, 2005 and December 31, 2004. As of March 31, 2005 and December 31, 2004, our Chief Executive Officer also held an approximate 3% voting interest in this company. We account for the investment under the cost method, as we have less than a 20% ownership and do not exercise significant influence over the investee. In addition to our stock ownership in BeBetter, we also hold warrants to purchase 25,000 common shares of BeBetter at an exercise price of $2 per share, expiring December 31, 2005. During 2002 we recorded an impairment charge of $84,000 to write off our investment based upon management’s assessment that the decline in its carrying value was “other than temporary.” We are currently subleasing office space to BeBetter on a month-to-month basis at $586 per month. We have the right to require BeBetter to vacate the space upon 30 days notice. At March 31, 2005 and December 31, 2004, the carrying value of our investment was $0. We have no plans to provide additional investment in BeBetter in the future.

Investment and Sublease with ThePort Network, Inc.

As of March 31, 2005 and December 31, 2004, we held an approximate 34% voting interest in ThePort Network, Inc. (“ThePort”). Our Chief Executive Officer, who currently serves as the Chairman of the Board of Directors of ThePort, held an approximate 10% voting interest in ThePort at March 31, 2005 and December 31, 2004 and held a convertible note and loans from ThePort in the amount of approximately $1,094,000 and $1,019,000 at March 31, 2005 and December 31, 2004, respectively. Two of our other directors also own equity interests in ThePort. The investment is being accounted for under the equity method.

At March 31, 2005 and December 31, 2004, after recording a permanent impairment charge of $92,000 in 2002, the carrying value of our investment was $0. We did not reduce our investment below zero for our share of ThePort’s losses during the three months ended March 31, 2005 or 2004 as we have not provided or committed to provide any additional financial support to ThePort.

We sublease space to ThePort on a month-to-month basis for $1,200 per month.

13. COMMITMENTS

We lease office space and equipment under non-cancelable lease agreements expiring on various dates through 2008. We also have capital lease commitments for certain equipment. Additionally, we have entered into certain agreements to license content for our services from various unrelated third parties. Total payments due and estimated under license agreements and real estate, operating and capital leases, and total bonus amounts due under an employment agreement for the remainder of 2005 and beyond are listed below (in thousands):

	License Agreements		Annual Bonus		Real Estate Leases		Other Operating Lease		Capital Lease

2005	173		105		173		1		15
2006	112		105		234		1		24
2007	—		105		239		1		23
2008	—		105		182		—		—

Total future minimum lease payments	$	285	$	420	$	828	$	3	62

Less - amounts representing interest									(11		)

Present value of future minimum lease payments									51

Less - current portion									(18		)

									$	33

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.

Effective May 10, 2005, we entered into an amended and restated employment agreement with our Chief Executive Officer, (Exhibit 10.1, herein). The employment agreement provides for bonuses in an aggregate amount of up to approximately $420,000 through May 2008. Under the terms of the agreement, the bonuses payable in 2005 and 2006 will be paid by reducing the amounts outstanding under the Exercise Note and Tax Note. At March 31, 2005 and December 31, 2004, we had accrued bonuses to our Chief Executive Officer in the amount of $87,629 and $61,340, respectively, which will be applied as payment in May 2005 first to any accrued interest and then to the outstanding Note Receivable balance.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” which clarifies disclosure, recognition and measurement requirements related to certain guarantees. We indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to this guarantee have not been significant and we are unable to estimate the potential impact of this guarantee on our future results of operations.

14. CONCENTRATIONS

No one customer accounted for more than 10% of our revenues during the three months ended March 31, 2005 or 2004.

15. INCOME TAXES

No provision for income taxes has been reflected for the three months ended March 31, 2005 and 2004 as we have sufficient net operating loss carry forwards to offset taxable income. As of March 31, 2005, we continue to maintain a valuation allowance against our total net deferred tax asset balance.

16. LEGAL PROCEEDINGS

We are not party to any legal proceedings.

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

GENERAL

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004.

We specialize in the creation and delivery of interactive health content and applications that can be used by a broad range of healthcare consumers – from those with low health literacy to those who play an active and ongoing role in their personal health management. Our health information can be used for learning about general health concerns, specific diseases, medical conditions and treatments, surgical procedures, drug information, specialty health subjects such as women’s health and children’s health, nutrition, alternative medicine and more. Our health applications, such as our Health Risk Assessment library, allow consumers to learn more about their health by providing them with relevant feedback regarding their health condition to help in making better decisions.

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

Over the past several years we have seen a significant improvement in our ability to secure new business in the healthcare market. This is a result of our increased sales and marketing focus, the development of additional sales channels into the healthcare market and our product development strategy. We also believe that the quality, depth and breadth of our product line, as well as the technology we have developed in our content management infrastructure allows us to compete favorably in the markets we serve.

Critical Accounting Policies and Estimates

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. 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 on-going basis, we evaluate our estimates, including those related to product returns, product and content development expenses, bad debts, inventories, intangible assets, income taxes and contingencies. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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.

We generate revenues mainly in two ways – Internet-based licensing and shipped product sales. Internet 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, when we have determined that the fees from the agreement are fixed and determinable, and there are no significant return or acceptance provisions. When a contract includes multiple elements, such as services, the entire fee is allocated to each respective element, based on vendor specific objective evidence of fair value, and recognized when the revenue criteria for each element is met. Service revenues are generally recognized upon completion and acceptance by the customer. For Internet revenue arrangements in which we sell through a reseller, 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 the reseller. Revenue is not recognized under any circumstances unless collectibility is reasonably assured. Shipped product revenues represent the sales of software products and revenues earned under certain royalty agreements. Revenues from product sales are generally recognized at the time title passes to customers, distributors or resellers. Revenues from royalty agreements are recognized as earned based upon performance or product shipment.

• Sales Returns Allowances and Allowance for Doubtful Accounts

Significant management judgments and estimates must be made 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 uncollectability 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 may be required.

• Capitalized Software Product and Content Development Costs

We capitalize 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 costs as cost of sales on a product-by-product basis using 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 life of the software, which we have determined to generally be two years. We continually evaluate the recoverability of capitalized costs and if the successes of new product releases are less than we anticipate then a write-down of capitalized 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 development costs in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” This statement specifies that computer software development costs for computer software intended for internal use occurs in three stages: (1) the preliminary project stage, where costs are expensed as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage, where again costs are 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 costs as cost of sales on a product-by-product basis using the straight-line method over a period of three years. We continually evaluate the usability of the products that make up our capitalized costs and if certain circumstances arise such as the introduction of new technology in the marketplace that management intends to use in place of the capitalized project, then a write-down of capitalized 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

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we evaluate goodwill and intangible assets for impairment on an annual basis. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. The carrying value of goodwill is evaluated in relation to the operating performance and estimated future discounted cash flows of the entity.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2005 with the Three Months Ended March 31, 2004

Revenues

	Three Months Ended March 31,				$ Change			% Change		2005 % of Total Rev		2004 % of Total Rev
	2005		2004		$ Change			% Change		2005 % of Total Rev		2004 % of Total Rev

Healthcare	$	1,539	$	1,160	$	379		32.7	%	65.8	%	66.2	%
Internet	$	305	$	369	$	(64	)	(17.3	)%	13.1	%	21.1	%
Education	$	482	$	215	$	267		124.2	%	20.6	%	12.3	%
Other	$	12	$	7	$	5		71.4	%	0.5	%	0.4	%
Total Net Revenues	$	2,338	$	1,751	$	587		33.5	%	100.0	%	100.0	%

Total revenues increased $587,000, or 33.5%, to $2,338,000 for the three months ended March 31, 2005 compared to $1,751,000 for the three months ended March 31, 2004.

Revenues from the healthcare market increased $379,000, or 32.7%, to $1,539,000 for the three months ended March 31, 2005 compared to $1,160,000 for the three months ended March 31, 2004. This increase was attributable to increased healthcare licensing revenue. The increase is the result of our continuing efforts to expand our presence in the healthcare industry and the success of the 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. As a percent of total revenues, revenues from the healthcare market decreased to 65.8% for the three months ended March 31, 2005 compared to 66.2% for the three months ended March 31, 2004.

Revenues from the Internet market decreased $64,000, or 17.3%, to $305,000 for the three months ended March 31, 2005 compared to $369,000 for the three months ended March 31, 2004. The Internet market includes 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 our concentration on expanding our presence in the healthcare market. As a percent of total revenues, revenues from the Internet market decreased to 13.1% for the three months ended March 31, 2005 compared to 21.1% for the three months ended March 31, 2004.

Revenues from the education market increased $267,000, or 124.2%, to $482,000 for the three months ended March 31, 2005 compared to $215,000 for the three months ended March 31, 2004. The education market revenues consist primarily of CD ROM-based product sales. This increase was primarily attributable a net increase in revenues of $150,000 related to the release of a major upgrade of our flagship product for education, A.D.A.M. Interactive Anatomy 4.0, and an increase of $65,000 due to the delivery of product to a new customer. As a percent of total revenues, revenues from the education market increased to 20.6% for the three months ended March 31, 2005 compared to 12.3% for the three months ended March 31, 2004.

Operating Costs and Expenses

	Three Months Ended March 31,				$ Change			% Change		2005 % of Total Rev		2004 % of Total Rev
	2005		2004		$ Change			% Change		2005 % of Total Rev		2004 % of Total Rev

Costs of Revenues	$	498	$	367	$	131		35.7	%	21.3	%	21.0	%
General and Administration.	$	594	$	348	$	246		70.7	%	25.4	%	19.9	%
Product and Content Development	$	319	$	264	$	55		20.8	%	13.6	%	15.1	%
Sales and Marketing	$	401	$	412	$	(11	)	(2.7	)%	17.2	%	23.5	%
Depreciation and Amortization	$	54	$	151	$	(97	)	(64.2	)%	2.3	%	8.6	%
Total Operating Costs and Expenses	$	1,866	$	1,542	$	324		21.0	%	79.8	%	88.1	%

Cost of revenues increased $131,000, or 35.7%, to $498,000 for the three months ended March 31, 2005 compared to $367,000 for the three months ended March 31, 2004. 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 increase was primarily the result of a $120,000 increase in amortization related to projects completed after the first quarter of 2004, and a $29,000 write-off in March 2005. These increases were offset by a $90,000 decrease due to projects being fully amortized or written off before March 31, 2005. This increase was also attributable to a $29,000 increase for Spanish content, a $27,000 increase in product sales expense for the first quarter of 2005 compared to product sales expense from first quarter 2004. As a percent of total revenues, cost of revenues, at 21.3% for the three months ended March 31, 2005, remained consistent with the three months ended March 31, 2004 which was 21.0%.

General and administrative expenses increased $246,000, or 70.7%, to $594,000 for the three months ended March 31, 2005 from $348,000 for the three months ended March 31, 2004. This increase was primarily attributable to a $93,000 increase in stock option compensation related to the variably priced stock options and a $114,000 increase in temporary labor, salaries and recruiting costs. This increase was offset by a $24,000 decrease in legal fees and a $17,000 decrease in investor relations fees. As a percent of total revenues, general and administrative expenses increased to 25.4% for the three months ended March 31, 2005 compared to 19.9% for the three months ended March 31, 2004.

Product and content development expenses increased $55,000, or 20.8%, to $319,000 for the three months ended March 31, 2005 from $264,000 for the three months ended March 31, 2004. This increase was primarily attributable to a $141,000 decrease in amounts capitalized for ongoing projects offset by a $58,000 decrease in consulting expense due to the internal development of products, an $11,000 decrease in salary expense and an $11,000 decrease in cost overhead allocation. As a percent of total revenues, product development expenses decreased to 13.6% for the three months ended March 31, 2005 compared to 15.1% for the three months ended March 31, 2004.

Sales and marketing expenses decreased $11,000, or 2.7%, to $401,000 for the three months ended March 31, 2005 from $412,000 for the three months ended March 31, 2004. This decrease was primarily attributable to a $34,000 decrease in commissions, a $10,000 decrease in travel expense and a $22,000 decrease in the overhead allocation. This decrease was offset by an increase in advertising expense of $37,000 and an increase in consulting fees of $20,000. As a percent of total revenues, sales and marketing expenses decreased to 17.2% for the three months ended March 31, 2005 compared to 23.5% for the three months ended March 31, 2004.

Depreciation and amortization expenses decreased $97,000, or 64.2%, to $54,000 for the three months ended March 31, 2005 from $151,000 for the three months ended March 31, 2004. This decrease was primarily attributable to a $67,000 decrease in amortization of content from the IMC acquisition, and a 20,000 decrease due to the completion of amortization relating to the NIDUS content acquisition. As a percent of total revenues, depreciation and amortization expenses decreased to 2.3% for the three months ended March 31, 2005 compared to 8.6% for the three months ended March 31, 2004.

As a result of the factors described above, operating profit increased $263,000 to $472,000 for the three months ended March 31, 2005 from $209,000 for the three months ended March 31, 2004.

Other Expenses and Income

Interest income, net, was $36,000 and $15,000 for the three months ended March 31, 2005 and 2004, respectively.

For the three months ended March 31, 2005 no provision was recorded for income taxes. We had sufficient net operating loss carry forwards to offset taxable income. As of March 31, 2005, we continue to maintain a valuation allowance against our total net deferred tax asset balance.

As a result of the above, we had a net income of $508,000 for the three months ended March 31, 2005 compared to a net income of $224,000 for the three months ended March 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2005, we had cash of $1,668,000 and working capital of $5,161,000.

Cash provided by operating activities was $1,700,000 during the three months ended March 31, 2005 as compared to $986,000 during the three months ended March 31, 2004. This $714,000 increase was due primarily to the increase in net income and the decrease in accounts receivable, and offset by a decrease in deferred revenue.

Cash used by investing activities was $3,411,000 during the three months ended March 31, 2005 as compared to $250,000 during the three months ended March 31, 2004. This increase was due primarily to the purchase of short term investments during 2005.

Cash provided by financing activities increased to $137,000 during the three months ended March 31, 2005 compared to $82,000 during the three months ended March 31, 2004. Cash provided by financing activities consisted of proceeds from the exercise of common stock options offset by cash used to repurchase common stock to be held as treasury stock and payments on capital leases.

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.

Additional information regarding contracts and commitments that affect our liquidity and capital resources is provided in Note 5 (consulting agreements), Note 9 (equity purchase agreements), Note 12 (promissory note with our Chief Executive Officer) and Note 13 (other commitments) to the unaudited financial statements included in this report.

We believe that cash and short-term investments, 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 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, our intention to develop certain platform technologies 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 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 we may suffer reduced gross margins and loss of market share.

• 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.

• We can offer no assurance that the loss of any significant license customer will not materially adversely 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 customized to an individual’s personal health management needs. As a result, we will need to have adequate technology infrastructure that will allow us to deliver in a cost effective manner portions of our content assets based on each customer’s requirements.

• We 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 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 of 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 must comply with Section 404 of the Sarbanes-Oxley Act which will require us to increase our expenses associated with the development and testing of our internal controls. There can be no assurance that we will not have significant deficiencies or material weaknesses in our internal controls or that we will not encounter higher than anticipated expenses associated with compliance that may adversely affect our share price.

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

• A significant number of 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 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 with Fusion Capital 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 Fund II, LLC. As of December 31, 2003, we had sold 486,566 shares for $733,000 under this agreement. Since that time and through March 31, 2005, there have been no further transactions under this agreement.

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 March 31, 2005 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.

ITEM 5. OTHER INFORMATION

Effective May 10, 2005, the Company entered into a second amended and restated employment agreement with Robert S. Cramer, Jr., which supersedes the Company’s prior employment agreement with Mr. Cramer. The new agreement provides that Mr. Cramer will serve as the Company’s Chairman and Chief Executive Officer and be entitled to receive a base annual salary of $250,000, which may be increased at the discretion of the board of directors. In addition, Mr. Cramer will be entitled to receive a bonus in the amount of approximately $105,000 on May 29 of each year from 2005 through 2008. The agreement will continue in effect until Mr. Cramer reaches age 62, or until earlier terminated by the Company or Mr. Cramer. In the event Mr. Cramer’s employment is terminated (i) by the Company without cause, (ii) as a result of Mr. Cramer’s death or disability, or (iii) by Mr. Cramer for any reason within twelve months following a change in control of the Company, the Company will generally be obligated to pay to him an amount equal to two times the sum of his then-current base salary and his most recent bonus, and to continue to provide him with insurance coverage until the second anniversary of the termination date. The agreement also contains two-year confidentiality, employee and customer non-solicitation, and non-competition provisions.

The foregoing summary of the employment agreement is qualified in its entirety by reference to the text of the agreement, which is filed as Exhibit 10.1 to this quarterly report.

PART II. OTHER INFORMATION

ITEM 2. – UNREGISTERED SALE OF SECURITIES AND USE OF PROCEEDS

The following table provides information regarding our repurchases of shares of our common stock during the three months ended March 31, 2005:

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)

January	33,188	$	4.83	33,188	286,441
February	56,200	$	5.97	56,200	230,241
March	0	—		0	0

(1) In May of 2004 we announced a stock repurchase program under which we would repurchase up to 500,000 shares of our common stock and in February 2005 we suspended this program.

ITEM 6. EXHIBITS.

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

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).

10.1		Second Amended and Restated Employment Agreement between the Company and Robert S. Cramer, dated May 10, 2005.

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.

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).

10.1		Second Amended and Restated Employment Agreement between the Company and Robert S. Cramer, dated May 10, 2005.

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.

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

		For the quarterly period ended March 31, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from

Georgia		58-1878070
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

ITEM 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2005

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004

	Notes to Condensed Consolidated Financial Statements

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 3.	Controls and Procedures

Part II-Other Information

ITEM 2.	Unregistered Sale of Securities and Use of Proceeds

ITEM 5.	Other Information

ITEM 6.	Exhibits

	A.D.A.M., Inc.
	(Registrant)

Date: May 11, 2005	By:	/s/ ROBERT S. CRAMER, JR.
		Robert S. Cramer, Jr.
		Chairman of the Board and
		Chief Executive Officer

Date: May 11, 2005	By:	/s/ KEVIN S. NOLAND
		Kevin S. Noland
		President, Chief Operating Officer and Corporate Secretary (acting principal financial and accounting officer)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

For the quarterly period ended March 31, 2005

OR

For the transition period from

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

For the quarterly period ended March 31, 2005

OR

For the transition period from

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION