UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended June 30, 2006

OR

o		TRANSITION 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		(IRS Employer Identification No.)
incorporation or organization)

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 x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

As of August 4, 2006 there were 8,437,126 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

A.D.A.M., Inc.
Index
Form 10-Q for the Quarter Ended June 30, 2006

Part I—Financial Information		3

ITEM 1.	Consolidated Financial Statements	3

	Consolidated Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005 (unaudited)	4

	Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2006 (unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	21

ITEM 4.	Controls and Procedures	21

Part II-Other Information		22

ITEM 1A.	Risk Factors	22

ITEM 4.	Submission of Matters to a Vote of Security Holders	23

ITEM 6.	Exhibits	24

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

A.D.A.M., Inc.

Consolidated Balance Sheets

(In thousands, except share data)

	(Unaudited) June 30, 2006			December 31, 2005

Assets
Current assets
Cash & cash equivalents	$	5,148		$	2,816
Short term investments	6,776			7,861
Accounts receivable, net of allowances of $93 and $147, respectively	2,646			1,840
Restricted cash	—			25
Inventories	76			68
Prepaids and other current assets	366			463
Deferred tax assets	221			221
Total current assets	15,233			13,294
Property and equipment, net	241			268
Intangible and other assets, net	934			953
Goodwill	2,043			2,043
Other assets	44			43
Deferred tax asset, net of current portion	5,279			5,279
Total assets	$	23,774		$	21,880

Liabilities and Shareholders’ Equity
Current liabilities
Accounts payables and accrued expenses	854			1,055
Deferred revenue	3,723			3,643
Current portion of long term debt	21			20
Total current liabilities	4,598			4,718

Current lease obligations, net of current portion	7			18
Total liabilities	4,605			4,736

Commitments and contingencies
Stockholders’ equity
Common stock, $.01 par value; 20,000,000 shares authorized; 8,706,885 shares issued and 8,437,126 shares outstanding at 6/30/2006 and 8,482,772 shares issued and 8,213,013 shares outstanding at 12/31/2005	87			85
Treasury stock, at cost, 269,759 shares	(1,088		)	(1,088		)
Additional paid-in capital	50,691			50,350
Unrealized loss on investments	(8		)	(11		)
Accumulated deficit	(30,513		)	(32,192		)
Total shareholders’ equity	19,169			17,144

Total liabilities and shareholders’ equity	$	23,774		$	21,880

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

A.D.A.M., Inc.

Consolidated Statements of Operations

(In thousands, except per share data)
(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Revenues, net	$	2,715	$	2,489	$	5,197	$	4,827

Operating costs and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)	509		474		997		972
General & administrative	565		601		1,125		1,195
Product & content development	350		343		710		662
Sales & marketing	454		453		889		854
Depreciation & amortization	37		37		75		91

Total operating costs and expenses	1,915		1,908		3,796		3,774

Operating income	800		581		1,401		1,053
Interest income, net	151		66		278		102
Net income	$	951	$	647	$	1,679	$	1,155
Basic net income per common share	$	0.11	$	0.08	$	0.20	$	0.14
Basic weighted average number of common shares outstanding	8,430		8,041		8,374		8,151
Diluted net income per common share	$	0.10	$	0.07	$	0.17	$	0.12
Diluted weighted average number of common shares outstanding	9,755		9,377		9,822		9,495

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

A.D.A.M., Inc.

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except share data)
(Unaudited)

												Accumulated
									Additional			Other
	Common Stock			Treasury Stock					Paid-in			Comprehensive			Accumulated
	Shares	Amount		Shares		Amount			Capital			Income/(Loss)			Deficit			Total
Balance at December 31, 2005	8,482,772	$	85	(269,759	)	$	(1,088	)	$	50,350		$	(11	)	$	(32,192	)	$	17,144
Comprehensive income
Net income	—	—		—		—			—			—			1,679			1,679
Unrealized gain on investments	—	—		—		—			—			3			—			3
Total comprehensive income	—	—		—		—			—			—			—			1,682
Stock based compensation expense (benefit)	—	—		—		—			(135		)	—			—			(135		)
Exercise of common stock options	224,113	2		—		—			476			—			—			478
Balance at June 30, 2006	8,706,885	$	87	(269,759	)	$	(1,088	)	$	50,691		$	(8	)	$	(30,513	)	$	19,169

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

A.D.A.M., Inc.

Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

	Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
Cash flows from operating activities
Net income	$	1,679		$	1,155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	452			423
Stock compensation for services	—			17
Stock option compensation expense (benefit)	(135		)	156
Other, net	—			(1		)
Changes in assets and liabilities
Accounts receivable	(806		)	893
Inventories	(8		)	28
Prepaids and other assets	98			(141		)
Accounts payable and accrued liabilities	(201		)	(160		)
Deferred revenue	80			(306		)
Net cash provided by operating activities	1,159			2,064
Cash flows from investing activities
Purchases of property and equipment	(48		)	(130		)
Proceeds from sales of property and equipment	—			1
Repayments on notes receivable	—			163
Net change in restricted time deposits	25			(47		)
Software product and content development costs	(359		)	(199		)
Maturities and reclassifications of investments	2,055			1,273
Purchase of investments available-for-sale	(967		)	(3,500		)
Other	—			(2		)
Net cash provided by (used in) investing activities	706			(2,441		)
Cash flows from financing activities
Proceeds from exercise of common stock options and warrants	476			662
Repurchase of common stock to be held as treasury stock	—			(496		)
Repayments on capital leases	(9		)	(8		)
Net cash provided by financing activities	467			158
Increase (decrease) in cash and cash equivalents	2,332			(219		)
Cash and cash equivalents, beginning of period	2,816			3,242
Cash and cash equivalents, end of period	$	5,148		$	3,023
Interest paid	$	2		$	3

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

A.D.A.M., Inc.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2006

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.

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

Basis of Presentation

The accompanying unaudited 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-Q. Accordingly, certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted. 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, 2005. 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 considered necessary for a fair presentation have been included. Certain amounts previously reported have been reclassified for comparative purposes to conform with current period presentation.

Operating results for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006 or any future period.

2. STOCK BASED COMPENSATION

On January 14, 1999, certain option grants were canceled at the election 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 173,149 and 224,638 variably priced options outstanding at June 30, 2006 and December 31, 2005, respectively, all of which had fully vested by January 2002 and are accounted for under FIN 44. There were 51,489 variably priced options exercised in the six months ended June 30, 2006, all during the first three months of 2006. As the result of a decreases in the stock price at June 30, 2006 versus March 31, 2006 as well as December 31, 2005, we recorded stock compensation benefit of $143,000 and $155,000 for the three and six months ended June 30, 2006, respectively. Conversely, for the three and six months ended June 30, 2005 we recored variably priced stock option expense of $63,000 and $156,000, respectively, due to the higher stock price at June 30, 2005.

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 (APB 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.

Effective January 1, 2006, we adopted Statement 123(R) using the modified prospective method and, therefore, 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.

As a result of the adoption of SFAS 123(R), we recorded $19,000 and $42,000 of stock compensation expense for the three and six months ended June 30, 2006 related to our employee stock options, not including those variable options described above. Had we continued to account for these options under APB 25 we would have recorded no such expense. After recording the expense through June 30, 2006, there remained approximately $156,000 of unrecognized compensation cost related to unvested employee stock options to be recognized over the next three years.

We used the Black-Scholes method (which models the value over time of financial instruments) to estimate the fair value at grant date of the options. The Black-Scholes method uses several assumptions to value an option. We used the following assumptions:

· Expected Dividend Yield – because we do not currently pay dividends, our dividend yield is zero.

· Expected Volatility in Stock Price – reflects the historical change in our stock price over the expected term of the stock option.

· Risk-free Interest Rate – reflects the average rate on the treasury bond with maturity equal to the expected term of the option.

· Expected Life of Stock Awards – reflects the simplified method to calculate an expected life based on the midpoint between the vesting date and the end of the contractual term of the stock award.

The weighted-average assumptions used in the option pricing model for stock option grants were as follows:

SIX MONTHS ENDED JUNE 30	2006
Expected Dividend Yield	—
Expected Volatility in Stock Price	78.22		%
Risk-Free Interest Rate	4.65		%
Expected Life of Stock Awards	3.5 years
Weighted Average Fair Value at Grant Date	$	5.79

Had we determined employee compensation costs using a fair value based methodology at the grant date for our stock options under SFAS 123(R) in 2005 as well, our pro forma consolidated net income for the year ago quarter would have been as follows (in thousands, except per share data):

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2005			2005

Net income as reported	$	647		$	1,155
Add stock compensation expense included in reported net income	63			156
Deduct total stock-based employee compensation determined under fair-value based methods for all awards	(98		)	(231		)

Pro forma net income	$	612		$	1,080
Basic net income per share
As reported	$	0.08		$	0.14
Pro forma	$	0.08		$	0.13

Diluted net income per share
As reported	$	0.07		$	0.12
Pro forma	$	0.07		$	0.11

In 2002, our Board adopted and our shareholders approved our 2002 Stock Incentive Plan, under which we have reserved 1,500,000 shares of common stock pursuant to the grant of incentive or non-qualified stock options to full-time employees and key persons. Options are granted at an exercise price as determined by our Board of Directors, which may not be less than the fair market value of our common stock at the date of the grant, and the options generally vest ratably over a three-year period. Options granted under the Plan generally expire ten years from the date of grant.

The following table summarizes stock option activity for the six months ended June 30, 2006:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Life (years)	Value ($000)
Outstanding at December 31, 2005	2,818,331		$	3.81	5.32

Granted	12,500		$	9.92
Exercised	(224,113	)	$	2.13
Canceled or expired	(2,500	)	$	5.48

Outstanding at June 30, 2006	2,604,218		$	3.98	4.83	$	7,850
Exercisable	2,557,551		$	3.94	4.76	$	7,799

Intrinsic value was calculated by multiplying the number of options times the amount by which the stock’s market price at June 30, 2006 exceeded the strike price for each option. The market price at June 30, 2006 was $6.22.

3. INVESTMENTS

Our investments are classified as available-for-sale and are therefore recorded at fair value based on current market rates. Changes in the fair value are included in the equity section of our balance sheet and reported in our Consolidated Statement of Changes in Shareholders’ Equity.

Our short-term investments at June 30, 2006 included the following (in thousands):

Description	Balance		Purchased	Maturity	Yield at 6/30/2006
Mutual Funds
- AIM Floating Fund	$	2,072	9/1/2005	9/1/2006	5.13	%
- AIM Floating Fund	1,036		9/22/2005	9/22/2006	5.13	%
- AIM Floating Fund	1,036		9/23/2005	9/23/2006	5.13	%
- AIM Floating Fund	518		10/14/2005	10/14/2006	5.13	%
- AIM Floating Fund	1,036		11/15/2005	11/15/2006	5.13	%
- AIM Floating Fund	310		12/16/2005	12/16/2006	5.13	%
- AIM Floating Fund	768		1/23/2006	1/23/2007	5.13	%
Total Short-term Investments	$	6,776

At December 31, 2005, our short-term investments included the following (in thousands):

Description	Balance		Purchased	Maturity	Yield at 12/31/2005
Mutual Funds
- Eaton Vance Floating Fund	$	2,021	3/17/2005	3/17/2006	4.33	%
- AIM Floating Fund	2,014		9/1/2005	9/1/2006	4.91	%
- AIM Floating Fund	1,007		9/22/2005	9/22/2006	4.91	%
- AIM Floating Fund	1,007		9/23/2005	9/23/2006	4.91	%
- AIM Floating Fund	503		10/14/2005	10/14/2006	4.91	%
- AIM Floating Fund	1,008		11/15/2005	11/15/2006	4.91	%
- AIM Floating Fund	301		12/16/2005	12/16/2006	4.91	%

Total Short-term Investments	$	7,861

4. COMPREHENSIVE INCOME

During the three and six months ended June 30, 2006, we reported comprehensive income of $782,000 and $1,682,000, respectively. During the three and six months ended June 30, 2005, we reported comprehensive income of $634,000 and $1,142,000 respectively.

5. 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	June 30,			December 31,
	lives (years)	2006			2005

Capitalized software products and content to be sold, leased or otherwise marketed	2	$	3,633		$	3,351
Software developed for internal use	3	339			263
Purchased intellectual content	3	1,431			1,431
Purchased customer contracts	2	333			333

Intangible assets, gross		5,736			5,378

Less accumulated amortization:
Capitalized software products and content to be sold, leased or otherwise marketed		(2,910		)	(2,559		)
Software developed for internal use		(128		)	(102		)
Purchased intellectual content		(1,431		)	(1,431		)
Purchased customer contracts		(333		)	(333		)

Accumulated amortization		(4,802		)	(4,425		)

Intangible assets, net		$	934		$	953

Amortization expense for the three and six months ended June 30, 2006 was $190,000 and $377,000, all of which is the amortization

of capitalized software reported in cost of revenues. For the three and six months ended June 30, 2005 total amortization expense was $186,000 and $404,000, respectively, including $174,000 and $359,000, respectively, for amortization of capitalized software reported in cost of revenues. The remaining $12,000 and $45,000 of amortization for the three and six months ended June 30, 2005, respectively, was related to purchased intellectual content and customer contracts which were fully amortized in 2005.

For the three and six months ended June 30, 2006, additions to intangibles were approximately $116,000 and $358,000 and were related to software development.

6. 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 and six months ended June 30, 2006 and 2005 is as follows (in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005

Net income	$	951	$	647	$	1,679	$	1,155
Weighted average common shares outstanding - basic	8,430		8,041		8,374		8,151
Weighted average common share equivalents (stock options and warrants)	1,325		1,336		1,448		1,344
Weighted average common shares outstanding - diluted	9,755		9,377		9,822		9,495
Net income per share:
Basic	$	0.11	$	0.08	$	0.20	$	0.14
Diluted	$	0.10	$	0.07	$	0.17	$	0.12

Anti-dilutive stock options and warrants outstanding	428		549		428		549

7. NON-CONSOLIDATED AFFILIATE

We have one non-consolidated affiliate, ThePort Network, Inc. (formerly ThePort.com, Inc.) (“ThePort”). As of June 30, 2006, we had an approximate 34% voting interest in ThePort and this investment was accounted for under the equity method. As of June 30, 2006 and December 31, 2005, the carrying value of this investment was $0. We have no future obligations to fund ThePort.

8. RELATED PARTY TRANSACTIONS

Investment and Sublease with BeBetter Networks, Inc.

At June 30, 2006 and December 31, 2005, we had a 2% investment in BeBetter Networks, Inc. (“BeBetter”). BeBetter’s president is also an A.D.A.M. board member and held an approximate 11% voting interest in BeBetter at June 30, 2006 and December 31, 2005. As of June 30, 2006 and December 31, 2005, our Chairman of the Board of Directors held an approximate 2% 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.

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.” At June 30, 2006 and December 31, 2005 the carrying value of our investment was $0. We have no plans to provide additional investment in BeBetter in the future.

In September 2005, BeBetter vacated the space we had been subleasing to them on a month to month basis at $585 per month.

Investment and Sublease with ThePort Network, Inc.

As of June 30, 2006 and December 31, 2005, we held an approximate 34% voting interest in ThePort Network, Inc. (“ThePort”). Our Chairman of the Board of Directors, who also currently serves as the Chairman of the Board of Directors of ThePort, held an approximate 10% voting interest in ThePort at June 30, 2006 and December 31, 2005 and held a convertible note from and made loans to ThePort in the amount of approximately $1,469,000 and $1,369,000 at June 30, 2006 and December 31, 2005, respectively. Two of our other directors also own equity interests in ThePort. The investment is being accounted for under the equity method (see Note 1 to the financial statements included in our Annual Report Form 10-KSB).

At June 30, 2006 and December 31, 2005, after recording a permanent impairment charge of $92,000 in 2002, the carrying value of our investment was $0. We have not adjusted our investment below zero for our share of ThePort’s losses since then and through June 30, 2006 as we have not provided or committed to provide any additional financial support to ThePort.

We currently sublease space to ThePort on a month-to-month basis for $1,200 per month. We have received notice that ThePort intends to vacate the space in August 2006.

9. 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 for the remainder of 2006 and beyond are listed below (in thousands):

	License		Real Estate		Other Operating		Capital
	Agreements		Leases		Leases		Lease

2006	$	63	$	118	$	11	$	12
2007	—		239		22		19
2008	—		182		5		—
Total future minimum lease payments and payments under license agreements	$	63	$	539	$	38	$	31
Less - amounts representing interest							(3		)

Present value of future minimum lease payments							28

Less - current portion							(21		)

							$	7

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 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.

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.

10. CONCENTRATIONS

No one customer accounted for more than 10% of our revenues during the three and six months ended June 30, 2006 or 2005.

11. INCOME TAXES

For the three and six months ended June 30, 2006 we recorded an income tax provision of $361,000 and 638,000, or 38% (our estimated effective tax rate) of our pretax income. Additionally, we performed our quarterly evaluation of the deferred tax asset and the related valuation allowance as of June 30, 2006. Based on our analysis for the three months ended June 30, 2006, we reduced the valuation allowance by an additional $361,000. The total reduction for the six months ended June 30, 2006 was $638,000. These two transactions fully offset one another and therefore had a $0 effect on our net income for the three and six months ended June 30, 2006. At June 30, 2006 the deferred tax asset balance of $5,500,000 remained unchanged from December 31, 2005. However, as a result of realizing this aggregate $638,000 of our deferred tax asset during the six months ended June 30, 2006, we reduced the related valuation allowance to $9,362,000 at June 30, 2006 from $10,000,000 at December 31, 2005.

No provision for income taxes had been reflected for the three or six months ended June 30, 2005 as we had sufficient net operating loss carry forwards to offset taxable income. As of June 30, 2005, we maintained a valuation allowance against our total net deferred tax asset balance.

At June 30, 2006 we had net operating loss (NOL) and R&D credit carryforwards available for tax purposes of approximately $34,300,000 and $1,000,000, respectively, which will expire on December 31 in years 2006 through 2022 and 2023, respectively.

12. LEGAL PROCEEDINGS

We are not a party to any legal proceedings.

13. SUBSEQUENT EVENT

On August 14, 2006, the Company acquired all of the outstanding capital stock of Online Benefits, Inc. and Subsidiaries (OBI) from the shareholders thereof, for an aggregate price of $32,500,000, including $1.5 million of assumed debt from OBI (Purchase Price), pursuant to an agreement and plan of merger dated as of August 14, 2006.

In connection with this acquisition, the Company entered into a credit agreement with CapitalSource Finance LLC (Credit Agreement), which provides for the following:

Description		Terms
$2.0 million revolver		Principal repayable in full in August 2011; interest at LIBOR plus 4% or the prime rate plus 2.75%, payable quarterly in arrears; revolver unused facility fee of 0.5% per annum of the average daily balance of the unused portion, payable monthly in arrears
$20.0 million term loan		Principal repayable in quarterly installments of varying amounts through June 2011, interest same as revolver; prepayment premium of either 2% (prior to first anniversary) or 1% (between first and second anniversary) of prepaid amount
$5.0 million convertible note		Principal repayable in full in August 2011; interest at LIBOR plus 2.5% or the prime rate plus 1.25%, payable quarterly in arrears; prepayment premium same as term loan; all or any portion of the principal balance is convertible at the option of the Lender into common equity of the Company at a conversion price per share as defined in the agreement

In addition to the above terms, there is a provision for a prepayment of 50% excess cash flow, as defined in the Credit Agreement. The Credit Agreement is secured by (i) a first lien on all existing and future tangible and intangible assets and personal property and equity stock of the Company and any existing and future subsidiaries, and (ii) a pledge of 100% of the Company’s subsidiaries capital stock.

The Company paid the Purchase Price by: (i) using $20,000,000 from the proceeds of the term loan and $5,000,000 from the proceeds of the convertible loan, both under the Credit Facility; (ii) $3,000,000 from the proceeds of newly issued equity; and (iii) cash on hand.

OnlineBenefits, Inc. is a leading provider of web-based applications serving the benefits management needs of consumers, employers and brokers. Its consumer solutions include employee self-service portals for benefits communication and enrollment, and flexible spending account administration.

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 Operations in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005.

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 shift 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, 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 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.

· 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.

· 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.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2006 with the Three Months Ended June 30, 2005

Revenues

	Three months ended June 30,									2006 % of		2005 % of
	2006		2005		$ Change			% Change		Total Rev		Total Rev

Licensing	$	2,114	$	1,839	$	275		15.0	%	77.9	%	73.9	%
Product	506		474		32			6.8	%	18.6	%	19.0	%
Professional services/other	95		176		(81		)	-46.0	%	3.5	%	7.1	%
Total Net Revenues	$	2,715	$	2,489	$	226		9.1	%	100.0	%	100.0	%

Total revenues increased $226,000 or 9.1%, to $2,715,000 for the three months ended June 30, 2006 compared to $2,489,000 for the three months ended June 30, 2005.

Revenues from the licensing market increased $275,000, or 15.0%, to $2,114,000 for the three months ended June 30, 2006 compared to $1,839,000 for the three months ended June 30, 2005. Increases in licensing revenue are primarily driven by new customer contracts and an increased reseller contribution. Both of these succeses are primarily due to ADAM’s ongoing sales and marketing efforts to sign new customers and the technological initiatives undertaken 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 licensing market increased to 77.9% for the three months ended June 30, 2006 compared to 73.9% for the three months ended June 30, 2005.

Revenues from product increased $32,000, or 6.8%, to $506,000 for the three months ended June 30, 2006 compared to $474,000 for the three months ended June 30, 2005. The product revenues consist primarily of CD ROM and DVD-based product sales. This increase was mainly attributable to the accounting benefit of a change in our return policy and was partially offset by a decrease in revenue from our AIA product whose upgrade had been recently released and had stronger sales in 2005. As a percent of total revenues, revenues from product were 18.6% for the three months ended June 30, 2006 compared to 19.0% for the three months ended June 30, 2005.

Revenues from professional services and other sources accounted for less than 10% of revenue for both 2006 and 2005. These revenues are typically one time items such as custom work and the sale of images and subscriptions to our newsletter. Aggregate revenues from this market were $95,000 during the three months ended June 30, 2006 which was a $81,000 or 46.0% decrease from the same period a year ago. This decrease was mainly due to fewer custom work orders this year as our recurring customers licensed our products “as-is”, and lower revenue from images which had several larger transactions in 2005.

Operating Costs and Expenses

	Three Months
	Ended June 30,									2006 % of		2005 % of
	2006		2005		$ Change			% Change		Total Rev		Total Rev

Costs of Revenues	$	509	$	474	$	35		7.4	%	18.7	%	19.0	%
General and Administrative	565		601		(36		)	-6.0	%	20.8	%	24.2	%
Product and Content Development	350		343		7			2.0	%	12.9	%	13.8	%
Sales and Marketing	454		453		1			0.2	%	16.7	%	18.2	%
Depreciation and Amortization	37		37		—			0.0	%	1.4	%	1.5	%
Total Operating Costs and Expenses	$	1,915	$	1,908	$	7		0.4	%	70.5	%	76.7	%

Cost of revenues increased $35,000, or 7.4%, to $509,000 for the three months ended June 30, 2006 compared to $474,000 for the three months ended June 30, 2005. Cost of revenues consists primarily of costs associated with (1) licensing, such as royalties and distribution license fees, (2) product sales, such as shipped product components, packaging and shipping costs and (3) amortization of capitalized software product and content development costs. The increase in cost of revenues was primarily attributable to an $18,000 increase in product costs and a $16,000 increase in amortization of capitalized software. As a percent of total revenues, cost of

revenues was to 18.7% for the three months ended June 30, 2006 and to 19.0% for the three months ended June 30, 2005.

General and administrative expenses decreased $36,000, or 6.0%, to $565,000 for the three months ended June 30, 2006 from $601,000 for the three months ended June 30, 2005. This decrease was primarily attributable to a $187,000 net decrease in stock compensation expense mainly due to the decrease in our stock price and its effect on our variably priced stock option expense, an $18,000 decrease in consulting and temporary help expenses, offset by a $96,000 increase in salaries, employee recruiting and benefits, and a $59,000 increase in our estimated bad debt expense. As a percent of total revenues, general and administrative expenses were 20.8% for the three months ended June 30, 2006 compared to 24.2% for the three months ended June 30, 2005.

Product and content development, sales and marketing, and depreciation and amortization expenses for the three months ended June 30, 2006 were materially consistent with the same peiod a year ago.

As a result of the factors described above, operating profit increased $219,000 to $800,000 for the three months ended June 30, 2006 compared to an operating profit of $581,000 for the three months ended June 30, 2005.

Other Expenses and Income

Interest income, net, was $151,000 and $66,000 for the three months ended June 30, 2006 and 2005, respectively.

For the three months ended June 30, 2006, we recorded an income tax provision of $361,000, or 38% (our estimated effective tax rate) of our pretax income of $951,000. Additionally, we performed a periodic re-evaluation of our deferred tax asset and the related valuation allowance as of June 30, 2006 and based on our analysis we reduced the valuation allowance by an additional $361,000. These two transactions fully offset one another and therefore had no effect on our net income for the three months ended June 30, 2006.

As a result of the above, we had a net income of $951,000 for the three months ended June 30, 2006 compared to a net income of $647,000 for the three months ended June 30, 2005.

Comparison of the Six Months Ended June 30, 2006 with the Six Months Ended June 30, 2005

Revenues

	Six months ended June 30,									2006 % of		2005 % of
	2006		2005		$ Change			% Change		Total Rev		Total Rev

Licensing	$	4,236	$	3,636	$	600		16.5	%	81.5	%	75.3	%
Product	742		879		(137		)	-15.6	%	14.3	%	18.2	%
Professional services/other	219		312		(93		)	-29.8	%	4.2	%	6.5	%
Total Net Revenues	$	5,197	$	4,827	$	370		7.7	%	100.0	%	100.0	%

Total revenues increased $370,000, or 7.7%, to $5,197,000 for the six months ended June 30, 2006 compared to $4,827,000 for the six months ended June 30, 2005.

Revenues from licensing increased $600,000, or 16.5%, to $4,236,000 for the six months ended June 30, 2006 compared to $3,636,000 for the six months ended June 30, 2005. The increase in licensing revenues was primarily driven by new customer contracts and increased reseller proceeds. Revenues growth was seen in several licensing customer markets including pharmaceuticals ($208,000), technology ($163,000), other healthcare ($134,000) and manged care/payer ($98,000). ADAM’s ongoing sales and marketing efforts to sign new customers and the technological initiatives undertaken 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, continues to succeed. As a percent of total revenues, revenues from licensing increased to 81.5% for the six months ended June 30, 2006 compared to 75.3% for the six months ended June 30, 2005.

Revenues from product, which consists primarily of CD ROM and DVD-based product, decreased $137,000, or 15.6%, to $742,000 for the six months ended June 30, 2006 compared to $879,000 for the six months ended June 30, 2005. This decrease was mainly attributable to the return of sales of A.D.A.M.’s Interactive Anatomy 4.0 2005 product to historical levels. Sales were above normal in 2005 due to the release of a major upgrade of this product which led to a spike in revenues. As a percent of total revenues, revenues from product decreased to 14.3% for the six months ended June 30, 2006 compared to 18.2% for the six months ended June 30, 2005.

Professional services and other revenues, which accounted for less than 10% of total revenues, for the six months ended June 30, 2006 and 2005 were $219,000 and $312,000, respectively. Other revenues consist mainly of subscriptions and sales of nonrecurring items such as images and custom work.

Operating Costs and Expenses

	Six Months
	Ended June 30,									2006 % of		2005 % of
	2006		2005		$ Change			% Change		Total Rev		Total Rev

Costs of Revenues	$	997	$	972	$	25		2.6	%	19.2	%	20.1	%
General and Administrative	1,125		1,195		(70		)	-5.9	%	21.6	%	24.8	%
Product and Content Development	710		662		48			7.3	%	13.7	%	13.7	%
Sales and Marketing	889		854		35			4.1	%	17.1	%	17.7	%
Depreciation and Amortization	75		91		(16		)	-17.6	%	1.4	%	1.9	%
Total Operating Costs and Expenses	$	3,796	$	3,774	$	22		0.6	%	73.0	%	78.2	%

Cost of revenues was $997,000 for the six months ended June 30, 2006 compared to $972,000 for the six months ended June 30, 2005. Cost of revenues consists primarily of costs associated with (1) licensing, such as royalties and distribution license fees, (2) product sales, such as shipped product components, packaging and shipping costs and (3) amortization of capitalized software product and content development costs. The $25,000, or $2.6%, increase was primarily due to an increase in amortization of capitalized software. As a percent of total revenues, cost of revenues increased to 19.2% for the six months ended June 30, 2006 compared to 20.1% for the six months ended June 30, 2005.

General and administrative expenses decreased $70,000, or 5.9%, to $1,125,000 for the six months ended June 30, 2006 from $1,195,000 for the six months ended June 30, 2005. This decrease was primarily attributable to a $291,000 net decrease in stock compensation expense mainly due to the decrease in our stock price and its effect on our variably priced stock option expense, offset by an $72,000 increase in salaries, employee recruiting and benefits, a $51,000 increase in professional fees, a $46,000 increase in our estimated bad debt expense, a $17,000 increase in taxes and licenses, and increases in rent, travel other general administrative expenses. As a percent of total revenues, general and administrative costs decreased to 21.6% for the six months ended June 30, 2006 compared to 24.8% for the six months ended June 30, 2005.

Product and content development expenses increased $48,000, or 7.3%, to $710,000 for the six months ended June 30, 2006 from $662,000 for the six months ended June 30, 2005. This increase was due to an $83,000 increase in salaries and payroll taxes, a $77,000 increase in consulting fees and a $53,000 decrease in the deferral of scope of work salary expense. These increceases to development department expenses were offset by a $163,000 increase in amounts capitalized for ongoing projects and an $11,000 increase in general production expense. As a percent of total revenues, product development expenses were to 13.7% for the six months ended June 30, 2006 and 2005.

Sales and marketing expenses increased $35,000, or 4.1%, to $889,000 for the six months ended June 30, 2006 from $854,000 for the six months ended June 30, 2005. This increase was primarily attributable to a $94,000 increase in salaries and commissions, a $27,000 increase in investor relations, and a $13,000 increase in travel. These increases were offset by a $91,000 decrease in general marketing and advertiing expenses and a $11,000 decrease in consulting expense As a percent of total revenues, sales and marketing expenses was 17.1% for the six months ended June 30, 2006 compared to 17.7% for the six months ended June 30, 2005.

Depreciation and amortization expenses decreased $16,000, or 17.6%, to $75,000 for the six months ended June 30, 2006 from $91,000 for the six months ended June 30, 2005. This decrease was primarily attributable to a $13,000 decrease in amortization of intangible assets fully amortized during 2005. As a percent of total revenues, depreciation and amortization was 1.4% for the six months ended June 30, 2006 compared to 1.9% for the six months ended June 30, 2005.

As a result of the factors described above, operating profit increased $348,000 to $1,401,000 for the six months ended June 30, 2006 compared to an operating profit of $1,053,000 for the six months ended June 30, 2005.

Other Expenses and Income

Interest income, net, was $278,000 and $102,000 for the six months ended June 30, 2006 and 2005, respectively. This $176,000 increase was primarily due to more invested funds and higher interest rates.

For the six months ended June 30, 2006, we recorded an income tax provision of $638,000, or 38% (our estimated effective tax rate) of our pretax income of $1,679,000. Additionally, we performed a periodic re-evaluation of our deferred tax asset and the related

valuation allowance as of June 30, 2006 and, based on our analysis, we reduced the valuation allowance by an additional $638,000. These two transactions fully offset one another and, therefore, had no effect on our net income for the six months ended June 30, 2006.

As a result of the above, we had a net income of $1,679,000 for the six months ended June 30, 2006 compared to a net income of $1,155,000 for the six months ended June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2006 we had cash and cash equivalents of $5,148,000, short term investments totaling $6,776,000 and working capital of $10,635,000.

Cash provided by operating activities was $1,158,000 during the six months ended June 30, 2006 as compared to $2,064,000 during the six months ended June 30, 2005. This $906,000 decrease was due primarily to the increase in the accounts receivable balance in 2006 compared to the decrease experienced in the first six months of of 2005. This effect was partially offset by increases in the 2006 over the 2005 six month net income (net of non-cash related add-backs such as depreciation and amortization and variable stock based compensation expense), an increase in the 2006 deferred revenue balance compared to the 2005 decreasing balance, an increase in the prepaid and other assets balance in 2006 versus the same six month period in 2005, and an increase in accounts payable balances.

Cash provided by investing activities was $706,000 during the six months ended June 30, 2006 as compared to cash used of $2,441,000 during the six months ended June 30, 2005. This year over year increase in cash inflow was due primarily to maturities of more short term investments, a decrease in the amount of investments purchased and decreased purchases of property and equipment.

Cash provided by financing activities increased to $466,000 during the six months ended June 30, 2006 compared to cash provided by financing activities of $158,000 during the six months ended June 30, 2005. The incease in cash provided by financing activities was attributable to cash used in 2005 to repurchase common stock to be held as treasury stock which was not repeated during the same six month period of 2006. This was offset by a decrease in proceeds from the exercise of common stock options during the six months ended June 30, 2006 compared to 2005.

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 9 (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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to risk and related changes in interest rates relates primarily to our investment portfolio (see Note 3 - Investments). As of June 30, 2006, we had $5,148,000 of cash and cash equivalents, $6,776,000 in short term investments and $44,000 in restricted time deposits. Due to the conservative and short-term nature of our investment portfolio, we believe that even a sudden 10% change in interest rates would not have a material effect on the value of the portfolio. The average yield on our short-tem investments at June 30, 2006, all of which mature between September 2006 and January 2007, was approximately 5.13%. The impact on our future interest income depends largely on the gross amount of our investment portfolio. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.

ITEM 4. 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 the end of the period covered by this report 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.

Management has evaluated any changes in our internal controls over financial reporting that occurred during the period covered in this report and has concluded there were no significant changes in our internal control over financial reporting during the 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 1A. RISK FACTORS

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.

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

We held our 2006 Annual Meeting of Shareholders on May 18, 2006. The following item was voted upon and the results of the voting were as follows:

To elect two directors, Clay E. Scarborough and Kevin S. Noland, to serve as Directors on our Board of Directors for terms of three years, expiring at the 2009 Annual Meeting of Shareholders and until their successors are elected and qualified. There were 7,158,329 and 6,693,114 votes for, and 188,491 and 653,706 votes withheld, for Mr. Scarborough and Mr. Noland, respectively.

Directors continuing in their positions are Daniel S. Howe, Mark Kishel, Robert S. Cramer, Jr., and John W. McClaugherty.

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			Employment agreement with Mark B. Adams, Chief Financial Officer.

31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

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 14, 2006	By:	/s/ KEVIN S. NOLAND
		Kevin S. Noland
		President, Chief Executive Officer and Corporate Secretary


Date: August 14, 2006	By:	/s/ MARK B. ADAMS
		Mark B. Adams Chief Financial Officer

EXHIBIT INDEX

Exhibit Number		Exhibit Description

10		Employment agreement with Mark B. Adams, Chief Financial Officer.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

FORM 10-Q

For the quarterly period ended June 30, 2006

OR

For the transition period from