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 September 30, 2008

OR

¨ 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 incorporation or organization)	(IRS Employer Identification No.)

10 10^th Street NW, Suite 500

Atlanta, Georgia 30309-3848

(Address of Principal Executive Offices, Zip Code)

1600 RiverEdge Parkway, Suite 100

Atlanta, Georgia 30328-4696

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

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

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

Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  x
		(Do not check if a smaller reporting company)

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

As of November 7, 2008, there were 9,875,440 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

A.D.A.M., Inc.

Form 10-Q for the Quarter Ended September 30, 2008

		Page No.
	Index
	Part I. Financial Information
ITEM 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)	4
	Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2008 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	19
ITEM 4.	Controls and Procedures	19
	Part II. Other Information
ITEM 1.	Legal Proceedings	20
ITEM 1A.	Risk Factors	20
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
ITEM 3.	Defaults Upon Senior Securities	20
ITEM 4.	Submission of Matters to a Vote of Security Holders	20
ITEM 5.	Other Information	20
ITEM 6.	Exhibits	20

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

A.D.A.M., Inc.

Consolidated Balance Sheets

(In thousands, except share data)

	September 30, 2008			December 31, 2007
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	2,388		$	5,425
Investments, short term		—			2,809
Accounts receivable, net of allowances of $409 and $424, respectively		2,302			3,940
Restricted cash		46			46
Inventories, net		20			65
Prepaids and other assets		855			839
Deferred income tax asset		793			793
Total current assets		6,404			13,917
Property and equipment, net		1,756			801
Intangible assets, net		10,091			9,953
Goodwill		27,546			27,468
Other assets		152			152
Deferred financing costs, net		513			852
Deferred income tax asset		6,827			6,827
Total assets	$	53,289		$	59,970
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued expenses	$	2,999		$	3,658
Deferred revenue		5,203			5,676
Current portion of long-term debt		11,000			3,250
Current portion of capital lease obligations		64			105
Total current liabilities		19,266			12,689
Capital lease obligations, net of current portion		43			85
Other liabilities		795			899
Long-term debt, net of current portion		—			16,750
Total liabilities		20,104			30,423
Shareholders’ equity
Common stock, $.01 par value; 20,000,000 shares authorized; 10,145,199 shares issued and 9,875,440 shares outstanding at 9/30/2008 and 9,958,617 shares issued and 9,688,858 shares outstanding at 12/31/2007		101			100
Treasury stock, at cost, 269,759 shares		(1,088	)		(1,088	)
Additional paid-in capital		57,831			56,406
Unrealized loss on investments		—			(166	)
Accumulated deficit		(23,659	)		(25,705	)
Total shareholders’ equity		33,185			29,547
Total liabilities and shareholders’ equity	$	53,289		$	59,970

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

3

A.D.A.M., Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues, net:
Licensing	$	6,270		$	5,822		$	19,028		$	17,380
Product		368			390			925			1,312
Professional services and other		501			464			1,498			1,553
Total revenues, net		7,139			6,676			21,451			20,245
Cost of revenues:
Cost of revenues		1,116			900			2,983			3,607
Cost of revenues – amortization		491			371			1,438			1,006
Total cost of revenues		1,607			1,271			4,421			4,613
Gross profit		5,532			5,405			17,030			15,632
Operating expenses:
Product and content development		899			1,026			3,088			3,225
Sales and marketing		2,368			1,533			6,642			4,352
General and administrative		1,245			1,501			3,838			4,123
Total operating expenses		4,512			4,060			13,568			11,700
Operating income		1,020			1,345			3,462			3,932
Interest expense		318			626			1,128			1,938
Interest income		(4	)		(69	)		(26	)		(125	)
Loss on the sale of investments		—			—			296			—
Loss on the sale of assets		18			—			18			4
Income before income taxes		688			788			2,046			2,115
Income tax expense		—			—			—			—
Net income	$	688		$	788		$	2,046		$	2,115
Basic net income per common share	$	0.07		$	0.08		$	0.21		$	0.22
Basic weighted average number of common shares outstanding		9,867			9,575			9,792			9,404
Diluted net income per common share	$	0.06		$	0.07		$	0.19		$	0.20
Diluted weighted average number of common shares outstanding		10,705			10,587			10,730			10,326

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

4

A.D.A.M., Inc.

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except share data)

(Unaudited)

	Common Stock			Treasury Stock					Additional Paid-in		Accumulated Other Comprehensive			Accumulated Deficit			Total
	Shares	Amount		Shares		Amount			Capital		Income/(Loss)
Balance at December 31, 2007	9,958,617	$	100	(269,759	)	$	(1,088	)	$	56,406	$	(166	)	$	(25,705	)	$	29,547
Comprehensive income:
Net income	—		—	—			—			—		—			2,046			2,046
Unrealized loss on investments	—		—	—			—			—		166			—			166
Total comprehensive income																		2,212
Stock-based compensation expense	—		—	—			—			624		—			—			624
Exercise of common stock options	186,582		1	—			—			801		—			—			802
Balance at September 30, 2008	10,145,199	$	101	(269,759	)	$	(1,088	)	$	57,831	$	—		$	(23,659	)	$	33,185

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

5

A.D.A.M., Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities
Net income	$	2,046		$	2,115
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,767			1,336
Deferred financing cost amortization		339			258
Loss on sale of assets		18			4
Loss on sale of investments		296			—
Stock-based compensation expense		624			495
Changes in assets and liabilities:
Accounts receivable		1,638			507
Inventories		45			(18	)
Prepaids and other assets		(16	)		667
Accounts payable and accrued liabilities		(659	)		(950	)
Deferred revenue		(473	)		1,028
Other liabilities		(104	)		(327	)
Net cash provided by operating activities		5,521			5,115
Cash flows from investing activities
Purchases of property and equipment		(1,305	)		(354	)
Proceeds from sale of property and equipment		2			7
Additional cost of previous acquisition		(77	)		(139	)
Net change in restricted cash		—			2,148
Software product and content development costs		(1,577	)		(971	)
Proceeds from sale of investments		2,716			—
Purchase of investments		(37	)		(132	)
Net cash provided by (used in) investing activities		(278	)		559
Cash flows from financing activities
Payment on note payable		—			(1,500	)
Payment on long term debt		(9,000	)		(2,000	)
Proceeds from exercise of common stock options		802			1,089
Repayments on capital leases		(82	)		(100	)
Net cash used in financing activities		(8,280	)		(2,511	)
Increase (Decrease) in cash and cash equivalents		(3,037	)		3,163
Cash and cash equivalents, beginning of period		5,425			4,446
Cash and cash equivalents, end of period	$	2,388		$	7,609
Interest paid	$	910		$	2,265

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

6

A.D.A.M., Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2008

1. BUSINESS AND BASIS OF PRESENTATION

Business

We provide high-quality health information services and benefits technology solutions to healthcare organizations, benefit brokers, employers, consumers, and educational institutions. With an industry-leading employee and human resources technology system and one of the largest consumer health information libraries in the world, our products empower consumers to become better informed about their health and wellness, manage their personal benefits and health account finances, while helping organizations reduce the costs of healthcare and benefits administration. Our products address a large and growing consumer driven healthcare market.

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-K for the fiscal year ended December 31, 2007. 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 nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any future period.

Net income per common share

Net income per share is computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic net income per share is computed 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 convertible debt) 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 nine months ended September 30, 2008 and 2007 is as follows (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Net income	$	688	$	788	$	2,046	$	2,115
Weighted average common shares outstanding – basic		9,867		9,575		9,792		9,404
Weighted average common share equivalents		838		1,012		938		922
Weighted average common shares outstanding – diluted		10,705		10,587		10,730		10,326
Net income per share:
Basic	$	0.07	$	0.08	$	0.21	$	0.22
Diluted	$	0.06	$	0.07	$	0.19	$	0.20
Anti-dilutive stock options and convertible debt outstanding		1,820		1,041		1,719		1,041

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Reclassifications

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation. In addition, we reclassified $1,936,000 from cash and cash equivalents to short-term investments at December 31, 2006. As a result cash provided by investing activities decreased by $888,000 for the nine months ended September 30, 2007 from the amount originally reported, and the cash balances on the statement of cash flows were revised accordingly.

Recently Adopted Accounting Standards

SFAS No. 157 – On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 provides a definition of fair value, establishes a framework for measuring fair value under GAAP, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value; therefore, it does not expand the use of fair value in any new circumstance. We adopted SFAS 157 on a prospective basis, and the impact had no effect on our results of operations, financial position or cash flows.

Recently Issued Accounting Standards

SFAS No. 141(R) – In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS 141(R)), which replaces SFAS No. 141, “Business Combinations”. SFAS 141(R) establishes principles and requirements for how an acquiring company recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measure the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We will adopt SFAS 141(R) at the time of any business combinations with an acquisition date on or after January 1, 2009, and management will assess each transaction on a case-by-case basis as they occur.

SFAS No. 162 – In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities (the Hierarchy). The Hierarchy within SFAS 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of SFAS 162 will not have a material effect on our consolidated financial statements because we have previously utilized the guidance within SAS 69.

FSP FAS No. 142-3 – In April 2008, the FASB directed the FASB Staff to issue FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” (SFAS 142). FSP FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other generally accepted accounting principles. FSP FAS 142-3 is effective for us beginning January 1, 2009. We are currently evaluating the potential impact of the adoption of FSP 142-3 on our results of operations, financial position and cash flows.

8

2. Debt and Restricted Cash

Long-term debt

In conjunction with the acquisition of Online Benefits, Inc. (“OnlineBenefits”), we entered into a credit agreement (“Credit Agreement”) with Capital Source Finance LLC (“Lender”). The Credit Agreement, with related balances at September 30, 2008, is summarized below (numbers in column are in thousands):

$2,000,000 revolver with Lender—principal repayable in full in August 2011; interest at LIBOR plus 4% (6.81% at 9/30/08) 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	$	—
$20,000,000 term loan with Lender—principal repayable in quarterly installments of varying amounts ($1,250,000 from December 2008 through September 2010, and $1,000,000 in December 2010), interest same as revolver (6.81% at 9/30/08); prepayment premium of either 2% (prior to first anniversary) or 1% (between first and second anniversary) of prepaid amount		6,000
$5,000,000 convertible note with Lender—principal repayable in full in August 2011; interest at LIBOR plus 2.5% (5.31% at 9/30/08) 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 our common stock at a conversion price per share as defined in the Credit Agreement		5,000
	$	11,000

In connection with the Credit Agreement, we entered into a Conversion and Registration Rights Agreement dated as of August 14, 2006, which specifies terms applicable to the conversion of the convertible note and provides the Lender with certain registration rights with respect to the shares issuable on conversion of the convertible note.

In addition to the above terms, there is a provision for a prepayment of 50% of 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 our equity stock and any existing and future subsidiaries, and (ii) a pledge of 100% of our subsidiaries’ capital stock. There are customary financial covenants for earnings as well as ratios related to total debt to earnings, debt and interest due to earnings, interest to earnings, and capital expenditures, as defined in the Credit Agreement. Our credit facility generally prohibits us from paying dividends on our common stock.

The Credit Agreement contains several financial covenants calculated on a quarterly basis. As of September 30, 2008, the Company was not in compliance with its debt covenants, therefore all of the related debt has been reclassified as current. The Company is currently working with the Lender on an amendment which would modify certain terms of the agreement, including certain financial covenants. In the event of an acceleration of the debt, the Company would seek funding from other sources.

The deferred financing fees related to this debt were a gross amount of $1,340,000 with an accumulated amortization of $827,000 and $488,000 at September 30, 2008 and December 31, 2007, respectively.

3. Investments

Short-term investments at December 31, 2007 included the following (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Mutual Funds
—AIM Floating Fund	$	2,975	$	385	$	(551	)	$	2,809

Investments are recorded at fair value based on current market prices and are classified as available-for-sale. 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.

9

4. Intangible Assets

Intangible assets are summarized as follows (in thousands):

	Estimated amortizable lives (years)	September 30, 2008			December 31, 2007
Intangible assets:
Capitalized software products and content	2 – 3	$	7,819		$	6,242
Purchased intellectual content	3		1,431			1,431
Purchased customer contracts	2		333			333
Purchased customer relationships	15		8,800			8,800
Intangible assets, gross			18,383			16,806
Accumulated amortization:
Capitalized software products and content			(5,277	)		(4,278	)
Purchased intellectual content			(1,431	)		(1,431	)
Purchased customer contracts			(333	)		(333	)
Purchased customer relationships			(1,251	)		(811	)
Accumulated amortization			(8,292	)		(6,853	)
Intangible assets, net		$	10,091		$	9,953

Amortization expense for the three and nine months ended September 30, 2008 was $491,000 and $1,438,000, respectively. For the three and nine months ended September 30, 2007, amortization expense was $371,000 and $1,006,000, respectively.

5. Income Taxes

For the three and nine months ended September 30, 2008, we recorded an income tax provision of $261,000 and $777,000, 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 September 30, 2008. Based on our analysis for the three and nine months ended September 30, 2008, we reduced the valuation allowance by $261,000 and $777,000. These two transactions fully offset one another and therefore our income tax provision was $0 for the three and nine months ended September 30, 2008. The September 30, 2008 deferred tax asset balance of $7,620,000 also remained unchanged from December 31, 2007. As a result of realizing this additional $777,000 of our deferred tax asset, we reduced the related valuation allowance to $13,017,000 at September 30, 2008 from $13,794,000 at December 31, 2007.

For the three and nine months ended September 30, 2007, we recorded an income tax provision of $299,000 and $804,000, 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 September 30, 2007. Based on our analysis for the three and nine months ended September 30, 2007, we reduced the valuation allowance by $299,000 and $804,000. These two transactions fully offset one another and therefore our income tax provision was $0 for the three and nine months ended September 30, 2007. The September 30, 2007 deferred tax asset balance of $5,500,000 also remained unchanged from December 31, 2006. As a result of realizing this additional $804,000 of our deferred tax asset, we reduced the related valuation allowance to $17,158,000 at September 30, 2007 from $17,953,000 at December 31, 2006.

In 2007 we recognized an income tax benefit of $1,510,000 as a result of an adjustment to the deferred tax asset and related valuation allowance based on our analysis of realizability as described above. At September 30, 2008, we had Net Operating Loss (“NOL”) and Research and Development (“R&D”) credit carryforwards available for tax purposes of approximately $57,540,000 and $1,020,000, respectively, which will expire on December 31 in years 2008 through 2022 and 2008 through 2023, respectively. Approximately $10,090,000 of NOL carryforwards was acquired as a result of the acquisition of Integrated Medicine Corp. (“IMC”) in December of 2001. We also acquired $29,510,000 of NOL carryforwards as a result of the acquisition of OnlineBenefits in August 2006. Internal Revenue Code (“IRC”) Section 382 limits the utilization of NOL carryforwards when a change in ownership, as defined by the Internal Revenue Service, occurs. The acquisitions of IMC and OnlineBenefits resulted in ownership change within the meaning of IRC Section 382. The total annual IRC Section 382 limitation is approximately $60,000 for IMC and $1,470,000 for OnlineBenefits. Of the total $10,090,000 of NOLs acquired from IMC, the pre-change NOLs estimated to be available for use after the application of the IRC Section 382 limitation is approximately $1,260,000. Of the total $29,510,000 NOLs acquired from OnlineBenefits, the NOLs estimated to be available for use after the application of the IRC Section 382 limitation is approximately $26,300,000.

10

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” on January 1, 2007. Tax benefits from all tax positions taken were recognized, and there has been no material adjustment to any carryforwards NOL or R&D credits as a result of the implementation of FIN 48. Therefore, there are no material unrecognized tax benefits and related FIN 48 tax liabilities at September 30, 2008. In addition, future changes in the unrecognized tax benefits will likely have no impact on the effective tax rate due to the existence of the valuation allowance.

As of September 30, 2008, there is no accrual for interest or penalties related to uncertain tax positions since the tax benefits have not been included in prior income tax return filings. Accrued interest relating to uncertain tax positions would be recorded as a component of interest expense and penalties related to uncertain tax positions would be recorded as a component of general and administrative expenses.

The tax years 2005 to 2007 remain open to examination by the major taxing jurisdictions which we are subject to. Additionally, upon inclusion of the NOL and R&D credit carry forward tax benefits in future tax returns, the related tax benefit for the period in which the benefit arose may be subject to examination.

6. Stock-based Compensation

In accordance with SFAS 123(R), we recorded $303,000 and $624,000 of stock-based compensation expense for the three and nine months ended September 30, 2008, respectively, related to employee stock options. We recorded a stock-based compensation expense of $255,000 and $495,000 for the three and nine months ended September 30, 2007, respectively. We expect to incur approximately $831,000 of expense over a weighted average of 1.71 years for all unvested options outstanding at September 30, 2008.

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 stock options. The Black-Scholes method uses several assumptions to value an option. The following assumptions were used:

• Expected Dividend Yield—because we do not currently pay dividends, the expected 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 a United States Treasury bond with maturity equal to the expected term of the option; and

• Expected Life of Stock Awards—is based on historical experience that was modified based on expected future changes.

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

Nine Months Ended September 30,	2008			2007
Expected Dividend Yield		—			—
Expected Volatility in Stock Price		45.01	%		50.45	%
Risk-Free Interest Rate		2.17	%		4.85	%
Expected Life of Stock Awards – Years		3.50			3.40
Weighted Average Fair Value at Grant Date	$	2.60		$	2.64

In 2002, our Board of Directors and shareholders approved the 2002 Stock Incentive Plan, under which 1,500,000 shares of common stock were reserved pursuant to the grant of incentive or non-qualified stock options to full-time employees and key persons. Under this plan, a number of additional shares are reserved annually. This number is 3% of the number of shares of stock outstanding on January 1 of each year, not to exceed 250,000 shares annually. 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 this plan generally expire ten years from the date of grant.

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The following table summarizes stock option activity for the nine months ended September 30, 2008:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2007	2,744,325		$	4.45
Granted	252,500		$	7.39
Exercised	(186,582	)	$	4.31
Canceled or expired	(140,726	)	$	5.86
Outstanding at September 30, 2008	2,669,517		$	5.15
Exercisable at September 30, 2008	2,087,792		$	4.77

As of September 30, 2008 and December 31, 2007 there were 2,087,792 and 2,172,492 options exercisable, respectively. During the nine months ending September 30, 2008, the aggregate intrinsic value of those options exercised was $546,000. As of September 30, 2008, the aggregate intrinsic value of options exercisable was $3,445,000. Aggregate intrinsic value was calculated by multiplying the number of options times the amount by which our market price at September 30, 2008 exceeded the strike price for each option. The market price at September 30, 2008 was $5.48.

On January 3, 2008, we awarded a total of 6,820 shares of restricted stock to our Board of Directors with a grant date fair value of $8.80 per share. These shares have an aggregate intrinsic value of $60,000 and are being expensed from the date issued until the vesting date of December 31, 2008. At September 30, 2008, total unrecognized compensation expense related to restricted stock was $13,000.

7. Related Party Transactions

Investment with BeBetter Networks, Inc.

At September 30, 2008 and December 31, 2007, we had a 2% investment in BeBetter Networks, Inc. (“BeBetter”). As of September 30, 2008 and December 31, 2007, our Chairman of the Board of Directors held an approximate 2% voting interest in BeBetter. 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.

At September 30, 2008 and December 31, 2007, the carrying value of our investment in BeBetter was $0. We have no plans to make additional investments in BeBetter in the future.

Investment with ThePort Network, Inc.

As of September 10, 2008, ThePort Network, Inc. (“ThePort”) converted its outstanding notes into a Preferred Stock designated Series A Preferred Stock at $0.30 per share, including notes held by our chairman. The Chairman of our Board of Directors also currently serves as the Chairman of the Board of Directors and Chief Executive Officer of ThePort. As part of the conversion, A.D.A.M. exchanged its prior Series A Preferred Stock, which had been purchased at $0.80 per share, for the new Series A Preferred Stock at $0.30 per share. As a result of the conversion, at September 30, 2008, we held an approximate 5.76% voting interest in ThePort, compared to an approximate 29% at December 31, 2007. The Chairman of our Board of Directors held an approximate 37% voting interest in ThePort at September 30, 2008, compared to 9% at December 31, 2007, and held a convertible note from ThePort in the amount of approximately $790,000 and $3,574,000 at September 30, 2008 and December 31, 2007, respectively. Two of the other directors of A.D.A.M. also own equity interests in ThePort. The investment is being accounted for under the equity method.

At September 30, 2008 and December 31, 2007, the carrying value of the investment in ThePort was $0. We have not adjusted our investment below zero for our share of ThePort’s losses since we have not provided or committed to provide any additional financial support to ThePort.

8. Contingencies

We indemnify 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 future results of operations.

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9. Concentrations

No one customer accounted for more than 10% of our revenues during the three and nine months ended September 30, 2008 or 2007.

10. Operating Segments

Statement of Financial Accounting Statements No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for reporting information about operating segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our Chief Executive Officer. We have two operating segments which aggregate into one reportable segment under SFAS 131. Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have the similar economic characteristics, and if the segments are similar in each of the following areas: nature of product and services, nature of the production process, class of customer for products and services, and the methods used to distribute the products and services.

We sell a portfolio of products related to the healthcare market. Sales and certain financial data is available by geographic regions and product lines. The largest product groups (our two operating segments) relate to our health information products, and our benefits communications and broker systems. Our chief operating decision-maker, our Chief Executive Officer, reviews financial information in aggregate and by products when making decisions for allocating resources and evaluating financial performance. Periodic decisions may be made for the two product groups due to customer strategies, product releases, market conditions, acquisitions, or staffing resources, but the common long term growth outlook for each segment remains constant. The two aggregated operating segments have similar economic characteristics and the aggregation into one reportable segment is not done to hide unprofitable segments.

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

GENERAL

A.D.A.M. provides high-quality health information services and benefits technology solutions to healthcare organizations, benefit brokers, employers, consumers, and educational institutions. Our portfolio of products helps consumers better understand their health and wellness, manage their personal benefits and health account finances, while helping organizations reduce the costs of healthcare and benefits administration. We also provide software applications for the education market that are designed to teach students gross anatomy and human physiology.

Our health information products include a rich library of interactive health content and interactive 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 Assessments, 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 Benergy™ communications system (“Benergy”) is used to communicate to employees about employer provided benefits, assist employees in the selection and enrollment process, and then promote and facilitate the use of their benefit programs. Benergy provides employees a self-service access and enables employees to better understand their benefit choices and make informed decisions about selection of their health insurance and other employer sponsored benefit plans.

Our broker agency management system includes a product suite called Advisor Tools. Within the Advisor Tool suite, we have several products brokers use to help them manage their business and communicate with their employer clients. One of the principal products within the Advisor Tool suite is AgencyWare, a client relationship management system specific to brokerage firms. AgencyWare assists brokers in quoting and selling insurance, managing commissions, tracking client interactions and other critical functions central to their business. Another application, Client Community, is a communications tool that facilitates communications between the broker and the human resources/benefits professional. Currently, Client Community is deployed to approximately 40,000 employers and prospective clients.

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 GAAP. 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 derive revenues from the following sources: (1) electronically delivered content, which includes content license and postcontract customer support (PCS) revenue, (2) hosted content, which includes content license, hosting and PCS revenue, (3) professional services and (4) product sales. 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) collectability is reasonably assured. When a contract includes multiple elements, such as content and 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.

Electronically delivered content, which includes content license and PCS revenue, is recognized in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” with the entire amount recognized ratably over the term of the license agreement.

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Hosted content, which includes content license, hosting and PCS revenue, is recognized using GAAP principles for service revenue recognition as per Emerging Issues Task Force (EITF) Issue No. 00-3. The entire amount of revenue is recognized ratably over the term of the license agreement, which matches the service that is being provided.

Professional service revenues are generally recognized upon completion and acceptance of the service by the customer. For revenue arrangements in which we sell through a reseller, we recognize revenue only after an agreement has been finalized between the customer and our authorized reseller and the content has been delivered to the customer by the reseller.

Product sales revenues are generally recognized at the time title passes to customers, distributors or resellers.

• 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. 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. The allowance for returns in prior years has not been significant.

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 revenues 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 revenues 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

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the fair value of an asset 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 accompanying 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.

• Stock-based Compensation

We account for stock-based compensation in accordance with SFAS No. 123(R). Under the fair value recognition provisions of this statement, stock-based compensation cost is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes Method option-pricing model and is recognized as expense over the requisite service period. The Black-Scholes Method requires various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the option pricing model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 2008 with the Three and Nine Months Ended September 30, 2007

Revenues (numbers in table in thousands)

	Three Months Ended September 30,				$ Change			% Change		Nine Months Ended September 30,				$ Change			% Change
	2008		2007							2008		2007
A.D.A.M., Inc. Consolidated
Licensing	$	6,270	$	5,822	$	448		7.7	%	$	19,028	$	17,380	$	1,648		9.5	%
Product		368		390		(22	)	(5.6	)%		925		1,312		(387	)	(29.5	)%
Professional services and other		501		464		37		8.0	%		1,498		1,553		(55	)	(3.5	)%
Total Net Revenues	$	7,139	$	6,676	$	463		6.9	%	$	21,451	$	20,245	$	1,206		6.0	%

Total net revenues increased 6.9%, or $463,000 to $7,139,000, for the three months ended September 30, 2008 over the three months ended September 30, 2007 compared to the total net revenues increase of 6.0%, or $1,206,000 to $21,451,000, for the nine months ended September 30, 2008 over the nine months ended September 30, 2007. For the periods shown above, over 85% of those revenues came from the licensing of our health information services and benefits technology solutions.

Licensing revenues are recognized on a monthly basis, either based on usage, expiration of monthly minimums, or on a straight-line basis over the life of the contract. Therefore fluctuation in licensing revenue is due to new contracts, customer usage levels or contract terminations. We annualize each contract’s committed value and use changes to that value, from new sales or terminations, to calculate a net client retention rate.

Our increase in licensing revenue is a result of new customer contracts and solid client retention from our health information products. We derive those revenues primarily from healthcare organizations and healthcare information technology companies. The increase in new customer contracts is a result of the increased staffing in sales and marketing personnel, product enhancements, and an increase in the demand for online consumer-focused health information.

Revenues from product sales decreased by 29.5%, or $387,000, to $925,000 for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Our product revenues consist primarily of CD-based product sales to the educational market. Revenues were lower in this area due to a market shift from CD-based products to online solutions. We are planning to invest in new product development of online solutions to meet the current market requirements.

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Professional services and other revenue are derived from products such as custom implementation services, flexible spending account services, direct to consumer products, and sales of nonrecurring products such as books, publications, and medical images.

Operating Costs and Expenses (numbers in table in thousands)

Certain reclassifications have been made for sales related expenses reclassified from cost of revenues to sales and marketing for 2007.

	Three Months Ended September 30,						$ Change			% Change		Nine Months Ended September 30,						$ Change			% Change
	2008			2007								2008			2007
A.D.A.M., Inc. Consolidated
Cost of revenues	$	1,116		$	900		$	216		24.0	%	$	2,983		$	3,607		$	(624	)	(17.3	)
Cost of revenues – amortization		491			371			120		32.3	%		1,438			1,006			432		42.9	%
Product and content development		1,362			1,387			(25	)	(1.8	)%		4,665			4,196			469		11.2	%
Development capitalization		(463	)		(361	)		(102	)	28.3	%		(1,577	)		(971	)		(606	)	62.4	%
Sales and marketing		2,368			1,533			835		54.5	%		6,642			4,352			2,290		52.6	%
General and administrative		1,245			1,501			(256	)	(17.1	)%		3,838			4,123			(285	)	(6.9	)%
Total Operating Cost and Expenses	$	6,119		$	5,331		$	788		14.8	%	$	17,989		$	16,313		$	1,676		10.3	%

Cost of revenues increased $216,000, or 24.0%, to $1,116,000 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Cost of revenues consists primarily of costs associated with royalties, distribution license fees, and personnel support for our products and services. Our increase in cost of revenues is associated with the higher levels of revenues and increased customer service personnel and related support costs to service the increase in clients. Conversely, cost of revenues decreased $624,000, or 17.3%, to $2,983,000 for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2008. This year to date decrease is primarily the result of lower royalty costs from the elimination or expiration of certain royalty agreements related to our healthcare products.

Cost of revenues – amortization increased $120,000, or 32.3%, to $491,000 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Similarly, cost of revenues – amortization increased $432,000, or 42.9%, to $1,438,000 for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Cost of revenues – amortization consists of costs associated with amortization of capitalized customer lists, software product, and content development costs. Cost of revenues – amortization for customer lists and software product related to the acquisition of OnlineBenefits was $188,000 for the three months ended September 30, 2008 and $565,000 for the nine months ended September 30, 2008. The amortization increases primarily relate to new benefit technology product releases and other product enhancements that were made in the second half of 2007.

Product and content development expenses increased $469,000, or 11.2%, to $4,665,000 for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Product and content development expenses consist of salary and costs associated with engineering and developing our product and service offerings. The increase in development is due to investments to enhance the functionality of Benergy. Development capitalization also increased $606,000, or 62.4% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Due to the increase in capitalization, the net expense decreased $138,000 for the nine months ended September 30, 2008 compared to the same period in the prior year.

Sales and marketing expenses increased 54.5%, or $835,000 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, and 52.6%, or $2,290,000 for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Sales and marketing expenses include the personnel costs of sales and marketing personnel and their related travel and support costs and the costs of our marketing and public relations programs. This increase is primarily attributable to the hiring of additional sales and customer relations personnel and related expenses in order to expand our sales presence, pursue additional market opportunities, and enhance our customer service levels.

General and administrative expenses decreased $256,000, or 17.1%, to $1,245,000 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. This decrease was the result of reduced

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personnel in the general and administrative area resulting from our prior efforts to streamline and automate internal processes costs, controls and the consolidation of certain functions between Online Benefits and A.D.A.M.

Operating profit decreased $325,000 to $1,020,000 for the three months ended September 30, 2008 compared to an operating profit of $1,345,000 for the three months ended September 30, 2007. Operating profit also decreased $470,000 to $3,462,000 for the nine months ended September 30, 2008 compared to an operating profit of $3,932,000 for the nine months ended September 30, 2007. This decrease is directly related to the increase in sales and marketing personnel which was undertaken to increase our future growth rates. These increases were partially offset by the reduction of royalty fees and reduction of general and administrative personnel, which are also expected to carryover in future periods.

Other Expenses and Income

Interest expense was $318,000 and $626,000 for the three months ended September 30, 2008 and 2007, respectively. Interest expense was $1,128,000 and $1,938,000 for the nine months ended September 30, 2008 and 2007, respectively. This decrease in interest expense was primarily due to the $14,000,000 repayment on the term loan.

Interest income was $4,000 and $69,000 for the three months ended September 30, 2008 and 2007, respectively. Interest income was $26,000 and $125,000 for the nine months ended September 30, 2008 and 2007, respectively. These decreases were primarily due to the decrease in cash associated with the advance payments of the long-term note.

We recognized a loss on the sale of interest bearing short-term investments of $296,000 during the three months ended March 31, 2008 as short term investments of $2,716,000 were sold. A portion of these funds were used to make a $5,000,000 early payment on long-term debt in January 2008.

Net Income

As a result of the factors described above, net income decreased $100,000 to $688,000 for the three months ended September 30, 2008 compared to net income of $788,000 for the three months ended September 30, 2007. For the nine months ended September 30, 2008 and 2007, net income was $2,046,000 and $2,115,000, respectively, a decrease of $69,000.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2008, we had current assets of $6,404,000, including cash and cash equivalents of $2,388,000, and $19,266,000 in current liabilities, or a negative working capital of $12,862,000. Working capital includes $5,203,000 in deferred revenue for which we have already received payments. Instead of this affecting cash flow in the future, we are obligated to provide services related to those payments. There was also a $2,000,000 payment made at the end of September 2008 that was in advance of the original required repayment schedule on the long-term note debt associated with the OnlineBenefits acquisition. Current liabilities were increased during the quarter due to a reclassification of $6,000,000 from long-term debt to current liabilities because the Company did not meet all of the covenants in our Credit Agreement. The Company is currently working with the Lender on an amendment which would modify certain terms of the agreement, including certain financial covenants. Excluding the deferred revenue, the early debt payment of the long-term note, and the debt reclassification, working capital would have been $341,000. Our working capital is affected by the timing of each period end in relation to items such as payments received from customers, payments made to vendors, and internal payroll and billing cycles, as well as the seasonality within our business. Accordingly, our working capital, and its impact on cash flow from operations, can fluctuate materially from period to period. 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.

Cash provided by operating activities was $5,521,000 during the nine months ended September 30, 2008, as compared to cash provided of $5,115,000 during the nine months ended September 30, 2007. This $406,000 increase was due to an increase in cash provided by accounts payable and accrued liabilities of $290,000 and an increase in cash provided by other liabilities of $223,000. The increase in cash provided by net income (net of non-cash related add-backs such as depreciation and amortization, loss on the sale of investments, and stock-based compensation expense) of $882,000, and additional cash provided by accounts receivable of $1,131,000, was offset by a decrease in cash provided by deferred revenue of $1,501,000 and a decrease in cash provided by prepaid and other assets of $683,000.

Cash used in investing activities was $278,000 during the nine months ended September 30, 2008, as compared to cash provided of $559,000 during the nine months ended September 30, 2007. During the nine months ended September 30, 2008, short-term investments of $2,716,000 were sold, being offset by $1,305,000 in property and equipment purchases and $1,577,000 in software product and content development costs. During the nine months ended September 30, 2007, cash was increased due to the change in restricted cash related to the payment of the OnlineBenefits note payable of $2,148,000, being offset by $354,000 in property and equipment purchases and $971,000 in software product and content development costs.

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Cash used in financing activities was $8,280,000 during the nine months ended September 30, 2008, as compared to cash used of $2,511,000 during the nine months ended September 30, 2007. The $5,769,000 increase in cash used was primarily due to the $9,000,000 in payments made in 2008, related to the long-term debt associated with the OnlineBenefits acquisition. Payments of $2,000,000 related to the long-term debt and the payment of the OnlineBenefits note payable of $1,500,000 were paid during the same period in 2007.

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 “believe,” “expect,” “estimate,” “intend” 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

We do not have operations of a material nature that are subject to risks of foreign currency fluctuations, nor do we use derivative financial instruments. During the three months ended March 31, 2008, short-term investments of $2,716,000 were sold. As of September 30, 2008, we currently hold no short-term investments.

As of September 30, 2008, we had a total of $11,000,000 in variable rate debt at differing interest rates tied to LIBOR. If the interest rates on our existing variable rate debt were to increase by 10 percentage points over the next twelve months, we would incur $1,100,000 of additional interest expense over a 12-month period and would potentially be in default of the long-term debt covenants. LIBOR has fluctuated significantly due to market disruptions and is likely to fluctuate in the future. We have the ability to convert the interest on our term loan from LIBOR plus 4.00% per annum to Prime plus 2.75% per annum. We have the ability to convert the interest on our convertible loan from LIBOR plus 2.50% per annum to Prime plus 1.25% per annum.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2008, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

There has been no material change in the information provided in Item 1A of the Form 10-K Annual Report for the year ended December 31, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of September 30, 2008, the Company was not in compliance with all the covenants of its Credit Agreement. The Company is in the process of obtaining an amendment to the Credit Agreement which would modify certain terms of the agreement, including certain financial covenants. At September 30, 2008, the balance related to the Credit Agreement was $11,000,000 and the Company was current on all payments required under the Credit Agreement.

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

We held our 2008 Annual Meeting of Shareholders on May 21, 2008. The following item was voted upon and the results of the voting were as follows:

To elect one director, Robert S. Cramer, to serve on our Board of Directors for a term of three years, expiring at the 2011 Annual Meeting of Shareholders and until his successor is elected and qualified. There were 7,803,500 votes for, and 440,588 votes withheld, for Mr. Cramer.

Directors continuing in their positions are Daniel S. Howe, Mark Kishel, Kevin S. Noland, and Clay E. Scarborough.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS.

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

Exhibit Number	Exhibit Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

	A.D.A.M., Inc. (Registrant)
Date: November 14, 2008	By:	/s/ KEVIN S. NOLAND
		Kevin S. Noland President and Chief Executive Officer (principal executive officer)
Date: November 14, 2008	By:	/s/ MARK B. ADAMS
		Mark B. Adams Chief Financial Officer and Corporate Secretary (principal financial officer)

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