UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------


                                   FORM 10-QSB

|X|  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the quarterly period ended June 30, 2000

                                       or

|_|  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _______

                           Commission File No. 0-22947

                                ADATOM.COM, INC.
                       ----------------------------------
            (Exact name of Small Business registrant in its charter)


          Delaware                                             43-1771999
          --------                                             ----------
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                        Identification Number)


920 Hillview Court, Suite 190, Milpitas, CA                        95035
-------------------------------------------                     ----------
  (Address of principal executive offices)                      (Zip Code)


Issuer's telephone number,:                                    (408) 935-7979


Check whether the registrant (1) 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
ninety (90) days.
YES  [X]    NO  [_]


State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest praciticablepracticable date: As of August 11, 2000
there were 16,313,166 shares outstanding of the Company's common stock.

                                       1

<PAGE>


                               TABLE OF CONTENTS


                                                                    PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

     Balance Sheet as of June 30, 2000............................... 3

     Statement of Operations for the quarter and six months ended
     June 30, 2000 and 1999 ......................................... 4

     Statement of Cash Flows for the six months ended
     June 30, 2000 and 1999  ........................................ 5

     Notes to the Financial Statements .............................. 6

Item 2. Management's Discussion and Analysis or Plan of Operations... 7


PART II.  OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds ...................32

Item 4. Submission of Matters to a Vote of the Security Holders .....33

Item 6. Exhibits and Reports on Form 8-K  ...........................34

SIGNATURES ..........................................................35

EXHIBITS............................................................E-1



                                       2

<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>

                                ADATOM.COM, INC.
                                  BALANCE SHEET
                                   (unaudited)
                                                               June 30, 2000
                                                               -------------
<S>                                                              <C>
Current assets:
     Cash                                                        $    15,000
     Accounts receivable                                              62,000
     Notes from receivable franchisee                                  8,000
     Investment joint venture                                        500,000
     Inventory                                                       428,000
     Prepaid expenses and other                                       47,000
                                                               -------------
             Total current assets                                  1,060,000

Other assets:
     Fixed assets net                                                465,000
     Deposits                                                         29,000
     Organization expense, net                                        33,000
     Web development costs, net                                      337,000
                                                               -------------
             Total other assets                                      864,000
                                                               -------------
                TOTAL ASSETS                                     $ 1,924,000
                                                               =============

Current Liabilities:
     Accounts payable                                            $   926,000
     Current lease contracts payable and notes                        55,000
     Accrued expenses                                                314,000
             Total current liabilities                             1,295,000

Long-term liabilities
     Lease contracts payable                                          80,000
     Note payable to shareholders                                    316,000
                                                               -------------
             Total liabilities                                     1,691,000

Equity
     Preferred stock, $.01 par value; authorized 5,000,000
             shares, issued and outstanding - 1,100 shares         1,100,000
     Common stock $.01 par value; 50,000,000 authorized;             162,000
             16,161,499 issued; 16,146,499 outstanding
     Paid in capital                                              17,934,00
     Accumulated Deficit                                        (18,927,000)
     Common stock notes receivable                                  (21,000)
     Treasury Stock - at cost (15,000 shares)                       (15,000)
                                                               -------------
             Stockholders Equity                                    233,000
                                                               -------------
                TOTAL LIABILITY AND STOCKHOLDER EQUITY          $ 1,924,000
                                                               =============

 The accompanying notes are an integral part of these financial statements

</TABLE>


                                       3

<PAGE>

<TABLE>
<CAPTION>

                                ADATOM.COM, INC.
                             STATEMENT OF OPERATIONS
                                   (unaudited)



                                          Three Months      Thee Months         Six Months          Six Months
                                         Ended June 30,    Ended June 30,     Ended June 30,      Ended June 30,
                                              2000              1999               2000                1999
                                        ------------------------------------------------------------------------
<S>                                      <C>               <C>               <C>                  <C>

Product revenue                            $   445,000       $   161,000        $   888,000          $  261,000

Cost of product revenue                        428,000           149,000            861,000             237,000
                                        --------------       -----------        -----------          ----------
                                                17,000            12,000             27,000              24,000

Operation expenses:
    Research and development                   178,000           147,000            542,000             279,000
    Selling, general and administrative      1,873,000           440,000          3,697,000             628,000
                                        --------------       -----------        -----------          ----------
                                             2,051,000           587,000          4,239,000             907,000

                                        --------------       -----------        -----------          ----------
            Loss from operations            (2,034,000)         (575,000)        (4,212,000)           (883,000)

Other income (expense)
    Internet support income                          0           (38,000)                 0                   0
    Miscellaneous income (expense)                   0             6,000              1,000               6,000
    Interest expense, net                        4,000            28,000              8,000                   0
                                        --------------       -----------        -----------          ----------
                                                 4,000            (4,000)             9,000               6,000

            Loss before income taxes        (2,030,000)         (579,000)        (4,203,000)           (877,000)
Provision for income taxes, all current              0             1,000              1,000              1,000
                                        --------------       -----------        -----------          ----------
            Net Loss                     $  (2,030,000)      $  (580,000)       $(4,204,000)         $ (878,000)
                                        ==============       ===========        ===========          ==========


    Basic and diluted loss per share            ($0.13)           ($0.11)            ($0.28)             ($0.17)

    Weighted average number of
        common shares outstanding           16,146,499         5,174,582         15,462,195           5,174,582

                   The Accompanying notes are an integral part of these financial statements

</TABLE>


                                       4

<PAGE>

<TABLE>
<CAPTION>


                                ADATOM.COM, INC.
                             STATEMENT OF CASH FLOWS
                                   (unaudited)


                                                         Six Months         Six Months
                                                       Ended June 30,     Ended June 30,
                                                            2000               1999
                                                       ---------------------------------
<S>                                                     <C>                 <C>

Cash flows from operating activities:
     Net loss                                            $ (4,204,000)       $  (878,000)
     Adjustments To reconcile net (loss) to net
        Cash provided (used) by operating activities:
           Depreciation and amortization                       59,000             16,000
           Decrease (increase) in operating assets
               Accounts receivable                             47,000            (11,000)
               Inventory                                     (188,000)            (8,000)
               Prepaid expenses and other                     124,000            (14,000)
           Increase (decrease) in operating liabilities
               Accounts payable                              (452,000)           286,000
               Accrued Expenses                                 7,000             58,000
               Customer deposits                             (201,000)            15,000
                                                       ---------------       -----------
Net cash used by operating activities                      (4,808,000)          (536,000)

Cash flows from investing activities:
     Investment Joint Venture (CPTNC)                        (500,000)                 0
     Payments received on franchisee notes                      1,000              1,000
     receivable
     Acquisition of fixed assets                             (144,000)            (9,000)
                                                       ---------------       -----------
Net cash provided (used by investing activities)             (643,000)            (8,000)

Cash flows from financing activities:
     Proceeds from sales and issuance of stock              5,041,000                  0
     Proceeds from notes and contracts payable                      0            250,000
     Proceeds from shareholder                                      0            255,000
     Net borrowings on line of credit                               0            (46,000)
     Net borrowings from stock holders                        316,000             (6,000)
                                                       ---------------       -----------
Net cash provided by financing activities                   5,357,000            453,000

Net increase (decrease) in cash                               (94,000)           (91,000)
Cash and restricted cash, beginning of period                 109,000             91,000
                                                       ---------------       -----------
Cash and restricted cash, end of period                  $     15,000        $         0
        SUPPLEMENTAL DISCLOSURE OF CASH FLOW
        INFORMATION
     Cash paid during year for:
        Interest                                                    0             48,000


       The accompanying notes are an integral part of these financial statements

</TABLE>


                                       5

<PAGE>
                                ADATOM.COM, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                         SIX MONTHS ENDED JUNE 30, 2000

                                   (Unaudited)


1.       ACCOUNTING POLICIES

Unaudited Interim Financial Information

      The accompanying unaudited condensed financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and the
applicable rules of the Securities and Exchange Commission. Accordingly,
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month periods ended June 30, 2000 June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1999.


Use of Estimates

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


Legal Proceedings

         From time to time Adatom.com, Inc. (the Company) is subject to legal
proceedings and claims in the ordinary course of business, including claims
alleging infringement of trademarks, copyrights and other intellectual property
rights. The Company currently is not aware of any such legal proceedings or
claims that it believes will have individually or in the aggregate a material
adverse effect on its business, prospects, financial condition or operating
results.


Net Loss Per Share

      Net loss per share basic and diluted is calculated using the weighted
average number of common shares outstanding during the period. Diluted net

                                       6

<PAGE>

loss per share excludes the impact of stock options and warrants, as the effect
of their inclusion is antidilutive as of the periods reported on.



ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         Statements in this Form 10-QSB and the following "Management's
Discussion and Analysis or Plan of Operations" that are not statements or
descriptions of historical facts are forward-looking statements that are subject
to risks and uncertainties. Words such as "expect," "intends," "believes,"
"plans," "anticipates" and "likely" also identify forward-looking statements.
All forward-looking statements are based on current facts and analyses. Actual
results may differ materially from those currently anticipated due to a number
of factors including, but not limited to, history of operating losses,
anticipated future losses, competition, future capital needs, the need for
market acceptance, dependence upon third parties, disruption of vital
infrastructure and intellectual property rights, government regulation, and
other risks. See the section entitled "MANAGEMENT DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -Risk Factors" for a discussion of some of those risks. All
forward-looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995. Additional information on factors that may affect
the business and financial results of the Company can be found in filings of the
Company with the Securities and Exchange Commission.

         The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.


GENERAL

About Adatom.com, Inc.

         Adatom.com, Inc. is a growing creator of electronic marketplaces world-
wide, enabling the most direct interfaces between buyers and sellers. Currently,
these marketplaces range from an Internet superstore (www.adatom.com) in the
United States to an evolving global network connecting the China marketplace to
the world. Adatom has substantive relationships in China, including strategic
partnerships with the China Product Trade Net Center, the Yangling Agricultural
Hitech Zone, ShenZhen Bay Industrial, Education and Research Center and the
China Federation of Industrial Economics. Adatom's Internet superstore
(www.adatom.com) offers more than three million items for the home, the
individual and the office with a comprehensive mix of name brand products in 29
product categories. Adatom.com also provides branded e-Commerce solutions to
other online retailers through its proprietary e-Commerce Solution Program (ESP)
based on a turnkey model of Web site enablement, customer service and
fulfillment.

WWW.Adatom.com

         The Company has created an Internet-based retail store, WWW.ADATOM.COM,
where most goods flow directly from suppliers to the consumers. The Company also
outsources warehouse facilities for stocking certain products and filling demand
from this inventory where it is more practical to do so. The system attempts to
reduce costs and expenses by removing the need for middlemen. In addition to its
superstore site, Adatom provides ancillary services such as website development,
administrative support and e-commerce infrastructure to other retailers who
desire to sell their products on the Internet. The Company's revenues are
derived principally from the sale of goods to consumers and businesses. All
sales and their corresponding expenses are recognized as revenues when the goods
are shipped to the customer.

Adatom.com E-commerce Solution Program (ESP)

         ESP is a business to business e-commerce program designed to work with
companies and individuals seeking to gain an instant presence in the e-commerce
marketplace by creating a branded store. The Company is an e-commerce enabler
and provides all of the associated fulfillment services. The ESP affiliate
receives a commission on sales which allows companies to launch their
"own" stores without the start-up burdens and high development costs often
associated with such ventures. The responsibility and

                                       7

<PAGE>

cost of customer acquisition is borne by the ESP affiliate while the costs
incurred by the Company will be relatively low. Products, order management
systems, and customer support representatives will be shared with other
e-tailers, including WWW.ADATOM.COM. ESP is anticipated to receive significant
attention in the marketplace, through its ability to quickly and efficiently
launch new e-tailers. The ESP program was launched in January 2000, with the
first customer iEntertainment Network. To date the Company has signed 84 ESP
contracts, but has not yet received any significant revenue from them. However,
the Company expects significant revenues in the last Quarter of 2000.

Global Ecommerce Marketmaker Solutions (GEMS)

         Adatom's role as a global ecommerce marketmaker is in its early
developmental stages. In March 2000, Adatom signed an exclusive joint venture
agreement with the CPTNC (China Product Trade Net Center) to form a US-China
marketplace. The CPTNC was formed by the Chinese government to facilitate the
systematic and efficient distribution of Chinese manufactured goods. A second
agreement was signed in April 2000 between Adatom and YAHIDZ (Yangling
Agricultural Hi-Tech Industrial Demonstration Zone) to develop and implement an
agricultural electronic marketplace to source and sell agricultural farm
machinery, seeds, fertilizer, pesticides and crops. Adatom has also signed a
third agreement with ShenZhen Bay Industrial, Education and Research Center
(SBIERC) to develop and facilitate an electronic marketplace with China Hi-Tech
Exchange Network and China IT Product Purchasing Net for international
e-commerce. Adatom.com signed a fourth agreement in May 2000 with China
Federation of Industrial Economics (CFIE), to establish and develop an
electronic marketplace for a marketing, sale, and distribution system between
China and the U.S.


CHINA JOINT VENTURES

         In March 2000, the Company signed an exclusive agreement with the China
Product Trade Net Center (CPTNC). The CPTNC is an organization officially
launched in 1997 with the support of several Chinese governmental and private
institutions to facilitate increased sales and ensure systematic and efficient
worldwide distribution of Chinese manufactured goods.

         The CPTNC initiative covers both consumer and industrial goods and aims
to use Internet technology as its primary information and distribution medium.
The Company and the CPTNC will establish a joint venture company located in
Beijing, China, to work directly with the CPTNC. The joint venture company will
develop and implement the systems, Internet applications, services and support
to enable the marketing and sale of industrial and consumer goods produced in
China into the U.S. as well as goods produced in the U.S. into the Chinese
marketplace exclusively through Adatom.com.

         The scope of this agreement includes the establishment of an electronic
business-to-business and business-to-consumer marketing, selling and
distribution system with back-end factory quality and level of service
standards. This electronic system will be accessible in both English and
Chinese. Additional support will be provided by subsidiary CPTNC organizations
including the centers for transportation, trade, Internet and method of
payments.

                                       8

<PAGE>

          This joint venture is presently conducting business through manual
methods, receiving and sourceing products and service requests from both China
and the US. implementation of the e-commerce network is in process and remains
subject to submission of a mutually acceptable business plan. Present plans are
for the GEMS revenues to begin in the fourth quarter of 2000.

         In August Adatom.com, Inc. was selected as an exclusive agent by the
CPTNC, to obtain a turn-key operation including equipment, technology and
training for the implementation of fiber optics production in China at an
estimated cost of $150,000,000 (150 million dollars) U.S.

         In March 2000, Adatom signed a cooperative agreement with Yangling
Agricultural Hi-Tech Industrial Demonstration Zone (YAHIDZ) to among other
things develop and implement a Hi-Tech agricultural electronic marketplace.
YAHIDZ is a Chinese agricultural organization established in 1997 by the China
National State council and 14 Chinese ministries, commissions and provincial
governments. In this joint effort, Adatom.com, Inc. is the exclusive overseas
e-commerce partner of YAHIDZ. Adatom and YAHIDZ will source, provide, market and
sell industrial and consumer agricultural products between the United States and
China. The timetable for implementation of this joint venture has not been
finalized and will require various China business licenses.

         Adatom.com has established a joint venture agreement with the ShenZhen
Bay Industrial, Education and Research Center (SBIERC) to develop and facilitate
an electronic marketplace with China Hi-Tech Exchange Network and China IT
Product Purchasing Net for international e-commerce. This electronic marketplace
will provide information on products and business opportunities related to
hi-tech products, electronics and information technology. In addition to the
e-commerce enablement, the cooperation will develop an online hi-tech education
platform and will establish a venture capital fund to invest in the activation
of Chinese hi-tech companies. Furthermore, a "Global Economic Network Forum"
will be instituted to educate and inform on economic strategy development,
industry orientation, new century network technology and human resources.
Located in South China, SBIERC is an elite high-tech industrial park that was
founded by city government officials of ShenZhen - the leader in China for
industrial products; the unparalleled management team at Peking University - the
top University in China with a strong industrial sector; and Hong Kong Science
and Technology University - the most westernized hi-tech University in China.
SBIERC will work exclusively with Adatom and will contribute financial resources
to enable the Company to establish an instant e-commerce presence for SBIERC.
The time table for implementation of this joint venture has not been finalized,
will require various China business licenses and is also subject to mutually
acceptable business plan.

         Adatom.com has established a joint venture agreement with China
Federation of Industrial Economics (CFIE) a national organization that oversees
and coordinates all Chinese trade associations. The network consists of hundreds
of trading associations such as the Electronic Association of China, The Chinese
Textile Association and the Chinese Toy Manufacturers Associations, etc. from
various industries and offers the best product prices on the market. China
Telecom and China Broadcasting will participate. CFIE is unique as a national
organization.

                                       9

<PAGE>

They coordinate all Chinese trade associations and most of the large companies
in China are members.

OPERATIONS

         The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.

         During the second quarter of 2000, the Company continued its activities
of establishing and marketing its Adatom Ecommerce Solution Program (ESP) and
building brand name recognition through its superstore with affiliate programs
and agreements with web shopping portals. During the second quarter Adatom
consummated three significant agreements with three different major Chinese
organizations discussed above. During 2000 the major promotion offered by
Adatom.com was free shipping on orders.

         The following table indicates the first six months user sessions,
orders received, and revenue for 1999 compared with  2000.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------
                                                     No. of Orders
                              User Sessions            Received             Revenue
------------------------------------------------------------------------------------
<S>                           <C>                    <C>                    <C>

1st  Six months 1999              429,350                1,882              $261,000
------------------------------------------------------------------------------------
1st Six months 2000             3,057,397                7,176              $888,000
------------------------------------------------------------------------------------
Change 2000 vs. 1999            2,628,047                5,294              $627,000
------------------------------------------------------------------------------------

</TABLE>

         User sessions have increased by 612% from the first half of 1999 to the
first half of 2000. During that same time period the number of orders increased
281% and revenue increased approximately 240%. The Company has seen steady
quarter over quarter growth in user sessions, as can be seen in the following
chart.

<TABLE>
<CAPTION>

                     ADATOM.com

              User Sessions by Quarter
              ------------------------
          <S>                      <C>

          Fourth Quater 1998         53,490
          First Quarter 1999         62,743
          Second Quarter 1999       366,607
          Third Quarter 1999        517,548
          Fourth Quarter 1999     1,078,633
          First Quarter 2000      1,485,476
          Second Quarter 2000     1,571,921

</TABLE>

RESULTS OF OPERATIONS:

         SIX MONTHS PERIODS ENDING JUNE 30, 2000 AND 1999. Revenues of approxi-
mately $888,000 were generated during like period ended June 30, 2000, an
increase of approximately 240% compared to revenues of $261,000 during the
period ended June 30, 1999. This increase in revenue is attributable to the
growth of sales in the Company's superstore. During the same period the number
of orders increased 281%.

         During the first six months the Company offered free shipping on orders
to build the customer base and brand name recognition. We believe that this
promotion was successful in increasing order volume and building brand
awareness. The freight costs incurred during this promotion reduced gross
profit. Management anticipated this impact and believed that the expected
increase in customers, customer satisfaction, and brand name recognition
justified the cost incurred. The average cost of this program is approximately
$21.30 per order.

         According to a study of 400 online retailers by Shop.org and the Boston
Consulting Group. "The average Net pure-play spent $82 to acquire a customer

                                       10

<PAGE>

last year, a 95 percent increase over the $42 spent on average in 1998." The
study goes on to say "Online firms spent an unsustainable 119 percent of their
revenues on marketing last year."

         Adatom continues to show order increases from the investment in free
shipping as a less costly and more effective method of converting user sessions
into orders versus traditional off line customer acquisition costs i.e.
advertising.

         As of June 30, 1999 the Company had gross margins of 9.2%. The gross
margin as of June 30, 2000 was 3.0% including free shipping. For the first
quarter of 2000 the Company had a gross margin of 2.2%. The gross margin for the
second quarter of 2000 was 3.8%. Again this is with free shipping which is being
eliminated in the third quarter of 2000.

         Given the new capabilities at our web site we will do selective
shipping promotions seeking to increase margin as well as continue to stimulate
sales.

         Total operating expenses for the first two quarters and first half of
1999 and 2000 are shown in the following table.

<TABLE>
<CAPTION>


           Analysis of Operating Expenses 1999 vs. 2000

                      1999        2000       Variance       % Change
<S>                  <C>        <C>          <C>              <C>

1st  quarter        $320,000   $2,188,000   $1,868,000        584%
2nd  quarter         587,000    2,051,000    1,464,000        249%
Six months           907,000    4,239,000    3,332,000        367%

</TABLE>

While there has been a significant increase in operating costs from 1999 to 2000
the rate of growth is slowing and there was a 6.3% decrease from the first
quarter to the second quarter of 2000. This modest decrease reflects
management's commitment to control cost and maximizes the use of funds, as well
as the scalability of our model as volume increases. The decrease in cost
occurred at the same time there was an increase in user sessions and orders. The
comparative year-to-date increase reflects the necessary expenses of growing and
expanding the business and is primarily the result of putting into place the
processes and personnel required to support increased orders and sales levels.
The chart below highlights some of the more significant cost areas. The
increased salaries and related expenses are due to increased headcount to handle
business growth, increased requirements in ESP and to position the Company to
begin to embark on its GEM program. Rent increased to accommodate the larger
staff and phone costs increased as call volume increased. In the early stages of
a company's development it may need to invest substantial amounts in capital
equipment and infrastructure, which may seem to be relatively high compared to
reoccurring operating costs. Adatom has hired a Chief Technology Officer, a
controller, and a Vice President of Operations since the second quarter of last
year, which has also caused an increase in compensation expense over the year
earlier period. Additionally the President started being compensated for his
services in the last half of 1999. The increased legal and accounting expense
reflects the effect of additional legal advisors and assistance needed in
connection with the Company's growing business, periodic financing transactions,
and regulatory filings.

                                       11

<PAGE>

<TABLE>
<CAPTION>


---------------------------------------------------------------------------------------------------------
   Analysis of Selected S G & A Expenses:            6/30/00        6/30/99       VARIANCE       % CHANGE
---------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>           <C>              <C>

Payroll                                            $1,397,000      $229,000      $1,168,000         510%
On Line Advertising                                   196,000       138,000          58,000          42%
Rent                                                  199,000        49,000         150,000         306%
Insurance (health)                                    159,000        10,000         149,000        1490%
Legal & Accounting Svc                                302,000        94,000         208,000         221%
Telephone                                              97,000        28,000          69,000         246%
                                             ------------------------------------------------------------
                                                   $2,350,000      $548,000      $1,802,000         329%
---------------------------------------------------------------------------------------------------------

</TABLE>

The following table depicts staffing levels at each month end during the second
quarter 2000 and 1999. Staffing increased in the second quarter 1999 from 11 in
May to 18 in June. During the same time period in 2000 staffing decreased from
64 to 57. The increase from June 30, 1999 to June 30, 2000 is 39 persons, or
217%.

<TABLE>
<CAPTION>

         -----------------------------------------------------------------------------------------
         TOTAL EMPLOYEES
         (BOTH FULL & PART TIME)                   Q2-1999          Q2-2000               VARIANCE
         -----------------------------------------------------------------------------------------
         <S>                                       <C>              <C>                   <C>

         APRIL                                        11              61                     50
         -----------------------------------------------------------------------------------------
         MAY                                          11              64                     53
         -----------------------------------------------------------------------------------------
         JUNE                                         18              57                     39
         -----------------------------------------------------------------------------------------

</TABLE>


         During the next nine months the Company may hire a number of additional
employees. We anticipate that most SG&A expenses will continue to increase.
Management will continue to monitor cost and staffing to keep expenditures as
low as possible consistent with execution of the business plan.

         Other income (expense) increased approximately 50% to $9,000 in 2000
from $6,000 in 1999.

         Net loss increased by approximately 3,788% from $878,000 in the first
six months of 1999 to $4,204,000 in the first six months of 2000. Net Losses
decreased from the first Quarter 2000 to the second quarter of 2000 by 6.6%.


LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 2000, the Company had cash of approximately $15,000. During
July 2000 certain officers (see page E- 1 of this document) loaned to the
Company $135,000. During August 2000 an additional $42,000 was loaned by certain
of the offices to the Company. On July 31, 2000 certain senior officers elected
to defer compensation, in the aggregate amount of approximately $70,000, until
such time as additional funding was available.

         Since its inception, our business has incurred significant losses, and
as of June 30, 2000, had an approximate accumulated deficit of $18,857,000. As a
result, there is an uncertainty about the Company's ability to continue

                                       12

<PAGE>

as a going concern, which was stated in our auditor's report on the Company's
financial statements for the 1999 fiscal year. The Company is expected to incur
operating losses for the foreseeable future due to a high level of expenditures
in the areas of operations, website development and other investments designed
to enhance the Company's products and services and maintain Internet
capabilities. The Company intends to increase marketing and promotional spending
in an effort to increase revenues from its superstore. However, we cannot be
sure that the Company will generate sufficient revenues to ever achieve or
sustain profitability.

         The operations of the Company are still subject to all the risks
inherent in the establishment of a new business enterprise, including the
absence of a substantial operating history. The likelihood of the success of the
Company must be considered in light of the uncertainties, expenses, and delays
frequently encountered in connection with the development of any new business.

         There was a net decrease in cash during the first six months of 2000 of
$94,000. Net cash used in operating activities primarily consisted of the
Company's net loss of approximately $4,204,000. Additionally, accounts payable
decreased by $452,000, inventory increased by $188,000, customer deposits
decreased by $201,000, and other sources of cash equaled an increase of $237,000
resulting in net cash used in operations of $4,808,000. The decrease in
customer's deposits represents a management decision to match as closely as
possible the charging of the customer's credit card with the actual shipment of
the order. Management believes that the customer's shopping experience at Adatom
is enhanced with this change.

         Net cash used in investing activities during the first six months of
2000 was approximately $643,000, $500,000 of which was the Company's investment
in the CPTNC joint venture and $144,000 related to acquisition of fixed assets.

         Net cash from financing activities was $5,357,000 for first half of
2000. In December 1999, Mr. Barton, the President and CEO made short-term
non-interest bearing loans in the amount of $500,000 to the Company for working
capital purposes. Mr. Barton also made an additional non-interest-bearing loan
on February 1, 2000 in the amount of $200,000, also for working capital
purposes. In February 2000, Adatom.com issued 172,057 shares of common stock to
Mr. Barton in settlement of $500,000 of these notes payable. In March 2000 the
remaining $200,000 was repaid.

         Mr. Barton made another loan to the Company of $200,000 during the
month of May 2000. Michele Ware, a Vice President of the Company made a loan of
$115,620 during the month of June. Both of these loans were outstanding as of
June 30, 2000 and represent $316,000 of the net cash provided by financing
activities. Both of these loans are outstanding as of August 14, 2000.

         During the month of July, Mr. Barton loaned the Company $105,000, Dr.
Jagannathan the Executive Vice President and Chief Technology Officer loaned the
Company $10,000, and Ms. Ware loaned the Company $20,000. During the month of
August Ms. Ware loaned the Company $42,000. Total loans outstanding to officers
of the Company amount to $493,000 all of which are unsecured. Officers have no
commitment to make additional loans in the future.

                                       13

<PAGE>

         During March 2000, the Company executed documents for a private
placement of two million shares of common stock yielding proceeds of $4 million.
The sale was made to several accredited investors. The Company used the proceeds
for working capital, including the payment of accrued liabilities of
approximately $1.5 million.

         During June 2000, the Company issued 1,100 shares of its Series A
Convertible Preferred Stock. Each share of Preferred Stock has a stated value of
$1,000 and is convertible into common stock at a conversion price equal to 85%
of the average of the two lowest closing bid prices of the common stock on the
Nasdaq SmallCap Market over the ten trading days preceding the date of
conversion ("Market Price") subject to a maximum conversion price of 115% of the
Market Price on the issue date of June 22, 2000, or $2.03. The number of shares
of common stock that may be acquired upon conversion is determined by dividing
the stated value of the number of shares of Preferred Stock to be converted by
the conversion price. Also, certain additional amounts calculated on the basis
of 6% of the stated value from June 22, 2000, the issue date of the Preferred
Stock, to the date of conversion would also be converted into common stock using
the same formula.

         Since there is no minimum conversion price, the number of shares of
common stock that holders of preferred stock may acquire upon conversion would
simply continue to increase if the stock price declines. Since upon conversion
holders of Preferred Stock acquire common stock for at least a 15% discount to
the market price, they have an incentive to sell these shares of common stock at
market price either concurrently with, or shortly after, conversion, in order to
profit from the difference between the market price and the discounted
conversion price. The holders of the preferred stock also could engage in short
sales of our common stock, after delivering a notice of conversion to us, which
could contribute to a decline in the market price of the common stock and give
them the opportunity to profit from that decrease by covering their short
position with shares acquired upon conversion for at least a 15% discount to the
prevailing market price. The conversion of the preferred stock and subsequent
sale of a large number of shares of common stock acquired upon conversion during
periods when the market price of the common stock declines, or the possibility
of such conversions and sales, may exacerbate the decline or impede increases in
the market price of the common stock.

         Net proceeds of $1,030,000 from the issuance of Preferred Stock was
used for working capital purposes and together with the $4,000,000 accounts for
the balance of the $5,357,000 cash provided by financing activities.



         Additional funds will be needed to grow the business. Adequate funds
for these and other purposes on terms acceptable to the Company, whether through
additional equity financing or other sources, may not be available when needed
or may result in significant dilution to existing stockholders. Furthermore, the
Company's lack of tangible assets to pledge as security for debt financing could
prevent the Company from obtaining bank or similar debt financing. Failure to
obtain adequate financing would have a material adverse effect on the Company
and could result in cessation of the

                                       14

<PAGE>

Company's business. The Company estimates that it will require a minimum of at
least $5,500,000 in additional capital to adequately implement its business plan
and sustain and expand its sales and marketing activities through December 31,
2000. The Company cannot be sure that it will be able to raise these funds.


         At this time the Company anticipates that an additional investment of
$20.0 million will be needed to fund the CPTNC joint venture and an investment
of $7.5 million will be need to fund the YAHIDZ joint venture and $12.5 million
will be needed to fund the ShenZhen (SBIERC) joint venture and $15.5 million
will be needed to fund the CFIE joint venture. The Company is pursuing raising
the necessary fund in Asian and Europen markets, in addition to U.S. markets.
The Company cannot provide any assurance that it will be able to raise these
funds.


RISK FACTORS

         The risks described below are not the only ones facing our company.
Additional risks not presently, known to us or that we currently deem immaterial
may also impair our business operations. Our business, financial condition or
results of operations could be materially adversely affected by any of these
risks. The trading price of our common stock could decline due to any of these
risks. Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results and stockholder
values of the company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Stockholders
are cautioned not to put undue reliance on any forward-looking statements. In
addition, the Company does not have any intention or obligation to update
forward-looking statements, even if new information, future events or other
circumstances have made them incorrect or misleading. For those statements, the
Company is relying on the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors could affect the
future results of the company, and could cause results to differ materially from
those expressed in such forward-looking statements.


WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE
FUTURE.

Adatom, Inc was incorporated in October 1996 but did not begin to generate
Internet revenues until October 1998. Accordingly, we have had only a limited
operating history upon which to evaluate our business and prospects. We will
encounter risks and difficulties that are frequently encountered by early stage
companies in new and rapidly evolving markets. Many of these risks are described
in more detail in this section. If we are unsuccessful in addressing these risks
and uncertainties, our business, results of operations and financial condition
will be harmed. We have incurred significant losses, as of March 31, 2000 the
accumulated deficit was $16,825,000. The accumulated deficit as of June 30, 2000
was $18,857,000. The accumulated deficit as of June 30, 1999 was $2,821,000. The
Company incurred net losses of $2,173,000 for the quarter ended March 31, 2000
and $2,031,000 for the quarter ended June 30, 2000, for year to date losses of
$4,204,000. The net

                                       15

<PAGE>

loss for the quarter ended March 31, 1999 was $298,000 and the net loss for the
quarter ended June 30, 1999 was $585,000, for year to date losses as of June 30,
1999 of $883,000. There is an uncertainty about our ability to continue as a
going concern. We anticipate our losses will increase from current levels
because we intend to increase our costs and expenses related to:

   o  brand development, marketing and other promotional activities to increase
      our revenue;

   o  the expansion of our inventory management and order fulfillment
      infrastructure;

   o  the continued development of our Web site, transaction-processing systems
      and network infrastructure;

   o  the expansion of our product offerings and Web site content; and

   o  strategic relationship development.

         Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. We are an early stage company and expect to incur substantial operating
losses for the foreseeable future as we incur significant operating expenses and
research and development expenses and make investments, to enhance our line of
products and services and establish Internet capabilities. We may never generate
sufficient revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future.


WE WILL NEED ADDITIONAL FINANCING TO FUND OUR BUSINESS AND THE FAILURE TO OBTAIN
FINANCING WOULD MOST LIKELY RESULT IN CESSATION OF OUR BUSINESS.

         We are dependent upon raising additional capital for working capital
and to finance our future plans for expansion. We estimate that we will
require a minimum of $5.5 million to adequately implement our business plan and
sustain and expand our sales and marketing activities through December 31, 2000.
We have experienced negative cash flow from operations from our inception and
expect to experience significant negative cash flow from operations for the
foreseeable future. We need additional funds to sustain and expand our sales and
marketing activities and arrangements, particularly if there is a shift in the
type of Internet services that are developed and ultimately receive customer
acceptance. Adequate funds for these and other purposes on terms acceptable to
us, whether through additional equity financing, debt financing or other
sources, may not be available when needed or may result in significant dilution
to existing stockholders.

         Failure to obtain financing would most likely result in cessation of
our business. Our lack of tangible assets to pledge has to date prevented us
from obtaining bank or similar debt financing, and will probably continue to do
so in the future. In their reports on the audits of our financial statements for
each of the years in the two-year period ended December 31,

                                       16

<PAGE>

1999, our independent auditors included an explanatory paragraph in each of
their reports because of the uncertainty that we could continue in business as a
going concern. Any raise of additional capital will dilute all of our
stockholders.

         We estimate that approximately $55.5 million will be required to fund
the four separate joint venture agreements signed with the four Chinese
organizations.


OUR COMMON STOCK PRICE MAY BE VOLATILE.

         The market price for our Common Stock is likely to be highly volatile
and subject to wide fluctuations in response to factors including the following:


   o  actual or anticipated variations in our quarterly operating results;

   o  announcements of technological innovations or new products or services by
      us or our competitors;

   o  changes in financial estimates by securities analysts;

   o  conditions or trends in the Internet and/or online commerce industries;

   o  changes in the economic performance and/or market valuations of other
      Internet, online commerce or retail companies;

   o  announcements by us or our competitors of significant acquisitions,
      strategic partnerships, joint ventures or capital commitments;

   o  additions or departures of key personnel;

   o  potential litigation.

         The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. Broad market and industry
factors may adversely affect the market price of our Common Stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of their stock, many companies have been the subjects of
securities class action litigation. If we were sued in a securities class
action, we could incur substantial costs and a diversion of management's
attention and resources could have an adverse affect on our stock price.


IF WE CANNOT SATISFY NASDAQ'S MAINTENANCE REQUIREMENTS, IT MAY DELIST OUR COMMON
STOCK FROM ITS SMALLCAP MARKET AND WE MAY NOT HAVE AN ACTIVE PUBLIC MARKET FOR
OUR COMMON STOCK. THE ABSENCE OF AN ACTIVE TRADING MARKET WOULD LIKELY MAKE THE
COMMON STOCK AN ILLIQUID INVESTMENT.

         Our common stock is quoted on the Nasdaq SmallCap Market. To continue
to be listed, we are required to maintain net tangible assets of $2,000,000 or a
market capitalization of $35 million and our common stock must maintain a
minimum bid price of $1.00 per share. From time to time our stock has had a
minimum bid price of less than $1.00 per share. We may not be able to continue
to satisfy those requirements. If this occurs, trading in the common stock would
be conducted in the over-the-counter market in the so-called "pink sheets" or,
if available, the "OTC Bulletin Board Service." As a

                                       17

<PAGE>

result, an investor would likely find it significantly more difficult to dispose
of, or to obtain accurate quotations as to the value of, our shares.

         The conversion of our convertible preferred stock may have consequences
that could cause Nasdaq to delist our common stock. The conversion of our
preferred stock and resale of the common stock acquired upon conversion, or the
possibility of the conversion of our preferred stock and resale of our common
stock, may depress or inhibit increases in the market price of our common stock.
As a result, the minimum bid price for our common stock may decline below $1.00.
Nasdaq also may delist our common stock if it deems it necessary to protect
investors and the public interest. If Nasdaq determines that the returns on our
convertible preferred stock are excessive compared with the returns received by
the holders of our common stock, and those excess returns were determined to be
egregious, Nasdaq could delist our common stock.


IF OUR COMMON STOCK IS DELISTED, IT MAY BECOME SUBJECT TO THE SEC'S "PENNY
STOCK" RULES AND MORE DIFFICULT TO SELL.

         SEC rules require brokers to provide information to purchasers of
securities traded at less than $5.00 and not traded on a national securities
exchange or quoted on the Nasdaq Stock Market. If our common stock becomes a
"penny stock" that is not exempt from these SEC rules, these disclosure
requirements may have the effect of reducing trading activity in our common
stock and making it more difficult for investors to sell. The rules require a
broker-dealer to deliver a standardized risk disclosure document prepared by the
SEC that provides information about penny stocks and the nature and level of
risks in the penny market. The broker must also give bid and offer quotations
and broker and salesperson compensation information to the customer orally or in
writing before or with the confirmation. The SEC rules also require a broker to
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction before a transaction in a penny stock.


RISK OF INTERNATIONAL EXPANSION.

         We plan to expand our presence in foreign markets especially China. We
have relatively little experience in purchasing, marketing and distributing
products or services for these markets and may not benefit from any
first-to-market advantages. It will be costly to establish international
facilities and operations, promote our brand internationally, and develop
localized Web sites and stores and other systems. We may not succeed in our
efforts in these countries. If revenues from international activities do not
offset the expense of establishing and maintaining foreign operations, our
business prospects, financial condition and operating results will suffer. As
the international online commerce market continues to grow, competition in this
market will likely intensify.

         In addition, governments in foreign jurisdictions may regulate Internet
or other online services in such areas as content, privacy, network security,
encryption or distribution. This may affect our ability to conduct business
internationally.

                                       18

<PAGE>

WE FACE RISKS AND UNCERTAINTIES WITH RESPECT TO OUR PROPOSED JOINT VENTURES IN
CHINA.

         Our agreements with the CPTNC, SBIERC, CFIE, and YAHIDZ contemplate the
formation of joint ventures in China. We may not be successful in establishing
any of these joint ventures. We may not succeed with either of these joint
ventures or in entering the China market, and each venture will be subject to
all of the risks attendant to a start-up business as well as those specific to
operating in China. The risks attendant to a start-up business are similar to
those relating to our existing business. We will be subject to various risks
relating to operating in China, including:
o        various new and unfamiliar regulatory requirements;
o        the risks of being subject to a different legal system in which
         prior court decisions may not have as much precedential value as
         in common law countries;
o        the risk of inadequate or inconsistent enforcement of intellectual
         property rights;
o        issues relating to currency exchange;
o        fluctuations in exchange rates and restrictions on repatriation of
         currency;
o        the risks associated with doing business in a country with a more
         volatile economy; o the effects of possible political and economic
         changes and disruptions;
o        establishment of and change in government policies and regulations
         regarding the use of the internet, including taxation, censorship
         and personal privacy issues;
o        tariffs and other barriers;
o        difficulties in staffing and managing foreign operations.

         We also face the risk of diverting management and other personnel from
our existing business to development of the joint ventures. If we are
unsuccessful in addressing these risks and uncertainties, our business, results
of operations and financial condition will be harmed.


WE DEPEND HEAVILY UPON MARKETING ARRANGEMENTS. WITHOUT THEM, OUR BUSINESS WILL
BE ADVERSELY AFFECTED.

         We rely heavily on certain marketing arrangements with other companies
that have websites to attract shoppers to purchase our products. We have entered
into marketing arrangements with a number of existing organizations with a
definable user base. Our ability to generate revenues from online commerce
depends, among other things, upon the increased traffic, purchases, advertising
and sponsorships that we generate through our marketing arrangements. We cannot
be sure that other companies will continue these relationships with us, or, if
continued that they will be on terms favorable to us. Our inability to enter
into new marketing arrangements or to maintain our existing arrangements would
have a material adverse effect on us.


                                       19

<PAGE>


WE RELY ON SUPPLIERS FOR OUR RETAIL MERCHANDIZE AND SHIPMENTS TO CUSTOMERS. LOSS
OF THESE RELATIONSHIPS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

         Our current suppliers may not continue to sell merchandise to us on
current terms. We may not be able to maintain our current arrangements with
suppliers or be able to establish new or extend current supplier relationships
to ensure acquisition of merchandise in a timely and efficient manner and on
acceptable commercial terms. Loss of these relationships could have a material
adverse effect on us. We also rely on most of our suppliers to process and ship
merchandise directly to customers and where required to install merchandise on
our customers' premises. We have limited control over the shipping procedures of
our suppliers, and shipments by these suppliers have at times been subject to
delays. If the quality of service provided by such suppliers falls below a
satisfactory standard or if our level of returns exceeds our expectations, our
business will be materially adversely affected.


OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE AND FLUCTUATIONS IN OUR QUARTERLY
RESULTS MAY CAUSE VOLATILITY IN OUR STOCK VALUATION.

         As a result of our limited operating history, it is difficult to
accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base planned operating expenses. We base our
current and future expense levels on our operating plans and estimates of future
net sales, and our expenses are to a large extent fixed. Sales and operating
results are difficult to forecast because they generally depend on the volume
and timing of the orders we receive. As a result, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
We may also be unable to increase our spending and expand our operations in a
timely manner to adequately meet customer demand to the extent it exceeds our
expectations. We expect to experience significant fluctuations in our future
quarterly operating results due to a variety of factors, many of which are
outside of our control which include, without limitation:
o        our ability to attract new customers at reasonable cost and at a
         steady rate, retain existing customers, or encourage repeat purchases
         and maintain customer satisfaction;
o        decreases in the number of visitors to our Web site or our inability to
         convert visitors to our Web site into customers;
o        seasonality;
o        our ability to manage inventory levels and to manage fulfillment
         operations;
o        our inability to adequately maintain, upgrade and develop our Web site,
         transaction-processing systems or network infrastructure;
o        the announcement or introduction of new sites, services and products by
         our competitors;
o        price competition in the industry;
o        the level of merchandise returns experienced by us;
o        the level of traffic on our web site;
o        fluctuations in the amount of consumer spending;


                                       20

<PAGE>

o        the termination of existing, or failure to develop new, strategic
         marketing relationships pursuant to which we receive exposure to
         traffic on third-party Web sites;
o        increases in the cost of online or offline advertising;
o        our ability to upgrade and develop our systems and infrastructure and
         attract new personnel in a timely and effective manner or retain
         existing personnel;
o        the amount and timing of operating costs and capital expenditures
         relating to expansion of our business, operations, and infrastructure;
o        unexpected increases in shipping costs or delivery times, particularly
         during the holiday season;
o        the level of use of the Internet and online services and increasing
         consumer acceptance of the Internet and other online services for the
         purchase of consumer products such as those offered by us;
o        technical difficulties, system downtime or Internet brownouts;
o        changes in gross profit margins or product mix;
o        effects of acquisitions and other business combinations and related
         integration issues;
o        failure to maintain good relationships with our business
         partners and suppliers;
o        government regulations related to use of the Internet
         for commerce;
o        general economic conditions and economic conditions specific to
         the Internet, online commerce.

         A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of product sold by us, inventory management, inbound
and outbound shipping and handling costs, the level of product returns and the
level of discount pricing and promotional activity. Any change in one or more of
these factors could materially and adversely affect our gross margins and
operating results in future periods. We expect that we will experience
seasonality in our business, reflecting a combination of seasonal fluctuations
in Internet usage and traditional retail seasonality patterns. Internet usage
and the rate of Internet growth may be expected to decline during the summer.
Further, sales in the traditional retail industry are significantly higher in
the fourth calendar quarter of each year than in the preceding three-quarters.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
Additionally it is likely that in one or more future quarters our operating
results may fall below the expectations of securities analysts and investors. In
such event, the trading price of our common stock would likely be materially
adversely affected.


WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS.

       Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We continue to increase the scope of our operations and have
grown the headcount substantially. At June 30, 1999, Adatom had a total of 18
employees full and part time combined and at June 30, 2000, we had a total of 57
employees full and part time combined. This growth has placed, and our
anticipated future operations will continue to place, a

                                       21

<PAGE>

strain on our management, information systems and resources. As a result, during
the remainder of 2000, we intend to increase our headcount and to install new
Enterprise Resource Planning (ERP) systems with new Accounting and Financial
Reporting Systems. We anticipate expanding our financial and management
information systems to accommodate new data. If we fail to successfully
implement and integrate our new financial reporting and management information
systems with our existing systems or if we are not able to expand these systems
to accommodate our growth, we may not have adequate, accurate or timely
financial information. Our failure to have such information would hinder our
ability to manage our business and operating results. If we grow rapidly, we
will face additional challenges in upgrading and maintaining our financial and
reporting systems. A failure to successfully implement and integrate these
systems would adversely affect our business. We expect that we will need to
continue to improve our financial and managerial controls and reporting systems
and procedures. In addition, we will need to continue to expand, train and
manage our already growing employee base. Furthermore, we expect that we will be
required to manage multiple relationships with various vendors and other third
parties. To manage the expected growth of our operations and personnel, we will
be required to improve existing and implement new transaction-processing,
operational and financial systems, procedures and controls. Further, we will be
required to maintain and expand our relationships with various merchandise
manufacturers, distributors, Internet and other online service providers and
other third parties necessary to our business. If we are unable to manage growth
effectively, our business will be materially adversely affected.


IF WE EXPERIENCE PROBLEMS WITH OUR THIRD PARTY SHIPPING SERVICES, WE COULD LOSE
CUSTOMERS.

         We rely upon third-party carriers, primarily UPS, for product
shipments, including shipments to and from our warehouse. We are therefore
subject to the risks, including employee strikes and inclement weather
associated with these carriers' ability to provide delivery services to meet our
shipping needs. In addition, failure to deliver products to our customers in a
timely manner would damage our reputation and brand identity.


THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON US.

         Our performance will be substantially dependent on the continued
services and on the performance of our senior management, particularly Richard
Barton, President, Chief Executive Officer, and Chairman of the Board, and
Sridhar Jagannathan, Chief Technical Officer and Executive Vice President. Two
of our senior management team joined us during the last half of 1999. They are
the Controller and the Vice President of Operations. Our future success depends
on these officers effectively working together with our original management
team. Other than the President, none of our officers or key employees is bound
by an employment agreement for any specific term. Our relationships with these
officers and key employees are at will. We do not have any "key person" life
insurance policies covering any of our employees. Our performance depends on our
ability to compensate, retain and motivate our officers and key employees. The
loss of the services of any of our executive officers or other key employees
could have a material adverse effect on us. Our future success also depends on
our ability to identify,

                                       22

<PAGE>

attract, hire, train, retain and motivate other highly skilled officers and
technical, managerial, editorial, merchandising, marketing and customer service
personnel. Competition for such personnel is intense, and we may not be able to
successfully attract, compensate, assimilate, or retain sufficiently qualified
personnel. This inability could have a material adverse effect on us.


WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS, WHICH WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

                  Our performance and ability to compete are dependent to a
significant degree on our proprietary technology. We regard our copyrighted
material, service marks, trademarks, trade secrets, and similar intellectual
property as critical to our success, and rely on trademark and copyright law,
trade secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary rights. We
have the registered trademarks "Adatom" and "Discovering New Shopping
Dimensions" in the United States and have a trademark application pending for
the mark "Adatom Home Dimensions." We cannot be sure that we will be able to
secure significant protection for these trademarks. It is possible that our
competitors or others will adopt product or service names similar to "Adatom"
and our other trademarks, thereby impeding our ability to build brand identity
and possibly leading to customer confusion. We generally have entered into
agreements containing confidentiality and non-disclosure provisions with our
employees and consultants and have limited access to and distribution of our
software, documentation and other proprietary information. We cannot be sure
that the steps taken by us will prevent misappropriation of our technology or
that agreements entered into for that purpose will be enforceable.
Notwithstanding the precautions taken by us, it might be possible for a third
party to copy or otherwise obtain and use our software or other proprietary
information without authorization or to develop similar software independently.
Policing unauthorized use of our technology is difficult, particularly because
the global nature of the Internet makes it difficult to control the ultimate
destination or security of software or other data transmitted. The laws of other
countries may afford us little or no effective protection of our intellectual
property. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our products and
services are made available online. In the future, we may also need to file
lawsuits to enforce our intellectual property rights, protect our trade secrets,
and determine the validity and scope of the proprietary rights of others. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversion of resources, which could have a material adverse effect on
us. We also rely on a variety of technology that is licensed from third parties,
including our database and Internet server software, which is used in our web
site to perform key functions. These third party technology licenses may not
continue to be available to us on commercially reasonable terms. Our loss of or
inability to maintain or obtain upgrades to any of these technology licenses
could result in delays in completing our proprietary software enhancements and
new developments until equivalent technology could be identified, licensed or
developed and integrated. Any such delays would have a material adverse effect
on us.

                                       23

<PAGE>

PROTECTION OF DOMAIN NAME IS UNCERTAIN.

         We currently hold various Web domain names relating to our brand,
including the "ADATOM.com" domain name. Governmental agencies and their
designees generally regulate the acquisition and maintenance of domain names.
For example, in the United States, the National Science Foundation has appointed
Network Solutions, Inc. as the current exclusive registrar for the ".com",".net"
and ".org" generic top-level domains. The regulation of domain names in the
United States and in foreign countries is subject to change. Such changes in the
United States are presently expected to include a transition from the current
system to a system that is controlled by a non-profit corporation and the
creation of additional top-level domains. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may be unable
to acquire or maintain relevant domain names in all countries in which we
conduct business. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of our trademarks and other proprietary rights.


WE MAY EXPERIENCE CAPACITY CONSTRAINTS DUE TO OUR RELIANCE ON INTERNALLY
DEVELOPED TRANSACTION-PROCESSING SYSTEMS.

         If we suffer any system interruptions that result in the unavailability
of our store on the Internet or reduced order fulfillment capability, such
interruptions would reduce the volume of goods sold and the attractiveness of
our product offerings. We have experienced periodic system interruptions, which
we believe will continue to occur from time to time. The satisfactory
performance, reliability and availability of our store on the Internet,
transaction-processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers and maintain adequate
customer service levels. Our revenues depend on the number of visitors who shop
at our store on the Internet and the volume of orders we fulfill. There will be
a significant need to upgrade the capacity of our store on the Internet in order
to handle thousands of simultaneous shoppers. Our inability to add additional
software and hardware or to develop and upgrade further our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic on our store on the Internet or increased sales volume through
our transaction-processing systems may cause unanticipated system disruptions,
slower response times, degradation in levels of customer service and impaired
quality and speed of order fulfillment, any of which could have a material
adverse effect on us.


OUR BUSINESS MAY SUFFER IF OUR SYSTEMS FAIL OR IF THE SYSTEMS OF OUR BUSINESS
PARTNERS FAIL.

         We presently have limited redundant systems. We do not have a complete
disaster recovery plan and carry limited business interruption insurance to
compensate us for losses that may occur. Despite our implementation of network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to

                                       24

<PAGE>

interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. Our ability to successfully receive and fulfill orders and
provide high-quality customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. In addition, any disruptions of those web sites or at the web sites of
other companies where we market goods or have a website link could have a
material adverse effect on us and the volume of sales generated. The occurrence
of any of the foregoing risks could have a material adverse effect on us.


IF WE ARE NOT ABLE TO SUSTAIN RAPID TECHNOLOGICAL CHANGES, OUR BUSINESS MAY
SUFFER.

         We may not successfully use new technologies effectively or adapt our
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. Our failure to adapt in a timely
manner for technical, legal, financial or other reasons, to changing market
conditions or customer requirements, could have a material adverse effect on us.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online stores. The Internet
and the online commerce industry are characterized by rapid technological
change, changes in user and customer requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing store on
the Internet and proprietary technology and systems obsolete. Our success will
depend, in part, on our ability to license leading technologies useful in our
business, enhance our existing services, develop new services and technology
that address the increasingly sophisticated and varied needs of our prospective
customers, and respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.


YEAR 2000 UPDATE

         Through the first six months of the calendar year 2000, we have not
experienced any significant problems associated with the Year 2000 issue.
Although it appears that the Year 2000 issue will not have a significant adverse
affect on us, we continue to monitor the Year 2000 compliance of our internal
systems. Undetected errors in our internal systems that may be discovered in the
future could have a material adverse affect on our business, operating results
or financial condition.


OUR BUSINESS STRATEGY REQUIRES CONTINUED GROWTH OF ONLINE COMMERCE. IF ON-LINE
COMMERCE DOES NOT CONTINUE TO GROW, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED

         Our future revenues and any future profits are substantially dependent
upon the widespread acceptance and use of the Internet and online services as a
significant medium of commerce by consumers. Rapid growth in the use of and
interest in the Internet and online services is a recent phenomenon, and we

                                       25

<PAGE>

cannot be sure that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and online services as a medium of commerce. We rely on consumers who
have historically used traditional means of commerce to purchase merchandise.
For us to be successful, these consumers must accept and utilize novel ways of
conducting business and exchanging information. Moreover, critical issues
concerning the commercial use of the Internet, such as ease of access, security,
privacy, reliability, cost and quality of service, remain unresolved and may
affect the growth of Internet use or the attractiveness of conducting commerce
online. In addition, the Internet and online services may not be accepted as a
viable commercial marketplace for reasons relating to the adequacy of
technology. To the extent that the Internet and online services continue to
experience significant growth, we cannot be sure that the infrastructure of the
Internet and online services will prove adequate to support increased user
demands. Difficulties with the telecommunications used to support the Internet
or online services also could result in slower response times and adversely
affect usage of the Internet.


OUR MARKETS ARE HIGHLY COMPETITIVE.

         The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Barriers to entry
are minimal, and current and new competitors can launch new Web sites at a
relatively low cost. We currently or potentially compete with a variety of other
companies, including:
o        major "brick and mortar" retailers such as Macys, J.C. Penney's,
         Nordstrom's, and Target;
o        online efforts of these traditional retailers, including the online
         stores operated by Macy, J. C. Penney, Toys R Us, and Wal-Mart, Sears;
o        catalog retailers;
o        vendors or manufacturers that currently sell certain of their products
         directly online, such as Mattel;
o        other online retailers such as Amazon.com, Taydo.com, Furniture.com,
         CDnow, Beyond.com and Reel.com;
o        on line stores that have a presence on Internet portals and online
         service providers that feature shopping services, such as AOL, Yahoo!,
         Excite and Lycos;
o        various online retailers.

         Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than us. Many of these current and potential competitors can
devote substantially more resources to Web site and systems development than we
can. In addition, online retailers may be acquired by, receive investments from
or enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Many of our competitors may be able to secure merchandise from
manufacturers on more favorable terms, fulfill customer orders more efficiently
and adopt more aggressive pricing or inventory availability policies, and devote
greater resources to marketing than we can. Traditional store-based retailers
also enable customers to see and feel

                                       26

<PAGE>

products in a manner that is not possible over the Internet. Our online
competitors are able to use the Internet as a marketing medium to reach
significant numbers of potential customers. Finally, new technologies and the
expansion of existing technologies, such as price comparison programs that
select specific titles from a variety of Web sites may direct customers to other
online retailers, and may increase competition. Increased competition may result
in reduced operating margins, loss of market share and a diminished brand
franchise. New technologies and the expansion of existing technologies may
increase the competitive pressures on us.


WE MAY ENTER NEW BUSINESS CATEGORIES.

         We may choose to expand our operations by developing new departments or
product categories, promoting new or complementary products or sales formats,
expanding the breadth and depth of products and services offered or expanding
our market presence through relationships with third parties. In addition, we
may pursue the acquisition of new or complementary businesses, products or
technologies. We may not be successful in our efforts to expand our operations,
and potential customers may not react favorably to these efforts. Furthermore,
any new department or product category that is launched by us but not favorably
received by consumers could damage our brand or reputation. An expansion of our
business in this manner would also require significant additional expenses and
expose us to additional inventory risk and development, operations and editorial
resources and would strain our management, financial and operational resources
and subject us to increased inventory risk.


WE FACE FULFILLMENT OPERATIONS RISKS.

         Our success depends on our ability to rapidly scale our fulfillment
operations in order to accommodate a significant increase in customer orders.
Our current fulfillment operations are not adequate to accommodate significant
increases in customer demand that may occur during the fourth calendar quarter
of 2000. We must also be able to rapidly scale our fulfillment operations and
information systems to accommodate significant increases in demand, which may
require us to automate tasks that are currently performed manually. If we do not
successfully scale our fulfillment operations to accommodate demand generally
and, in particular, increased demand during the fourth calendar quarter of each
year, due to the seasonal nature of our business, our business will be adversely
affected.


OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE SECURITY MEASURES WE
HAVE IMPLEMENTED TO PROTECT CONFIDENTIAL INFORMATION PROVE TO BE INADEQUATE.

         Advances in computer capabilities, new discoveries in the field of
cryptography, or other developments may result in a compromise or breach of the
algorithms used by us to protect customer transaction data. Any compromise of
our security could have a material adverse effect on our reputation and on us.
We rely on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card numbers.
A party who is able to circumvent our security

                                       27

<PAGE>

measures could misappropriate proprietary information or cause interruptions in
our operations. Furthermore, our servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may be required to
expend significant additional capital and other resources to protect against
such security breaches or to alleviate problems caused by such breaches. Our
business may be adversely affected if our security measures do not prevent
security breaches and we cannot assure that we can prevent all security
breaches.


CREDIT CARD FRAUD.

         During the first half of 2000 we suffered losses of less than $9,000 as
a result of orders placed with fraudulent credit card data even though the
associated financial institution approved payment of the orders. Under current
credit card practices, a merchant is liable for fraudulent credit card
transactions where, as is the case with the transactions we process, that
merchant does not obtain a cardholder's signature. A failure to adequately
control fraudulent credit card transactions would adversely affect our business.


GROWING CONCERNS ABOUT THE USE OF "COOKIES" AND DATA COLLECTION MAY LIMIT OUR
ABILITY TO DEVELOP USER PROFILES.

         Our current technology uses small files of information, commonly known
as "cookies", on a user's hard drive to collect information about our customers'
movements through our Website. Most Internet browsers allow users to modify
their browsers settings to prevent cookies from being stored on their hard
drive, and small minorities of users are currently choosing to do so. Users can
also delete cookies from their hard drive at any time. Some Internet
commentators and privacy advocates have suggested limiting or eliminating the
use of cookies. The reduction or limitation in the use of cookies could:
o        reduce the effectiveness of our technology to gather data on our
         customers;
o        require us to switch to other potentially less effective technology in
         order to gather demographic or behavioral information; and
o        require us to expend financial and technological resources, originally
         allocated to other purposes, to create alternatives that might be
         unsuccessful.


WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION.

         Due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet covering issues such as user privacy,
pricing, content, copyrights, distribution and quality of products and services.
We are not currently subject to regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce. The
adoption of any additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand for
our products and services and increase our cost of


                                       28

<PAGE>

doing business, or otherwise have a material adverse effect on us. Moreover, the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes and personal privacy is uncertain and may take years to resolve. In
addition, as our service is available over the Internet in multiple states and
foreign countries, and as we sell to numerous consumers residing in such states
and foreign countries, such jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each such state and foreign
country. We could be subject to taxes and penalties for failure to qualify as a
foreign corporation in a jurisdiction where we are required to do so. Any such
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on us.


WE MAY BE SUBJECT TO SALES AND OTHER TAXES.

         We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than California. However, one or more
local, state or foreign jurisdictions may seek to impose sales tax collection
obligations on us. In addition, any new operation in states outside California
could subject our shipments in such states to state sales taxes under current or
future laws. If one or more states or any foreign country successfully asserts
that we should collect sales or other taxes on the sale of our products, it
could adversely affect our business.


WE MAY BE LIABLE FOR INFORMATION RETRIEVED FROM THE INTERNET.

         Due to the fact that material may be downloaded from web sites and
subsequently distributed to others, there is a potential that claims will be
made against us for negligence, copyright or trademark infringement or other
theories based on the nature and content of such material. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to cover all costs incurred in defense of
potential claims or to indemnify us for all liability that may be imposed. Any
costs or imposition of liability that is not covered by insurance or in excess
of insurance coverage could have a material adverse effect on us.


INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.

         Other parties may assert infringement or unfair competition claims
against us. We cannot predict whether third parties will assert claims of
infringement against us, or whether any future assertions or prosecutions will
adversely affect our business. If we are forced to defend against any such
claims, whether they are with or without merit or are determined in our favor,
then we may face costly litigation, diversion of technical and management
personnel, or product shipment delays. As a result of such a dispute, we may
have to develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all. If there

                                       29

<PAGE>

is a successful claim of product infringement against us and we are unable to
develop non-infringing technology or license the infringed or similar technology
on a timely basis, it could adversely affect our business.


OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.

         Our executive officers, directors and 5% or greater stockholders, and
their respective affiliates, in the aggregate, own approximately 52.3% of our
outstanding common stock. As a result, they could act together to control all
matters submitted to stockholders for approval (including the election and
removal of directors and any merger, consolidation or sale of all or
substantially all of our assets). Accordingly, such concentration of ownership
may delay, defer or prevent a change in control, impede a merger, consolidation,
takeover or other business combination involving us or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
us. This could, in turn, have an adverse effect on the market price of our
common stock.


CHILDREN'S ONLINE PRIVACY PROTECTION ACT

         Congress has enacted the Children's Online Privacy Protection Act of
1998 (COPPA) and the Federal Trade Commission ("FTC") has issued rules to
implement COPPA. The main goal of COPPA and the rule is to protect the privacy
of children using the Internet. Under the FTC's rules, certain commercial Web
sites must obtain parental consent before collecting, using, or disclosing
personal information from children under 13. The statute and rule apply to
commercial websites and online services directed to, or that knowingly collect
information from, children under 13. To inform parents of their information
practices, these sites are required to provide notice on the site and a separate
notification to parents about their policies with respect to the collection, use
and disclosure of children's personal information. With certain statutory
exceptions, sites will also have to obtain "verifiable parental consent" before
collecting, using or disclosing personal information from children. Websites
have six months from the rule's April 21, 2000 effective date to comply. A
website operator must post a clear and prominent link to a notice of its
information practices on its home page and at each area where personal
information is collected from children. The notice must state the name and
contact information of all operators, the types of personal information
collected from children, how such personal information is used, and whether
personal information is disclosed to third parties. The notice also must state
that the operator is prohibited from conditioning a child's participation in
activity on the child's disclosing more personal information than is reasonably
necessary. In addition, the notice must state that the parent can review and
have deleted the child's personal information, and refuse to permit further
collection or use of the child's information. The COPPA regulations could reduce
our ability to engage in direct marketing. The cost to the Company of complying
with COPPA is not known and it is not clear what impact the regulations will
have on the Company's plan to expand its business opportunities utilizing the
School Savings program.

                                       30

<PAGE>

         In addition, governments in foreign jurisdictions may regulate Internet
or other online services in such areas as content, privacy, network security,
encryption or distribution. This may affect our ability to conduct business
internationally. For example, the European Union recently enacted its own
privacy regulations. The European Union Directive on the Protection of Personal
Data, which became effective in October 1998, fosters electronic commerce by
establishing a stable framework to ensure both a high level of protection for
private individuals and the free movement of personal data within the European
Union. The EU and the U.S. Department of Commerce are currently negotiating an
agreement under which the privacy policies of American businesses may be deemed
to be adequate under the EU Directive. Until such time as an agreement is
reached, the EU has voluntarily agreed to a moratorium on enforcement of the EU
Directive against U.S. businesses. The European legislation and its adoption via
any agreement could adversely affect our ability to expand our sales efforts to
Europe by limiting how information about us can be sent over the Internet in the
EU and limiting our efforts to collect information from European users.


ADDITIONAL FINANCING FOR OUR OPERATIONS COULD ADVERSELY AFFECT HOLDERS OF OUR
COMMON STOCK.

We may issue common stock or debt or equity securities convertible into shares
of common stock to obtain additional financing if required. Any additional
financing may result in substantial dilution to current holders of our common
stock.


CONVERSION OF OUR PREFERRED STOCK, EXERCISE OF OUR OUTSTANDING WARRANTS AND
OPTIONS AND SUBSEQUENT PUBLIC SALE OF OUR COMMON STOCK WHILE ITS MARKET PRICE IS
DECLINING MAY RESULT IN FURTHER DECREASES IN ITS PRICE.

         As of June 30, 2000, we had outstanding 1,100 shares of Preferred
Stock. Each share of Preferred Stock has a stated value of $1,000 per share and
is convertible into common stock at a conversion price equal to 85% of the
average of the two lowest closing bid prices of the common stock on the Nasdaq
SmallCap Market over the ten trading days preceding the date of conversion
("Market Price") subject to a maximum conversion price of 115% of the Market
Price on the issue date of June 22, 2000, or $2.03. The number of shares of
common stock that may be acquired upon conversion is determined by dividing the
stated value of the number of shares of Preferred Stock to be converted by the
conversion price. Also, certain additional amounts calculated on the basis of 6%
of the stated value from June 22, 2000, the issue date of the Preferred Stock,
to the date of conversion would also be converted into common stock using the
same formula.

         Since there is no minimum conversion price, the number of shares of
common stock that holders of preferred stock may acquire upon conversion would
simply continue to increase if the stock price declines. Since upon conversion
holders of Preferred Stock acquire common stock for at least a 15% discount to
the market price, they have an incentive to sell these shares of common stock at
market price either concurrently with, or shortly after, conversion, in order to
profit from the difference between the market price and the discounted
conversion price. The holders of the preferred stock also could engage in short
sales of our common stock, after delivering a notice of

                                       31

<PAGE>

conversion to us, which could contribute to a decline in the market price of the
common stock and give them the opportunity to profit from that decrease by
covering their short position with shares acquired upon conversion for at least
a 15% discount to the prevailing market price. The conversion of the preferred
stock and subsequent sale of a large number of shares of common stock acquired
upon conversion during periods when the market price of the common stock
declines, or the possibility of such conversions and sales, may exacerbate the
decline or impede increases in the market price of the common stock.

         In addition, we have other warrants and stock options exercisable at
various prices for a total of, respectively, 5,362,902 and 1,006,050 shares of
common stock.


OTHER ISSUANCES OF PREFERRED STOCK COULD ADVERSELY AFFECT EXISTING HOLDERS OF
OUR COMMON STOCK.

         Under our certificate of incorporation, our Board of Directors may,
without further stockholder approval, issue up to an additional 4,998,900 shares
of preferred stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of common stock. We could use new classes of preferred stock as a method
of discouraging, delaying or preventing a change in persons that control us. In
particular, the terms of the preferred stock could effectively restrict our
ability to consummate a merger, reorganization, sale of all or substantially all
of our assets, liquidation or other extraordinary corporate transaction without
the approval of the holders of the preferred stock. We could also create a class
of preferred stock with rights and preferences similar to those of our
outstanding convertible preferred stock, which could result in substantial
dilution to holders of our common stock or adversely affect its market price.


CONVERSION OF OUR OUTSTANDING PREFERRED STOCK AND THE EXERCISE OF OUR
OUTSTANDING WARRANTS AND STOCK OPTIONS AND SUBSEQUENT PUBLIC SALE OF OUR COMMON
STOCK WILL RESULT IN SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS.

Existing stockholders will experience substantial dilution in their percentage
ownership of our common stock if the preferred stock is converted and warrants
and stock options are exercised.




PART II  OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In addition to transactions previously reported, the foregoing transactions were
done under Section 4(2) of the Securities Act of 1933 during and after the
quarter reported on based, INTER ALIA, on representations and warranties made by
the investors, the small numbers of investors solicited and the


                                       32

<PAGE>

absence of any advertising or general solicitation in the process of raising
funds.

         (i)      On July 13, 2000, the Company issued a warrant to purchase up
                  to 810,000 shares of common stock to Swartz Private Equity,
                  LLC at an exercise price which varies depending on the market
                  price of the Company's common stock, in return for a
                  commitment to engage in a private equity transaction with the
                  Company. The warrant includes a net exercise feature and
                  certain registration rights for the underlying common stock;

         (ii)     On July 19, 2000, the Company issued a warrant to purchase up
                  to 20,000 and 80,000 shares of common stock, respectively, to
                  Fahnestock & Co., and Gabriel M. Cerrone, an employee of
                  Fahnestock & Co. at an exercise price of $2.25 per share. The
                  warrant contains certain registration rights.  The warrant
                  issuances were made in return for past and continuing
                  consultations with and guidance to management in connection
                  with business financing issues;

         (iii)    On June 26, 2000, the Company issued a warrant to purchase up
                  to 100,000 shares of common stock to Jerry Deutscher at an
                  exercise price of $2.25 per share, as a partial inducement to
                  Mr. Deutscher to accept employment with the Company. The
                  warrant contains certain registration rights;

         (iv)     On August 10, 2000 the Company issued 166,667 shares of its
                  common stock to Avenel Financial Group Incorporated and
                  certain of its affiliates to resolve a claim and in return for
                  past assistance in connection with the Company's corporate
                  finance and marketing activities;

         (v)      On July 31, 2000, the Company entered into an Investor
                  Relations Services Agreement with The Financial Globe,
                  Incorporated under which it agreed to issue 200,000 common
                  shares and make certain cash payments as compensation for
                  services rendered. The agreement contains certain registration
                  rights;

         (vi)     The Company issued promissory notes to the following officers
                  in return for unsecured loans:

                  ------------------------------- -----------------------------
                           OFFICER                      AMOUNT AND DATE
                  ------------------------------- -----------------------------

                  Richard S. Barton               $200,000   -   May 19,  2000
                                                  $105,000   -   July 28, 2000
                  ------------------------------- -----------------------------
                  Michelle Ware                   $115,000   -   June 6,  2000
                                                  $ 20,000   -   July 31, 2000
                                                  $ 22,000   -   August 4,2000
                                                  $ 20,000   -   August 8,2000
                  ------------------------------- -----------------------------
                  Sridhar Jagannathan             $ 10,000   -   July 28, 2000
                  ------------------------------- -----------------------------



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


                                       33

<PAGE>

On May 25, 2000, the registrant held its annual meeting of stockholders. All
director nominees were elected and all proposals submitted for stockholder vote
were approved. The voting results are as follows:

Proposal 1.  Election Of Directors


----------------------------------------  -------------------  --------------
Nominee                                   Votes For            Votes
                                                               Withheld
----------------------------------------  -------------------  --------------
Richard S. Barton                         13,301,151           29,970
----------------------------------------  -------------------  --------------
Sridhar Jagannathan                       13,301,151           29,970
----------------------------------------  -------------------  --------------
Ralph K. Frasier                          13,301,151           29,970
----------------------------------------  -------------------  --------------
Sylvia A. Dresner                         13,301,151           29,970
----------------------------------------  -------------------  --------------
Victor W. Nee                             13,301,151           29,970
----------------------------------------  -------------------  --------------

On June 29, 2000, Sylvia A. Dresner resigned as a director and the Board of
Directors reduced the size of the Board by one position.


Proposal 2.       Ratification of Appointment of Richard A. Eisner & Company,
                  LLP as Independent Auditor For 2000


----------------- ---------------- -------------------
Votes For         Votes Against    Votes Abstained
----------------- ---------------- -------------------
13,327,135        2,480            1,506
----------------- ---------------- -------------------


Proposal 3.       Approval of Warrant and Underlying Shares Issuable to Victor
                  W. Nee

----------------- ---------------- ------------------- ------------------
Votes For         Votes Against    Votes Abstained     Broker Non-Votes
----------------- ---------------- ------------------- ------------------
10,405,913        68,582           12,506              2,844,120
----------------- ---------------- ------------------- ------------------



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

(a)      List of Exhibits.  An Exhibit Index has been filed starting on page E-1
of this Report and is incorporated herein by reference.

(b)      Reports On Form 8-K.

Registrant filed a Current Report on Form 8-K dated May 19, 2000 (Items 5 and
7).


                                       34

<PAGE>


                                  SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
Adatom.com, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                        ADATOM.COM, INC.

Date: August 14, 2000


                                        /s/RICHARD S. BARTON
                                        -------------------------
                                        By: Richard S. Barton
                                        President and Chief Executive Officer



                                       35


<PAGE>

                                  EXHIBIT INDEX


EXHIBIT  DESCRIPTION
-------  -----------

4.26     Revised form of warrant issued to Dr. Victor W. Nee, dated May 25, 2000

4.27     Commitment Warrant to purchase shares of common stock issued  to Swartz
         Private Equity, LLC, dated as of July 13, 2000

4.28     Warrant to purchase shares of common stock issued to Gabriel M.Cerrone,
         dated as of July 19, 2000

4.29     Warrant to purchase shares of common stock issued  to Fahnestock & Co.,
         dated as of July 19, 2000

4.30     Warrant to  purchase shares of common stock issued to  Jerry Deutscher,
         dated as of June 26, 2000

4.31     Notice  of  Issuance  of  Common   Stock  to   Avenel  Financial  Group
         Incorporated, dated July 31, 2000

4.32     Investor  Relations  Services  Agreement  with   The  Financial  Globe,
         Incorporated, dated as of July 31, 2000

4.33     Promissory Note issued to Richard Barton  for $105,000  dated  July 28,
         2000

4.34     Promissory Note issued to Michelle Ware for $20,000 dated July 31, 2000

4.35     Promissory  Note  issued  to  Michelle Ware for $22,000 dated August 4,
         2000

4.36     Promissory  Note  issued  to  Michelle Ware for $20,000 dated August 8,
         2000


4.37     Promissory  Note  issued  to Sridhar Jagannathan for $20,000 dated July
         28, 2000

27       Financial Data Schedule


                                     E-1