<SUBMISSION>
<ACCESSION-NUMBER>0000950144-05-002832
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>9
<PERIOD>20041231
<FILING-DATE>20050318
<DATE-OF-FILING-DATE-CHANGE>20050318
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>HEALTHSTREAM INC
<CIK>0001095565
<ASSIGNED-SIC>7370
<IRS-NUMBER>621443555
<STATE-OF-INCORPORATION>TN
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>000-27701
<FILM-NUMBER>05691816
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>209 10TH AVE SOUTH STE 450
<CITY>NASHVILLE
<STATE>TN
<ZIP>37203
<PHONE>6153013100
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>209 10TH AVE SOUTH STE 450
<CITY>NASHVILLE
<STATE>TN
<ZIP>37203
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>g93873e10vk.htm
<DESCRIPTION>HEALTHSTREAM, INC.
<TEXT>
<HTML>
<HEAD>
<TITLE>Healthstream, Inc.</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>




<P align="center" style="font-size: 14pt"><B>SECURITIES AND EXCHANGE COMMISSION</B>

<DIV align="center" style="font-size: 12pt"><B>Washington, D.C. 20549</B>
</DIV>

<P align="center" style="font-size: 18pt"><B>FORM 10-K</B>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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<TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="70%">&nbsp;</TD>
</TR>
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<!-- Begin Table Body -->
<TR valign="bottom" style="font-size: 12pt">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><FONT face="Wingdings">&#254;</FONT></B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934</B></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><B>FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004</B>



<P align="center" style="font-size: 10pt"><B>OR</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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<TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="70%">&nbsp;</TD>
</TR>
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<!-- Begin Table Body -->
<TR valign="bottom" style="font-size: 12pt">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><FONT face="Wingdings">&#111;</FONT></B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934</B></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><B>FOR THE TRANSITION PERIOD FROM</B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>TO</B>



<P align="center" style="font-size: 10pt"><B>Commission File Number 001-8833</B>


<P align="center" style="font-size: 24pt"><B>HEALTHSTREAM, INC.</B>


<DIV align="center" style="font-size: 10pt"><B><I>(Exact name of registrant as specified in its charter)</I></B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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<TR valign="bottom">
    <TD width="47%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>
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<TR valign="bottom">
    <TD align="center" valign="top"><B>Tennessee</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>62-1443555</B></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><I>(State or other jurisdiction of</I>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><I>(I.R.S. Employer Identification No.)</I></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><I>incorporation or organization)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>209 10th Avenue South, Suite&nbsp;450</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>37203</B></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>Nashville, Tennessee</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><I>(Zip Code)</I></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><I>(Address of principal executive offices)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><B>(615)&nbsp;301-3100</B><BR>
<I>(Registrant&#146;s telephone number, including area code)</I>



<P align="center" style="font-size: 10pt"><B>Securities Registered Pursuant To Section&nbsp;12(b) Of The Act:<BR>
None</B>



<P align="center" style="font-size: 10pt"><B>Securities Registered Pursuant To Section&nbsp;12(g) Of The Act:<BR>
Common Stock, No Par Value</B>



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Indicate by check mark whether the registrant (1)&nbsp;has filed all reports required to be filed by
Section&nbsp;13 or 15 (d)&nbsp;of the Securities Exchange Act of 1934 during the preceding 12&nbsp;months (or for
such shorter period that the registrant was required to file such reports), and (2)&nbsp;has been
subject to such filing requirements for the past 90&nbsp;days.
Yes&nbsp;<FONT face="Wingdings">&#254;</FONT>&nbsp;No&nbsp;<FONT face="Wingdings">&#111;</FONT>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Indicate by check mark if disclosure of delinquent filers pursuant to Item&nbsp;405 of Regulation&nbsp;S-K is
not contained herein, and will not be contained, to the best of registrant&#146;s knowledge, in
definitive proxy or information statements incorporated by reference in Part&nbsp;III of this Form 10-K
or any amendment to this Form 10-K.&nbsp;<FONT face="Wingdings">&#254;</FONT>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule&nbsp;12b-2).
Yes&nbsp;<FONT face="Wingdings">&#111;</FONT>&nbsp;No&nbsp;<FONT face="Wingdings">&#254;</FONT>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of
the Registrant, based upon the closing sales price for the Common Stock on the NASDAQ National
Market on June&nbsp;30, 2004 was $26,701,267. All executive officers and directors of the registrant
have been deemed, solely for the purpose of the foregoing calculation, to be &#147;affiliates&#148; of the
registrant.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">As
of March&nbsp;15, 2005, there were 20,700,620 shares of the Registrant&#146;s common stock outstanding.


<P align="center" style="font-size: 10pt"><B>DOCUMENTS INCORPORATED BY REFERENCE</B>



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Portions of the Registrant&#146;s definitive Proxy Statement for its 2005 Annual Meeting of Shareholders
are incorporated by reference into Part&nbsp;III hereof.


<DIV style="width: 100%; border-bottom: 1pt solid black; margin-top: 10pt; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>





<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">







<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.</B>



<P align="center" style="font-size: 10pt"><B>TABLE OF CONTENTS<BR>
ANNUAL REPORT ON FORM 10-K</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Page</B></TD>

    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#101">PART I</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#102">Item&nbsp;1. Business</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#103">Item&nbsp;2. Properties </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">15</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#104">Item&nbsp;3. Legal Proceedings </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">15</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#105">Item&nbsp;4. Submission of Matters to a Vote of Security Holders </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">15</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#106">PART II</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#107">Item&nbsp;5. Market for Registrant&#146;s Common Equity, Related Stockholder Matters and Issuer Purchases
Of Equity Securities </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">16</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#108">Item&nbsp;6. Selected Financial Data</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">16</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#109">Item&nbsp;7. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">17</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#110">Item&nbsp;7A. Quantitative and Qualitative Disclosures About Market Risk</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">28</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#111">Item&nbsp;8. Financial Statements and Supplementary Data</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">29</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#112">Item&nbsp;9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#113">Item&nbsp;9A. Controls and Procedures </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#114">Item&nbsp;9B. Other Information </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#115">PART III</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#116">Item&nbsp;10. Directors and Executive Officers of the Registrant </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#117">Item&nbsp;11. Executive Compensation </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#118">Item&nbsp;12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#119">Item&nbsp;13. Certain Relationships and Related Transactions </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#120">Item&nbsp;14. Principal Accountant Fees and Services </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#121">PART IV</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#122">Item&nbsp;15. Exhibits and Financial Statement Schedules </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">48</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#123">Signatures </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">49</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv10w9.txt">Ex-10.9  Form of Director Stock Option Agreement</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv10w10.txt">Ex-10.10  Form of Employees and Executive Officer Stock Option Agreement</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv10w11.txt">Ex-10.11  Form of Cash Bonus Plan</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv23w1.txt">Ex-23.1  Consent of Ernst & Young LLP</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv31w1.txt">Ex-31.1  Section 302 Certification of the CEO</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv31w2.txt">Ex-31.2  Section 302 Certification of the CFO</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv32w1.txt">Ex-32.1  Section 906 Certification of the CEO</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g93873exv32w2.txt">Ex-32.2  Section 906 Certification of the CFO</A></FONT></TD></TR>
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<!-- /TOC -->
</DIV>
<DIV align="left">
<A name="101"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>PART I</B>



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">This Annual Report contains forward-looking statements within the meaning of Section&nbsp;21E of the
Securities Exchange Act of 1934. Such forward-looking statements include, among others, those
statements including the words &#147;expects,&#148; &#147;anticipates,&#148; &#147;intends,&#148; &#147;believes,&#148; &#147;may,&#148; &#147;will,&#148;
&#147;should,&#148; &#147;continue&#148; and similar language or the negative of such terms or other comparable
terminology. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, HealthStream&#146;s actual results may differ significantly from those projected in the
forward-looking statements. Factors that might cause or contribute to such differences include, but
are not limited to, those discussed in the section &#147;Risk Factors&#148; and elsewhere in this document.
In addition, factors that we are not currently aware of could harm our future operating results.
You should carefully review the risks described in other documents HealthStream files from time to
time with the Securities and Exchange Commission. You are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.
HealthStream undertakes no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this document.

<DIV align="left">
<A name="102"></A>
</DIV>

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Item&nbsp;1. </B><B><I>Business</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>OVERVIEW AND HISTORY</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">HealthStream, Inc. (&#147;HealthStream&#148; or the &#147;Company&#148;) provides Internet-based solutions and services
to meet the training and education needs of the healthcare industry. Our learning solutions are
helping healthcare organizations to improve compliance, develop their workforce, and reduce risks.
Focused primarily on healthcare organizations (HCO)&nbsp;and pharmaceutical and medical device companies
(PMD), HealthStream&#146;s customers are comprised of over 1,000 healthcare organizations (predominately
acute-care facilities) throughout the United States and include
relationships with some of the top
medical device and pharmaceutical companies.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The Company&#146;s flagship product is the &#147;HealthStream Learning Center&#153;,&#148; our proprietary,
Internet-based learning platform, which currently has approximately 1,168,000 contracted
hospital-based subscribers. We released Competency Compass&#153;, an online performance assessment
and management solution, HealthStream<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> Express, a scaled-down version of our Internet-based learning
platform, and HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>, a software application that delivers product training in
hospitals, during 2003. Services provided to and on behalf of pharmaceutical and medical device
companies include live and online education and training activities for healthcare professionals,
as well as medical industry sales representatives. Medical device companies provide device training within hospitals through our HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> platform, and
along with pharmaceutical companies, also provide commercial support for some of our continuing
education activities.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began marketing its
Internet-based solutions in March&nbsp;1999. Including a satellite office in Denver, Colorado,
HealthStream has 146 employees. From an initial focus on technology-based training, HealthStream
has evolved to provide full-service delivery of training and education for the healthcare industry.
The Company completed its initial public offering (IPO)&nbsp;in April of 2000.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>INDUSTRY BACKGROUND</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">According to the Centers for Medicare and Medicaid Services (CMS), the healthcare industry exceeded
$1.6 trillion of spending in 2004, or approximately 15&nbsp;percent of the gross domestic product.
Hospital care expenditures accounted for $496&nbsp;billion, or 31%, of the $1.6 trillion industry.
Approximately 10.4&nbsp;million professionals are employed in the healthcare segment of the domestic
economy, with slightly more than half, or 5.6&nbsp;million, employed in healthcare organizations, our
target market for the HealthStream Learning Center&#153; and HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The 5.6&nbsp;million healthcare organization professionals predominately work in the nation&#146;s
approximately 5,000 acute-care hospitals, and are required by federal mandates and accrediting
bodies to train in a number of areas. This training includes safety training mandated by both the
Occupational Safety and Health Administration (OSHA), and the Joint Commission on Accreditation of
Healthcare Organizations, or JCAHO, for all institutional-based healthcare workers as well as
training on patient information confidentiality required under the Health Insurance Portability and
Accountability Act (HIPAA).


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In hospitals, staffing issues and personnel shortages have also contributed to the need for
enhanced workforce development as well as additional competency based training. The American
College of Healthcare Executives reported in October&nbsp;2004 that 72% of hospital CEOs were
experiencing a nursing shortage at their facilities. According to U.S. Bureau of Labor Statistics
(February&nbsp;2004) Monthly Labor Review, more than one million new and replacement nurses will be
needed by 2012. For the first time, the U.S. Department of Labor has identified Registered Nursing
as the top occupation in terms of job growth through the year 2012. As reported by the <I>American
Journal of Nursing </I>(April&nbsp;2003), offering training and educational opportunities to hospital
personnel is
increasingly recommended as a retention and recruitment incentive.


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In addition, to keep abreast of the latest developments and meet licensing, certification, and
credentialing requirements, many healthcare professionals must obtain continuing education.
Continuing education requirements include continuing education for nurses, emergency medical
services personnel, first responder personnel, radiologic personnel and physicians. Pharmaceutical
and medical device companies must also provide their medical industry sales representatives with
training mandated for the healthcare industry and training for new products. They also provide
support for education and training for those audiences that use their products in healthcare
organizations.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Finally, the hospital industry continues to operate under intense pressure to reduce costs as a
result of reductions in government reimbursement and increased focus on cost containment consistent
with participation of patients in managed care programs. In addition, hospitals, as well as
pharmaceutical and medical device companies continue to experience rising operating costs, coupled
with increased pressure to measure and report on the outcomes of the dollars spent on training. Our
products and services are designed to meet these needs by reducing healthcare organizations&#146; costs
of training while improving learning outcomes, enhancing reporting capabilities, and supporting
customers&#146; business objectives.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>HEALTHSTREAM&#146;S SOLUTIONS</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Services to healthcare organizations</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">HealthStream&#146;s solutions help healthcare organizations meet their ongoing training, education, and
compliance needs. We bring training and education content together with administrative and
management tools through our Internet-based platform, the
HealthStream Learning Center&#153; (HLC) and
HealthStream<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>
Express. This combination supports healthcare administrators in configuring training to meet the precise
needs of different groups of employees, modifying training materials, and documenting that training
has been completed. At December&nbsp;31, 2004, 1,168,000 healthcare professionals had contracted
subscriptions for our services. Pricing for the HLC is subscription based, with fees based on the
number of users, content provided and other factors. We offer training, implementation and account
management services to facilitate integration of this technology product into our customer&#146;s
operating environments. Fees for training are based on the time and efforts of the personnel
involved.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our online content is hosted in a central data center that allows end users Internet access to HLC
services, thereby eliminating the need for onsite local implementations of installed learning
management products. As a result, a significant number of our customers that historically used our
installed learning management products have transitioned to our Internet-based platform. Our
installed learning management software contracts historically consisted of an upfront license fee,
additional content sales, and ongoing maintenance and support. Although we no longer actively sell
our installed learning management products, we continue to provide these customers ongoing
maintenance and support. We continue to provide our installed learning management customers with
product updates and are looking to provide additional content access capabilities to these
customers.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We also offer our customers an online competency assessment and performance management solution,
Competency Compass&#153;. Competency assessment is a requirement of hospitals and healthcare
organizations for maintaining accreditation, based on new JCAHO requirements to evaluate, document,
and report performance competencies. The Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">&#153;</SUP> provides an effective
means of determining which competencies are associated with each position and evaluating and
documenting competency assessments. To facilitate this process, a comprehensive dictionary of job
profiles used in healthcare organizations is included in Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">&#153;</SUP> that
lists corresponding competencies associated with each of those jobs.
This product is intended to facilitate a custom
training program of courses available through the HLC that uniquely responds to the needs
identified for individual employees.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Along with the Internet-based HLC, we also offer healthcare organizations full-service capabilities
to convert existing course materials to a Web-enabled format through our HealthStream Authoring
Center&#153;. Pricing for this product is subscription based, with fees based on the number of users
and a separate fee for licenses.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our strategy is to expand our content offerings and other services to existing customers and grow
our existing customer base of approximately 1,168,000 contracted subscribers using the
Internet-based HLC, while continuing to transition our installed learning management product
customers to our Internet-based HLC. We believe our existing sales force and market conditions
offer us the opportunity to continue to grow our HLC customer base.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Services to pharmaceutical and medical device companies</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our services to pharmaceutical companies and medical device companies include live and online
educational and training activities for healthcare professionals, as well as online training for
medical industry sales representatives. As an accredited provider of continuing education
activities for physicians, nurses, pharmacists and other healthcare professionals, our services
include planning, development, implementation and administration of these activities. Services for
live activities can further include development of
course agendas, coordination of subject matter experts, preparation of course materials, and
registration of attendees. Pricing for live activity services are based on the scope of the
project, including the size of the event, number of attendees and other factors. Live educational
activities


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">also include preceptorships and proctorships for various specialties that take place
within the hospital environment. Preceptorships and proctorships are live interactive activities
with small groups of healthcare professionals, designed to provide them with supervised experience
in a clinical environment. Pricing for these activities is usually based on a per attendee basis.
Pricing for online activities varies from project to project, and is based on time and efforts of
the personnel involved. Mandated training for manufacturer sales force personnel is priced on a
per user basis. We also offer both live and archived Web casts of medical procedures,
thought-leader discussions, and other events in a cost effective manner to facilitate the provision
of training or continuing education. In addition, we can develop custom courseware for our
customers&#146; specific training needs. Pricing for these services is generally based on time and
efforts involved. Our development group responsible for such services includes programmers,
instructional and multimedia designers, graphic artists, and project managers. In addition to our
development employees, we also utilize third party resources as
needed. Live and online continuing education
activities may be supported by an educational grant by a pharmaceutical or medical device company.
Fees or the amount of the grant vary based on the scope of the event, the target audience,
publicity and other peripheral services related to the event.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>, introduced in 2003, is intended to leverage our subscriber network of
hospital-based personnel by delivering online product training and other educational activities
through our Internet-based HLC. Pricing charged to medical device and pharmaceutical companies
includes initial content development services and subsequent subscription pricing based on the
number of hospital facilities selected to receive the training and education.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We also provide live educational activities for nurses and technicians conducted within healthcare
organizations, as well as continuing education study guides and educational activities on the
exhibit floor at the annual AORN (Association of PeriOperative Registered Nurses) Congress. All of
these activities are supported by either pharmaceutical or medical device companies. Our strategy
includes expanding our revenues by further developing customer relationships and by leveraging our
existing base of Internet-based HLC customers for deployment of pharmaceutical and medical device
training and education through both existing products as well as development of new products.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>ACQUISITIONS</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We acquired seven companies between 2000 and 2001. To date, our acquisitions have focused on adding
products or services, increasing our customer base and/or providing enabling technologies that are
complementary to our existing business. We believe we have recognized economies of scale through
acquisitions in markets in which we already had a presence. In addition, we have expanded our
product and service offerings by leveraging products that can operate on our existing technology
platform. To date, all acquisitions have been accounted for using the purchase method of
accounting.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>CUSTOMERS</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We provide our training and education solutions to customers across a broad range of entities
within the healthcare industry, including healthcare organizations (including government entities)
and pharmaceutical and medical device companies. We derived approximately 15% of net revenue from HCA,
Inc. during both 2004 and 2003. During both 2004 and
2003, no other customers represented more than 10% of our net revenue. The following is a partial list of customers that have purchased or
contracted for products and services from HealthStream.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><U><B>Healthcare Organizations</B></U></TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Pharmaceutical
and Medical Device Companies</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">HCA Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Cordis Endovascular Division of
Cordis Corporation
</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Tenet
Healthcare Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Aesculap Inc.</TD>

    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">CHRISTUS Health
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>BiogenIdec, Inc.</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Waterbury Hospital
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">McKesson Corporation</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>SALES, MARKETING, AND CUSTOMER SUPPORT</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We market our products and services primarily through our direct sales force. As of December&nbsp;31,
2004, our sales and relationship management personnel consisted of approximately 33 employees based
at our corporate headquarters in Nashville, Tennessee and in Denver, Colorado, as well as remote
home office sales locations. Our geographically dispersed field sales organization is divided into
teams focused on our hospital audience and our pharmaceutical and medical device audience. In
addition to sales professionals, we also employ account managers who work to develop and expand
relationships, including contract renewals, with our hospital customers, and program managers who
are responsible for services associated with pharmaceutical and medical device customers.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We conduct a variety of marketing programs to promote our products and services, including product
catalogs, user groups and trade shows, online promotion and demonstrations, telemarketing
campaigns, public relations, distribution of product specific literature,
direct mail and advertising. Annually, we host a national users&#146; group in Nashville known as
&#147;The Summit&#148;. We have an in-house marketing team that is responsible for these initiatives and for
working with, and supporting, our product managers and sales force. We also have an in-house
research team focused on ensuring that our sales professionals have appropriate market and target
information.


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We believe our ability to establish and maintain long-term customer relationships, adoption of our
products and services and recurring sales are dependent on the strength of our customer service,
operations and support team. Our customer service, operations and support team consists of
approximately 29 employees located in our corporate headquarters in Nashville. This team provides
customer support to end users through a toll-free telephone line as well as electronic mail. Our
representatives are trained to understand our philosophy, our
products and services, and our specific sales, marketing and
support issues. This team also maintains an ongoing dialog with our customer base to ensure a
complete understanding of customer needs. These personnel also assist with ongoing issues and
training of our products as well as to ensure anticipated renewals and incremental sales are
achieved. The remaining personnel on this team are responsible for
training, implementation and support of HLC, HealthStream<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>
Express, and installed learning management customers.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>TECHNOLOGY MANAGEMENT</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our
services are designed to be
secure, reliable, and expandable. Our software is a combination of
proprietary and commercially-available software and operating
systems. This combination of software supports acquisition and conversion of
content, hosting and management of that content, publication of our Web sites, downloads of
courseware, registration, tracking of users, and reporting of information for both internal and
external use. We designed our services to allow each component to be independently
scaled by adding commercially-available hardware and a combination of
commercially-available and proprietary software components.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our network infrastructure, Web sites, and servers that deliver our services are hosted by third
party providers. Our primary data center and hosting facility is in Chicago, while a second data
center and hosting facility in Nashville (with a second vendor) was
added in 2004. We are not currently serving customers out of the
second hosting facility, but we continue to work to configure this
location as a disaster recovery facility. Both providers
maintain our equipment in a secure environment, including multiple redundancies in power sources
and network connections. Our providers&#146; hosting centers are connected to the Internet through
multiple, redundant high-speed fiber optic circuits. Company
personnel monitor all servers, networks, and
systems on a continuous basis. Together with our providers, we
employ several levels of enterprise firewall systems to protect our databases, customer
information, and content library. Backups of customer data are performed
on a daily basis. Data is secured at a remote location on a weekly basis.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>COMPETITION</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The healthcare education industry is highly fragmented, varies significantly in delivery methods
(<I>i.e.</I>, written materials, live events, satellite broadcasts, video, CD-ROM products and online
products), and is composed of a wide variety of entities competing for customers. The sheer volume
of healthcare information available to satisfy continuing education needs, rapid advances in
medical developments, and the time constraints that healthcare professionals face make it difficult
to quickly and efficiently access the continuing education content most relevant to an individual&#146;s
practice or profession. Historically, healthcare professionals have received continuing education
and training through offline publications, such as medical journals and CD-ROMs, and by attending
conferences and seminars. In addition, other healthcare workers and pharmaceutical and medical
device manufacturers&#146; sales and internal regulatory personnel usually fulfill their education and
training needs through instructor-led programs from external vendors or internal training
departments. While these approaches satisfy the ongoing requirements, they are limited in that they
are typically costly and inconvenient. In addition, live courses are often limited in the breadth
of offerings and do not provide a method for tracking training completion. The related results of
these traditional methods, both from a business and compliance standpoint, are difficult to track
and measure.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In addition to the competing delivery methods described above, we also have direct competitors. A
number of companies offer competitive installed and Web based learning management products to the
healthcare industry. We also compete with large scale learning management system providers such as
SABA, SumTotal Systems, Thinq and Thomson Delmar that provide their services to
multiple industries, including healthcare. Finally, over the past year we have also seen an
increase in a teaming approach between consulting and technology entities to address larger scale
projects.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We believe our solutions, which include both products and services that facilitate training for
healthcare professionals, a wide assortment of content, a mechanism for measuring results, and the
ability to provide all our services on a single platform over the Internet, provide us with a
competitive advantage. We believe that the principal competitive factors affecting the marketing of
e-learning services to the healthcare industry include:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> features of the HLC product, including reporting, management
functionality, courseware assignment, scalability, and the ability
to track utilization and results;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> scope and variety of Internet-based learning content available,
including mandated content for OSHA, JCAHO, patient safety, and
HIPAA requirements, competency-based content, as well as the
ability of our customers to create and host their own Web-enabled
content;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> scope and quality of professional services offered, including implementation,
training and the expertise and technical knowledge of the customers&#146; employees;</TD>
</TR>

</TABLE>

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<P><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> ability to access and leverage an existing customer base to increase exposure for
pharmaceutical and medical device companies;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> competitive pricing, which supports a return on investment when compared to other alternatives;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> customer service and support; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> effectiveness of sales and marketing efforts, and company reputation.</TD>
</TR>

</TABLE>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Collectively, we believe these capabilities provide us with the ability to improve the quality of
healthcare by improving the quality and accessibility of healthcare training.


<P align="left" style="font-size: 10pt"><B>GOVERNMENT REGULATION OF THE INTERNET AND THE HEALTHCARE INDUSTRY</B>



<P align="left" style="font-size: 10pt"><B>The Internet</B>



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The laws and regulations that govern our business change rapidly. The United States government and
the governments of some states and foreign countries have attempted to regulate activities on the
Internet. The following are some of the evolving areas of law that are relevant to our business:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> <I>Privacy Law. </I>Current and proposed federal, state and foreign privacy regulations and
other laws restricting the collection, use, confidentiality and disclosure of personal
information could limit our ability to collect information or use the information in
our databases or derived from other sources, to generate revenues. It may be costly to
implement security or other measures designed to comply with any new legislation.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> <I>Encryption Laws. </I>Many copyright owner associations have lobbied the federal
government for laws requiring copyrighted materials transmitted over the Internet to be
digitally encrypted in order to track rights and prevent unauthorized use of
copyrighted materials. If these laws are adopted, we may incur substantial costs to
comply with these requirements or change the way we do business.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> <I>Content Regulation. </I>Both foreign and domestic governments have adopted and proposed
laws governing the content of material transmitted over the Internet. These include
laws relating to obscenity, indecency, libel and defamation. We could be liable if
content delivered by us violates these regulations.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> <I>Information Security Accountability Regulation. </I>A couple of bills are pending in
Congress that could require public companies to obtain certification by an independent
third party of the company&#146;s computer information security. If this legislation is
enacted, we may incur costs to comply with these security requirements. The preliminary
nature of such legislation and the lack of related guidance makes estimation of related
costs difficult. In addition, at least one state has enacted legislation that requires
companies to notify customers of any security breaches. If the Company is required to
make a public announcement regarding a breach of security, it could have a negative
impact on our business.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> <I>Sales and Use Tax. </I>Through December&nbsp;31, 2004, we collected sales, use or other taxes
on taxable transactions in all states in which we have employees. While HealthStream
expects that this approach is appropriate, other states or foreign jurisdictions may
seek to impose tax collection obligations on companies like us that engage in online
commerce. If they do, these obligations could limit the growth of electronic commerce
in general and limit our ability to profit from the sale of our services over the
Internet.</TD>
</TR>

</TABLE>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Laws and regulations directly applicable to e-commerce and Internet communications are becoming
more prevalent. Recent sessions of Congress enacted Internet laws regarding online copyright
infringement. Congress continues considering laws regarding Internet taxation. The dynamic nature
of this regulatory environment increases the uncertainty regarding the marketplace impact of such
regulation. The enactment of any additional laws or regulations may increase our cost of conducting
business or otherwise harm our business, financial condition and operating results.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Regulation of Education and Training for Healthcare Professionals</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>Allied Disciplines. </I>Various allied health professionals are required to obtain continuing education
to maintain their licenses. For example, emergency medical services personnel may be required to
acquire up to 20 continuing education hours per year. These requirements vary by state and depend
on the classification of the employee.


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>Occupational Safety and Health Administration (OSHA). </I>OSHA regulations require employers to provide
training to employees to minimize the risk of injury from various potential workplace hazards.
Employers in the healthcare industry are required to provide training with respect to various
topics, including blood borne pathogens exposure control, laboratory safety and tuberculosis
infection control. OSHA regulations require employers to keep records of their employees&#146;
completion of training with respect to these workplace hazards.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>Joint Commission on Accreditation of Healthcare Organizations (JCAHO). </I>JCAHO mandates that
employers in the healthcare industry provide certain workplace safety and patient interaction
training to employees. JCAHO required training may include programs on infection control, patient
bill of rights, radiation safety and incident reporting. Healthcare organizations are required to
provide and document training on these topics to receive JCAHO accreditation. In addition, JCAHO
imposes continuing education requirements on physicians that relate to each physician&#146;s specific
staff appointments.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>Health Insurance Portability and Accountability Act (HIPAA). </I>HIPAA regulations require
organizations that maintain or transmit health information electronically in connection with
certain transactions to provide reasonable and appropriate safeguards to protect the integrity and
confidentiality of individually identifiable healthcare information. These healthcare organizations
are required to establish, maintain and provide training with regard to their policies and
procedures for protecting the integrity and confidentiality of individually identifiable healthcare
information. Healthcare organizations are required to document training on these topics to support
their compliance.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>Continuing Education (CE). </I>State nurse practice laws are usually the source of authority for
establishing the state board of nursing, which then establishes the state&#146;s CE requirements for
professional nurses. Continuing education programs are provided through accredited providers
approved by the American Nurses Credentialing Center Commission on Accreditation and/or the state
board of nursing. CE requirements vary widely from state to state. Twenty-nine states require some
form of CE in order to renew a nurse&#146;s license. In some states, the CE requirement only applies to
re-licensure of advance practice nurses, or additional CEs may be required of this category of
nurses. On average, 12 to 15 CEs are required annually, with reporting generally on a bi-annual
basis. Certifications may also require continuing education credits (e.g., CNOR &#151; certification of
perioperative nursing).


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>Continuing Medical Education (CME). </I>State licensing boards, professional organizations and
employers require physicians to certify that they have accumulated a minimum number of continuing
medical education hours to maintain their licenses. Generally, each state&#146;s medical practice laws
authorize the state&#146;s board of medicine to establish and track CME requirements. Thirty-four state
medical licensing boards currently have CME requirements. The number of CME hours required by each
state ranges up to 50 hours or more per year. Other sources of CME requirements are state medical
societies and practice specialty boards. The failure to obtain the requisite amount and type of CME
could result in non-renewal of the physician&#146;s license to practice medicine and/or membership in a
medical or practice specialty society. The American Medical Association&#146;s, or AMA&#146;s, Physician
Recognition Award, or PRA, is the most widely recognized certificate for acknowledging physician
completion of a CME course. The AMA classifies continuing education activities as either category
1, which includes formal CME activities, or category 2, which includes most informal activities.
Sponsors want to designate CME activities for AMA PRA category 1 because this has become the
benchmark for quality in formally organized educational activities. Most agencies nationwide that
require CME participation specify AMA PRA category 1 credit. Only institutions and organizations
accredited to provide CME can designate an activity for AMA PRA category 1. The Accreditation
Council for Continuing Medical Education, or ACCME, is responsible for the accreditation of medical
schools, state medical societies and other institutions and organizations that provide CME
activities for a national or regional audience of physicians. Only institutions and organizations
are accredited. The ACCME and state medical societies do not accredit or approve individual
activities. State medical societies, operating under the aegis of the ACCME, accredit institutions
and organizations that provide CME activities primarily for physicians within the state or
bordering states. We are an accredited provider of CME by the ACCME.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Office of the Inspector General (OIG)&nbsp;of the Department of Health and Human Services (HHS)</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The OIG issued Compliance Program Guidelines for Pharmaceutical Manufacturers (Guidelines) in April
2003. This document includes guidelines related to continuing educational activities supported by
pharmaceutical and medical device companies. The Guidelines could affect the type and extent of
future support for our continuing education activities. The trade associations for the
pharmaceutical and medical device industries (PhRMA and AdvaMed, respectively) have also
promulgated their own codes of ethics. The Company follows the rules and guidelines provided by
ACCME, ANCC, and other continuing education accrediting bodies to ensure that its continuing
education programming is free from commercial bias and consistent with the OIG Guidelines.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>The U.S. Food and Drug Administration and the Federal Trade Commission</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Current FDA and FTC rules and enforcement actions and regulatory policies or those that the FDA or
the FTC may develop in the future could have a material adverse effect on our ability to provide
existing or future applications or services to our end users or obtain the necessary corporate
sponsorship to do so. The FDA and the FTC regulate the form, content and dissemination of labeling,
advertising and promotional materials, including direct-to-consumer prescription drug and medical
device advertising, prepared by, or


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">for, pharmaceutical, biotechnology or medical device companies.
The FTC regulates over-the-counter drug advertising and, in some cases, medical device advertising.
Generally, regulated companies must limit their advertising and promotional materials to
discussions of the FDA-approved claims and, in limited circumstances, to a limited number of claims
not approved by the FDA. Therefore, any information that promotes the use of pharmaceutical or
medical device products that is presented with our services is subject to the full array of the FDA
and FTC requirements and enforcement actions. We believe that banner advertisements, sponsorship
links and any educational programs that lack independent editorial control that we may present with
our services could be subject to FDA or FTC regulation. While the FDA and the FTC place the
principal burden of compliance with advertising and promotional regulations on the advertiser, if
the FDA or FTC finds that any regulated information presented with our services violates FDA or FTC
regulations, they may take regulatory action against us or the advertiser or sponsor of that
information. In 1996, the FDA announced it would develop a guidance document expressing a broad set
of policies dealing with the promotion of pharmaceutical, biotechnology and medical device products
on the Internet. The FDA has yet to issue that guidance document, and it is not clear when such
document may be released. The FDA guidance document may reflect new regulatory policies that more
tightly regulate the format and content of promotional information on the Internet.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws,
confidentiality agreements and procedures with employees, consultants and other third parties, license agreements with
consultants, vendors and customers, and by controlling access to our
software, documentation and other proprietary information. We own federal trademark and service mark registrations for the
marks &#147;HEALTHSTREAM&#148;, &#147;HOSPITALDIRECT&#148; and &#147;OR PROTOCOL.&#148;


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We
obtain the content that we license to our customers through a
combination of license agreements with publishers or authors,
assignments and work-for-hire arrangements with third parties, and
development by employees.
We require publishers, authors and other third parties to represent and warrant that their content does not infringe on
any third-party intellectual property rights and that they have the right to provide their content
and have obtained all third-party consents necessary to do so. Our
publishers, authors and other third parties also agree to
indemnify us against liability we might sustain due to the content they provide.



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">If a third party asserts a
claim that we have infringed their intellectual property, we may be required to
redesign our products or enter into royalty or licensing agreements. In
addition, we license technologies from third parties for incorporation into our
services. Royalty and licensing agreements with these third parties may not be
available on terms acceptable to us, if at all. Additionally, the steps we have
taken to protect our intellectual property rights may not be adequate. Third
parties may infringe or misappropriate our proprietary rights. Competitors may
also independently develop technologies that are substantially equivalent or
superior to the technologies we employ in our services. If we fail to protect
our proprietary rights adequately, our competitors could offer similar services,
potentially significantly harming our competitive position and decreasing our
revenues.

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>AVAILABLE INFORMATION</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The Company files reports with the Securities and Exchange Commission (SEC), including annual
reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The
public may read and copy any materials we file with the SEC at the SEC&#146;s Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer
and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and
information statements, and other information filed electronically. Our website address is
www.healthstream.com. Please note that our website address is provided as an inactive textual
reference only. We make available free of charge through our website, the annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The information provided on our website is not part of this report, and is
therefore not incorporated by reference unless such information is otherwise specifically
referenced elsewhere in this report.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>OUR EMPLOYEES</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">As of December&nbsp;31, 2004, we employed 146 persons. Our success will depend in large part upon our
ability to attract and retain qualified employees. We face competition in this regard from other
companies, but we believe that we maintain good relations with our employees. We are not subject to
any collective bargaining agreements.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>EXECUTIVE OFFICERS OF THE REGISTRANT</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The following is a brief summary of the business experience of each of the executive officers of
the Company. Officers of the Company are elected by the Board of Directors and serve at the
pleasure of the Board of Directors. The following table sets forth certain information regarding
the executive officers of the Company:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="15%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Age</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Position</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Robert A. Frist, Jr.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">38</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chief Executive Officer, President and Chairman of the Board of Directors</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Arthur E. Newman </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">56</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Senior Vice President and Chief Financial Officer, Compliance Officer</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fred Perner </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">51</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Senior Vice President</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Susan A. Brownie </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">40</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Senior Vice President, Corporate Secretary</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Robert A. Frist, Jr., one of our co-founders, has served as our chief executive officer and
chairman of the board of directors since 1990 and president since 2001. Mr.&nbsp;Frist serves on the
board of directors of HearingPlanet, Inc., an online hearing aid distribution
company. He graduated with a Bachelor of Science in business with concentrations in finance,
economics and marketing from Trinity University.


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Arthur E. Newman has served as our chief financial officer and senior vice president since January
2000. Mr.&nbsp;Newman assumed compliance officer responsibilities in October&nbsp;2004. From April&nbsp;1990 to
August&nbsp;1999, Mr.&nbsp;Newman served as executive vice president overseeing finance, human resources,
information systems and customer service and fulfillment for Lippincott, Williams and Wilkins,
formerly Waverly, Inc., a publicly traded medical sciences publisher. In May&nbsp;1998, Waverly was
acquired by Wolters Kluwer and merged with Wolters Kluwer&#146;s existing U.S. based medical publisher,
Lippincott-Raven Publishers. From August&nbsp;1999 to January&nbsp;2000, Mr.&nbsp;Newman served as the chief
technology officer for Wolters Kluwer&#146;s scientific, technical and medical companies consisting of
five separate units. Mr.&nbsp;Newman holds a Bachelor of Science in chemistry from the University of
Miami and a Masters of Business Administration from Rutgers University.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Fred Perner has served as senior vice president since November&nbsp;2000 and senior director from July
2000 to November&nbsp;2000. During 2004, Mr.&nbsp;Perner assumed
responsibility for sales and marketing in addition to other areas. From
January&nbsp;1999 until June&nbsp;2000, Mr.&nbsp;Perner served as president of Education Design, Inc., a company
acquired by HealthStream in July&nbsp;2000. Mr.&nbsp;Perner served as corporate director of marketing for the
Association of periOperative Registered Nurses from 1996 to 1999. From 1976 to 1988, Mr.&nbsp;Perner
served various positions, including vice president of marketing and business development for the
medical device group of Bristol Myers Squibb. Mr.&nbsp;Perner holds a Bachelor of Science in general
management and a Masters in Business Administration from Indiana University. Mr.&nbsp;Perner also holds
a J.D. from the University of Denver College of Law.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Susan A. Brownie was promoted to Senior Vice President in early
2005. Before her promotion, Ms.&nbsp;Brownie served as our vice president of finance and corporate
controller since joining us in November&nbsp;1999. Ms.&nbsp;Brownie assumed corporate secretary
responsibilities in October&nbsp;2004. From August&nbsp;1986 until 1999, Ms.&nbsp;Brownie worked for KPMG LLP, a
public accounting and consulting firm, most recently as a senior manager. Ms.&nbsp;Brownie serves on the
board of directors of Levy&#146;s Inc., a clothing retailer. She holds a Bachelor of Business
Administration from the College of William and Mary and is a certified public accountant.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>RISK FACTORS</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We believe that the risks and uncertainties described below and elsewhere in this document are the
principal material risks facing the Company as of the date of this report. In the future, we may
become subject to additional risks that are not currently known to us. Our business, financial
condition or results of operations could be materially adversely affected by any of the following
risks and by any unknown risks. The trading price of our common stock could decline due to any of
the following risks or any unknown risks.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Risks related to our business model.</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may be unable to effectively implement our growth strategy which could have an adverse effect on
our business and competitive position in the industry.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our business strategy includes increasing our market share and presence through sales to new
customers, transitioning existing customers, further penetration and additional sales to existing
customers and introductions of new products and services. Some of the risks that we may encounter
in implementing our growth strategy include:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> expenses, delays and difficulties of identifying and integrating new products or services into our existing
organization;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> inability to leverage our operational and financial systems
sufficient to support our growth;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> diversion of management&#146;s attention from daily operations;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> inability to generate sufficient revenue from new products
to offset investment costs; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> inability to effectively identify, manage and exploit
existing and emerging market opportunities.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">If any of these risks are realized, our business could suffer.



<P align="left" style="font-size: 10pt"><B><I>We may be unable to effectively identify, complete or integrate the operations of future
acquisitions.</I></B>



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">As part of our growth strategy, we are actively reviewing possible strategic acquisitions that
complement or enhance our business. We may not be able to identify, complete or integrate the
operations of future acquisitions. In addition, if we finance acquisitions by issuing equity
securities, our existing shareholders may be diluted which could affect the market price of our
stock. As a result, if we fail to properly evaluate and execute acquisitions and investments, our
business prospects may be seriously harmed. Some of the risks that we may encounter in
implementing our acquisition strategy include:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> expenses, delays or difficulties of identifying and integrating acquired companies into our organization;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> diversion of management&#146;s attention from daily operations; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> inability to generate sufficient revenues from future acquisitions to offset acquisition costs.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">8
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<P><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Certain revenue components are subject to significant fluctuations.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">As revenues from our subscription business continue to increase, a larger portion of our revenues
will be more easily forecasted; however, quarterly performance may be more subject to fluctuations
associated with our project based business, which generally relates to our pharmaceutical and
medical device business. This business is generally associated with recurring customer
relationships, however services are generally specific and relate to product launches or training
events that may vary from year to year. The magnitude of such
contracts may vary widely.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Our sales cycle is lengthy and can vary widely.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The period from our initial contact with a potential customer and the first purchase of our
solution by the customer typically ranges from three to nine months, and in some cases has extended
much further. The range in the sales cycle can be impacted by factors including an increasing trend
towards more formal requests for proposals (RFP&#146;s) process, more competition within our space, as
well as formal budget timelines which impact timing of purchases by target customers. As a result
of these factors, we have only limited ability to forecast the timing and type of sales. This, in
turn, makes it more difficult to predict quarterly financial performance.



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may not be able to maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, technical and other resources.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Several of our competitors have longer operating histories and significantly greater financial,
technical, marketing and other resources than us, and several of the larger e-learning companies
have from time-to-time announced their intentions to enter the healthcare e-learning market. Still
others offer a lower cost service alternative that may capture a portion of our potential customer
base. In addition, if such competitors were to offer a complete e-learning solution to the
healthcare industry, our competitive position could be adversely affected. These companies may be
able to respond more quickly than us to new or changing opportunities, technologies, standards or
customer requirements. Most of our customer subscription agreements are for short terms with no
obligation to renew. The short terms of these agreements allow customers to more easily shift to
one of our competitors.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We have begun to encounter more competition from new companies focused on training and continuing
education in the healthcare industry. While we have not experienced direct competition across all
of our products and services with a single provider, as the market for online training and
continuing education becomes saturated with competitors, our business
may suffer.



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Growth in courseware subscription revenues depend, in part, on our obtaining proper distribution
rights from our content partners.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Most of our agreements with content providers are for initial terms of one to three years. The
content partners may choose not to renew their agreements with us or may terminate the agreements
early if we do not fulfill our contractual obligations. If a significant number of our content
providers terminate or fail to renew their agreements with us on acceptable terms, it could result
in a reduction in the number of courses we are able to distribute and decreased revenues. Most of
our agreements with our content partners are also non-exclusive, and our competitors offer, or
could offer, training and continuing education content that is similar to or the same as ours. If
publishers and authors, including our current content partners, offer information to users or our
competitors on more favorable terms than those offered to us or increase our license fees, our
competitive position and our profit margins and prospects could be harmed. In addition, the
failure by our content partners to deliver high-quality content and to continuously
upgrade their content in response to user demand and evolving healthcare advances and trends could
result in user dissatisfaction and inhibit our ability to attract users.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may not be able to develop enhancements to our existing products and services or achieve
widespread acceptance of new features or keep pace with technological developments.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We plan to increase our revenues through sales to new customers as well as increasing our
sales of additional courseware subscriptions and other products and services to existing customers.
Our identification of additional features, content, products and services may not


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">result in timely
development of complementary products. In addition, the success of certain new products and
services may be dependent on continued growth in our base of Internet-based customers or adoption
of new methodology by new customers. Because healthcare training continues to change and evolve, we
may be unable to accurately predict and develop features, content and other products to address the
needs of the healthcare industry. During the past two years, we have invested in new products
including HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>, HealthStream<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> Express, and Competency
Compass<SUP style="font-size: 85%; vertical-align: text-top">&#153;</SUP>. If these products are not accepted by new or existing customers, we may not
be able to recover the cost of this development and our business will be harmed. Continued growth
of our Internet-based customer population is dependent on our ability to continue to provide
relevant products and services in a timely manner. The success of our business will depend on our
ability to continue providing our products and services as well as continued content, product and
service enhancements to address the needs of the healthcare industry.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Within the healthcare industry, our customer channels are focused on two segments: healthcare
organizations and pharmaceutical/ medical device companies. We rely on spending within these two
segments and our business may suffer if financial pressures cause our potential or existing
customers to cut back on our services.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">There
are several economic factors that have had an impact on the nation&#146;s approximately 5,000
acute care hospitals. Some of these factors include labor costs,
which as recently as 2002 constituted 40&nbsp;percent of
hospital revenues, according to the Centers for Medicare and Medicaid (CMS), with half of that
allocated for staffing nurses. Also, the reduced Medicare payment increases that resulted from the
Balanced Budget Act of 1997 and the lower payments that most hospitals accepted from managed care
companies in the last several years have both had an adverse financial effect on the hospital
segment. These financial pressures, along with several major hospital defaults and bankruptcies,
have resulted in limited access to capital for hospitals. As HealthStream&#146;s target market within
the healthcare industry, hospitals&#146; financial pressures are salient in achieving our business
objectives.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Financial analysts generally believe that medical device companies enjoy higher revenues and
earnings growth, relative to their medical supply company counterparts, although they&#146;re considered
more volatile. The medical device industry is highly concentrated; the largest two percent of the
6,000 U.S. medical device firms account for nearly half of the industry&#146;s sales, according to the CMS. In
addition, relatively short product life cycles for medical devices make the management and
marketing strategies particularly crucial in this segment. These economic factors contribute to the
volatility of this customer channel for HealthStream.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The top ten pharmaceutical companies account for 60&nbsp;percent of U.S. drug sales, with the top
company owning a ten percent market share of the U.S. pharmaceutical market in 2001, according to
CMS. Successful research and development is the key driver for long-term growth, yet this may be
held constant or reduced during profit crunches&#151;like that experienced by some companies as the
patent expires on their blockbuster drugs. Both branded and generic pharmaceutical companies
fiercely litigate intellectually property and, as a result, may experience adverse financial
consequences. Over the past few years, pharmaceutical companies experienced a significant increase in public
scrutiny with respect to product development, testing and introductions in certain specific
treatment areas. Continued restrictions or further extending the testing and product launch cycle
could have a negative impact on our sales to and revenues from pharmaceutical companies. As one of
our two customer channels, these characteristics of the pharmaceutical and medical device segment
could have an impact on HealthStream.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Financial Risks</B>




<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>A significant portion of our revenue is generated from a relatively small number of customers.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We provide our Internet-based training and education services to HCA Information Technology &#038;
Services, Inc. (HCA)&nbsp;pursuant to an agreement that expires in October&nbsp;2005. During 2004, we
derived approximately 15%, or $2.9&nbsp;million, of our net revenues from HCA. HCA has the right to
terminate this agreement if we fail to deliver the required services under this agreement on a
timely basis. We also derive a significant portion of our revenues from a relatively small number
of customers. A termination of our agreement with HCA or several of our other significant
customers or a failure by HCA or other significant customers to renew their contracts would have a
material adverse effect on our business.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>The percentage of our business that is subject to renewal continues to increase, which makes it
difficult to predict the rate of customer subscription renewals and the impact those renewals will
have on our revenue and operating results.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our Internet-based HLC customers have no obligation to renew their subscriptions for our products
or services after the expiration of the initial subscription period and in fact, some customers
have elected not to renew their subscription. In addition, our customers may renew at a lower
pricing or activity level. Our historical data with respect to rates of customer subscription
renewals is based on lower levels of contract renewal activity.
During the year ended December 31, 2004, we renewed 85% of the annual
contract value up for renewal and over 80% of the contracts which
were up for renewal. We expect that the
number of accounts up for renewal will increase during and after 2005, so we cannot accurately
predict customer renewal rates. Our customers&#146; renewal rates may decline or fluctuate as a result
of a number of factors, including their dissatisfaction with our service. If we are unable to renew
a substantial portion of the contracts that are up for renewal or maintain our pricing, our
revenues could be adversely affected, which would have a material adverse affect on our results of
operations and financial position. In addition, much of our live event activity is of a recurring
and predictable nature, however,


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">we do not have any long term contracts that obligate these
customers beyond the current contract terms. If our customers do not
renew their arrangements for
our service, or if their activity levels decline, our revenue may decline and our business will
suffer.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our future success also depends in part on our ability to sell additional features or enhanced
editions of our service to our current customers. This may require increasingly sophisticated and
costly sales efforts that require targeting, contact with, or approval by our customer&#146;s senior
management. If these efforts are not successful, our business may suffer.



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>The timing of our revenue recognition from sales activity is dependent upon achievement of certain
events, and our inability to accurately predict them will harm our operating results.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our ability to record revenues is dependent upon several factors including the transfer of
customer-specific information such as unique subscriber IDs, which are required for us to implement
customers on our Internet-based learning platform. Accordingly, if customers do not provide us with
the specified information in a timely manner, our ability to recognize revenues will be delayed,
which could adversely impact our operating results. In addition, completion and acceptance by our
customers of developed content and courseware must be achieved, and utilization of courseware is
required in connection with subscription Internet-based learning products and commercial support
arrangements for us to recognize revenues. As we noted above, while we have been successful in
achieving growth in the percentage of subscription based revenues, our project based revenues are
subject to significant fluctuations.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Because we recognize revenue from subscriptions for our products and services over the term of the
subscription period, downturns or upturns in sales may not be immediately reflected in our
operating results.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We recognize a large portion of our revenue from customers monthly over the terms of their
subscription agreements, which are typically one to three years, although terms can range from less
than one to up to five years. As a result, much of the revenue we report in each quarter is related
to subscription agreements entered into during previous quarters. Consequently, a decline in new or
renewed subscriptions in any one quarter will not necessarily be fully reflected in the revenue in
that quarter and will negatively affect our revenue in future quarters. In addition, we may be
unable to adjust our cost structure to reflect these reduced revenues. Accordingly, the effect of
significant downturns in sales and market acceptance of our products and services may not be fully
reflected in our results of operations until future periods. Additionally, our subscription model
also makes it difficult for us to rapidly increase our revenue through additional sales in any
period, as revenue from new customers must be recognized over the applicable subscription term.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may not be able to meet our strategic business objectives unless we obtain additional financing,
which may not be available to us on favorable terms or at all.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The net proceeds of our initial public offering, or IPO, and the preceding private offerings of our
common and preferred stock, together with our current cash reserves and results of operations, are
expected to be sufficient to meet our cash requirements through at least 2005. However, we may need
to raise additional funds in order to:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> develop new, or enhance existing, services or products;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> respond to competitive pressures;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> finance working capital requirements;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> sustain content and development relationships; or</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD> acquire complementary businesses, technology, content or products.</TD>
</TR>

</TABLE>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">At December&nbsp;31, 2004, we had approximately $16.5&nbsp;million in cash, cash equivalents, restricted
cash, investments in marketable securities and related interest receivable. We have commitments to
pay approximately $300,000 in 2005 related to certain agreements with various content partners and
other strategic agreements. We expect to incur approximately $3.0&nbsp;million of capital expenditures
and content purchases during 2005 to support our business. We expect net operating losses to
continue for at least one quarter of 2005. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund expansion, take advantage of available
opportunities, develop or enhance services


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">or products or otherwise respond to competitive
pressures would be significantly limited. If we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our shareholders will be reduced.

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Our relatively short operating history may prevent us from forecasting our results of operations
accurately.</I></B>

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">As
a result of our short operating history and lack of sustained success in executing our
growth strategy, we do not have historical financial data for a significant number of periods upon
which to forecast quarterly revenues and results of operations. We believe that period-to-period
comparisons of our operating results are not necessarily meaningful and
should not be relied upon as indicators of future performance. In addition, our operating results
may vary substantially. This variability results primarily from the differences in levels of sales
activity, introductions of new products and services, and the related revenue recognition for our
various products and services. In one or more future quarters, our results of operations may fall
below recent operating trends or the expectations of securities analysts and investors, and the trading
price of our common stock may decline.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Our stock price is likely to be volatile.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The market price of our common stock is likely to be volatile and could be subject to significant
fluctuations in response to factors such as the following, some of which are beyond our control:
quarterly variations in our operating results; operating results that vary from the expectations of
securities analysts and investors; changes in expectations as to our future financial performance;
changes in market valuations of other online service companies; future sales of our common stock;
stock market price and volume fluctuations; general political and economic conditions, such as a
recession or war or terrorist attacks or interest rate or currency rate fluctuations; and other
risk factors described in this Form 10-K. Moreover, our stock is thinly traded, and we have a
relatively small public float. These factors may adversely affect the market price of our common
stock. In addition, the market prices for stocks of many Internet related and technology companies
have historically experienced extreme price fluctuations that appeared to bear no relationship to
the operating performance of these companies.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Risks Related to Sales, Marketing and Competition</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We continue to refine our pricing and our products and services and cannot predict whether the
ongoing changes will be accepted.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Over the past few years we have implemented several changes and continue to make such changes in
our pricing and our product and service offerings to increase revenue and to meet the needs of our
customers. We cannot predict whether our current pricing and products and services, or any ongoing
refinements we make will be accepted by our existing customer base or by prospective customers. If
our customers and potential customers decide not to accept our current or future pricing or product
and service offerings, it could have a material adverse effect on our business.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Risks Related to Operations</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may be unable to adequately develop our systems, processes and support in a manner that will
enable us to meet the demand for our services.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We have provided our online products and services for approximately five years and continue to
develop our ability to provide our courses and education management systems on both a subscription
and transactional basis over the Internet. Our future success will depend on our ability to
effectively develop the infrastructure, including additional hardware and software, and implement
the services, including customer support, necessary to meet the demand for our services. Our
inability from time to time to successfully develop the necessary systems and implement the
necessary services on a timely basis has resulted in our customers experiencing some delays or
interruptions in their service. Such delays or interruptions may cause customers to become
dissatisfied with our service and move to competing providers of traditional and online training
and education services. If this happens, our revenues could be adversely affected, which would have
a material adverse effect on our financial condition.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Our business operations could be significantly disrupted if we lose members of, or fail to
integrate, our management team.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our future performance will be substantially dependent on the continued services of our management
team and our ability to retain and motivate them. The loss of the services of any of our officers
or senior managers could harm our business, as we may not be able to find suitable replacements. We
do not have employment agreements with any of our key personnel, other than our chief executive
officer, and we do not maintain any &#147;key person&#148; life insurance policies.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may not be able to hire and retain a sufficient number of qualified employees and, as a result,
we may not be able to grow as we expect or maintain the quality of our services.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our future success will depend on our ability to attract, train, retain and motivate other highly
skilled technical, managerial, marketing and customer support personnel. Competition for these
personnel is intense, especially for developers, Web designers and sales personnel, and we may be
unable to successfully attract sufficiently qualified personnel. We have experienced difficulty in
the past hiring qualified personnel in a timely manner for these positions. The pool of qualified
technical personnel, in particular, is limited in Nashville, Tennessee, which is where our
headquarters are located. We will need to maintain the size of our staff to support our anticipated
growth, without compromising the quality of our offerings or customer service. Our inability to
locate, hire, integrate and retain qualified personnel in sufficient numbers may reduce the quality
of our services.


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<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We must continue to upgrade our technology infrastructure, both hardware and software, to
effectively meet demand for our services.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We must continue to add hardware and enhance software to accommodate the increased content in our
library and increased use of our Web site. In order to make timely decisions about hardware and
software enhancements, we must be able to accurately forecast the growth in demand for our
services. This growth in demand for our services is difficult to forecast and the potential
audience for our services is large. If we are unable to increase the data storage and processing
capacity of our systems at least as fast as the growth in demand, our systems may become unstable
and our customers may encounter delays or disruptions in their service. Unscheduled downtime could
harm our business and also could discourage current and potential customers and reduce future
revenues.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Our network infrastructure and computer systems and software may fail.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">An unexpected event like a telecommunications failure, fire, flood, earthquake, or other
catastrophic loss at our Internet service providers&#146; facilities or at our on-site data facility
could cause the loss of critical data and prevent us from offering our products and services. Our
business interruption insurance may not adequately compensate us for losses that may occur. In
addition, we rely on third parties to securely store our archived data, house our Web server and
network systems and connect us to the Internet. While our service providers have planned for
certain contingencies, the failure by any of these third parties to provide these services
satisfactorily and our inability to find suitable replacements would impair our ability to access
archives and operate our systems and software.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may lose users and lose revenues if our security measures fail.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">If the security measures that we use to protect personal information are ineffective, we may lose
users of our services, which could reduce our revenues. We rely on security and authentication
technology licensed from third parties. With this technology, we perform real-time credit card
authorization and verification. We cannot predict whether these security measures could be
circumvented by new technological developments. In addition, our software, databases and servers
may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We
may need to spend significant resources to protect against security breaches or to alleviate
problems caused by any breaches. We cannot assure that we can prevent all security breaches.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Risks Related to Government Regulation, Content and Intellectual Property</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Government regulation may require us to change the way we do business.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The laws and regulations that govern our business change rapidly. The United States government and
the governments of states and foreign countries have attempted to regulate activities on the
Internet. Evolving areas of law that are relevant to our business include privacy law, proposed
encryption laws, content regulation and sales and use tax laws and regulations. Because of this
rapidly evolving and uncertain regulatory environment, we cannot predict how these laws and
regulations might affect our business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do business. See &#147;Business -
Government Regulation of the Internet and the Healthcare Industry&#148; for a more complete discussion
of these laws and regulations.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Any reduction or change in the regulation of continuing education and training in the healthcare
industry may adversely affect our business.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our business model is dependent in part on required training and continuing education for
healthcare professionals and other healthcare workers resulting from regulations of state and
Federal agencies, state licensing boards and professional organizations. Any change in these
regulations that reduce the requirements for continuing education and training for the healthcare
industry could harm our business.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In addition, our business with pharmaceutical and medical device manufacturers is predicated on our
ability to maintain accreditation status with organizations such as the Accreditation Council for
Continuing Medical Education (ACCME), American Nurses Credentialing Center (ANCC), American Council
for Pharmaceutical Education (ACPE)&nbsp;and others. The failure to maintain status as an accredited
provider could result in a detrimental effect on our business.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>New regulations may reduce our business activity with pharmaceutical and medical device customers.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In April&nbsp;2003, the Office of Inspector General (OIG)&nbsp;of the Department of Health and Human Services
issued &#147;OIG Compliance Program Guidance for Pharmaceutical Manufacturers.&#148; This guidance identifies
three areas of risks for pharmaceutical and medical device companies and recommends certain best
practices to be included in a compliance plan designed to avoid the risk of federal healthcare
program abuse. The guidance highlighted a number of arrangements that have the potential to trigger
fraud and abuse violations, including educational grants. The Company follows the rules and
guidelines provided by the ACCME, ANCC and other continuing education accrediting bodies to ensure
that its continuing education programming is free from commercial bias and consistent with the OIG
guidance. The majority of the Company&#146;s accredited continuing education programming is funded by


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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">educational grants from our pharmaceutical and medical device customers. There is no assurance that
our pharmaceutical and medical device customers will continue to provide educational grants
consistent with past practices. To the extent that our customers curtail or restructure their
business practices, it could have a material adverse impact on the Company&#146;s revenues, results of
operations, and financial position.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may be liable to third parties for content that is available from our online library.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We may be liable to third parties for the content in our online library if the text, graphics,
software or other content in our library violates copyright, trademark, or other intellectual
property rights, our content partners violate their contractual obligations to others by providing
content to our library or the content does not conform to accepted standards of care in the
healthcare profession. We attempt to minimize these types of liabilities by requiring
representations and warranties relating to our content partners&#146; ownership of the rights to
distribute as well as the accuracy of their content. We also take necessary measures to review this
content ourselves. Although our agreements with our content partners contain provisions providing
for indemnification by the content providers in the event of inaccurate content, we cannot assure
you that our content partners will have the financial resources to meet this obligation. Alleged
liability could harm our business by damaging our reputation, requiring us to incur legal costs in
defense, exposing us to awards of damages and costs and diverting management&#146;s attention away from
our business. See &#147;Business &#151; Intellectual Property and Other Proprietary Rights&#148; for a more
complete discussion of the potential effects of this liability on our business.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>Protection of certain proprietary trademarks and domain names may be difficult and costly.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Despite protection of certain proprietary trademarks and domain names, a third-party could, without
authorization, copy or otherwise appropriate our content or other information from our database.
Our agreements with employees, consultants and others who participate in development activities
could be breached. We may not have adequate remedies for any breach, and our trade secrets may
otherwise become known or independently developed by competitors. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as the laws of the
United States, and effective copyright, trademark and trade secret protection may not be available
in those jurisdictions. We currently hold several domain names. The legal status of intellectual
property on the Internet is currently subject to various uncertainties. The current system for
registering, allocating and managing domain names has been the subject of litigation and proposed
regulatory reform. Additionally, legislative proposals have been made by the federal government
that would afford broad protection to owners of databases of information, such as stock quotes.
This protection of databases already exists in the European Union. There have been substantial
amounts of litigation in the computer and online industries regarding intellectual property assets.
Third-parties may claim infringement by us with respect to current and future products, trademarks
or other proprietary rights, and we may counterclaim against such parties in such actions. Any
such claims or counterclaims could be time-consuming, result in costly litigation, divert
management&#146;s attention, cause product release delays, require us to redesign our products or
require us to enter into royalty or licensing agreements, any of which could have a material
adverse effect upon our business, financial condition and operating results. Such royalty and
licensing agreements may not be available on terms acceptable to us, if at all.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B><I>We may be unable to protect our intellectual property, and we may be liable for infringing the
intellectual property rights of others.</I></B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our business could be harmed if unauthorized parties infringe upon or misappropriate our
proprietary systems, content, services or other information. Our efforts to protect our
intellectual property through copyright, trademarks and other controls may not be adequate. In the
future, litigation may be necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others, which could be time consuming and costly.
Intellectual property infringement claims could be made against us as the number of our competitors
grows. These claims, even if not meritorious, could be expensive and divert our attention from
operating our company. In addition, if we become liable to third parties for infringing their
intellectual property rights, we could be required to pay a substantial damage award and develop
comparable non-infringing intellectual property, to obtain a license or to cease providing the
content or services that contain the infringing intellectual property. We may be unable to develop
non-infringing intellectual property or obtain a license on commercially reasonable terms, if at
all.


<P align="center" style="font-size: 10pt">14
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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="103"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;2. </B><B><I>Properties</I></B>



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Our principal office is located in Nashville, Tennessee. Our lease for approximately 31,000 square
feet at this location expires in April&nbsp;2005. The lease provides for a five-year renewal option with
rent at rates which are substantially similar to current rates. We
anticipate renewing or renegotiating our Nashville office lease at
rates substantially similar to our current lease. Rent at this location is
approximately $22,000 per month through April&nbsp;2005.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We are leasing approximately 8,000 square feet of office space in Denver, Colorado for our
satellite office. The lease expires in March&nbsp;2010 and has monthly rent of approximately $9,000.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We are leasing approximately 6,000 square feet of office space in Dallas, Texas. The lease expires
in January&nbsp;2007 and has monthly rent of approximately $8,000. We are currently subleasing this
office space at the rate of approximately $6,000 per month to a third party for the remaining term
of the lease.

<DIV align="left">
<A name="104"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;3. </B><B><I>Legal Proceedings</I></B>



<P align="left" style="font-size: 10pt">None.


<DIV align="left">
<A name="105"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;4. </B><B><I>Submission of Matters to a Vote of Security Holders</I></B>



<P align="left" style="font-size: 10pt">None.




<P align="center" style="font-size: 10pt">15
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<DIV align="left">
<A name="106"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>PART II</B>


<DIV align="left">
<A name="107"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;5. </B><B><I>Market for Registrant&#146;s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.</I></B>



<P align="left" style="font-size: 10pt">The following table sets forth, for the periods indicated, the high and low sales prices per share
of our common stock as reported on the NASDAQ National Market under the ticker symbol HSTM:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>2004</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">First Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.75</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Second Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.53</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.86</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Third Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.61</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fourth Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.87</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>2003</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">First Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Second Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Third Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fourth Quarter </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.50</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">On March&nbsp;8, 2005, there
were 223 registered holders and approximately 2,100 beneficial holders of
our common stock. Because many of such shares are held by brokers and other institutions on behalf
of shareholders, we are unable to estimate the total number of shareholders represented by these
record holders.



<P align="left" style="font-size: 10pt"><B>DIVIDEND POLICY</B>



<P align="left" style="font-size: 10pt">We have never declared or paid any cash dividends on our common stock, and we do not anticipate
paying cash dividends in the foreseeable future. We intend to retain earnings to finance the
expansion of our operations.



<P align="left" style="font-size: 10pt"><B>RECENT SALES OF UNREGISTERED SECURITIES</B>



<P align="left" style="font-size: 10pt">There have been no sales of unregistered securities since December&nbsp;31, 2003.



<P align="left" style="font-size: 10pt"><B>ISSUER PURCHASES OF EQUITY SECURITIES</B>



<P align="left" style="font-size: 10pt">There were no stock repurchases by the Company in the fourth quarter of 2004.



<P align="left" style="font-size: 10pt"><B>USE OF PROCEEDS</B>



<P align="left" style="font-size: 10pt">On April&nbsp;10, 2000 our Registration Statement on Form&nbsp;S-1 (File No.&nbsp;333-88939) was declared
effective by the Securities and Exchange Commission. Pursuant to the Registration Statement, we
registered and sold 5,275,000 shares of common stock at a price of $9.00 per share. The managing
underwriter was FleetBoston Robertson Stephens, Inc. The aggregate price of the amount offered and
sold was $47,475,000. In connection with the issuance and distribution of the securities
registered, we paid $3,323,250 related to underwriting discounts and commissions and approximately
$2,000,000 of other expenses.



<P align="left" style="font-size: 10pt">The net offering proceeds to the Company after deducting the total expenses noted above were
approximately $42,200,000. From the effective date of the Registration Statement through December
31, 2004, we have used approximately $34,700,000 of the net offering proceeds to fund general
operating expenses, acquisitions and other working capital needs.


<DIV align="left">
<A name="108"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;6. </B><B><I>Selected Financial Data</I></B>



<P align="left" style="font-size: 10pt">The selected statements of operations data for the three-year period ended December&nbsp;31, 2004 and
the balance sheet data as of December&nbsp;31, 2004 and 2003 are derived from our financial statements
that have been audited by Ernst &#038; Young LLP, our independent registered public accounting firm, and
are included elsewhere in this report. You should read the following selected financial data in
conjunction with our consolidated financial statements and the notes to those statements and
&#147;Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations&#148; located
elsewhere in this report.



<P align="left" style="font-size: 10pt">HealthStream acquired seven companies between 2000 and 2001. As a result of these acquisitions, the
annual results presented below are not comparable. Revenues may be subject to fluctuations as
discussed further in &#147;Management&#146;s Discussion and Analysis of



<P align="center" style="font-size: 10pt">16
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt">Financial Condition and Results of Operations&#148; located elsewhere in this report. During 2002, we
adopted SFAS No.&nbsp;142 &#147;Goodwill and Intangible Assets,&#148; which eliminated the amortization of
goodwill and indefinite lived intangible assets. In accordance with the provisions of SFAS No.&nbsp;142,
we recorded a transitional goodwill impairment charge of $5.0&nbsp;million, in our HCO business unit, as
a cumulative effect of a change in accounting principle as of January&nbsp;1, 2002. As a result of this
accounting change, the annual results presented below are not comparable. See Note 5 to the
Consolidated Financial Statements for details. The operating results for any single year are not
necessarily indicative of the results to be expected in the future.


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>Years Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2001</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2000</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(In thousands, except per share data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">STATEMENT OF OPERATIONS DATA:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,790</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,503</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,652</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating costs and expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,277</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,268</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,357</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,531</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,247</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,639</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales, marketing, general and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,433</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,431</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,835</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,428</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,107</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,048</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,936</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,901</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Office consolidation charge</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Impairment of long-lived assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">712</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,348</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,994</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,881</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,325</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,291</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,799</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,358</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,378</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22,673</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income (expense)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">243</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">387</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">717</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,802</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,388</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss, before cumulative effect of a change in accounting
principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,048</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,412</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,641</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,576</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,285</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cumulative effect of a change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,641</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(19,576</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(20,285</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss per share &#150; basic and diluted, before cumulative effect of a
change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.57</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.98</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1.29</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cumulative effect of a change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.25</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss per share &#150; basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.82</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.98</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1.29</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>

    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average shares of common stock
outstanding &#150; basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,586</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,921</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,786</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>At December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2001</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2000</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(In thousands)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE SHEET DATA:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,257</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,747</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">19,831</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Investments in marketable securities &#150;short and long
term</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,958</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,410</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,341</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Working capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,675</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,316</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,945</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,436</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,557</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,247</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,452</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,988</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,764</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt and capital leases, net of current
portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">216</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,896</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,543</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,017</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
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<A name="109"></A>
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<P align="left" style="font-size: 10pt"><B>Item&nbsp;7. </B><B><I>Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</I></B>



<P align="left" style="font-size: 10pt">The following discussion of the financial condition and results of operations of HealthStream
should be read in conjunction with &#147;Selected Financial Data&#148; and HealthStream&#146;s Consolidated
Financial Statements and related notes thereto included elsewhere in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. HealthStream&#146;s actual
results may differ significantly from the results discussed and those anticipated in these
forward-looking statements as a result of many factors, including but not limited to, those
described under &#147;Risk Factors&#148; and elsewhere in this report.



<P align="left" style="font-size: 10pt">The following discussion provides an overview of our history together with a summary of our
critical accounting policies and estimates. Our critical accounting policies and estimates include
revenue recognition, product development costs and related capitalization, impairment of goodwill,
intangible and other long-lived assets and the allowance for doubtful accounts.



<P align="left" style="font-size: 10pt"><B>OVERVIEW</B>



<P align="left" style="font-size: 10pt">HealthStream was incorporated in 1990 and began marketing its Internet-based solutions in March
1999. The Company focuses on being a facilitator of solutions and training tools for entities in
the healthcare industry. Revenues from the healthcare organizations business unit (HCO)&nbsp;are derived
from the following categories: provision of services through our Internet-based HealthStream
Learning Center, courseware subscriptions, a variety of complimentary online products, and
maintenance and support of installed learning management products. Revenues from the pharmaceutical
and medical device company business unit (PMD)&nbsp;are derived from live event development, online
training and content development, and other educational and training services.



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<P align="left" style="font-size: 10pt">To date, we have incurred substantial costs to develop our technologies, create, license, update,
and acquire our content, build brand awareness, develop our infrastructure and expand our business,
and only recently achieved sufficient revenues to generate a net profit or positive operating cash
flows. We have incurred operating losses in each fiscal quarter from 1994 through the third quarter
of 2004. During the fourth quarter of 2004 we had net income of approximately $77,000. We expect
our operating results to continue to improve over prior year levels during 2005.



<P align="left" style="font-size: 10pt"><B>CRITICAL ACCOUNTING POLICIES AND ESTIMATES</B>



<P align="left" style="font-size: 10pt"><B>Revenue Recognition</B>



<P align="left" style="font-size: 10pt">We recognize revenues from our Internet-based learning products and courseware subscriptions to
healthcare workers through healthcare organizations based on a per person subscription basis, with
fees ranging from less than $1 to more than $6 per month. These fees are based on the size of the
facilities&#146; or organizations&#146; employee user population and the service offerings to which they
subscribe. Contracts for our Internet-based learning products
generally range from less than $5,000 to
approximately $400,000 based on the number of users, products and services included and the
duration of the contract. Revenue is recognized ratably over the service period of the underlying
contract.



<P align="left" style="font-size: 10pt">Revenues associated with content maintenance services are recognized on a percentage of completion
basis.



<P align="left" style="font-size: 10pt">We offer training services for clients to facilitate integration of this technology. Fees for
training are based on the time and efforts of the personnel involved. Training revenues are
generally recognized upon completion of training services. Basic online training is generally
included in the initial contract, however, incremental training is recognized upon completion.



<P align="left" style="font-size: 10pt">Revenues from installed learning management products are associated with ongoing maintenance and
technical support services, typically based on a percentage of the original contract amount and
recognized as revenue over the term of the service period, generally one year. Until early 2002, we
also had revenues related to sales of installed learning management products, which were recognized
based upon shipment or installation of the software.



<P align="left" style="font-size: 10pt">We have and expect to continue to transition customers from our existing installed learning
management products to our Internet-based learning products. We expect that revenues resulting from
these transition customers will increase when compared to the annual maintenance and technical
support services fees due to sales of additional services and online courseware.



<P align="left" style="font-size: 10pt">We recognize revenue from live event development services and online training and content
development services based on the percentage of completion method using labor hours or similar
performance milestones. This methodology requires ongoing estimates regarding the total expenses or
significant milestones associated with the project as well as periodic estimates of the progress
with respect to completion of such projects. Event registration services revenue is based on the
contracted services including the expected registrant attendance. Revenues for these services are
recognized upon completion of the related events. Sales of products and services to pharmaceutical
and medical device companies can be subject to seasonal factors as a result of drug and product
introductions, meeting and conference dates and budget cycles for such companies.



<P align="left" style="font-size: 10pt">Revenues associated with online training are recognized over the term of the subscription period or
over the historical usage period, if usage typically differs from the subscription period. All
other service revenues are recognized as the related services are performed or products are
delivered.



<P align="left" style="font-size: 10pt">We expect to continue to generate revenues by marketing our Internet-based products and services to
healthcare workers through healthcare organizations and pharmaceutical and medical device
companies. We expect that the portion of our revenues related to services provided via our
Internet-based learning products will increase. Specifically, we will seek to generate revenues
from healthcare workers by marketing to their employers or sponsoring organizations. The fees we
charge for courseware resulting from this marketing is typically paid by either the employer or
sponsoring organization.



<P align="left" style="font-size: 10pt"><B>Product Development Costs</B>



<P align="left" style="font-size: 10pt">Product development costs primarily include our internal costs to maintain and internally develop
software features and content for our Internet-based learning and installed learning management
products. Once technological feasibility is achieved, we capitalize payments to third parties
associated with the cost of features or content where the life expectancy is greater than one year
and the anticipated cash flows from such features or content are expected to exceed the related
cost of the features or content. During 2004 and 2003, we capitalized approximately $600,000 and
$400,000, respectively, related to content development completed by third parties. Such amounts are
included in the accompanying consolidated balance sheets under the caption &#147;prepaid development
fees&#148; and &#147;other assets&#148; based on remaining useful lives. During 2004 and 2003, we capitalized
approximately $300,000 and $25,000, respectively, of software feature enhancements. Such amounts
are included in the accompanying balance sheets under the caption &#147;prepaid expenses and other
current assets&#148; and &#147;other assets&#148; based on remaining useful lives. We amortize content and feature
development over the expected life,



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<P align="left" style="font-size: 10pt">which is generally one to three years. Product development and content development costs that have
been capitalized are subject to a periodic impairment review in accordance with our policy.



<P align="left" style="font-size: 10pt">Product development costs also include our systems team, which manages our efforts associated with
product development and maintenance, database management, quality assurance and security. This
team is responsible for new internal product development, integration of external new products, and
continued enhancements and regularly scheduled maintenance (called ServicePacks) to our platform.



<P align="left" style="font-size: 10pt">We account for Web site development costs in accordance with EITF Issue No.&nbsp;00-2 &#147;Accounting for
Web Site Development Costs,&#148; which provides guidance on when to capitalize versus expense costs
incurred to develop a Web site. We capitalize costs incurred between the point of establishing
technological feasibility and general release when such costs are material.



<P align="left" style="font-size: 10pt">In connection with product development, our significant estimates involve the assessment of
technological feasibility for new products, as well as the expected useful life of costs associated
with new products and content. Once capitalized, product and content development costs are subject
to the policies and estimates described below regarding goodwill, intangibles and other long-lived
assets.



<P align="left" style="font-size: 10pt"><B>Goodwill, intangibles and other long-lived assets</B>



<P align="left" style="font-size: 10pt">We account for goodwill, intangibles and other long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS)&nbsp;No.&nbsp;142, &#147;Goodwill and Intangible Assets,&#148; and SFAS No.&nbsp;144,
&#147;Accounting for the Impairment or Disposal of Long-Lived Assets.&#148; We measure for impairment at the
reporting unit level using a discounted cash flow model to determine the estimated fair value of
the reporting units. Our discounted cash flow model contains significant assumptions and accounting
estimates about discount rates, future cash flows and terminal values that could materially affect
our operating results or financial position if they were to change significantly in the future. We
perform our goodwill impairment test whenever events or changes in facts or circumstances indicate
that impairment may exist and also during the fourth quarter each year.



<P align="left" style="font-size: 10pt"><B>Allowance for Doubtful Accounts</B>



<P align="left" style="font-size: 10pt">We estimate the allowance for doubtful accounts using both a specific and non-specific
identification method. Management&#146;s evaluation includes reviewing past due accounts on a case-by
case basis, and determining whether an account should be reserved, based on the facts and
circumstances surrounding each potentially uncollectible account. An allowance is also maintained
for accounts not specifically identified that may become uncollectible in the future. Uncollectible
accounts are written-off in the period management believes it has exhausted every opportunity to
collect payment from the customer. Bad debt expense is recorded when events or circumstances
indicate an additional allowance is necessary based on our specific identification approach.



<P align="left" style="font-size: 10pt"><B>RESULTS OF OPERATIONS</B>



<P align="left" style="font-size: 10pt"><B>Revenues and Expense Components</B>



<P align="left" style="font-size: 10pt">The following descriptions of the components of revenues and expenses apply to the comparison of
results of operations.



<P align="left" style="font-size: 10pt"><I>Revenues. </I>Revenues for our HCO business unit currently consist of the provision of services through
our Internet-based HealthStream Learning Center (HLC), authoring tools, maintenance and support
services for our installed learning management products, maintenance of content, competency tools
and a variety of courseware subscriptions (add-on courseware). Revenues for our PMD business unit
consist of live event development, online training and content development, online sales training
courses, live educational activities for nurses and technicians conducted within healthcare
organizations and continuing education activities at association meetings.



<P align="left" style="font-size: 10pt"><I>Cost of Revenues. </I>Cost of revenues consists primarily of salaries and employee benefits, employee
travel and lodging, materials, contract labor, hosting costs, and other direct expenses associated
with revenues as well as royalties paid by us to content providers based on a percentage of
revenues. Personnel costs within cost of revenues are associated with individuals that facilitate
product delivery, provide services, handle customer support calls or inquiries, manage our web
sites and content delivery, coordinate content maintenance services, and provide training or
implementation services.



<P align="left" style="font-size: 10pt"><I>Product Development. </I>Product development expenses consist primarily of salaries and employee
benefits, content acquisition costs before technological feasibility is achieved, costs associated
with the development of content and expenditures associated with maintaining, developing and
operating our training delivery and administration platforms. In addition, product development
expenses are associated with the development of feature enhancements and new products. Personnel
costs within product development include our systems team, product managers, and other personnel
associated with content and product development.



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<P align="left" style="font-size: 10pt"><I>Sales and Marketing Expenses. </I>Sales and marketing expenses consist primarily of salaries,
commissions and employee benefits, employee travel and lodging, advertising, trade shows,
promotions, and related marketing costs. Annually, we host a national users&#146; group in Nashville
known as The Summit. Personnel costs within sales and marketing include our sales and marketing
team as well as our account management group. Our account management personnel are involved with
the contract renewal process for existing hospital customers, as well as working to ensure our
products and services are fully utilized by our customers.



<P align="left" style="font-size: 10pt"><I>Other General and Administrative Expenses. </I>Other general and administrative expenses consist
primarily of salaries and employee benefits, employee travel and lodging, facility costs, office
expenses, fees for professional services, and other operational expenses. Personnel costs within
general and administrative expenses include individuals associated with normal corporate functions
(accounting, legal, human resources, administrative, internal information systems, and executive
management) as well as accreditation professionals.



<P align="left" style="font-size: 10pt"><I>Depreciation and Amortization. </I>Depreciation and amortization consist of fixed asset depreciation,
amortization of intangibles considered to have definite lives, and amortization of content, license
fees, software features, and royalties paid to content providers that are of a fixed nature.



<P align="left" style="font-size: 10pt"><I>Other Income/Expense. </I>The primary component of other income is interest income related to interest
earned on cash, cash equivalents and investments in marketable securities. The primary component of
other expense is interest expense related to capital leases.



<P align="left" style="font-size: 10pt"><B>Executive Summary</B>



<P align="left" style="font-size: 10pt">During 2004, revenues
increased $1.9&nbsp;million, or 10.2%, to $20.1
million for 2004 from $18.2&nbsp;million for 2003. Revenues from our flagship product, the Internet-based HealthStream Learning
Center, increased 26.7% over the prior year, while revenues from maintenance fees associated with
our HCO installed learning management products and from live event activities in our PMD unit
declined over the prior year. Our fully implemented subscriber base was approximately 1,040,000 at
the end of 2004, an annual increase of 35%. Gross margins (which we define as revenues less cost of
revenues divided by revenues) for 2004 declined compared to 2003, primarily as a result of
personnel expenses associated with Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>,
which were accounted for as product development in 2003, but included in cost of revenues in 2004.
Net loss improved by 69% over the prior year, primarily related to the increase in revenues and
reductions in amortization, product development, and other general and administrative expenses, but
was partially offset by increases in sales and marketing expense. Net loss per share improved to
$(0.05) per share for 2004 from $(0.17) per share for 2003.



<P align="left" style="font-size: 10pt"><B>2004 Compared to 2003</B>



<P align="left" style="font-size: 10pt"><I>Revenues. </I>Revenues increased approximately $1.9&nbsp;million, or 10.2%, to $20.1&nbsp;million for 2004 from
approximately $18.2&nbsp;million for 2003. Revenues for 2004 consisted of $14.0&nbsp;million for HCO and $6.1
million for PMD. In 2003, revenues consisted of $12.0&nbsp;million for HCO and $6.2&nbsp;million for PMD. HCO
revenue increases over 2003 resulted from growth in our core product, the Internet-based HLC,
content maintenance services and Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> product revenues, while revenues
associated with our installed learning management products declined as anticipated because of the
transition of customers to our Internet-based HLC product. Revenues associated with add-on
courseware subscriptions also declined slightly. PMD revenues experienced modest declines during
2004, primarily resulting from lower live event revenues, which were partially offset by increases
in revenues from sales of content development services.



<P align="left" style="font-size: 10pt">The Internet-based HLC subscriber base increased approximately 35% during 2004, from approximately
770,000 fully implemented subscribers at the end of 2003, to approximately 1,040,000 fully
implemented subscribers at the end of 2004. This increase contributed to a $2.1&nbsp;million increase in
HCO revenues, while content maintenance service revenues increased $340,000, and Competency
Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> product revenues increased $150,000. These HCO revenue increases were
partially offset by slight declines in add-on courseware subscription revenues. Revenues from
maintenance and support fees associated with our installed learning management products also
declined, as expected, by $550,000. This decline is consistent with our planned transition of these
customers to our Internet-based learning platform. We expect revenues from our installed learning
management products to continue to decline during 2005, as we continue to focus on transitioning
the customers using these products to our Internet-based learning platform. We expect revenues from
our Internet-based HLC, our Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> product<SUP style="font-size: 85%; vertical-align: text-top"> </SUP>and add-on
courseware to increase during 2005.



<P align="left" style="font-size: 10pt">The PMD unit experienced a modest decline in revenues during 2004. Revenues from the sales of our
online training and content development services increased $130,000 during 2004. This revenue
increase was offset by a $290,000 decline in live event revenues, in part related to the
pharmaceutical and medical device industry&#146;s cautious response to compliance guidelines issued by
the OIG and AdvaMed, which were effective January&nbsp;1, 2004. These guidelines placed additional
regulations on the funding of educational programs. We expect that revenues from our live event
services and content development services will increase during 2005. We also expect
HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>, which was launched during the third quarter of 2003, to generate
increased revenues during 2005.



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<P align="left" style="font-size: 10pt">During 2004, 62.1% of revenues were derived from our Internet-based learning products, 18.9% from
live event development services, 11.1% from content development services, 5.2% from our installed
learning management products and 2.7% from other products. During 2003, 57.2% of revenues were
derived from our Internet-based learning products, 22.5% from live event development services,
11.5% from content development services and 8.8% from our installed learning management products.



<P align="left" style="font-size: 10pt"><I>Cost of Revenues. </I>Cost of revenues increased approximately $1.0&nbsp;million, or 16.1%, to $7.3&nbsp;million
for 2004 from approximately $6.3&nbsp;million for 2003. During 2004, we experienced increased personnel
expenses, incremental costs associated with increased content maintenance and content development
revenues, and increased royalties paid by us associated with add-on courseware subscriptions and
Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> revenues. Most of the personnel expense increase is associated with
our Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> solutions, which were reflected
in product development expenses in 2003. Now that both products are being offered to customers,
these personnel costs were included in cost of revenues in 2004. Cost of revenues as a percentage
of revenues increased to 36.3% for 2004 from 34.4% for 2003. This increase as a percentage of
revenues resulted from increased personnel expenses and the change in revenue components discussed
above.



<P align="left" style="font-size: 10pt">Cost of revenues for HCO increased approximately $600,000, or 29.4%, to $2.8&nbsp;million for 2004 from
$2.2&nbsp;million for 2003, and approximated 20.2% and 18.2% of revenues for 2004 and 2003,
respectively. This increase is a result of expenses associated with Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
personnel, increased hosting costs, and increased royalties related to sales of add-on courseware
and Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>. We expect royalties to increase during 2005, but to remain
comparable or decline slightly as a percentage of revenue. Cost of revenues for PMD increased
$300,000, or 8.3%, to $3.9&nbsp;million in 2004 from $3.6&nbsp;million in 2003, and approximated 63.7% and
57.8% of revenues for 2004 and 2003, respectively. This increase is a result of expenses associated
with HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> personnel and higher contract labor and materials costs associated
with increases in content development revenues.



<P align="left" style="font-size: 10pt">Cost of revenues for the unallocated corporate functions increased approximately $70,000, or 13.6%,
to $585,000 in 2004 from $515,000 in 2003. This increase was associated with additional personnel
expenses. Cost of revenues for our unallocated corporate functions is comprised of content support
personnel who handle loading, updating, maintenance, versioning and support of content on our
Internet-based learning platforms, which serve products within both the HCO and PMD business units.



<P align="left" style="font-size: 10pt"><I>Gross Margin. </I>Gross margin (which we define as revenues less cost of revenues divided by revenues)
declined to 63.7% during 2004 from 65.6% during 2003. This decline is a result of the change in
revenue mix and related cost of revenues discussed above. Gross margins for HCO were 79.8% and
81.8% for 2004 and 2003, respectively. Gross margins for PMD were 36.3% and 42.2% for 2004 and
2003, respectively. Gross margins for PMD are lower than HCO due to the higher costs associated
with delivering live event and content development services, and such costs can vary from project
to project. We expect gross margins for HCO to improve modestly during 2005 resulting from
increases in Internet-based HLC and add-on courseware subscription revenues. We expect gross
margins for PMD in 2005 to remain comparable to 2004 levels.



<P align="left" style="font-size: 10pt"><I>Product development. </I>Product development expenses decreased approximately $700,000, or 22.1%, to
$2.5&nbsp;million for 2004 from $3.2&nbsp;million for 2003, and approximated 12.6% and 17.8% of revenues for
2004 and 2003, respectively. This reduction primarily resulted from lower personnel expenses
partially due to the redesignation of personnel associated with our Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
and HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> solutions from product development in 2003 to cost of revenues in
2004. In addition, the continued consolidation of product development efforts resulted in lower
personnel and contract labor expenses during 2004. New product development efforts during 2004 were
focused on feature enhancements, and content offerings that build upon our core product, the
Internet-based HLC. During 2004, we launched HealthStream Express (an economy-scaled version of our
Internet-based HLC) and several new content offerings to further our penetration and also expand
existing customer relationships. We also have several other content products under development that
are expected to be launched during the first quarter of 2005. In addition to amounts expensed, we
capitalized approximately $900,000 and $400,000 in 2004 and 2003, respectively, related to content
and software features completed by third parties.



<P align="left" style="font-size: 10pt">Product development expenses for HCO increased approximately $100,000, or 4.0%, to $2.0&nbsp;million for
2004 from $1.9&nbsp;million for 2003, and approximated 14.4% and 16.1% of revenues in 2004 and 2003,
respectively. During 2004, personnel expenses associated with Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> were
redesignated to cost of revenues. This shift of expense was offset by increased personnel costs
associated with platform maintenance and development of new feature enhancements for our
Internet-based products. Product development expenses for PMD decreased approximately $500,000, or
58.0%, to $400,000 for 2004 from $900,000 for 2003, and approximated 6.2% and 14.6% of revenues for
2004 and 2003, respectively. This decline was associated with the redesignation of personnel
associated with HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> to cost of revenues as well as reductions in the
development of other content products. The unallocated corporate portion of our product development
expenses decreased approximately $300,000, or 65.3%, to $100,000 in 2004 from $400,000 in 2003.
This decline was a result of a shift to more HCO related projects.



<P align="left" style="font-size: 10pt"><I>Sales and Marketing Expenses. </I>Sales and marketing expenses, including personnel costs, increased
approximately $400,000, or 8.0%, to $4.8&nbsp;million for 2004 from $4.4&nbsp;million for 2003, and
approximated 23.9% and 24.4% of revenues for 2004 and 2003, respectively. The increase in the
amount of expenses primarily resulted from increases in personnel, primarily those associated with
account



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<P align="left" style="font-size: 10pt">management efforts, and increases in commissions, which were partially offset by lower advertising
and marketing spending. Commission expense increased as a result of changes in commission plans for
2004. Advertising and marketing spending levels were lower in 2004 due to changes in marketing
initiatives.



<P align="left" style="font-size: 10pt">Sales and marketing expense for HCO increased approximately $400,000, or 13.4%, to $3.5&nbsp;million for
2004 from $3.1&nbsp;million for 2003, and approximated 25.5% and 26.2% of revenues for 2004 and 2003,
respectively. This increase in the amount of expenses is primarily a result of additional account
management personnel and related travel of approximately $500,000. Advertising and marketing
expense, excluding personnel, decreased $100,000 for HCO due to changes in marketing initiatives.
Sales and marketing expense for PMD decreased approximately $100,000 to $1.0&nbsp;million for 2004 from
$1.1&nbsp;million for 2003, and approximated 16.9% and 18.0% of revenues for 2004 and 2003,
respectively. PMD experienced higher commission expense in 2004 due to changes in commission plans
for 2004, but was partially offset by reductions in personnel and lower travel. Advertising and
marketing expense, excluding personnel, were comparable between periods for PMD. Sales and
marketing expense for our unallocated corporate functions increased slightly, and approximated
$200,000 for 2004 and 2003.



<P align="left" style="font-size: 10pt"><I>Depreciation and Amortization. </I>Depreciation and amortization decreased approximately $900,000, or
30.9%, to $2.1&nbsp;million in 2004 from $3.0&nbsp;million in 2003. Amortization decreased $0.9&nbsp;million due
to certain intangible assets and prepaid content development becoming fully amortized. Depreciation
expense levels were comparable between periods.



<P align="left" style="font-size: 10pt"><I>Other General and Administrative. </I>Other general and administrative expenses decreased approximately
$400,000, or 7.1%, to $4.6&nbsp;million for 2004 from $5.0&nbsp;million for 2003, and approximated 23.1% and
27.4% of revenues for 2004 and 2003, respectively. The decrease is a result of lower personnel
expenses as a result of consolidating corporate functions.



<P align="left" style="font-size: 10pt">Other general and administrative expenses for HCO approximated $200,000 for both 2004 and 2003, and
approximated 1.2% and 1.5% of revenues for 2004 and 2003, respectively. Other general and
administrative expenses for PMD decreased approximately $100,000, to $100,000 for 2004 from
$200,000 for 2003, and approximated 1.9% and 3.6% of revenues for 2004 and 2003, respectively. The
decrease for PMD resulted from reductions in personnel. Other general and administrative expenses
for the unallocated corporate functions decreased $200,000 to $4.4&nbsp;million for 2004 from $4.6
million for 2003. This reduction resulted from lower personnel and other corporate expenses.



<P align="left" style="font-size: 10pt"><I>Other Income/Expense. </I>Other income/expense decreased approximately $140,000, or 37.3%, to $240,000
for 2004 from $380,000 for 2003. The decrease resulted from a reduction of interest income from
investments in marketable securities and due to lower invested balances and lower yield rates.



<P align="left" style="font-size: 10pt"><I>Net Loss. </I>Net loss decreased approximately $2.4&nbsp;million, or 69.3%, to a loss of $1.0&nbsp;million for
2004 from a loss of $3.4&nbsp;million for 2003, due to the factors mentioned above.



<P align="left" style="font-size: 10pt"><B>2003 Compared to 2002</B>



<P align="left" style="font-size: 10pt"><I>Revenues. </I>Revenues increased approximately $2.4&nbsp;million, or 15.2%, to $18.2&nbsp;million for 2003 from
approximately $15.8&nbsp;million for 2002. Revenues for 2003 consisted of $12.0&nbsp;million for HCO and $6.2
million for PMD. In 2002, revenues consisted of $9.8&nbsp;million for HCO and $6.0&nbsp;million for PMD. HCO
revenue increases over 2002 resulted from growth in our core product, the Internet-based HLC and
sales of add-on courseware subscriptions, while revenues associated with our installed learning
management products declined. PMD revenues increased slightly over 2002, primarily resulting from
sales of content development services.



<P align="left" style="font-size: 10pt">The Internet-based HLC subscriber base increased approximately 33% during 2003, from approximately
580,000 fully implemented subscribers at the end of 2002, to approximately 770,000 fully
implemented subscribers at the end 2003. This increase contributed to a $2.2&nbsp;million increase in
HCO revenues, while courseware subscription revenues increased $1.1&nbsp;million during 2003, primarily
associated with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Revenues
from maintenance and support fees associated with our installed learning management products
declined by $800,000. This decline was consistent with a planned transition of these customers to
our Internet-based learning platform.



<P align="left" style="font-size: 10pt">The PMD unit experienced moderate revenue growth during 2003. Revenues from the sales of our
content development services increased during 2003. This revenue growth was partially offset by
moderate declines in live event revenues, in part related to the pharmaceutical and medical device
industry&#146;s cautious response to compliance guidelines issued by the OIG in April&nbsp;2003, that relate
to the funding of educational programs.



<P align="left" style="font-size: 10pt">During 2003, 57.2% of revenues were derived from our Internet-based learning products, 22.5% from
live event development services, 11.5% from content development services and 8.8% from our
installed learning management products. During 2002, 45.3% of revenues related to our
Internet-based learning products, 27.1% related to live event services, 15.3% related to our
installed learning management products, and 12.3% related to content development services.



<P align="center" style="font-size: 10pt">22
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt"><I>Cost of Revenues. </I>Cost of revenues increased approximately $300,000, or 5.0%, to $6.3&nbsp;million for
2003 from approximately $6.0&nbsp;million for 2002. During 2003, we experienced increased royalties from
sales of courseware subscriptions, primarily HIPAA. Contract labor expenses also increased
resulting from outsourcing content development services. These increases were partially offset by
lower personnel expense and travel, due to reductions in personnel. Cost of revenues as a
percentage of revenues decreased from 37.8% for 2002 to 34.4% for 2003. This decrease as a
percentage of revenues resulted from increased revenues and the change in revenue components
discussed above.



<P align="left" style="font-size: 10pt">Cost of revenues for HCO increased approximately $300,000, or 13.8%, to $2.2&nbsp;million for 2003 from
$1.9&nbsp;million for 2002, and approximated 18.2% and 19.7% of revenues for 2003 and 2002,
respectively. Royalties increased during 2003, related to sales of add-on courseware, primarily
HIPAA. This increase was partially offset by a reduction in personnel related expenses. Cost of
revenues for PMD decreased $100,000, or 3.2%, to $3.6&nbsp;million in 2003 from $3.7&nbsp;million in 2002,
and approximated 57.8% and 61.1% of revenues for 2003 and 2002, respectively. This decline is
primarily related to personnel expense and travel reductions, and was partially offset by increased
contract labor costs associated with content development services. Cost of revenues for the
unallocated corporate functions increased approximately $200,000 to $500,000 in 2003 from $300,000
in 2002, as a result of additional content support personnel who handle loading, maintenance,
versioning and support of content on our Internet-based learning platform.



<P align="left" style="font-size: 10pt"><I>Gross Margin. </I>Gross margin (which we define as revenues less cost of revenues divided by revenues)
improved to 65.6% during 2003 from 62.2% during 2002. This improvement is a result of increased
revenues as well as the change in revenue mix. Gross margins for HCO were 81.8% and 80.3% for 2003
and 2002, respectively. Gross margins for PMD were 42.2% and 38.9% for 2003 and 2002, respectively.
Gross margins for PMD are lower than HCO due to the higher costs associated with delivering live
event and content development services, and such costs can vary from project to project.



<P align="left" style="font-size: 10pt"><I>Product development. </I>Product development expenses decreased approximately $1.4&nbsp;million, or 30.6%,
to $3.3&nbsp;million for 2003 from $4.7&nbsp;million for 2002, and approximated 17.8% and 29.6% of revenues
for 2003 and 2002, respectively. This reduction primarily resulted from lower personnel expenses
associated with the consolidation of our product development efforts. Product development efforts
during 2003 were focused on launching products, feature enhancements, and content that build upon
our core product, the Internet-based HLC. During 2003, we launched several new products to meet
this objective, including HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP>, Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>, and an
authoring solution for the Internet-based HLC.



<P align="left" style="font-size: 10pt">Product development expenses for HCO decreased approximately $1.3&nbsp;million, or 40.4%, to $1.9
million for 2003 from $3.2&nbsp;million for 2002, and approximated 16.1% and 33.2% of revenues in 2003
and 2002, respectively. The decrease is primarily associated with the consolidation of product
development efforts. During 2003, the HCO unit launched Competency Compass<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and an
authoring solution for the Internet-based HLC. Product development expenses for PMD increased
approximately $200,000, or 37.2%, to $900,000 for 2003 from $700,000 for 2002, and approximated
14.6% and 10.9% of revenues for 2003 and 2002, respectively. The increase is attributable to costs
associated with the development of HospitalDirect<SUP style="font-size: 85%; vertical-align: text-top">R</SUP> as well as development and
maintenance of other content products for medical industry representatives. The unallocated
corporate portion of our product development expenses decreased approximately $400,000, or 46.7%,
to $400,000 in 2003 from $800,000 in 2002. This was a result of personnel reductions and a shift to
projects that benefit the platforms for both the HCO and PMD business unit products.



<P align="left" style="font-size: 10pt"><I>Sales and Marketing Expenses. </I>Sales and marketing expenses, including personnel costs, decreased
approximately $2.0&nbsp;million, or 30.8%, to $4.4&nbsp;million for 2003 from $6.4&nbsp;million for 2002, and
approximated 24.4% and 40.7% of revenues for 2003 and 2002, respectively. This decrease primarily
resulted from lower commissions, reductions in personnel related expenses and travel, and reduced
advertising and marketing spending. Commission expense is lower as a result of changes in
commission plans for 2003 and lower activity levels during the first half of the year. Personnel
expense and related travel decreases are a result of reductions in personnel. Advertising and
marketing spending levels were lower in 2003 due to changes in marketing initiatives.



<P align="left" style="font-size: 10pt">Sales and marketing expense for HCO decreased approximately $1.8&nbsp;million to $3.1&nbsp;million for 2003
from $4.9&nbsp;million for 2002, and approximated 35.3% and 49.8% of revenues for 2003 and 2002,
respectively. This decrease is attributable to lower commissions of $900,000, personnel expense and
travel reductions of $500,000 and lower advertising and marketing expenses of $300,000. Commissions
decreased as a result of changes in the commission plan for 2003 and lower headcount. Personnel
expense and travel were lower due to fewer sales and marketing personnel. Advertising and
marketing expense decreases, excluding personnel, were attributable to changes in marketing
initiatives. Sales and marketing expense for PMD decreased approximately $400,000 to $1.1&nbsp;million
for 2003 from $1.5&nbsp;million for 2002, and approximated 18.0% and 24.7% of revenues for 2003 and
2002, respectively. The decrease resulted from lower personnel expenses and travel of $200,000 due
to lower headcount, and lower commissions of $100,000 due to lower sales personnel and related
sales activity. Advertising and marketing expense, excluding personnel, decreased $100,000,
primarily due to changes in marketing initiatives. Sales and marketing expense for our unallocated
corporate functions increased approximately $100,000 during 2003.



<P align="center" style="font-size: 10pt">23
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt"><I>Depreciation and Amortization. </I>Depreciation and amortization decreased approximately $1.3&nbsp;million,
or 30.7%, to $3.1&nbsp;million in 2003 from $4.4&nbsp;million in 2002. Amortization decreased $1.1&nbsp;million
due to certain intangible assets and prepaid content development becoming fully amortized.
Depreciation decreased $200,000 due to lower fixed asset purchases over the past two years as well
as assets becoming fully depreciated.



<P align="left" style="font-size: 10pt"><I>Other General and Administrative. </I>Other general and administrative expenses decreased approximately
$1.4&nbsp;million, or 22.2%, to $5.0&nbsp;million for 2003 from $6.4&nbsp;million for 2002, and approximated 27.4%
and 40.6% of revenues for 2003 and 2002, respectively. The decrease is a result of lower personnel
expenses and corporate operating expenses as a result of consolidating corporate functions.



<P align="left" style="font-size: 10pt">Other general and administrative expenses for HCO decreased approximately $900,000, to $200,000 for
2003 from $1.1&nbsp;million for 2002, and approximated 1.5% and 11.6% of revenues for 2003 and 2002,
respectively. The decrease for HCO resulted from a redesignation of certain personnel to corporate,
headcount reductions, and other expense reductions. Other general and administrative expenses for
PMD decreased approximately $700,000, to $200,000 for 2003 from $900,000 for 2002, and approximated
3.6% and 15.7% of revenues for 2003 and 2002, respectively. The decrease for PMD resulted from
headcount reductions and a redesignation of certain personnel and operating expenses to corporate.
Other general and administrative expenses for the unallocated corporate functions increased
approximately $200,000 primarily as a result of the redesignation of executive management personnel
and certain operating expenses to corporate. This realignment resulted in an additional $1.1
million of unallocated expenses, which was offset by headcount and operating expense reductions of
$900,000 resulting from consolidating our corporate functions. The office consolidation charge and
impairment losses recognized in 2002 did not recur in 2003.



<P align="left" style="font-size: 10pt"><I>Other Income/Expense. </I>Other income/expense decreased approximately $300,000, or 46.1%, to $400,000
for 2003 from $700,000 for 2002. The decrease resulted from a reduction of interest income from
investments in marketable securities and due to lower invested balances and lower yield rates.



<P align="left" style="font-size: 10pt"><I>Net Loss. </I>Net loss decreased approximately $13.2&nbsp;million, or 79.5%, to a loss of $3.4&nbsp;million for
2003 from a loss of $16.6&nbsp;million for 2002. Net loss before the cumulative effect of a change in
accounting principle of $5.0&nbsp;million, decreased $8.2&nbsp;million, or 70.7%, to a loss of $3.4&nbsp;million
for 2003 from a loss of $11.6&nbsp;million for 2002, due to the factors mentioned above.



<P align="center" style="font-size: 10pt">24
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt"><B>SELECTED QUARTERLY OPERATING RESULTS</B>



<P align="left" style="font-size: 10pt">The following tables set forth selected statement of operations data for the eight quarters ended
December&nbsp;31, 2004 both in absolute dollars and as a percentage of total revenues. The information
for each quarter has been prepared on substantially the same basis as the audited statements
included in other parts of this report and, in our opinion, includes all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the results of operations
for these periods. You should read this information in conjunction with HealthStream&#146;s Consolidated
Financial Statements and related notes thereto included elsewhere in this report. The operating
results for any quarter are not necessarily indicative of the results to be expected in the future.


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Quarters Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>June 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(In thousands, except per share data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">STATEMENT OF OPERATIONS DATA:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,032</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,426</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating costs and expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,890</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,776</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,860</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">647</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">634</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">659</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">591</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,157</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,336</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">330</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">344</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">175</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,202</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,067</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,377</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,265</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,432</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(469</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(574</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(242</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">83</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(529</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(177</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)&nbsp;per share &#150; basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.02</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.03</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)&nbsp;per share &#150; diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.02</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.03</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average shares of common stock
outstanding &#150; basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,581</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,656</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,660</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average shares of common stock
outstanding &#150; diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,581</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,656</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,124</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Quarters Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>June 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(In thousands, except per share data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">STATEMENT OF OPERATIONS DATA:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,342</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,766</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating costs and expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,496</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,766</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">811</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">711</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,142</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">274</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">445</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,423</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,131</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,787</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,051</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,257</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,117</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(709</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(491</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">73</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,359</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,011</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(624</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(418</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss per share &#150; basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.03</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.02</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average shares of common stock
outstanding &#150; basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,306</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,361</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,421</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,444</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">25
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Quarters Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>June 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(% of Revenues)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">STATEMENT OF OPERATIONS DATA:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating costs and expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34.2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24.6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19.7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9.5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12.2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.1</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8.5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11.2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Quarters Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>June 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(% of Revenues)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">STATEMENT OF OPERATIONS DATA:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating costs and expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23.7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">133.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110.3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33.6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(23.9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16.3</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10.3</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(30.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21.6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14.3</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8.8</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>Factors Affecting Quarterly Operating Results</B>



<P align="left" style="font-size: 10pt">Revenues from our subscription products are recognized ratably over the subscription term. Revenues
from sales of products and services to pharmaceutical and medical device companies can be subject
to seasonal factors as a result of timing of conferences and live events as well as drug and
product introductions and budget cycles for such companies.



<P align="left" style="font-size: 10pt"><B>Liquidity and Capital Resources</B>



<P align="left" style="font-size: 10pt">Since our inception, we have financed our operations largely through proceeds from our IPO, private
placements of equity securities, loans from related parties and, to an increasing extent, from
revenues generated from the sale of our products and services.



<P align="left" style="font-size: 10pt">Net cash provided by operating activities was approximately $400,000 during 2004 compared to
approximately $1.1&nbsp;million used in operating activities during 2003. The improvement in cash
consumption primarily resulted from our improved operating results as indicated by the $2.4&nbsp;million
decline in our net loss, which was offset by an increase in accounts and unbilled receivables of
$1.5&nbsp;million and prepaid development fees of $600,000. The number of days sales outstanding (DSO)
for 2004 was 72&nbsp;days compared to 50&nbsp;days for 2003. This increase was primarily due to the increase
in accounts receivable associated with the timing of billings at the end of 2004. The Company
calculates DSO by dividing the accounts receivable balance (excluding unbilled and other
receivables) by average daily revenues for the year. The primary uses of cash for 2004 were to
fund operations and purchases of content and feature enhancements. The primary uses of cash for
2003 were to fund operations and payout of employee bonuses that were earned in 2002.



<P align="center" style="font-size: 10pt">26
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt">Net cash used in investing activities was approximately $1.5&nbsp;million in 2004 while approximately
$90,000 was provided by investing activities in 2003. Investments in marketable securities during
2004 and 2003 were primarily comprised of auction rate securities, which typically trade on a
monthly basis. During 2004, the proceeds from the sale and maturity of marketable securities was
approximately $19.0&nbsp;million, while purchases of marketable securities was approximately $19.1
million. During 2003, the proceeds from the maturity of marketable securities was approximately
$13.8&nbsp;million, while purchases of marketable securities was approximately $13.0&nbsp;million.
Acquisitions of property and equipment approximated $1.6&nbsp;million and $720,000 during 2004 and 2003,
respectively. Our capital additions during 2004 and 2003 were primarily comprised of hardware and
software to support the growth of our product infrastructure, primarily our Internet-based learning
platform. Also during 2004, we received proceeds of approximately $230,000 from the repayment of a
note receivable &#150; related party.



<P align="left" style="font-size: 10pt">Cash provided by financing activities was approximately $175,000 and $120,000 during 2004 and 2003,
respectively. The primary sources of cash for both 2004 and 2003 resulted from proceeds associated
with the issuance of common stock from both the exercise of employee stock options and the Employee
Stock Purchase Plan, offset by payments under capital lease obligations.



<P align="left" style="font-size: 10pt">As of December&nbsp;31, 2004, our primary source of liquidity was $16.5&nbsp;million of cash and cash
equivalents, restricted cash, investments in marketable securities, and related interest
receivable. We have no bank credit facility or other indebtedness other than capital lease
obligations. As of February&nbsp;28, 2005, we had cash and cash equivalents, restricted cash,
investments and related interest receivable of approximately $17.8&nbsp;million. The primary increase in
cash and cash equivalents, restricted cash, investments in marketable securities, and related
interest receivable since December&nbsp;31, 2004 resulted from the receipt of grant funds from
commercial supporters.



<P align="left" style="font-size: 10pt">We believe that our cash and cash equivalents, restricted cash, investments in marketable
securities and related interest receivable will be sufficient to meet anticipated cash needs for
working capital, new product development, capital expenditures and acquisitions for at least the
next 12&nbsp;months. As part of our growth strategy, we are actively reviewing possible acquisitions
that complement our products and services. We anticipate that these acquisitions, if any, will be
effected through a combination of stock and cash consideration. The issuance of stock as
consideration for an acquisition could have a dilutive effect on our stock price. Failure to
generate sufficient cash flow from operations or raise additional capital when required during or
following any potential acquisitions in sufficient amounts and on terms acceptable to us could harm
our business, financial condition and results of operations.



<P align="left" style="font-size: 10pt"><B>Commitments and Contingencies</B>



<P align="left" style="font-size: 10pt">We expect that our capital expenditures and content purchases will be approximately $3.0&nbsp;million in
2005. From January&nbsp;1, through February&nbsp;28, 2005, we had capital expenditures of approximately
$400,000, primarily related to hardware and software additions. In January&nbsp;2005, we entered into a
capital lease for computer hardware, in which total estimated payments are approximately $114,000
over a three year term.



<P align="left" style="font-size: 10pt">Our strategic alliances have typically provided for payments to content partners based on revenues
and development partners and other parties based on services rendered. We expect to continue
similar arrangements in the future. In addition to these commitments, we have capital lease
obligations and operating lease commitments for our operating facilities in Nashville, TN and
Denver, CO, and a closed facility in Dallas, TX.



<P align="left" style="font-size: 10pt">A summary of future anticipated payments for commitments and other contractual obligations are
outlined below:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18">Payments due by period</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Less than 1 year</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">1-3 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">3-5 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">More
than 5<br>years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Total</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">63,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">107,625</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">174,738</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">328,721</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">215,408</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,926</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,040,892</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase commitments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">226,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">135,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">361,795</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other contractual obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">835,571</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">608,846</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">218,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">26,926</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,689,925</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">Purchase commitments include minimum purchases for copy center services and computer software.
Other contractual obligations consist of fixed commitments resulting from agreements with various
business partners.



<P align="left" style="font-size: 10pt"><B>Off-Balance Sheet Arrangements</B>



<P align="left" style="font-size: 10pt">The extent of the Company&#146;s off-balance sheet arrangements is described above.



<P align="center" style="font-size: 10pt">27
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt"><B>Recent Accounting Pronouncements</B>



<P align="left" style="font-size: 10pt">In December&nbsp;2004, the Financial Accounting Standards Board (FASB)&nbsp;issued Statement of Financial
Accounting Standards No.&nbsp;123&#174;, &#147;Share-Based Payments.&#148; Statement 123&#174; supersedes Accounting
Principles Board (APB)&nbsp;Opinion No.&nbsp;25, &#147;Accounting for Stock Issued to Employees,&#148; and will require
companies to recognize compensation expense, using a fair-value based method, for costs related to
share-based payments, including stock options. The Statement is effective in the first interim or
annual reporting period beginning after June&nbsp;15, 2005. The Company intends to adopt Statement
123&#174; in the third quarter of 2005, and to implement it on a prospective basis. We are currently
assessing the impact the Statement will have on our consolidated results of operations.



<P align="left" style="font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.153, &#147;Exchanges of Nonmonetary Assets,&#148; which amends APB
Opinion No.&nbsp;29. The guidance in APB 29, &#147;Accounting for Nonmonetary Transactions,&#148; is based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. The amendment made by Statement 153 eliminates the exception for exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. The provisions of the statement are effective for
exchanges taking place in fiscal periods beginning after June&nbsp;15, 2005. We do not believe the
adoption of this Statement will have any impact on our consolidated financial position or results
of operations.


<DIV align="left">
<A name="110"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;7A. </B><B><I>Quantitative and Qualitative Disclosures about Market Risk</I></B>



<P align="left" style="font-size: 10pt">We are exposed to market risk from changes in interest rates. We do not have any foreign currency
exchange rate risk or commodity price risk. As of December&nbsp;31, 2004, we had no outstanding
indebtedness other than approximately $54,000 of capital lease obligations. Accordingly, the
Company is not exposed to significant interest rate market risk with respect to liabilities. The
Company is exposed to market risk with respect to its cash and investment balances. At December&nbsp;31,
2004, the Company had cash and cash equivalents, restricted cash, investments in marketable
securities, and related interest receivable totaling approximately $16.5&nbsp;million. Current
investment rates of return approximate 2-3%. Assuming a 2.5% rate of return on $16.5&nbsp;million, a
hypothetical 10% decrease in interest rates would decrease interest income and increase the net
loss on an annualized basis by approximately $41,000.



<P align="left" style="font-size: 10pt">The Company manages its investment risk by investing in corporate debt securities, foreign
corporate debt and secured corporate debt securities with minimum acceptable credit ratings. For
certificates of deposit and corporate obligations, ratings must be A2/A or better; A1/P1 or better
for commercial paper; A2/A or better for taxable or tax advantaged auction rate securities and AAA
or better for tax free auction rate securities. The Company also requires that all securities must
mature within 24&nbsp;months from the original settlement date, the average portfolio shall not exceed
18&nbsp;months, and the greater of 10% or $5.0&nbsp;million shall mature within 90&nbsp;days. Further, the
Company&#146;s investment policy also limits concentration exposure and other potential risk areas.



<P align="left" style="font-size: 10pt">The above market risk discussion and the estimated amounts presented are forward-looking statements
of market risk assuming the occurrence of certain adverse market conditions. Actual results in the
future may differ materially from those projected as a result of actual developments in the market.



<P align="center" style="font-size: 10pt">28
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="111"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;8. </B><B><I>Financial Statements and Supplementary Data</I></B>



<P align="center" style="font-size: 10pt"><B>INDEX TO CONSOLIDATED FINANCIAL STATEMENTS</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Page</B></TD>

</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#300">Report of Independent Registered Public Accounting Firm </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#301">Consolidated Balance Sheets </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#302">Consolidated Statements of Operations </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#303">Consolidated Statements of Shareholders&#146; Equity (Deficit) </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#304">Consolidated Statements of Cash Flows </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#305">Notes to Consolidated Financial Statements </A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">29
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="300"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>



<P align="left" style="font-size: 10pt">To the Board of Directors and Shareholders of



<P align="left" style="font-size: 10pt">HealthStream, Inc.



<P align="left" style="font-size: 10pt">We have audited the accompanying consolidated balance sheets of HealthStream, Inc. as of December
31, 2004 and 2003, and the related consolidated statements of operations, shareholders&#146; equity
(deficit), and cash flows for each of the three years in the period ended December&nbsp;31, 2004. These
financial statements are the responsibility of the Company&#146;s management. Our responsibility is to
express an opinion on these financial statements based on our audits.



<P align="left" style="font-size: 10pt">We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company&#146;s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.



<P align="left" style="font-size: 10pt">In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of HealthStream, Inc. at December&nbsp;31, 2004 and 2003,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December&nbsp;31, 2004, in conformity with U.S. generally accepted accounting
principles.



<P align="left" style="font-size: 10pt">As discussed in Note 1 to the consolidated financial statements, in 2002, the Company changed its
method of accounting for goodwill and other intangible assets upon adoption of a new accounting
standard.



<P align="right" style="font-size: 10pt">/s/ Ernst &#038; Young LLP&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



<P align="left" style="font-size: 10pt">Nashville, Tennessee<BR>
February&nbsp;16, 2005



<P align="center" style="font-size: 10pt">30
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.</B>


<DIV align="left">
<A name="301"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED BALANCE SHEETS</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px"><B>ASSETS</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,257,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,219,807</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investments in short term marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,025,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,957,703</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Restricted cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">184,041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">723,878</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119,263</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts
receivable, net of allowance for doubtful accounts of $234,167<BR>
and $278,502 at December&nbsp;31, 2004 and 2003, respectively</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,990,590</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,497,997</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts receivable &#150; unbilled</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">596,877</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">592,538</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid development fees, net of amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">542,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238,566</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other prepaid expenses and other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">850,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">805,970</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,473,131</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,155,722</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and equipment:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Furniture and fixtures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">931,118</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">920,724</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,402,343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,896,395</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,267,133</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,239,353</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,600,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,056,472</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less accumulated depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,281,311</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,053,530</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,319,283</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,002,942</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,306,688</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,306,688</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible
assets, net of accumulated amortization of $6,695,922<BR>
and $6,351,860 at December&nbsp;31, 2004 and 2003, respectively</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">166,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">510,282</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Notes receivable &#150; related party</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233,003</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">291,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">190,006</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,557,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,398,643</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px"><B>LIABILITIES AND SHAREHOLDERS&#146; EQUITY</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">830,941</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">864,977</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,117,367</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">967,995</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued compensation and related expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">284,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">172,950</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Registration liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">735,265</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Commercial support liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,987,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,059,248</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Current portion of capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,020</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,798,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,839,455</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital lease obligations, less current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,199</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Commitments and contingencies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shareholders&#146; equity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Common stock, no par value, 75,000,000 shares authorized;
20,667,515 and 20,455,746<BR>shares issued and outstanding
at December&nbsp;31, 2004 and 2003, respectively</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91,642,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91,416,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated other comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,475</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(69,912,719</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(68,864,339</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,729,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,557,989</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total liabilities and shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,557,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,398,643</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to the consolidated financial statements.



<P align="center" style="font-size: 10pt">31
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.</B>


<DIV align="left">
<A name="302"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF OPERATIONS</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>For the Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,057,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,195,071</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,789,594</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating costs and expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,277,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,267,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,970,498</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,531,177</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,247,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,678,820</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,798,687</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,444,997</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,425,028</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,366,216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,371,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,632,960</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization
of intangibles, content fees, feature enhancements, fixed
royalties,<BR>and prepaid compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">740,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,676,454</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,761,507</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,634,377</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,986,317</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,409,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Office consolidation charge</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Impairment of long-lived assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">105,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,348,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,993,769</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,148,172</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,290,864</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,798,698</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,358,578</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income (expense):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest and other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">258,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">415,416</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">776,723</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13,095</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22,466</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,926</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,565</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,286</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,461</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">242,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">386,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">717,336</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss, before cumulative effect of a change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cumulative effect of a change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,000,000</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic and diluted net loss before cumulative effect of a change in accounting
principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.57</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cumulative effect of a change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.25</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic and diluted net loss per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.82</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average shares of common stock outstanding:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,585,825</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,383,134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,261,062</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to the consolidated financial statements.



<P align="center" style="font-size: 10pt">32
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.</B>


<DIV align="left">
<A name="303"></A>
</DIV>

<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF SHAREHOLDERS&#146; EQUITY (DEFICIT)</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Other</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>Common Stock</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Comprehensive</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Shareholders&#146;</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Deficit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Income</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Equity (Deficit)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2001</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"></TD>
    <TD align="right">20,372,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">91,275,282</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(48,811,063</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">79,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">42,543,459</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrealized gain on investments in
marketable securities, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,296</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,594,946</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of common stock to Employee Stock
Purchase Plan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,005</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of stock options to advisory boards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,385</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Modification of stock option grant</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,411</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,411</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Retirement of common stock in connection
with EMInet escrow resolution</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(85,625</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(107,031</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(107,031</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,322,687</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91,223,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(65,452,305</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">125,536</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,896,283</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrealized loss on investments in
marketable securities, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(120,061</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(120,061</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,532,095</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercise of stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">88,319</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,360</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of common stock to Employee Stock
Purchase Plan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,740</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,029</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Modification of stock option grant</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,412</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,455,746</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91,416,853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(68,864,339</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,557,989</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrealized loss on investments in
marketable securities, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,475</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,475</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,053,855</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercise of stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121,503</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,804</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,804</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of common stock to Employee Stock
Purchase Plan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90,266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,726</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,726</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,667,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">91,642,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(69,912,719</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">21,729,664</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to the consolidated financial statements.



<P align="center" style="font-size: 10pt">33
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.</B>


<DIV align="left">
<A name="304"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>For the Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OPERATING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustments to reconcile net loss to net cash used in operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,366,216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,371,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,632,960</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amortization
of intangibles, content fees, feature enhancements, fixed
royalties,<BR>and prepaid compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">740,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,676,454</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,761,507</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Provision for doubtful accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">295,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Office consolidation charge</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Impairment of long-lived assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">105,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Non cash compensation expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,796</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Realized loss on disposal of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,814</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,637</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cumulative effect of a change in accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,000,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Changes in operating assets and liabilities, excluding effects of acquisitions:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accounts and unbilled receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,536,932</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">311,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">394,681</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Restricted cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">539,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(315,253</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Interest receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">187,244</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">231,078</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Prepaid development fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(582,738</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(269,542</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(127,314</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other prepaid expenses and other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(127,308</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(246,890</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(66,179</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(83,750</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">419,791</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,036</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">146,174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(170,451</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accrued liabilities and compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260,723</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(802,371</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,717</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Registration liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(560,568</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(165,389</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">266,866</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Commercial support liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">928,449</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(286,976</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72,399</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Net cash provided by (used in) operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">375,465</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,059,014</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,823,224</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INVESTING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Proceeds from maturities and sale of investments in marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,951,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,809,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,568,334</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase of investments in marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,077,045</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13,000,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,697,817</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Repayments on note receivable &#150; related party</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233,003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,620,906</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(720,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(625,535</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Net cash (used in) provided by investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,513,948</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">88,518</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,244,982</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">FINANCING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of common stock to Employee Stock Purchase Plan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,726</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,005</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Proceeds from exercise of stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,804</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Payments on capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(49,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(67,717</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(137,566</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Net cash provided by (used in) financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">176,048</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120,672</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(99,561</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net decrease in cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(962,435</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(849,824</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(677,803</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at beginning of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,219,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,069,631</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,747,434</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at end of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,257,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,219,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,069,631</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">SUPPLEMENTAL CASH FLOW INFORMATION:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,095</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">22,466</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">29,926</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital lease obligations incurred</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">62,804</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of common stock to advisory boards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,385</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to the consolidated financial statements.




<P align="center" style="font-size: 10pt">34
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.</B>


<DIV align="left">
<A name="305"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B></DIV>



<P align="left" style="font-size: 10pt"><B>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</B>



<P align="left" style="font-size: 10pt"><B>Reporting Entity</B>



<P align="left" style="font-size: 10pt">HealthStream, Inc. (&#147;the Company&#148;) was incorporated in 1990 as a Tennessee corporation and is
based in Nashville, Tennessee. We provide Internet-based services and solutions to meet the
ongoing training and continuing education needs of the healthcare community. These solutions
provide, deliver and track computer based education for our customers in the United States through
our application service provider (ASP)&nbsp;products and installed learning management products. We
also provide the healthcare community with live event development services, content maintenance
and development services, and assistance in the development of other educational activities,
provided in a live, written, or online format.



<P align="left" style="font-size: 10pt"><B>Business Segments</B>



<P align="left" style="font-size: 10pt">We operate our business in two segments: 1) services provided to healthcare organizations and
professionals, and 2) services provided to pharmaceutical and medical device companies. Services
to healthcare organizations and professionals include offerings of our Internet-based learning
products, including authoring, maintenance and support of our installed learning management
products, courseware subscriptions, content maintenance, and competency tools. Our services to
pharmaceutical and medical device companies include live and online educational training
activities for healthcare professionals, content development services, as well as online training
for medical industry representatives.



<P align="left" style="font-size: 10pt"><B>Recognition of Revenue</B>



<P align="left" style="font-size: 10pt">Revenues are derived from providing services through our Internet-based learning products,
maintenance and support of our installed learning management products, courseware subscriptions,
live event development, content maintenance and development and other education and training
services.



<P align="left" style="font-size: 10pt">We recognize revenue in accordance with American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP)&nbsp;97-2, &#147;Software Revenue Recognition,&#148; SEC Staff Accounting Bulletin
No.&nbsp;104, &#147;Revenue Recognition,&#148; Emerging Issues Task Force (EITF)&nbsp;Issue No.&nbsp;99-19 &#147;Reporting
Revenue Gross Versus Net,&#148; EITF Issue No.&nbsp;00-21 &#147;Revenue Arrangements with Multiple Deliverables&#148;
and other authoritative guidance. This guidance provides that revenue recognized from software and
other arrangements is to be allocated to each element of the arrangement based on the relative
fair values of the elements. While elements include software products and post contract customer
support, fair value of each element is based on objective evidence specific to the vendor. If fair
value cannot be determined for each element of the arrangement, all revenue from the arrangement
is deferred until fair value can be determined or until all elements of the arrangement are
delivered and customer acceptance has occurred. Sales of our Internet-based learning products
include customer support, implementation services, and training; therefore all revenues are
deferred until the Internet-based learning product is implemented, at which time revenues are
recognized ratably over the subscription service period. In the event that circumstances occur
which give rise to uncertainty regarding the collectibility of contracted amounts, revenue
recognition is suspended until such uncertainty is resolved.



<P align="left" style="font-size: 10pt">Revenues derived from the delivery of services through our Internet-based learning products and
courseware subscriptions are recognized ratably over the term of the subscription service
agreement. Software support and maintenance revenues associated with our installed learning
management products are recognized ratably over the term of the related agreement, generally one
year. Other training revenues are generally recognized upon the completion of training.



<P align="left" style="font-size: 10pt">We recognize revenue from live event development services and content maintenance and development
services based on the percentage of completion method using labor hours or similar event
milestones. All other revenues are recognized as the related services are performed or products
are delivered.



<P align="left" style="font-size: 10pt"><B>Principles of Consolidation</B>



<P align="left" style="font-size: 10pt">The consolidated financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in
consolidation.



<P align="center" style="font-size: 10pt">35
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)</B>



<P align="left" style="font-size: 10pt"><B>Reclassifications</B>



<P align="left" style="font-size: 10pt">Investments in auction rate securities, which we consider available-for-sale securities, have been
reclassified from &#147;Cash and cash equivalents&#148; to &#147;Investments in short term marketable securities&#148;
at December&nbsp;31, 2003. We previously considered such investments cash equivalents due to the
short-term nature of their relative auction dates, which typically occur every 30&nbsp;days. We
reclassified $11&nbsp;million of auction rate securities from cash equivalents to investments in short
term marketable securities on our December&nbsp;31, 2003 balance sheet, and modified our statement of
cash flows for the year ended December&nbsp;31, 2003 to include gross sales of $2&nbsp;million and purchases of $13&nbsp;million related to our
investments in marketable securities. This reclassification did not change our working capital or
results of operations, but did reduce net cash provided by investing activities on our
consolidated statement of cash flows for the year ended
December&nbsp;31, 2003. This reclassification did not impact any
disclosures associated with the year ended December&nbsp;31, 2002.



<P align="left" style="font-size: 10pt"><B>Use of Estimates</B>



<P align="left" style="font-size: 10pt">The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates and such differences could be material to the consolidated
financial statements.



<P align="left" style="font-size: 10pt"><B>Cash and Cash Equivalents</B>



<P align="left" style="font-size: 10pt">We consider cash and cash equivalents to be unrestricted, highly liquid investments with initial
maturities of less than three months.



<P align="left" style="font-size: 10pt"><B>Restricted Cash</B>



<P align="left" style="font-size: 10pt">Cash received for registration fees is classified as restricted cash on the accompanying
consolidated balance sheets. The use of this cash is restricted because it is held on behalf of
the commercial supporter until services have been rendered, at which time the registration fees
are used to pay certain expenses and fees for conducting those services. Excess registration funds
are typically remitted to the commercial supporter or applied to other projects. Any deficiency in
registration funds is billed to the commercial supporter.



<P align="left" style="font-size: 10pt"><B>Allowance for Doubtful Accounts</B>



<P align="left" style="font-size: 10pt">The Company estimates its allowance for doubtful accounts using a specific identification method.
Management determines the allowance for doubtful accounts on a case-by-case basis, based on the
facts and circumstances surrounding each potentially uncollectible receivable. An allowance is
also maintained for accounts that are not specifically identified that may become uncollectible in
the future. Uncollectible receivables are written-off in the period management believes it has
exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded
when events or circumstances indicate an additional allowance is required based on our specific
identification approach. Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense were as follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Allowance</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Balance at</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Charged to</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Allowance</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Beginning of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Costs and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Balance at</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Expenses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Write-Offs</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>End of Period</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31,</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2004 </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">278,502</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">84,335</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">234,167</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2003 </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">295,704</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">192,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">209,702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">278,502</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2002 </DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">288,158</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">295,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">287,454</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">295,704</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>Investments in marketable securities</B>



<P align="left" style="font-size: 10pt">Investments in marketable securities are classified as available-for-sale and are stated at fair
market value, with any unrealized gains and losses, net of tax, reported in other comprehensive
income on the accompanying consolidated balance sheets. Realized gains and losses and declines in
market value judged to be other-than-temporary on investments in marketable securities are included in interest and other income on the accompanying consolidated statements of operations.
The cost of securities sold is based on the specific identification method. Interest and dividends
on securities classified as available-for-sale are included in interest and other income on the
accompanying consolidated statements of operations.



<P align="center" style="font-size: 10pt">36
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)</B>



<P align="left" style="font-size: 10pt"><B>Investments in marketable securities (continued)</B>



<P align="left" style="font-size: 10pt">The Company invests in auction rate securities, corporate debt securities, foreign corporate debt
and secured corporate debt securities with minimum acceptable credit ratings. The Company
classifies investments in auction rate securities as short-term investments although their
scheduled maturities may be greater than 12&nbsp;months. This determination is based on management&#146;s
intent of holding such securities for less than 12&nbsp;months from the current balance sheet date.



<P align="left" style="font-size: 10pt"><B>Property and Equipment</B>



<P align="left" style="font-size: 10pt">Property and equipment are stated on the basis of cost. Depreciation and amortization are provided
on the straight-line method over the following estimated useful lives, except for assets under
capital leases and leasehold improvements, which are amortized over the shorter of the estimated
useful life or their respective lease term.


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Years</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Furniture and fixtures </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">5-10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equipment </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">3-5</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>Goodwill and Intangible Assets</B>



<P align="left" style="font-size: 10pt">Goodwill represents the excess of purchase price over fair value of net tangible assets acquired.
Effective January&nbsp;1, 2002 we adopted Statement of Financial Accounting Standards (SFAS)&nbsp;No.&nbsp;142,
&#147;Goodwill and Other Intangible Assets.&#148; We measure for impairment at the reporting unit level
using a discounted cash flow model to determine the fair value of the reporting units. We will
perform our goodwill impairment test whenever events or changes in facts or circumstances indicate
that impairment may exist, or at least annually during the fourth quarter each year.



<P align="left" style="font-size: 10pt">Intangible assets are comprised of content, customer lists, non-competition agreements and
favorable lease rights. These intangible assets are considered to have definite useful lives and
are being amortized on a straight line basis over the expected periods to be benefited, generally
three to five years for content, two to three years for customer lists, six months to two years
for non-competition agreements, and over the lease term for favorable lease rights. Our weighted
average amortization period is 3.5&nbsp;years. Favorable lease rights represent the difference between
contractual terms and market rates for obligations under lease contracts at the date of
acquisition. Intangible assets are reviewed for impairment whenever events or changes in facts or
circumstances indicate that the carrying amount of the assets may not be recoverable.



<P align="left" style="font-size: 10pt"><B>Other Assets</B>



<P align="left" style="font-size: 10pt">Other assets are comprised of the long term portion of content development fees and feature
enhancements, and other assets of a long term nature.



<P align="left" style="font-size: 10pt"><B>Long-Lived Assets</B>



<P align="left" style="font-size: 10pt">We account for assets of a long term nature (&#147;long-lived assets&#148;) in accordance with SFAS No.&nbsp;144,
&#147;Accounting for the Impairment or Disposal of Long-Lived Assets,&#148; which requires that companies
consider whether events or changes in facts and circumstances, both internally and externally, may
indicate that an impairment of long-lived assets held for use are present. We measure any
impairment at the reporting unit level based on discounted future cash flows from the reporting
unit including the long-lived assets. The cash flow estimates and discount rates incorporate
management&#146;s best estimates, using appropriate and customary assumptions and projections at the
date of evaluation.



<P align="left" style="font-size: 10pt">Management periodically evaluated the carrying value of long-lived assets, including property and
equipment, other assets and intangible assets and determined that there was no impairment as of
December&nbsp;31, 2004 and 2003.



<P align="center" style="font-size: 10pt">37
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)</B>



<P align="left" style="font-size: 10pt"><B>Accounts Receivable-Unbilled and Deferred Revenue</B>



<P align="left" style="font-size: 10pt">Accounts receivable-unbilled represents revenue earned for contracts accounted for on the
percentage of completion basis for which invoices have not been generated or billing milestones
stated in the contract have not been reached. Deferred revenue represents amounts, which have been
billed or collected, but not yet recognized in revenue.



<P align="left" style="font-size: 10pt"><B>Income Taxes</B>



<P align="left" style="font-size: 10pt">Income taxes have been provided using the liability method in accordance with SFAS No.&nbsp;109,
&#147;Accounting for Income Taxes.&#148; Under the liability method, deferred tax assets and liabilities are
determined based on the temporary differences between the financial statement and tax bases of
assets and liabilities measured at tax rates that will be in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to be realized.



<P align="left" style="font-size: 10pt"><B>Commercial Support Liabilities</B>



<P align="left" style="font-size: 10pt">Commercial support liabilities represent grant funds received from entities supporting educational
activities, such as live events, in which we are the accredited provider. The funds are
unrestricted, and are primarily used to pay for pass-through expenses.



<P align="left" style="font-size: 10pt"><B>Advertising</B>



<P align="left" style="font-size: 10pt">We expense the costs of advertising as incurred in accordance with SOP 93-7, &#147;Reporting on
Advertising Costs.&#148; Advertising expense for the years ended December&nbsp;31, 2004, 2003, and 2002 was
approximately $226,000, $413,000, and $483,000, respectively.



<P align="left" style="font-size: 10pt"><B>Product Development Costs</B>



<P align="left" style="font-size: 10pt">Product development costs include internal and external costs to develop and convert content for
our Internet-based learning and installed learning management products. We capitalize the cost of
content and features developed by third parties where the life expectancy is greater than one year
and the anticipated cash flows from such content or feature is expected to exceed its cost. During
2004 and 2003, we capitalized approximately $900,000 and $400,000, respectively, related to third
party content and feature development completed by third parties. Capitalized content development
costs are included in the accompanying consolidated balance sheets under the captions &#147;prepaid
development fees&#148; and &#147;other assets.&#148; Capitalized feature development costs are included in the
accompanying consolidated balance sheets under the captions &#147;other prepaid expenses and other
current assets&#148; and &#147;other assets.&#148; We amortize content and feature development over its expected
life, which is generally one to three years. Content development and feature development costs
that have been capitalized are subject to a periodic impairment review in accordance with our
policy.



<P align="left" style="font-size: 10pt">We account for Web site development costs in accordance with EITF Issue No.&nbsp;00-2 &#147;Accounting for
Web Site Development Costs,&#148; which provides guidance on capitalization versus expensing of costs
incurred to develop a Web site. We capitalize costs incurred between the point of establishing
technological feasibility and general release when such costs are material. As of December&nbsp;31,
2004 and 2003, we had no capitalized internal development costs for computer software developed
for resale. We did not capitalize any internal Web site development costs during 2004 or 2003,
since the costs related to planning or operation of such products and sites. The costs incurred
with respect to our Internet-based learning products and Web sites were incurred prior to the
application of EITF Issue No.&nbsp;00-2.



<P align="left" style="font-size: 10pt"><B>Net Loss Per Share</B>



<P align="left" style="font-size: 10pt">We compute net loss per share following SFAS No.&nbsp;128, &#147;Earnings Per Share.&#148; Under the provisions
of Statement 128, basic net loss per share is computed by dividing the net loss available to
common shareholders for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of incremental common shares issuable upon the exercise
of stock options and warrants, escrowed or restricted shares, and shares subject to vesting are
included in diluted net income per share to the extent these shares are dilutive. Common
equivalent shares are not included in the computation of diluted net loss per share for the years
ended December&nbsp;31, 2004, 2003, and 2002 because the effect on net loss per share would be
anti-dilutive.



<P align="center" style="font-size: 10pt">38
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)</B>



<P align="left" style="font-size: 10pt"><B>Concentrations of Credit Risk and Significant Customers</B>



<P align="left" style="font-size: 10pt">We place our temporary excess cash investments in high quality, short-term money market
instruments. At times, such investments may be in excess of the FDIC insurance limits.



<P align="left" style="font-size: 10pt">We sell our learning management systems and other education services to various companies in the
healthcare industry that are located in the United States. We perform ongoing credit evaluations
of our customers&#146; financial condition and generally require no collateral from customers. We have
one significant customer, HCA, who comprised approximately 15%, or $2.9&nbsp;million, of net revenues
during 2004, approximately 15%, or $2.7&nbsp;million, of net revenues during 2003, and approximately
18%, or $2.9&nbsp;million, of net revenues during 2002. The total amounts receivable from HCA at
December&nbsp;31, 2004 and 2003 were approximately $540,000 and $330,000, respectively. Further, in
2005, a number of significant customers, including HCA, are subject to contract renewal.



<P align="left" style="font-size: 10pt"><B>Stock Based Compensation</B>



<P align="left" style="font-size: 10pt">We grant stock options for a fixed number of shares to employees and other parties with an
exercise price not less than the fair value of the shares at the grant date. We account for stock
option grants in accordance with Accounting Principles Board Opinion (APB)&nbsp;No.&nbsp;25 &#147;Accounting for
Stock Issued to Employees&#148; and related interpretations. Under APB 25, because the exercise price
of our employee stock options is not less than the market price of the underlying stock on the
date of grant, no compensation expense is recorded. To the extent that options are issued to
members of our advisory boards or non-employees, the value of such options is measured in
accordance with the provisions of SFAS No.&nbsp;123, &#147;Accounting for Stock-Based Compensation.&#148; During
the years ended December&nbsp;31, 2004, 2003, and 2002, we recorded expense of $-0-, 5,412, and $16,796
respectively, related to options granted to advisory board members and non-employees. We have
disclosed the fair value recognition requirements of Statement 123 and the additional disclosure
requirements as specified in SFAS No.&nbsp;148, &#147;Accounting for Stock-Based Compensation-Transition and
Disclosure,&#148; which amends Statement 123.



<P align="left" style="font-size: 10pt">If the alternative method of accounting for stock incentive plans prescribed by Statement 123 had
been followed, our net loss and net loss per share would have been:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10">Year Ended December 31,</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2002</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss as reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Add: Stock-based employee compensation expense included in reported
net loss, net of related taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,796</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards net of related tax effects</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(454,573</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(699,385</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(842,511</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro forma net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,502,953</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(4,106,007</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(17,466,957</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic and diluted net loss per share &#150; as reported*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.82</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic and diluted net loss per share &#150; pro forma*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.20</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.86</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P><HR noshade size="1" width="18%" align="left" color="#000000">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">*&nbsp;&nbsp;</TD>
    <TD>The net loss per share as reported and pro forma net loss per share for the year ended
December&nbsp;31, 2002 includes a $5.0&nbsp;million or ($0.25) per share charge related to a cumulative
effect of a change in accounting principle.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt"><B>Fair Value of Financial Instruments</B>



<P align="left" style="font-size: 10pt">The following methods and assumptions were used in estimating fair value for financial
instruments:



<P align="left" style="font-size: 10pt"><I>Cash, cash equivalents and restricted cash: </I>The carrying amounts approximate the fair value
because of the short-term maturity or short-term nature of such instruments.



<P align="left" style="font-size: 10pt"><I>Accounts receivable, accounts receivable-unbilled, interest receivable, accounts payable, accrued
liabilities and deferred revenue: </I>The carrying amounts, net of any allowance for doubtful
accounts, approximate the fair value because of the short-term nature of such instruments.



<P align="left" style="font-size: 10pt"><I>Notes receivable: </I>The carrying amounts approximate fair value based on the consideration provided
and the estimated consideration expected to be received.



<P align="left" style="font-size: 10pt"><I>Investments in marketable securities: </I>The carrying amounts approximate the fair value based on
quoted market prices.



<P align="center" style="font-size: 10pt">39
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)</B>



<P align="left" style="font-size: 10pt"><B>Newly Issued Accounting Standards</B>



<P align="left" style="font-size: 10pt">In December&nbsp;2004, the Financial Accounting Standards Board (FASB)&nbsp;issued Statement of Financial
Accounting Standards No.&nbsp;123&#174;, &#147;Share-Based Payments.&#148; Statement 123&#174; supersedes Accounting
Principles Board (APB)&nbsp;Opinion No.&nbsp;25, &#147;Accounting for Stock Issued to Employees,&#148; and will
require companies to recognize compensation expense, using a fair-value based method, for costs
related to share-based payments, including stock options. The Statement is effective in the first
interim or annual reporting period beginning after June&nbsp;15, 2005. The Company intends to adopt
Statement 123&#174; in the third quarter of 2005, and to implement it on a prospective basis. We are
currently assessing the impact the Statement will have on our consolidated results of operations.



<P align="left" style="font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.153, &#147;Exchanges of Nonmonetary Assets,&#148; which amends APB
Opinion No.&nbsp;29. The guidance in APB 29, &#147;Accounting for Nonmonetary Transactions,&#148; is based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. The amendment made by Statement 153 eliminates the exception for exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. The provisions of the statement are effective for
exchanges taking place in fiscal periods beginning after June&nbsp;15, 2005. We do not believe the
adoption of this Statement will have a material impact on our consolidated financial position or
results of operations.



<P align="left" style="font-size: 10pt"><B>2. SHAREHOLDERS&#146; EQUITY</B>



<P align="left" style="font-size: 10pt"><B>Common Stock</B>



<P align="left" style="font-size: 10pt">We are authorized to issue up to 75&nbsp;million shares of common stock.



<P align="left" style="font-size: 10pt"><B>Preferred Stock</B>



<P align="left" style="font-size: 10pt">We are authorized to issue up to 10&nbsp;million shares of preferred stock in one or more series,
having the relative voting powers, designations, preferences, rights and qualifications,
limitations or restrictions, and other terms as the Board of Directors may fix in providing for
the issuance of such series, without any vote or action of the shareholders. During 2000, all
outstanding shares of preferred stock were converted into common stock in connection with our IPO.
There have been no shares of preferred stock outstanding since our IPO.



<P align="left" style="font-size: 10pt"><B>Warrants</B>



<P align="left" style="font-size: 10pt">In connection with a distribution agreement during 1999, we provided a business partner with a
warrant to purchase 245,032 shares of our common stock at $4.06 per share. The warrants expire in
June&nbsp;2009. The issuance of the warrants resulted in the recognition of approximately $748,000 of
product development expense in 1999. No part of the 1999 warrant has been exercised as of December
31, 2004.



<P align="left" style="font-size: 10pt"><B>3. IMPAIRMENT OF LONG-LIVED ASSETS</B>



<P align="left" style="font-size: 10pt">During the years ended December&nbsp;31, 2004, 2003 and 2002, we performed impairment assessments
of our long-lived assets including identifiable intangibles with finite useful lives. We recorded
an impairment charge in our HCO business unit of approximately $105,000 during 2002 related to
prepaid content development fees. This charge reflected the expectation that the carrying value of
the related content exceeded the anticipated undiscounted cash flows to be generated from the sale
of the content. There was no impairment of long-lived assets during the years ended December&nbsp;31,
2004 and 2003.



<P align="center" style="font-size: 10pt">40
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>4. INVESTMENTS IN MARKETABLE SECURITIES</B>



<P align="left" style="font-size: 10pt">At December&nbsp;31, 2004, investments in marketable securities, which were all classified as
available-for-sale and considered to be short-term based on management&#146;s intent of holding such
securities for less than 12&nbsp;months, included the following:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amortized Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unrealized Losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unrealized Gains</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair Value</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Auction Rate Securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,025,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,025,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">At December&nbsp;31, 2003, investments in marketable securities, which were all classified as
available-for-sale, included the following:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amortized Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unrealized Losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unrealized Gains</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair Value</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Auction Rate Securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,000,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,755,635</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,759,943</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,196,593</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,197,760</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,952,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,957,703</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">The scheduled maturities of the above auction rate securities at December&nbsp;31, 2004 is shown below:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mature after one but before five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,025,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>5. GOODWILL</B>



<P align="left" style="font-size: 10pt">We account for goodwill under the provisions of Statement 142, which specifies the approach and
timing for evaluating impairment of intangible assets, and also requires that goodwill be tested
for impairment at least annually using a fair value method. Effective January&nbsp;1, 2002, we recorded
a transitional goodwill impairment loss of $5.0&nbsp;million in the HCO reporting unit, in connection
with our adoption of Statement 142. The charge was recorded as a cumulative effect of a change in
accounting principle in our consolidated statement of operations.



<P align="left" style="font-size: 10pt">We test goodwill for impairment using a discounted cash flow model. The technique used to
determine the fair value of our reporting units is sensitive to estimates and assumptions
associated with cash flow from operations and its growth, discount rates, and reporting unit
terminal values. If these estimates or their related assumptions change in the future, we may be
required to record additional impairment charges, which could adversely impact our operating
results for the period in which such a determination is made. We perform our annual impairment
evaluation of goodwill during the fourth quarter of each year and as changes in facts and
circumstances indicate impairment exists. During our annual impairment evaluation in the fourth
quarter of 2004 and 2003, the results of our goodwill impairment analysis indicated the fair value
of our reporting units exceeded their carrying values. Therefore no impairment existed at December
31, 2004 and 2003.



<P align="left" style="font-size: 10pt">A reconciliation of the net loss and net loss per share information for the years ended December
31, 2004, 2003 and 2002, adjusted for the provisions of Statement 142, net of the related income
tax effect, follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Years ended</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Reported net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjusted for cumulative effect of a change in
accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,000,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjusted net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(11,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic and diluted net loss per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reported net loss per share &#150; basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.82</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjusted for cumulative effect of a change in
accounting principle</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.25</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjusted net loss per share &#150; basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.57</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">41
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>5. GOODWILL (continued)</B>



<P align="left" style="font-size: 10pt">The changes in the carrying amount of goodwill for the years ended December&nbsp;31, 2004 and 2003 are
as follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>HCO</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>PMD</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at January&nbsp;1, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,982,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,323,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,306,688</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Changes in carrying value of goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,982,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,323,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,306,688</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>HCO</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>PMD</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at January&nbsp;1, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,982,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,323,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,306,688</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Changes in carrying value of goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,982,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,323,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,306,688</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>6. INTANGIBLE ASSETS</B>



<P align="left" style="font-size: 10pt">All intangible assets have been evaluated in accordance with Statement 142 and are considered to
have finite useful lives. The intangibles are being amortized over their original useful lives,
ranging from one to five years. Amortization of intangible assets was approximately $344,000,
$1,140,000, and $1,916,000 for the years ended December&nbsp;31, 2004, 2003 and 2002, respectively.
Estimated amortization expense for the year ended December&nbsp;31, 2005 is approximately $166,000.



<P align="left" style="font-size: 10pt">Identifiable intangible assets are comprised of the following:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>As of December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>As of December 31, 2003</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Gross Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amortization</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Net</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Gross Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amortization</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Net</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Content</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,350,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,050,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">450,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Customer lists</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,940,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,940,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,940,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,930,278</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,722</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">422,142</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(405,922</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">422,142</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(371,582</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,560</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,862,142</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(6,695,922</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">166,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,862,142</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(6,351,860</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">510,282</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>7. BUSINESS SEGMENTS</B>



<P align="left" style="font-size: 10pt">We have two reportable segments, services provided to healthcare organizations and professionals
(HCO)&nbsp;and services provided to pharmaceutical and medical device companies (PMD). The accounting
policies of the segments are the same as those described in Note 1, &#147;Summary of Significant
Accounting Policies.&#148; We manage and operate our business segments based on the markets they serve
and the products and services provided to those markets. Substantially all sales from both
business units during 2004 were made to customers in the United States.



<P align="left" style="font-size: 10pt">The following is our business segment information as of and for the years ended December&nbsp;31, 2004,
2003 and 2002. We measure segment performance based on operating loss before income taxes and
prior to the allocation of corporate overhead expenses, interest expense, and depreciation.


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>Year ended December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>HCO</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>PMD</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unallocated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,998,818</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,068,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,057,308</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,826,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,865,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">585,184</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,277,173</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,008,007</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378,569</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">144,601</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,531,177</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,564,673</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,024,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">209,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,798,687</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">338,012</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">402,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,366,216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,106,758</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,345,307</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,634,377</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Segment income (loss)&nbsp;from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,078,436</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">281,616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(6,650,916</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,290,864</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">*Segment assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,617,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,254,682</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">17,684,815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,557,101</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchases of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">608,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">340,131</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">672,575</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,620,906</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">42
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>7. BUSINESS SEGMENTS (continued)</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>Year ended December 31, 2003</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>HCO</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>PMD</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unallocated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,016,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,178,630</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,195,071</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,183,479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,569,041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">515,224</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,267,744</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,930,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">900,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">416,466</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,247,246</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,143,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,113,715</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">187,838</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,444,997</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,211,578</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">432,013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,403,874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,047,465</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">181,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">225,363</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,579,601</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,986,317</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Segment income (loss)&nbsp;from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,365,827</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(61,522</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(7,103,003</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,798,698</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">*Segment assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,037,093</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,617,845</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,743,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,398,643</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchases of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">221,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">178,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">320,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">720,482</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>Year ended December 31, 2002</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>HCO</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>PMD</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unallocated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,748,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,041,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,789,594</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,919,361</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,688,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">362,662</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,970,498</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,241,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">656,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">781,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,678,820</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,859,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,493,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72,256</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,425,028</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,280,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">480,913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,632,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,394,467</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,126,053</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">945,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,337,773</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,409,576</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Office consolidation charge</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164,783</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Impairment of long-lived assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">105,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">105,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Segment loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,948,088</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,223,563</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(7,186,927</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(12,358,578</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">*Segment assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,128,785</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,985,371</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,799,060</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">32,913,216</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchases of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">308,778</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">177,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">139,362</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">625,535</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>
<P>
<HR noshade size="1" width="18%" align="left" color="#000000">
<DIV align="left" style="font-size: 10pt">* Segment assets include restricted cash, accounts and unbilled receivables, prepaid and
other current assets, other assets, property and equipment, and intangible assets. Investments in
marketable securities and cash and cash equivalents are not allocated to individual segments, and
are included within Unallocated.</DIV>



<P align="left" style="font-size: 10pt"><B>8. INCOME TAXES</B>



<P align="left" style="font-size: 10pt">Income tax benefit differs from the amounts computed by applying the federal statutory rate of 34%
to the loss before income taxes as follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax benefit at the statutory rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(356,449</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,200,912</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,658,022</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">State income tax benefit, net of federal benefit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(39,631</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(114,173</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(412,340</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nondeductible amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">210,139</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,108,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(94,670</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,602</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase in valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">490,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,035,533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,894,760</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">43
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>8. INCOME TAXES (continued)</B>



<P align="left" style="font-size: 10pt">Deferred federal and state income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of deferred tax assets are as
follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Allowance for doubtful accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">88,983</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">105,831</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Differences related to business combinations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,353,302</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,477,881</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">316,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,042</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">244,454</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Difference related to warrants</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,227,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,227,388</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development credits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">180,540</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,318</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,711</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net operating loss carryforwards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,264,281</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,994,986</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,810,583</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,319,833</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,810,583</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,319,833</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net deferred tax asset</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">As of December&nbsp;31, 2004 we had federal and state net operating loss carryforwards of $43,711,587
and $35,058,537, respectively. These losses will expire in years 2012 through 2024. A portion of
these losses may be subject to limitation in future years.



<P align="left" style="font-size: 10pt">We have established a valuation allowance for deferred tax assets at December&nbsp;31, 2004 and 2003,
due to the uncertainty of realizing these assets in the future. No federal or state income tax
payments were made during the years ended December&nbsp;31, 2004, 2003, and 2002.



<P align="left" style="font-size: 10pt"><B>9. STOCK OPTION PLAN</B>



<P align="left" style="font-size: 10pt">Our 2000 Stock Incentive Plan (2000 Plan) and 1994 Employee Stock Option Plan (1994 Plan) (the
2000 Plan and the 1994 Plan are collectively referred to as &#147;the Plan&#148;) authorize the grant of
options or other forms of stock-based compensation to employees, officers, directors, and others
and such grants must be approved by the Compensation Committee of the Board of Directors. The
terms of both plans are substantially similar. Options granted under the Plan have terms of no
more than ten years with certain restrictions. The Plan allows the Board of Directors to determine
the vesting period of each grant. The vesting period of the options granted ranges from immediate
vesting (generally associated with professional consulting boards and directors&#146; options), to
annual vesting over four years, beginning one year after the grant date (generally for employee
and officer options). In connection with the 2000 Plan, 5,000,000 shares have been reserved for
issuance, bringing the total shares reserved for issuance through the Plan to 9,000,000 shares.
During 2002, the 1994 Plan was amended to exclude forfeited shares from shares available for
future grants. This amendment reduced the number of shares available for future grants by
1,934,750 through December&nbsp;31, 2004.



<P align="left" style="font-size: 10pt">The weighted average fair value of options granted was estimated using the Black-Scholes method.
The weighted average assumptions used for these estimates include:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Risk-free interest rate </DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD nowrap align="right">2.50-3.50</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.50</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">4.2</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected dividend yield </DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected life (in years) </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Volatility </DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">75</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">60</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">60</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">The estimated weighted average fair values of options granted during 2004, 2003 and 2002 using the
above pricing models were $1.60, $0.93, and $0.75, respectively.



<P align="center" style="font-size: 10pt">44
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>9. STOCK OPTION PLAN (continued)</B>



<P align="left" style="font-size: 10pt">A progression of activity and various other information relative to stock options is presented in
the table below.


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Common</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Common</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Common</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding &#150; beginning of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,840,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,987,380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,816,717</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4.17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">450,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.59</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">605,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">570,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.36</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(121,503</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(88,319</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,008</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(140,683</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(50,049</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.54</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(346,559</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(522,498</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(349,288</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.65</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding &#150; end of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,803,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,840,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,987,380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.69</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercisable at end of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,993,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.81</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,872,299</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,755,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4.09</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">During 2002, we issued 11,500
stock options to our advisory boards at per
share exercise prices of $1.80. In connection with this grant we recognized compensation expense
of approximately $11,400 in 2002.



<P align="left" style="font-size: 10pt">Shares of common stock available for future grants totaled 2,728,229 at December&nbsp;31, 2004.
Exercise prices per share and various other information for options outstanding at December&nbsp;31,
2004 are segregated into ranges as follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Options Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Options Exercisable</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Remaining</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Range of Exercise Price</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Per Share</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Contractual Life</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Per Share</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$0.54 - $1.19</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">212,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">207,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.07</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$1.20 - $2.38</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,345,229</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">896,354</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.86</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$2.39 - $3.57</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">369,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.67</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$3.58 - $4.76</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">338,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.06</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">338,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.06</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$4.77 - $5.95</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.42</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.42</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$5.96 - $7.13</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,775</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.49</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,775</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.49</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$8.33 - $9.50</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,361</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,361</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.94</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$9.51 - $10.70</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">81,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">81,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$10.71 - $11.89</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.89</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.89</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,803,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,993,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.81</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt"><B>10. EMPLOYEE BENEFIT PLANS</B>



<P align="left" style="font-size: 10pt"><B>401(k) Plan</B>



<P align="left" style="font-size: 10pt">We have a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of
Section&nbsp;401(k) of the Internal Revenue Code. Our employees must have attained the age of 21 and
have completed thirty days of service to be eligible to participate in the 401(k) Plan. Under the
provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, not
to exceed 15% of compensation, subject to IRS limitations. The Company elected to provide eligible
employees with a discretionary contribution totaling approximately $73,000 for the year ended
December&nbsp;31, 2004. The Company has not provided matching contributions through December&nbsp;31, 2004.



<P align="left" style="font-size: 10pt"><B>Employee Stock Purchase Plan</B>



<P align="left" style="font-size: 10pt">Our Employee Stock Purchase Plan (Purchase Plan) incorporates the provisions of Section&nbsp;423 of the
Internal Revenue Code. Under the Purchase Plan, 1,000,000 shares of common stock have been
reserved for purchase by employees. The Purchase Plan provides for annual offer periods of twelve
months to eligible employees. Under the Purchase Plan, eligible employees can purchase through
payroll deductions, the lesser of up to 15% of their eligible base compensation or 2,500 shares of
common stock, at a price equivalent to 85% of the lesser of the beginning or end of year price.
During 2004 and 2003, 90,266 and 44,740 shares were purchased under the plan at a price per share
of $0.85 for both plan years.



<P align="center" style="font-size: 10pt">45
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><B>HEALTHSTREAM, INC.<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)</B>



<P align="left" style="font-size: 10pt"><B>11. COMMITMENTS AND CONTINGENCIES</B>



<P align="left" style="font-size: 10pt"><B>Lease Commitments</B>



<P align="left" style="font-size: 10pt">We lease office facilities in Nashville, TN, Denver, CO, and Dallas, TX, under agreements that
expire before or during March&nbsp;2010. The Dallas, TX facility is subleased to a third party through
the expiration of the original lease, which ends January&nbsp;2007. The Nashville, TN lease expires in
April&nbsp;2005 and provides for two five-year renewal options. Some lease agreements contain
provisions for escalating rent payments over the initial terms of the lease. We account for these
leases by recognizing rent expense on the straight-line basis and adjusting the deferred rent
expense liability for the difference between the straight-line rent expense and the amount of rent
paid. The Company also leases certain office equipment under both operating and capital leases.
Total rent expense under all operating leases was approximately $490,000, $475,000, $560,000, for
the years ended December&nbsp;31, 2004, 2003, and 2002, respectively. We also lease certain computer
equipment from third parties which are accounted for as capital leases.



<P align="left" style="font-size: 10pt">Future rental payment commitments at December&nbsp;31, 2004 under capital and non-cancelable operating
leases, with initial terms of one year or more, are as follows:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Capital Leases</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Operating Leases</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">29,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">469,837</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">210,084</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118,637</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107,704</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107,704</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,926</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total minimum lease payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;</TD>
    <TD align="right">60,458</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,040,892</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less amounts representing interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,917</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Present value of minimum lease payments (including $24,113 classified as current)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">53,541</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">Sublease rental income related to the Dallas, TX facility was approximately $73,500 in 2004 and
$72,000 in 2003. Future operating lease commitments have been reduced by sublease income of
approximately $71,700 in both 2005 and 2006 and by $6,000 in 2007.



<P align="left" style="font-size: 10pt">The carrying value of assets under capital leases, which are included with owned assets in the
accompanying consolidated balance sheets was $54,962 and $35,289 at December&nbsp;31, 2004 and 2003,
respectively. Amortization of the assets under the capital leases is included in depreciation
expense on the accompanying consolidated statements of operations.



<P align="left" style="font-size: 10pt"><B>Litigation</B>



<P align="left" style="font-size: 10pt">We are subject to various legal proceedings and claims that arise in the ordinary course of our
business. In the opinion of management, the ultimate liability with respect to those proceedings
and claims will not materially affect our financial position, operations or liquidity.



<P align="left" style="font-size: 10pt"><B>12. LOSS PER SHARE</B>



<P align="left" style="font-size: 10pt">The following table sets forth the computation of basic and diluted net loss per share:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>

    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Numerator:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,048,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,412,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,641,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Denominator:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted-average shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,585,825</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,383,134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,261,062</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net loss per share, basic and diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.05</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.17</TD>
    <TD nowrap>)</TD>

    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.82</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">For the years ended December&nbsp;31, 2004, 2003, and 2002, the calculation of weighted average and
equivalent shares excluded options, warrants, and restricted stock because such items were
anti-dilutive. The equivalent common shares related to such options, warrants, and restricted
stock were 3,048,842 in 2004, 3,092,978 in 2003, and 3,246,544 in 2002.



<P align="center" style="font-size: 10pt">46
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="112"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;9. </B><B><I>Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</I></B>



<P align="left" style="font-size: 10pt">None.


<DIV align="left">
<A name="113"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;9A. </B><B><I>Controls and Procedures</I></B>



<P align="left" style="font-size: 10pt"><B>Evaluation of Controls and Procedures</B>



<P align="left" style="font-size: 10pt">HealthStream&#146;s chief executive officer and principal financial officer have reviewed and evaluated
the effectiveness of the Company&#146;s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the &#147;Exchange Act&#148;))
as of December&nbsp;31, 2004. Based on that evaluation, the chief executive officer and principal
financial officer have concluded that HealthStream&#146;s disclosure controls and procedures effectively
and timely provide them with material information relating to HealthStream required to be disclosed
in the reports HealthStream files or submits under the Exchange Act.



<P align="left" style="font-size: 10pt"><B>Changes in Internal Control Over Financial Reporting</B>



<P align="left" style="font-size: 10pt">There were no changes in HealthStream&#146;s internal control over financial reporting that occurred
during the fourth quarter of 2004 that have materially affected, or that are reasonably likely to
materially affect, HealthStream&#146;s internal control over financial reporting.


<DIV align="left">
<A name="114"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;9B. </B><B><I>Other Information</I></B>



<P align="left" style="font-size: 10pt">None.


<DIV align="left">
<A name="115"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>PART III</B>


<DIV align="left">
<A name="116"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;10. </B><B><I>Directors and Executive Officers of the Registrant</I></B>



<P align="left" style="font-size: 10pt">Information as to directors of the Company is incorporated by reference from the information
contained in our proxy statement for the 2005 Annual Meeting of Stockholders that we will file with
the Securities and Exchange Commission within 120&nbsp;days of the end of the fiscal year to which this
report relates. Pursuant to General Instruction G(3), certain information concerning executive
officers of the Company is included in Part I of this Form&nbsp;10-K, under the caption &#147;Executive
Officers of the Registrant.&#148;


<DIV align="left">
<A name="117"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;11. </B><B><I>Executive Compensation</I></B>



<P align="left" style="font-size: 10pt">Incorporated by reference from the information contained in our proxy statement for the 2005 Annual
Meeting of Stockholders that we will file with the Securities and Exchange Commission within 120
days of the end of the fiscal year to which this report relates.


<DIV align="left">
<A name="118"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;12. </B><B><I>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters</I></B>



<P align="left" style="font-size: 10pt">Incorporated by reference from the information contained in our proxy statement for the 2005 Annual
Meeting of Stockholders that we will file with the Securities and Exchange Commission within 120
days of the end of the fiscal year to which this report relates.


<DIV align="left">
<A name="119"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;13. </B><B><I>Certain Relationships and Related Transactions</I></B>



<P align="left" style="font-size: 10pt">Incorporated by reference from the information contained in our proxy statement for the 2005 Annual
Meeting of Stockholders that we will file with the Securities and Exchange Commission within 120
days of the end of the fiscal year to which this report relates.


<DIV align="left">
<A name="120"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;14. </B><B><I>Principal Accountant Fees and Services</I></B>



<P align="left" style="font-size: 10pt">Incorporated by reference from the information contained in our proxy statement for the 2005 Annual
Meeting of Stockholders that we will file with the Securities and Exchange Commission within 120
days of the end of the fiscal year to which this report relates.



<P align="center" style="font-size: 10pt">47
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="121"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>PART IV</B>


<DIV align="left">
<A name="122"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;15. </B><B><I>Exhibits and Financial Statement Schedules</I></B>



<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>(a)(1) Financial Statements</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>Reference is made to the financial statements included in Item&nbsp;8 to this Report on Form 10-K.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>(a)(2) Financial Statement Schedules</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial
Statements or the notes thereto.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>(a)(3) Exhibits</TD>
</TR>

</TABLE>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="92%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Description</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement, dated July&nbsp;23, 1999, among SilverPlatter Education, Inc., SilverPlatter Information, Inc.
and HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Agreement and Plan of Merger, dated January&nbsp;5, 2000, among HealthStream, Inc., HealthStream Acquisition I, Inc.,
Quick Study, Inc. and each shareholder of Quick Study, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement, dated December&nbsp;16, 1999, among KnowledgeReview, LLC, Louis Bucelli and Maksim Repik, and
HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Agreement and Plan of Merger, dated January&nbsp;25, 2000 among HealthStream, Inc., HealthStream Acquisition II, Inc.,
Multimedia Marketing, Inc., and the stockholders of Multimedia Marketing, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement, dated January&nbsp;27, 2000, between Emergency Medicine Internetwork, Inc. and HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*3.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Fourth Amended and Restated Charter of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*3.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Amended and Restated Bylaws of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*4.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Article&nbsp;7 of the Fourth Amended and Restated Charter &#151; included in Exhibit&nbsp;3.1</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Article&nbsp;II of the Amended and Restated Bylaws &#151; included in Exhibit&nbsp;3.2</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*4.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Warrant to purchase common stock of HealthStream, Inc., dated June&nbsp;14, 1999, held by GE Medical Systems.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*4.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Common Stock Purchase Agreement between HealthStream, Inc. and Healtheon/WebMD Corporation</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.1^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">1994 Employee Stock Option Plan, effective as of April&nbsp;15, 1994</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.2^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2000 Stock Incentive Plan, effective as of April&nbsp;10, 2000</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.3^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Indemnification Agreement</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.4^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Executive Employment Agreement, dated April&nbsp;21, 1999, between HealthStream, Inc. and Robert A. Frist, Jr.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease dated March&nbsp;27, 1995, as amended June&nbsp;6, 1995 and September&nbsp;22, 1998, between Cummins Station LLC, as landlord,
and NewOrder Media, Inc., as tenant</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*&#043;10.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development and Distribution Agreement between HealthStream, Inc. and GE Medical Systems</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*&#043;10.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Education Services Provider Agreement dated October&nbsp;1, 2001 between HealthStream, Inc. and HCA Information Technology
&#038; Services, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*^10.8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Employee Stock Purchase Plan</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^10.9
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Director Stock Option Agreement</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^10.10
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Employee and Executive Officer Stock Option Agreement</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^10.11
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Cash Bonus Plan</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*21.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Subsidiaries of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">23.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Independent Registered Public Accounting Firm</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the Chief Executive Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the Chief Financial Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">32.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">32.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR><TD colspan="3"><HR noshade size="1" width="18%" align="left" color="#000000"></TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&#043;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Confidential treatment was received, with respect to certain portions of this document. Such portions were omitted
and filed separately with the Securities and Exchange Commission.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Incorporated by reference to Registrant&#146;s Registration Statement on Form&nbsp;S-1 (Reg. No.&nbsp;333-88939).</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Management contract or compensatory plan or arrangement</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">48
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="123"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>SIGNATURES</B>



<P align="left" style="font-size: 10pt">Pursuant to the requirements of Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on this 17th day of March&nbsp;2005.


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="27%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">HEALTHSTREAM, INC.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Robert A. Frist, Jr.</FONT></TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Robert A. Frist, Jr.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><I>Chief Executive Officer</I></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on the dates indicated:


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"> <B>Signature</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Title(s)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Date</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Robert A. Frist, Jr.</FONT>
<HR size="1" noshade color="#000000">
Robert A. Frist, Jr.</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
President, Chief Executive Officer and
Chairman (Principal Executive Officer)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Arthur E. Newman</FONT>
<HR size="1" noshade color="#000000">
Arthur E. Newman</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Senior Vice-President and Chief Financial
Officer, Compliance Officer (Principal Financial Officer)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Susan A. Brownie</FONT>
<HR size="1" noshade color="#000000">
Susan A. Brownie</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Senior Vice-President of Finance and Human Resources,
Corporate Secretary (Principal Accounting Officer)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Jeffrey L. McLaren</FONT>
<HR size="1" noshade color="#000000">
Jeffrey L. McLaren</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">John Dayani</FONT>
<HR size="1" noshade color="#000000">
John Dayani</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">James Daniell</FONT>
<HR size="1" noshade color="#000000">
James Daniell</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">William Stead</FONT>
<HR size="1" noshade color="#000000">
William Stead</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">M. Fazle Husain</FONT>
<HR size="1" noshade color="#000000">
M. Fazle Husain</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Thompson Dent</FONT>
<HR size="1" noshade color="#000000">
Thompson Dent</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Linda Rebrovick</FONT>
<HR size="1" noshade color="#000000">
Linda Rebrovick</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Frank Gordon</FONT>
<HR size="1" noshade color="#000000">
Frank Gordon</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em"><!-- Blank Space -->
    <TD align="right">&nbsp;</TD>
</TR>
<TR valign="bottom" style="padding-top: 1em">
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Ron Hinds</FONT>
<HR size="1" noshade color="#000000">
Ron Hinds</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March 17, 2005</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">49
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="124"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>INDEX TO EXHIBITS</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="92%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Description</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement, dated July&nbsp;23, 1999, among SilverPlatter Education, Inc., SilverPlatter
Information, Inc. and HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Agreement and Plan of Merger, dated January&nbsp;5, 2000, among HealthStream, Inc., HealthStream Acquisition
I, Inc., Quick Study, Inc. and each shareholder of Quick Study, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement, dated December&nbsp;16, 1999, among KnowledgeReview, LLC, Louis Bucelli and Maksim
Repik, and HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Agreement and Plan of Merger, dated January&nbsp;25, 2000 among HealthStream, Inc., HealthStream Acquisition
II, Inc., Multimedia Marketing, Inc., and the stockholders of Multimedia Marketing, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*2.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement, dated January&nbsp;27, 2000, between Emergency Medicine Internetwork, Inc. and
HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*3.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Fourth Amended and Restated Charter of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*3.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Amended and Restated Bylaws of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*4.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Article&nbsp;7 of the Fourth Amended and Restated Charter &#151; included in Exhibit&nbsp;3.1</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Article&nbsp;II of the Amended and Restated Bylaws &#151; included in Exhibit&nbsp;3.2</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*4.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Warrant to purchase common stock of HealthStream, Inc., dated June&nbsp;14, 1999, held by GE Medical Systems.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*4.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Common Stock Purchase Agreement between HealthStream, Inc. and Healtheon/WebMD Corporation</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.1^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">1994 Employee Stock Option Plan, effective as of April&nbsp;15, 1994</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.2^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2000 Stock Incentive Plan, effective as of April&nbsp;10, 2000</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.3^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Indemnification Agreement</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.4^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Executive Employment Agreement, dated April&nbsp;21, 1999, between HealthStream, Inc. and Robert A. Frist, Jr.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*10.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease dated March&nbsp;27, 1995, as amended June&nbsp;6, 1995 and September&nbsp;22, 1998, between Cummins Station LLC,
as landlord, and NewOrder Media, Inc., as tenant</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*&#043;10.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development and Distribution Agreement between HealthStream, Inc. and GE Medical Systems</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*&#043;10.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Education Services Provider Agreement dated October&nbsp;1, 2001 between HealthStream, Inc. and HCA
Information Technology &#038; Systems, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*^10.8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Employee Stock Purchase Plan</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^10.9
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Director Stock Option Agreement</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^10.10
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Employee and Executive Officer Stock Option Agreement</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^10.11
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Cash Bonus Plan</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*21.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Subsidiaries of HealthStream, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">23.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Independent Registered Public Accounting Firm</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the Chief Executive Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the Chief Financial Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">32.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the
Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">32.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the
Sarbanes-Oxley Act of 2002</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR><TD colspan="3"><HR noshade size="1" width="18%" align="left" color="#000000"></TD></TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&#043;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Confidential treatment was received with respect to certain portions of this document. Such
portions were omitted and filed separately with the Securities and Exchange Commission.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Incorporated by reference to Registrant&#146;s Registration Statement on Form&nbsp;S-1 (Reg. No.&nbsp;333-88939).</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">^
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Management contract or compensatory plan or arrangement</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">50
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>2
<FILENAME>g93873exv10w9.txt
<DESCRIPTION>EX-10.9  FORM OF DIRECTOR STOCK OPTION AGREEMENT
<TEXT>
<PAGE>

                                                                    EXHIBIT 10.9

                     FORM OF DIRECTOR STOCK OPTION AGREEMENT
                               HEALTHSTREAM, INC.
                            2000 STOCK INCENTIVE PLAN

      OPTION GRANTED THIS ____ DAY OF ______, 200__ ("GRANT DATE") BY
      HEALTHSTREAM, INC. (THE "COMPANY") TO Optionee (THE "DIRECTOR").

      1. Stock Option. The Company hereby grants to the Director an option (the
"Option") to purchase up to ______ shares of the common stock of the Company, no
par value, to be issued upon the exercise of the Option, in the manner hereafter
set forth, fully paid and nonassessable. This Option is being granted under the
provisions of the Company's 2000 Stock Incentive Plan (the "Plan"), which are
incorporated herein by reference. The Plan is administered by the Compensation
Committee of the Board of Directors of the Company.

      2. Time of Exercise. This Option shall be exercisable and have a term as
follows:

            (a)   This Option shall expire on the tenth anniversary of the
   Grant Date.

            (b)   One hundred percent (100%) of the shares granted under this
   Option shall vest and become exercisable on the Grant Date.

            (c)   This Option shall be exercisable only in the lesser of round
   lots of One Hundred (100) shares or the total number of shares remaining
   under this Grant.

      3. Purchase Price. The purchase price per share shall be _____, being not
less than the fair market value of the common stock as of the Grant Date.

      4. Rights as a Shareholder. The Director shall have no rights as a
shareholder with respect to any shares covered by this Option until the Director
has given written notice of exercise, has paid in full for such shares and taken
such other actions as may be required by the Committee in accordance with the
provisions of the Plan. No adjustment shall be made for dividends for which the
record date is prior to the date of issuance of such stock certificate.

HEALTHSTREAM, INC.

______________________

______________________

The undersigned:

      (a)   Acknowledges receipt of the foregoing Option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this Option and the Plan; and

      (b)   Acknowledges that as of the date of grant of this Option, it sets
forth the entire understanding between the undersigned Director and the Company
and its Affiliates regarding the acquisition of stock in the Company pursuant to
this grant and supersedes all prior oral and written agreements on that subject.

______________________

OPTIONEE
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>3
<FILENAME>g93873exv10w10.txt
<DESCRIPTION>EX-10.10  FORM OF EMPLOYEES AND EXECUTIVE OFFICER STOCK OPTION AGREEMENT
<TEXT>
<PAGE>

                                                                   EXHIBIT 10.10

          FORM OF EMPLOYEE AND EXECUTIVE OFFICER STOCK OPTION AGREEMENT
                               HEALTHSTREAM, INC.
                            2000 STOCK INCENTIVE PLAN

      OPTION GRANTED THIS ____ DAY OF ______, 200__ ("GRANT DATE") BY
      HEALTHSTREAM, INC. (THE "COMPANY") TO Optionee (THE "EMPLOYEE").

      1. Stock Option. The Company hereby grants to the Employee an option (the
"Option") to purchase up to _____ shares of the common stock of the Company, no
par value, to be issued upon the exercise of the Option, in the manner hereafter
set forth, fully paid and nonassessable. This Option is being granted under the
provisions of the Company's 2000 Stock Incentive Plan (the "Plan"), which are
incorporated herein by reference. The Plan is administered by the Compensation
Committee of the Board of Directors of the Company.

      2. Time of Exercise. This Option shall be exercisable and have a term as
follows:

            (a)   This Option shall expire on the eighth anniversary of the
   Grant Date.

            (b)   One fourth (1/4) of the shares granted under this Option shall
   vest and become exercisable on the first anniversary of the Grant Date.

            (c)   One half (1/2) of the shares granted under this Option shall
   vest and become exercisable on the second anniversary of the Grant Date.

            (d)   Three fourths (3/4) of the shares granted under this Option
   shall vest and become exercisable on the third anniversary of the Grant Date.

            (e)   The remaining one fourth (1/4) of the shares granted under
   this Option shall vest and become exercisable on the fourth anniversary of
   the Grant Date.

            (f)   This Option shall be exercisable only in the lesser of round
   lots of One Hundred (100) shares or the total number of shares remaining
   under this Grant.

      3. Purchase Price. The purchase price per share shall be _______, being
not less than the fair market value of the common stock as of the Grant Date.

      4. Rights as a Shareholder. The Employee shall have no rights as a
shareholder with respect to any shares covered by this Option until the Employee
has given written notice of exercise, has paid in full for such shares and taken
such other actions as may be required by the Committee in accordance with the
provisions of the Plan. No adjustment shall be made for dividends for which the
record date is prior to the date of issuance of such stock certificate.

HEALTHSTREAM, INC.

______________________

______________________

The undersigned:

      (a)   Acknowledges receipt of the foregoing Option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this Option and the Plan; and

      (b)   Acknowledges that as of the date of grant of this Option, it sets
forth the entire understanding between the undersigned Employee and the Company
and its Affiliates regarding the acquisition of stock in the Company pursuant to
this grant and supersedes all prior oral and written agreements on that subject.


______________________

OPTIONEE
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>4
<FILENAME>g93873exv10w11.txt
<DESCRIPTION>EX-10.11  FORM OF CASH BONUS PLAN
<TEXT>
<PAGE>

                                                                   EXHIBIT 10.11

                             FORM OF CASH BONUS PLAN
                               HEALTHSTREAM, INC.




Methodology
-----------

The primary financial measurement underlying our cash bonus plan will be EBITDA.
This measure is intended to allow for comparability between periods and
generally will exclude the impact of non-cash items or accounting changes. If
net revenues are less than 95% of budgeted revenues, management will reduce the
bonus calculations by 5-10% depending on the extent and circumstances of the
unfavorable variance. Only non-commissioned employees are eligible for
participation in the cash bonus plan.

Method of Bonus Calculation
---------------------------

The calculation is based on the employee's level and role within the company.
Adjustments to the calculation may include discretionary amounts related to
product line responsibilities or performance compared to budgeted results. Bonus
amounts shall be adjusted to reflect movement from commissioned to
non-commissioned roles, as well as leave of absences, employment for less than
the entire year or other changes in roles and responsibilities.

Participant Level descriptions and participation
------------------------------------------------

Once results have exceeded budgeted EBITDA results, bonuses will begin to be
earned. Calculations by participant shall be subject to the following levels and
participation:

Level 1- Includes all positions within the company that generally don't have
         managerial responsibilities as a component of their job description.
         (up to 5% of base compensation)

Level 2- Includes positions that have supervisory and/or project
         responsibilities and have the title of Manager. (up to 6.25% of base
         compensation)

Level 3- Includes Business Directors and Vice Presidents. (up to 14% of base
         compensation)

Level 4- Includes the CEO and Senior Vice Presidents. (up to 14% of base
         compensation)

Bonus Amount - Any payout over the budgeted EBITDA target will be self-funding
(that is to say, bonus payout would represent only a portion of the incremental
EBITDA achievement over budget).

Timing - The Plan will run from January 1 through December 31. A summary of the
plan shall be provided to all employees explaining the plan.

Administration - The plan shall be administered by the Compensation Committee of
the Board of Directors.

Payout - On or about March 15 of the following year, contingent upon employment
on the payment date.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>g93873exv23w1.txt
<DESCRIPTION>EX-23.1  CONSENT OF ERNST & YOUNG LLP
<TEXT>
<PAGE>

                                                                    EXHIBIT 23.1

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-37440) pertaining to the (1) HealthStream, Inc. 1994 Employee Stock
Option Plan; (2) HealthStream, Inc. 2000 Stock Incentive Plan; and (3)
HealthStream, Inc. Employee Stock Purchase Plan, of our report dated February
16, 2005, with respect to the consolidated financial statements of HealthStream,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
2004.

                                                      /s/ Ernst & Young LLP

Nashville, Tennessee
March 15, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>6
<FILENAME>g93873exv31w1.txt
<DESCRIPTION>EX-31.1  SECTION 302 CERTIFICATION OF THE CEO
<TEXT>
<PAGE>

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Robert A. Frist, Jr., certify that:

1.    I have reviewed this annual report on Form 10-K of HealthStream, Inc.;

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

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

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

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

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

            c) disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

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

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

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

Date: March 17, 2005                                  /s/ ROBERT A. FRIST, JR.
                                                      --------------------------
                                                      Robert A. Frist, Jr.
                                                      Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>7
<FILENAME>g93873exv31w2.txt
<DESCRIPTION>EX-31.2  SECTION 302 CERTIFICATION OF THE CFO
<TEXT>
<PAGE>

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Arthur E. Newman, certify that:

1.    I have reviewed this annual report on Form 10-K of HealthStream, Inc.;

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

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

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

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

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

            c) disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

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

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

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

Date: March 17, 2005                                  /s/ ARTHUR E. NEWMAN
                                                      ----------------------
                                                      Arthur E. Newman
                                                      Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>8
<FILENAME>g93873exv32w1.txt
<DESCRIPTION>EX-32.1  SECTION 906 CERTIFICATION OF THE CEO
<TEXT>
<PAGE>

                                                                    EXHIBIT 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HealthStream, Inc. (the "Company") on
Form 10-K for the year ending December 31, 2004, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), Robert A. Frist, Jr.,
Chief Executive Officer of the Company certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

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

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

/s/ ROBERT A. FRIST, JR.
------------------------
Robert A. Frist, Jr.
Chief Executive Officer
March 17, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>9
<FILENAME>g93873exv32w2.txt
<DESCRIPTION>EX-32.2  SECTION 906 CERTIFICATION OF THE CFO
<TEXT>
<PAGE>

                                                                    EXHIBIT 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HealthStream, Inc. (the "Company") on
Form 10-K for the year ending December 31, 2004, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), Arthur E. Newman,
Chief Financial Officer of the Company certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

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

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

/s/ ARTHUR E. NEWMAN
------------------------
Arthur E. Newman
Chief Financial Officer
March 17, 2005
</TEXT>
</DOCUMENT>
</SUBMISSION>
