0001095565 2011-10-27 0001095565 2010-06-30 0001095565 2011-09-30 0001095565 2010-12-31 0001095565 2011-07-01 2011-09-30 0001095565 2010-07-01 2010-09-30 0001095565 2011-01-01 2011-09-30 0001095565 2010-01-01 2010-09-30 0001095565 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2010-12-31 0001095565 us-gaap:RetainedEarningsMember 2010-12-31 0001095565 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2010-12-31 0001095565 us-gaap:RetainedEarningsMember 2011-01-01 2011-09-30 0001095565 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2011-01-01 2011-09-30 0001095565 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2011-01-01 2011-09-30 0001095565 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2011-09-30 0001095565 us-gaap:RetainedEarningsMember 2011-09-30 0001095565 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2011-09-30 0001095565 2009-12-31 0001095565 2010-09-30 iso4217:USD xbrli:shares xbrli:shares iso4217:USD HEALTHSTREAM INC 0001095565 --12-31 No No Yes Smaller Reporting Company 10-Q false 2011-09-30 Q3 2011 71681232 22211085

30236000

17868000

5703000

15000

85000

51000

13141000

11069000

152000

157000

1117000

1314000

3437000

1913000 3145000 1844000 1599000

51703000

44271000

16088000

14348000

4048000

2738000

2384000

2027000

22520000

19113000

16386000

15288000

6134000

3825000

7746000

4333000

7673000

5887000

21147000

2175000

2844000

8712000

8043000

2445000

5347000

85000

244000

91435000

82011000

1302000

2375000

4123000

4121000

1499000

1506000

20488000

16740000

4000

27412000

24746000

458000

474000

98844000

97227000

75000000

22211000

21805000

22211000

21805000

-35279000

-40431000

-5000

63565000

56791000

91435000

82011000

20618000

16616000

7915000

6274000

1946000

1750000

3810000

3358000

2782000

2401000

1471000

1143000

17924000

14926000

2694000

1690000

5000

4000

13000 9000

-8000

-5000

2686000

1685000

890000

889000

1796000

796000

0.08

0.04

0.08

0.04

22164000

21807000

23496000

22511000

60175000

48114000

22623000

17643000

5644000

4999000

11674000

9369000

8009000

6885000

3868000

3769000

51818000

42665000

8357000

5449000

43000

13000

35000 31000

8000

-18000

8365000

5431000

3213000

2481000

5152000

2950000

0.23

0.14

0.22

0.13

22001000

21759000

23272000

22358000

21805000

97227000

-40431000

-5000

5152000

5000

597000

406000

1020000

22211000

98844000

-35279000

597000

498000

2902000

2338000

45000

20000

1920000

1366000

-70000

-23000

-1233000 -314000 356000 402000

-243000

-134000

-1073000

-730000

-21000

-600000

3748000

4869000

14488000

11817000

10351000

4728000

5199000

1586000

3560000

850000

-3136000

-2436000

1020000

469000

380000

307000

4000

7000

1016000

-225000

12368000

9156000

12287000

21443000

<div align="left" style="font-family: 'Times New Roman',Times,serif">   <div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b> </div> <div align="left"> </div> <div align="center" style="font-size: 10pt"><b></b></div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>1. BASIS OF PRESENTATION</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">The balance sheet at December 31, 2010 is consistent with the audited financial statements at that date but does not include all of the information and footnotes required by US GAAP for a complete set of financial statements. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2010 (included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 23, 2011 and as amended on August 10, 2011). </div> </div>

<div align="left" style="font-family: 'Times New Roman',Times,serif"> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>2. INCOME TAXES</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">Income taxes are accounted for using the asset and liability method, whereby 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. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">During the nine months ended September 30, 2011 and 2010, the Company recorded a provision for income taxes of $3.2 million and $2.5 million, respectively. The Company’s effective tax rate for the nine months ended September 30, 2011 and 2010 was 38.4% and 45.7%, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, and the effect of various immaterial permanent tax differences. </div> </div>

<div align="left" style="font-family: 'Times New Roman',Times,serif"> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>3. STOCK BASED COMPENSATION</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">The Company maintains two stock incentive plans. The Company accounts for its stock based compensation plans using the fair-value based method for costs related to share-based payments, including stock options. During the nine months ended September 30, 2011, the Company granted 362,750 stock options with a weighted average grant date fair value of $4.67. During the nine months ended September 30, 2010, the Company granted 319,000 stock options with a weighted average grant date fair value of $2.07. The fair value of stock based awards granted during the nine months ended September 30, 2011 and 2010 was estimated using the Black Scholes option pricing model, with the assumptions as follows: </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">  <tr valign="bottom"> <td width="76%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Nine Months Ended</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> </tr>   <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Risk-free interest rate </div></td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td nowrap="nowrap" align="right">1.05 — 2.39</td> <td nowrap="nowrap">%</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td nowrap="nowrap" align="right">2.39 — 2.49</td> <td nowrap="nowrap">%</td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Expected dividend yield </div></td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">0.0</td> <td nowrap="nowrap">%</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">0.0</td> <td nowrap="nowrap">%</td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Expected life </div></td> <td> </td> <td colspan="3" nowrap="nowrap" align="center">5 — 7 years</td> <td> </td> <td colspan="3" nowrap="nowrap" align="center">5 — 7 years</td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Expected forfeiture rate </div></td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td nowrap="nowrap" align="right">0–5</td> <td nowrap="nowrap">%</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td nowrap="nowrap" align="right">0–10</td> <td nowrap="nowrap">%</td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Volatility </div></td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">50</td> <td nowrap="nowrap">%</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">55</td> <td nowrap="nowrap">%</td> </tr>  </table> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">Total stock based compensation expense recorded for the three and nine months ended September 30, 2011 and 2010, which is recorded in the condensed consolidated statements of income, is as follows (in thousands): </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">  <tr valign="bottom"> <td width="52%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Three Months Ended</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Nine Months Ended</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> </tr>   <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Cost of revenues (excluding depreciation and amortization) </div></td> <td> </td> <td align="left">$</td> <td align="right">9</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">9</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">29</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">28</td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Product development </div></td> <td> </td> <td> </td> <td align="right">34</td> <td> </td> <td> </td> <td> </td> <td align="right">32</td> <td> </td> <td> </td> <td> </td> <td align="right">110</td> <td> </td> <td> </td> <td> </td> <td align="right">96</td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Sales and marketing </div></td> <td> </td> <td> </td> <td align="right">35</td> <td> </td> <td> </td> <td> </td> <td align="right">40</td> <td> </td> <td> </td> <td> </td> <td align="right">117</td> <td> </td> <td> </td> <td> </td> <td align="right">126</td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Other general and administrative </div></td> <td> </td> <td> </td> <td align="right">145</td> <td> </td> <td> </td> <td> </td> <td align="right">85</td> <td> </td> <td> </td> <td> </td> <td align="right">341</td> <td> </td> <td> </td> <td> </td> <td align="right">248</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">Total stock based compensation expense </div></td> <td> </td> <td align="left">$</td> <td align="right">223</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">166</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">597</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">498</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr>  </table> </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> </div>

<div style="font-family: 'Times New Roman',Times,serif"> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>4. NET INCOME PER SHARE</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">Basic net income per share is computed by dividing the net income available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income 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 only to the extent these shares are dilutive. Common equivalent shares are dilutive when the average market price during the period exceeds the exercise price of the underlying shares. The total number of common equivalent shares excluded from the calculations of diluted net income per share, due to their anti-dilutive effect, was approximately 0.1 million and 0.3 million for the three and nine months ended September 30, 2011, respectively, and approximately 0.3 million and 0.5 million for the three and nine months ended September 30, 2010, respectively. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share data): </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">  <tr valign="bottom"> <td width="52%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Three Months Ended</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Nine Months Ended</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> </tr>   <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Numerator: </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:30px; text-indent:-15px">Net income </div></td> <td> </td> <td align="left">$</td> <td align="right">1,796</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">796</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">5,152</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">2,950</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Denominator: </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:30px; text-indent:-15px">Weighted average shares outstanding: </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:45px; text-indent:-15px">Basic </div></td> <td> </td> <td> </td> <td align="right">22,164</td> <td> </td> <td> </td> <td> </td> <td align="right">21,807</td> <td> </td> <td> </td> <td> </td> <td align="right">22,001</td> <td> </td> <td> </td> <td> </td> <td align="right">21,759</td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:45px; text-indent:-15px">Employee stock options </div></td> <td> </td> <td> </td> <td align="right">1,332</td> <td> </td> <td> </td> <td> </td> <td align="right">704</td> <td> </td> <td> </td> <td> </td> <td align="right">1,271</td> <td> </td> <td> </td> <td> </td> <td align="right">599</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:45px; text-indent:-15px">Diluted </div></td> <td> </td> <td> </td> <td align="right">23,496</td> <td> </td> <td> </td> <td> </td> <td align="right">22,511</td> <td> </td> <td> </td> <td> </td> <td align="right">23,272</td> <td> </td> <td> </td> <td> </td> <td align="right">22,358</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Net income per share: </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">Basic </div></td> <td> </td> <td align="left">$</td> <td align="right">0.08</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">0.04</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">0.23</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">0.14</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:30px; text-indent:-15px">Diluted </div></td> <td> </td> <td align="left">$</td> <td align="right">0.08</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">0.04</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">0.22</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">0.13</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr>  </table> </div> </div>

<div style="font-family: 'Times New Roman',Times,serif"> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>5. COLLABORATIVE ARRANGEMENT</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">On June 23, 2010, the Company announced the formation of SimVentures, a collaborative arrangement between HealthStream and Laerdal Medical Corporation (Laerdal Medical). The Company receives 50 percent of the profits or losses generated from this collaborative arrangement. The parties did not form a separate legal entity as part of the collaborative arrangement; therefore, the Company accounts for SimVentures as a collaborative arrangement in accordance with applicable accounting guidance. During the first quarter of 2011, the Company acquired a fifty percent ownership interest in Laerdal Medical’s Advanced Video System (AVS) product for $3.5 million in cash. AVS is a product that enables users of advanced patient simulators to easily capture video, audio, data logs, and “patient” responses. The AVS product is now jointly owned through SimVentures. During the second quarter of 2011, SimVentures launched SimStore™, one of the components of SimCenter™ that offers healthcare providers an opportunity to sample and purchase simulation scenarios to use in their simulation training activities. During the nine months ended September 30, 2011, the Company recorded approximately $0.5 million of revenues and $0.9 million of expenses related to the collaborative arrangement. The expenses are primarily recorded in the product development, sales and marketing and depreciation and amortization categories within the condensed consolidated statements of income. The Company also recorded approximately $4.0 million of capitalized software development for SimVentures during 2011, comprised of the $3.5 million paid for the AVS product and $0.5 million associated with SimStore<sup style="font-size: 85%; vertical-align: text-top">TM</sup>. </div> </div>

<div style="font-family: 'Times New Roman',Times,serif"> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>6. BUSINESS SEGMENTS</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">The Company primarily provides services to healthcare organizations, and to a lesser extent, to pharmaceutical and medical device companies and other members within the healthcare industry. The Company’s services are primarily focused on the delivery of education and training products and services (HealthStream Learning), as well as survey and research services (HealthStream Research). The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on <font style="white-space: nowrap">Form 10-K,</font> as amended, for the year ended December 31, 2010. </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The following is the Company’s business segment information as of and for the three and nine months ended September 30, 2011 and 2010 (in thousands). </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">  <tr valign="bottom"> <td width="52%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Three Months Ended</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6">Nine Months Ended</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000">September 30,</td> <td> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td nowrap="nowrap" align="left" style="border-bottom: 0px solid #000000">Revenues</td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td> <td> </td> </tr>   <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">HealthStream Learning </div></td> <td> </td> <td align="left">$</td> <td align="right">14,805</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">11,527</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">42,248</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">33,070</td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:30px; text-indent:-15px">HealthStream Research </div></td> <td> </td> <td> </td> <td align="right">5,813</td> <td> </td> <td> </td> <td> </td> <td align="right">5,089</td> <td> </td> <td> </td> <td> </td> <td align="right">17,927</td> <td> </td> <td> </td> <td> </td> <td align="right">15,044</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:45px; text-indent:-15px">Total net revenue </div></td> <td> </td> <td align="left">$</td> <td align="right">20,618</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">16,616</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">60,175</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">48,114</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Income from operations </div></td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">HealthStream Learning </div></td> <td> </td> <td align="left">$</td> <td align="right">4,649</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">3,686</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">13,124</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">11,033</td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:30px; text-indent:-15px">HealthStream Research </div></td> <td> </td> <td> </td> <td align="right">504</td> <td> </td> <td> </td> <td> </td> <td align="right">39</td> <td> </td> <td> </td> <td> </td> <td align="right">1,977</td> <td> </td> <td> </td> <td> </td> <td align="right">665</td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">Unallocated </div></td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">(2,459</td> <td nowrap="nowrap">)</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">(2,035</td> <td nowrap="nowrap">)</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">(6,744</td> <td nowrap="nowrap">)</td> <td> </td> <td nowrap="nowrap" align="left"> </td> <td align="right">(6,249</td> <td nowrap="nowrap">)</td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:45px; text-indent:-15px">Total income from operations </div></td> <td> </td> <td align="left">$</td> <td align="right">2,694</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">1,690</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">8,357</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">5,449</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr>  </table> </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">  <tr valign="bottom"> <td width="76%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> <td width="5%"> </td> <td width="1%"> </td> </tr> <tr style="font-size: 8pt" valign="bottom"> <td nowrap="nowrap" align="left" style="border-bottom: 0px solid #000000">Segment assets *</td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">September 30, 2011</td> <td> </td> <td> </td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">December 31, 2010</td> <td> </td> </tr>   <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">HealthStream Learning </div></td> <td> </td> <td align="left">$</td> <td align="right">23,670</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">18,731</td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:30px; text-indent:-15px">HealthStream Research </div></td> <td> </td> <td> </td> <td align="right">25,256</td> <td> </td> <td> </td> <td> </td> <td align="right">26,702</td> <td> </td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:30px; text-indent:-15px">Unallocated </div></td> <td> </td> <td> </td> <td align="right">42,509</td> <td> </td> <td> </td> <td> </td> <td align="right">36,578</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td> <td> </td> </tr> <tr valign="bottom"> <td> <div style="margin-left:45px; text-indent:-15px">Total assets </div></td> <td> </td> <td align="left">$</td> <td align="right">91,435</td> <td> </td> <td> </td> <td align="left">$</td> <td align="right">82,011</td> <td> </td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">  </div></td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> <td> </td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td> <td> </td> </tr>  </table> </div> <div align="left"> <div style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">  </div> </div> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr> <td width="3%"></td> <td width="1%"></td> <td width="96%"></td> </tr> <tr valign="top"> <td nowrap="nowrap" align="left">*</td> <td> </td> <td>Segment assets include restricted cash, accounts and unbilled receivables, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, and intangible assets. Cash and cash equivalents and investments in marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.</td> </tr> </table> </div>