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HEALTHSTREAM, INC.

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QUESTIONS AND ANSWERS
STOCK OWNERSHIP
ITEM ONE — ELECTION OF DIRECTORS
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION FOR 2002
AUDIT COMMITTEE REPORT FOR 2002
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GENERAL INFORMATION
APPENDIX A RESTATED CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF HEALTHSTREAM, INC.

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HEALTHSTREAM, INC.

209 10^TH Avenue, Suite 450
Nashville, Tennessee 37203
(615) 301-3100
___________________

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 30, 2003
___________________

Dear Shareholder:

     On Friday, May 30, 2003, HealthStream, Inc. will hold its 2003 annual meeting of shareholders at 209 10th Avenue, Suite 450, Nashville, Tennessee 37203. The meeting will begin at 2:00 p.m., Central Daylight Time.

     Only shareholders that own our common stock at the close of business on April 8, 2003 may vote at this meeting. A list of our shareholders will be available at our principal executive offices at 209 10th Avenue, Suite 450, Nashville, Tennessee, during ordinary business hours beginning two days after this notice of the annual meeting is first sent to shareholders. At the meeting, we will consider the following proposals:

     1.    to elect three (3) Class III directors to hold office for a term of three (3) years and until their respective successors have been duly elected and qualified; and

     2.    to transact such other business as may properly come before the meeting or any postponement or adjournment of the meeting.

     Our 2002 Annual Report to Shareholders is being mailed to shareholders with this proxy statement. The annual report is not part of the proxy solicitation materials.

     Cameras and recording devices are not permitted at the meeting. “Street name” holders will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date.

     WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN AS PROMPTLY AS POSSIBLE THE ENCLOSED PROXY IN THE ACCOMPANYING REPLY ENVELOPE. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON.

By Order of the Board of Directors,

Robert A. Frist, Jr. Chief Executive Officer

Nashville, Tennessee
April 30, 2003

 

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HEALTHSTREAM, INC.

209 10TH AVENUE, SUITE 450
NASHVILLE, TENNESSEE 37203

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PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS
May 30, 2003

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QUESTIONS AND ANSWERS

 

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notifying our Secretary, Robert H. Laird, Jr., at 209 10th Avenue, Suite 450, Nashville, TN 37203;

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voting in person; or

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submitting a later-dated proxy card.

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STOCK OWNERSHIP

     The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2003 (unless otherwise noted), for:

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each person who is known by us to beneficially own more than 5% of the outstanding shares of our common stock;

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each of our directors and nominees;

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each of our executive officers named in the Summary Compensation Table; and

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all of our directors and executive officers as a group.

     The percentages of shares outstanding provided in the table are based on 20,322,690 shares outstanding as of March 31, 2003. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise indicated, each person or entity named in the table has sole voting and investment power, or shares voting and investment power with his or her spouse, with respect to all shares of stock listed as owned by that person. The number of shares shown does not include the interest of certain persons in shares held by family members in their own right. Shares issuable upon exercise of options that are exercisable within 60 days of March 31, 2003 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares held by any other individual. The address of each of our directors and executive officers listed below is c/o HealthStream, Inc., 209 10th Avenue, Suite 450, Nashville, Tennessee 37203.

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*		Less than one percent.
(1)		Includes 110,350 shares issuable upon exercise of options.

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(2)		100 E. Pratt Street Baltimore, Maryland 21202. Based upon information set forth in Schedule 13G filed with the SEC on February 14, 2003 jointly by T. Rowe Price Associates, Inc. (“Price Associates”) and T. Rowe Price New Horizons Fund, Inc. (“New Horizons”), these shares are held by various individual and institutional investors for which Price Associates and New Horizons serve as investment advisor with power to direct investments and/or sole power to vote the shares. Price Associates and New Horizons disclaim beneficial ownership of these shares except to the extent of their pecuniary interest in those shares.
(3)		1585 Broadway, New York, New York 10036. Morgan Stanley Venture Partners III, L.P. owns 999,284 common shares. Morgan Stanley Venture Investors, L.P. owns 95,947 common shares. The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. owns 43,709 common shares. Morgan Stanley Venture Partners III, L.L.C. (the “General Partner”) owns options to purchase 34,800 common shares. The General Partner is the general partner of Morgan Stanley Venture Partners III, L.P., Morgan Stanley Venture Investors III, L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. (collectively, the “Funds”), and, as such, has the power to vote or direct the vote and to dispose or direct the disposition of all of the shares held by the Funds. Morgan Stanley Venture Capital III, Inc. is the institutional managing member of the General Partner, and, as such, shares, together with the remaining managing members, the power to direct the actions of the General Partner. Morgan Stanley Dean Witter & Co., as the sole stockholder of Morgan Stanley Venture Capital III, Inc., controls the actions of Morgan Stanley Venture Capital III, Inc.
(4)		Includes 34,800 shares issuable upon exercise of options. Mr. Husain does not own any common shares directly. Mr. Husain is a managing member of Morgan Stanley Venture Partners III, L.L.C. and therefore may be deemed to beneficially own the shares owned by Morgan Stanley Venture Partners III, L.L.C., Morgan Stanley Venture Partners III, L.P., Morgan Stanley Venture Investors III, L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. Mr. Husain disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in those shares.
(5)		Includes 94,538 shares issuable upon exercise of options.
(6)		Includes 34,800 shares issuable upon exercise of options.
(7)		48,510 of these shares are owned by Borneo Partners. Mr. Pote disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in those shares. Also includes 150,393 shares issuable upon exercise of options.
(8)		136,000 of these shares are held by Crofton Capital. Mr. Gordon disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in those shares. 11,386 of these shares are held by The Joel Company. Mr. Gordon disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in those shares. Also includes 5,000 shares issuable upon exercise of options.
(9)		Includes 145,736 shares issuable upon exercise of options.
(10)		Includes 38,500 shares issuable upon exercise of options.
(11)		Includes 81,500 shares issuable upon exercise of options.
(12)		Includes 78,965 shares issuable upon exercise of options.
(13)		Includes 41,275 shares issuable upon exercise of options.
(14)		Includes 42,200 shares issuable upon exercise of options.
(15)		Includes 34,800 shares issuable upon exercise of options.
(16)		Includes 16,000 shares issuable upon exercise of options.
(17)		Includes 991,022 shares issuable upon exercise of options.

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ITEM ONE – ELECTION OF DIRECTORS

     The Board of Directors is divided into three classes (Class I, Class II and Class III). At each annual meeting of shareholders, directors constituting one class are elected for a three-year term. Directors who were elected to fill a vacancy in a class whose term expires in a later year are elected for a term equal to the remaining term for their respective class. The Fourth Amended and Restated Charter of the Company provides that each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The current Board of Directors is comprised of ten members. Three members of the Board of Directors will be elected as Class III directors at the Annual Meeting.

     The Board of Directors has nominated and recommends to the shareholders, Robert A Frist, Jr., M. Fazle Husain and Frank Gordon for election as Class III directors to serve until the annual meeting of shareholders in 2006 and until such time as their respective successors are duly elected and qualified. Messrs. Frist and Husain are currently Class III directors of the Company having been previously elected by the shareholders. Mr. Gordon is currently a Class II director of the Company having been previously elected by the shareholders. Charles N. Martin, Jr. is a current Class III director who is not standing for re-election. Mr. Gordon is being shifted to Class III from Class II to maintain the number of directors in each class as nearly equal as possible as required by the Company’s Fourth Amended and Restated Charter.

     If any of the nominees should become unable to accept election, the persons named in the proxy may vote for such other person or persons as may be designated by the Board of Directors. Management has no reason to believe that any of the nominees named above will be unable to serve. Certain information with respect to directors who are nominees for election at the Annual Meeting and with respect to directors who are not nominees for election at the Annual Meeting is set forth on the following pages.

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     The directors shall be elected by a plurality of the votes cast in the election by the holders of the common stock represented and entitled to vote at the Annual Meeting.

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Corporate Governance

     Our business is managed under the direction of our Board of Directors. The Board of Directors delegates the conduct of the business to our senior management team. Directors have regular access to senior management. They may also seek independent, outside advice. The Board of Directors considers all major decisions. The Board of Directors holds regular quarterly meetings and meets on other occasions when required by special circumstances. Some of the directors also devote their time and attention to the Board of Directors’ principal standing committees. The Board of Directors has established three standing committees so that certain areas can be addressed in more depth than may be possible at a full board meeting. The committees, their primary functions and memberships are as follows:

     Audit Committee. The audit committee’s primary duties and responsibilities are to oversee the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting and legal compliance; approve the selection, evaluation and compensation of the Company’s independent auditors, oversee the independence and performance of the Company’s independent auditors and internal auditing functions; and provide an avenue of communication among the independent auditors, management and the Board of Directors. The audit committee operates pursuant to the terms of a Restated Audit Committee Charter, a copy of which is attached to this proxy statement as Appendix A. Members of the audit committee are M. Fazle Husain, John H. Dayani and James Daniell. See “Audit Committee Report.”

     Compensation Committee. The compensation committee has the responsibility for reviewing and approving the salaries, bonuses and other compensation and benefits of executive officers, reviewing and advising management regarding benefits and other terms and conditions of compensation of management and administering the Company’s 2000 Stock Incentive Plan (the “2000 Stock Plan”). Members of the compensation committee are Thompson Dent, John H. Dayani and Frank Gordon. See “Compensation Committee Report on Executive Compensation.”

     Nominating and Corporate Governance Committee. The nominating and corporate governance committee provides assistance to the Board of Directors in identifying and recommending individuals qualified to serve as directors of the Company, reviews the composition of the Board of Directors, reviews and recommends corporate governance policies for the Company and periodically evaluates the performance of the Board of Directors. Members of the nominating and corporate governance committee are Linda Rebrovick, James Daniell and William Stead.

     During 2002, our Board of Directors held six meetings, the audit committee held four meetings, the compensation committee held four meetings and the nominating and corporate governance committee held two meetings. Except for Charles N. Martin who attended sixty-seven percent of the meetings, all incumbent directors attended at least seventy-five percent of the board meetings, and all incumbent directors attended all of the meetings of the committees of the board on which the director served. Our Chairman proposes the agenda for the board meetings and presents the agenda to the nominating and corporate governance committee, which reviews the agenda with our Chairman and may raise other matters to be included in the agenda or at the meetings. All directors receive the agenda and supporting information in advance of the meetings. Directors may raise other matters to be included in the agenda or at the meetings. Our Chief Executive Officer and other members of senior management make presentations to the board at the meetings and a substantial portion of the meeting time is devoted to the Board of Directors’ discussion of these presentations.

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     The Board of Directors will consider nominees for the Board of Directors recommended by certain shareholders, if such shareholders comply with the advance notice provisions contained in our bylaws. Directors are selected based on their demonstrated knowledge, experience and ability in their chosen endeavors and, most importantly, based on their ability to represent the interests of all the shareholders. Shareholder recommendations for nominees must include certain biographical and other information and the proposed nominee’s written consent to nomination. The recommendations must be addressed to our Secretary and delivered or mailed and received at our principal executive offices not less than 120 days prior to the first anniversary of the date this notice of annual meeting was provided to shareholders.

Section 16(a) Beneficial Ownership Reporting Compliance

     We believe that during the 2002 fiscal year, all SEC filings of directors, officers and greater than ten-percent shareholders complied with the requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, except for Mr. McLaren who failed to timely file a Form 5 reporting a grant of stock options. This belief is based on our review of forms filed or written representations that no forms were required.

     THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE DIRECTOR NOMINEES.

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EXECUTIVE COMPENSATION

Summary Compensation Table

     The following table sets forth information for fiscal years 2000, 2001 and 2002, regarding the compensation earned by the Chief Executive Officer and the other four most highly compensated executive officers based on salary and bonus earned during 2002 (named executive officers).

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(1)

Includes reimbursed travel and living expenses that are not deductible for income tax purposes.

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Options Granted During 2002

     The following table provides information related to options granted to the named executive officers during the 2002 fiscal year and the potential realizable value of each grant of options assuming that the market price of the underlying security appreciates in value from the date of the grant to the end of the option term. We have not issued stock appreciation rights to our executive officers.

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(1)		8,750 of these shares are exercisable as of March 15, 2003, 8,750 of these shares are exercisable as of March 15, 2004, 8,750 of these shares are exercisable as of March 15, 2005, and 8,750 of these shares are exercisable as of March 15, 2006.
(2)		The Company granted a total of 570,000 options to employees, directors and consultants during 2002.

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Aggregate Option Exercises During 2002 and Fiscal Year End Option Values

     The following table provides information related to options exercised by the named executive officers during the 2002 fiscal year and the number and value of options held at fiscal year end. We have not issued stock appreciation rights or warrants to our executive officers.

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Equity Compensation Plan Information

     The following table provides information related to securities available and outstanding under the Company’s equity compensation plans as of the end of the 2002 fiscal year:

Directors’ Compensation

     We do not currently pay cash fees to directors for attendance at meetings. We do reimburse our directors for out-of-pocket expenses related to attending meetings of the board of directors. Non-employee directors are eligible to receive stock option grants under the 2000 Stock Plan. Each year, immediately following the date of our annual meeting, assuming enough shares are available under the 2000 Stock Plan, each non-employee director is automatically granted options to purchase 5,000 shares of our common stock. The exercise price is equal to the fair market value on the date of grant, and these options vest immediately upon grant. During 2000, upon the effectiveness of our initial public offering, each of our non-employee directors was granted options to purchase 10,000 shares of our common stock at the initial public offering price. These options vested immediately upon grant. Upon the election of Ms. Rebrovick to the Board of Directors, she was granted an option to purchase 15,000 shares of common stock at the fair market value at the date of grant. This option will vest in five equal annual installments beginning on the first anniversary of the date of grant.

     Employee directors are not eligible for any additional compensation for service on the board or its committees.

Employment Agreement

     Under an employment agreement dated April 21, 1999, Robert A. Frist, Jr. was employed as our chief executive officer initially for a two-year period at a base salary of $85,000. The employment term is automatically extended for successive one year periods unless on or before a date that is 90 days prior to the expiration of the employment term either the Company or Mr. Frist shall have

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given written notice to the other of its or his intention not to further extend the employment term, in which case the employment agreement shall expire and terminate at the end of the initial or extended employment term. Mr. Frist is also entitled to participate in the 2000 Stock Plan. Under this employment agreement, Mr. Frist has agreed not to compete with us and not to solicit our customers or employees for one year after his employment is terminated, with limited exceptions. Mr. Frist is entitled to severance benefits if we terminate him without cause. He is also entitled to severance benefits if he resigns for good reason after a change in control, if he resigns upon the occurrence of a material change in the terms of his employment or if he resigns upon the occurrence of a material breach of the agreement by the Company. The severance benefit equals the sum of $145,000, less the cumulative amount of base salary actually paid to Mr. Frist during the one year period through the effective date of termination, and $145,000. In addition, if Mr. Frist terminates his employment for good reason after the occurrence of a change in control, all options, shares and other benefits will fully vest immediately.

Compensation Committee Interlocks and Insider Participation

     The members of the compensation committee are responsible for determining executive compensation and stock option grants to executive officers. During 2002, the following directors served on the compensation committee: Thompson Dent, Charles N. Martin, Jr. and John H. Dayani. None of these persons has at any time been an officer or employee of the Company or any of its subsidiaries. In addition, there are no relationships among the Company’s executive officers, members of the compensation committee or entities whose executive serves on the board of directors or the compensation committee that require disclosure under applicable SEC regulations.

Certain Relationships and Related Transactions

     In March 2001, the Company loaned Jeffrey L. McLaren, a director and our vice-chairman, $215,000 pursuant to a secured promissory note maturing in March 2006. This note carries an interest rate at an annual rate equal to the annual Wall Street Journal Prime Rate as of the first day of every month and is secured by 300,000 shares of our common stock. Interest only on the principal balance outstanding is due and payable on a monthly basis.

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Company Stock Performance

     The graph below compares the cumulative total shareholder return on our common stock since our initial public offering on April 10, 2000, with the cumulative total return of companies on the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index over the same period (assuming the investment of $100 in our common stock, the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index on April 10, 2000 (for our stock) and March 31, 2000 (for the indices) and reinvestment of all dividends).

Cumulative Total Return

		Initial
		date(1)				12/00				12/01				12/02
HEALTHSTREAM, INC.			100				11.11				12.22				15.67
NASDAQ STOCK MARKET (U.S.)			100				53.59				42.52				29.39
NASDAQ COMPUTER & DATA PROCESSING			100				46.60				37.52				25.87

(1)	April 10, 2000 for HealthStream, Inc. stock and March 31, 2000 for the two indices.

Copyright© 2002 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION FOR 2002

     The compensation of HealthStream’s executive officers is reviewed and approved annually by the compensation committee of the Board of Directors, currently comprised of three non-employee directors. In addition to reviewing and approving executive officers’ salary and bonus arrangements, the compensation committee establishes policies and guidelines for other benefits and administers the awards of stock and stock options pursuant to the Company’s 2000 Stock Plan. The compensation committee is assisted in making compensation decisions by the Company’s Chief Executive Officer (referred to in this report as the “CEO”).

Compensation Policies Applicable to Executive Officers

     The objectives of the Company’s executive compensation program are to:

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attract, motivate and retain the executives responsible for the success of the Company;

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reward key executives based upon corporate and individual performance; and

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provide incentives designed to maximize shareholder value.

The compensation committee reviews the Company’s executive officer compensation program annually to ensure that the compensation paid to the Company’s executive officers is consistent with the Company’s business strategy, corporate culture and operating performance. The compensation committee also reviews the compensation policies of similarly situated companies to ensure that the Company’s compensation policies are competitive with other companies in the industry. The three primary components of the Company’s executive officer compensation program are a base salary, the potential for a performance-based annual bonus, and periodic grants of stock options.

     Base Salaries. Base salaries for the Company’s executive officers, as well as changes in such salaries, are based upon a number of factors, including:

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recommendations by the CEO;

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the nature of the executive officer’s position;

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the committee’s subjective determination of the executive officer’s contribution to the performance of the Company;

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the experience of the officer; and

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the term of the officer’s employment with the Company.

The CEO reviews all salary recommendations with the compensation committee, which then approves or disapproves such recommendations.

     In March 2002, the compensation committee reviewed the base salaries for the Company’s executive officers. Based upon discussions with the CEO, the committee determined that the base compensation levels for the Company’s executive officers were competitive with the average base compensation levels of executive officers with similar responsibilities at comparable companies.

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     Annual Bonuses. Annual bonuses were paid to the executive officers of the Company for fiscal 2002 based upon the attainment of certain 2002 earnings targets. The compensation committee has approved an officers’ compensation plan for 2003 that provides for the payment of bonuses based upon the attainment of certain 2003 earnings targets.

     Stock Options. In order to align the long-term interests of the executive officers with those of shareholders, the compensation committee from time to time awards stock options to the Company’s executive officers. The terms of these options, including the sizes of the grants, are determined by the compensation committee based upon the recommendations of the CEO and the committee’s subjective discretion. Awards of stock options to executive officers have been historically at then-current market prices and with periodic vesting over periods ranging up to four years.

     In 2002, the compensation committee granted stock options to purchase an aggregate of 53,750 shares to the Company’s executive officers. The options vest over a four-year period and are exercisable at the market price of the common stock on the date of grant.

Chief Executive Officer Compensation

     In establishing the compensation of Robert A. Frist, Jr., the Company’s CEO, the compensation committee utilized the same compensation policies applicable to executive officers in general, however, Mr. Frist has elected to receive annual cash compensation at levels below the average base compensation levels of chief executive officers at comparable companies. Mr. Frist did not receive an increase in his base salary for fiscal year 2002 or 2001. During the first quarter of 2003, Mr. Frist’s annual base salary was increased to $100,000. The compensation committee recommended and authorized an annual salary of $175,000. Mr. Frist elected to defer the difference between his actual base salary and the authorized amount until such time as the Company achieves certain financial targets relating to budgeted improvements in the Company’s earnings before interest, taxes, depreciation and amortization.

Limitations on the Deductibility of Compensation

     Section 162(m) of the Internal Revenue Code (the “Code”) generally disallows a corporate deduction for compensation over $1.0 million paid to the Company’s CEO and any of the other four most highly compensated executive officers. The $1.0 million limitation applies to all types of compensation, including restricted stock awards and amounts realized upon the exercise of stock options and stock appreciation rights, unless the awards and plan under which the awards are made qualify as “performance based” under the terms of the Code and related regulations. Based on applicable tax regulations, any taxable compensation derived from the exercise of stock options granted pursuant to the 2000 Stock Incentive Plan should qualify as “performance based” compensation for purposes of Section 162(m). None of the Company’s executive officers received other compensation that exceeded the applicable deductibility limits in 2002.

Thompson Dent, Compensation Committee member
John H. Dayani, Compensation Committee member
Frank Gordon, Compensation Committee member

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AUDIT COMMITTEE REPORT FOR 2002

     The audit committee of the Board of Directors is comprised of three directors who are independent directors as defined under Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards. During 2002, the members of the audit committee were Messrs. Daniell, Dayani and Husain.

     In accordance with its written charter, the audit committee reviews HealthStream’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. The Company’s independent auditors are responsible for expressing an opinion on the conformity of our audited financial statements to generally accepted accounting principles. The audit committee held four meetings during fiscal year 2002 which were attended by all members.

     The audit committee has reviewed and discussed with management and the independent auditors the interim financial statements for each quarter and the audited financial statements. The audit committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended. In addition, the audit committee has received from the independent auditors the written disclosures and letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and discussed with them their independence from the Company and its management. The audit committee has considered whether the independent auditors provision of non-audit services to the Company is compatible with the auditors’ independence.

     In reliance on the reviews and discussions referred to above, the audit committee recommended to the board of directors, and the board has approved, that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2002, for filing with the Securities and Exchange Commission.

     The audit committee’s review and discussion of the audited financial statements with management included a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. In addressing the quality of management’s accounting judgments, members of the audit committee asked for management’s representations that the audited consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles, and have expressed to both management and auditors their general preference for conservative policies when a range of accounting options is available.

     In performing these functions, the audit committee acts in an oversight capacity. The committee does not complete all of its reviews prior to the Company’s public announcements of financial results and, necessarily, in its oversight role, the audit committee relies on the work and assurances of the Company’s management, which has the primary responsibility for financial statements and reports, and of the independent accountants, who, in their report, express an opinion on the conformity of the Company’s annual financial statements with generally accepted accounting principles.

Fazle Husain, Audit Committee Chairman
Dr. James Daniell, Audit Committee Member
John Dayani, Audit Committee Member

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INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

     The audit committee has selected Ernst & Young LLP to serve as our independent auditors for 2003. The independent auditors will audit our consolidated financial statements for 2003. Ernst & Young LLP has served as our independent auditors since 1998. Representatives of Ernst & Young LLP will attend our annual meeting. They will have an opportunity to speak and respond to your questions.

Independent Auditor Fee Information

     Audit Fees. The aggregate audit fees billed to us by Ernst & Young LLP during 2002 and 2001 for professional services rendered for the audits of our annual financial statements and for the reviews of the financial statements included in our quarterly reports on Form 10-Q totaled $125,000 and $120,000, respectively.

     Audit-Related Fees. Fees for audit-related services provided by Ernst & Young LLP during 2002 and 2001 totaled $21,500 and $19,500, respectively. The fees for audit-related services during 2002 relate to the annual audits of the Company’s employee benefit plans. The fees for audit-related services during 2001 relate to the annual audits of the Company’s employee benefit plans and certain due diligence procedures related to an acquisition.

     Tax Fees. Fees for tax services provided by Ernst & Young LLP totaled $20,303 during 2002 and $31,050 during 2001. The tax fees paid to Ernst & Young LLP relate to federal and state tax compliance matters, tax advice and planning.

     All Other Fees. There were no other fees paid to Ernst & Young LLP during 2002 and 2001 that were not included in the captions above.

     The audit committee has considered whether the independent auditors provision of non-audit services to the Company is compatible with maintaining the auditor’s independence.

GENERAL INFORMATION

Delivery of Shareholder Documents

     The rules of the Securities and Exchange Commission allow the Company to send a single copy of the proxy statement and annual report to shareholders to any household at which two or more shareholders reside if the Company believes the shareholders are members of the same family, unless the Company has received contrary instructions from a shareholder. This process, known as “householding,” reduces the volume of duplicate information received at your household and helps reduce the Company’s expenses. The rule applies to the Company’s annual reports and proxy statements. Each shareholder in the household will continue to receive a separate proxy card.

     If your shares are registered in your own name and you would like to receive your own set of the Company’s annual disclosure documents this year or in future years, or if you share an address with another shareholder and together both of you would like to receive only a single set of the Company’s annual disclosure documents, please contact the Company’s Secretary by calling (615) 301-3100 or writing to the Company at HealthStream, Inc., Investor Relations Department, 209 10th Avenue, Suite 450, Nashville, Tennessee 37203. If a bank, broker or other nominee holds your shares, please contact your bank, broker or other nominee directly. The Company will deliver promptly upon oral or written request a separate copy of the Proxy Statement or Annual Report to Shareholders to a shareholder at a shared address to which a single copy of the documents was delivered.

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Annual Report

     Our 2002 Annual Report to Shareholders is being mailed to shareholders with this proxy statement. The Annual Report is not part of the proxy solicitation materials.

Additional Information

     A copy of our Annual Report on Form 10-K for the year ended December 31, 2002, excluding certain of the exhibits thereto, may be obtained without charge by writing to HealthStream, Inc., Investor Relations Department, 209 10th Avenue, Suite 450, Nashville, Tennessee 37203 or an oral request by calling (615) 301-3237. The Company’s Annual Report on Form 10-K and various other filings also may be accessed on the World Wide Web at www.healthstream.com or www.sec.gov.

Nashville, Tennessee
April 30, 2003

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APPENDIX A
RESTATED CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF HEALTHSTREAM, INC.

I.    AUDIT COMMITTEE PURPOSE

The Audit Committee (the “Committee”) is appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities. The Committee’s primary duties and responsibilities are to:

•

Oversee the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance.

•

Oversee the independence and performance of the Company’s independent auditors.

•

Provide an avenue of communication among the independent auditors, management and the Board of Directors.

The Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities and it has direct access to the independent auditors as well as anyone in the organization. The Committee has the ability to retain independent legal, accounting, or other advisors as it deems necessary or appropriate in the performance of its duties. The Company shall provide for appropriate funding, as determined by the Committee, for payment of compensation to the independent auditor for the purpose of rendering or issuing an audit report and to any advisors employed by the Committee.

The Committee’s oversight responsibility recognizes that the Company’s management is responsible for preparing the Company’s financial statements in accordance with generally accepted accounting principles and that the outside auditors are responsible for auditing those financial statements. Additionally, the Committee recognizes that the Company’s financial management, as well as its outside auditors, have more time, knowledge and more detailed information on the Company and its financial reports than do Committee members; consequently, in carrying out its duties and responsibilities, the Committee is not providing any expert or special assurance as to the Company’s financial statements and is not conducting an audit or investigation of the financial statements or determining that the Company’s financial statements are true and complete or are in accordance with generally accepted accounting principles.

II.     AUDIT COMMITTEE COMPOSITION AND MEETINGS

The Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent non-executive directors, free from any relationship that would interfere with the exercise of his or her independent judgment. Each member of the Committee must also meet the other qualification standards set by federal and state legislation and regulation and the applicable listing standards of The Nasdaq Stock Market, Inc. All members of the Committee shall have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, and at least one member of the Committee shall be an “audit committee financial expert” as defined by the Securities and Exchange Commission.

 

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The Committee shall meet at least four times annually, or more frequently as circumstances require, including teleconferences when appropriate. The Committee Chair shall prepare and/or approve an agenda for each meeting. A majority of the Committee shall constitute a quorum, and the Committee shall act only on the affirmative vote of a majority of the members present at the meeting; provided that the Committee may form and delegate authority to subcommittees or members when appropriate. The Committee shall meet privately in executive session at least annually with management, the independent auditors and as a committee to discuss any matters that the Committee or each of these groups believes should be discussed. In addition, the Committee shall communicate with management and the independent auditors’ quarterly to review the Company’s financial statements and significant findings based upon the auditors limited review procedures.

III.     AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES

The following functions shall be the common recurring activities of the Committee in carrying out its oversight duties and responsibilities. These functions are set forth as minimum duties and responsibilities with the understanding that the Committee may undertake additional duties and responsibilities as the Board or the Committee deems appropriate given the circumstances.

Document/Reports Review Procedures

1.

The Committee shall assess the adequacy of this Charter at least annually, submit the Charter to the Board of Directors for approval and have the document published in accordance with SEC regulations or applicable listing standards.

2.

The Committee shall review and discuss with the Company’s management and independent auditors the Company’s annual audited financial statements, the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the selection, application and disclosure of critical accounting policies and practices used in such financial statements. Additionally, based on such review, the Committee shall consider whether to recommend to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K. The discussion of financial statements and the related critical accounting policies and practices shall occur prior to the public release of such financial statements or results, and the discussion of the related disclosure, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” shall occur prior to the filing of the Form 10-K.

3.

The Committee shall review with management and the independent auditors the Company’s quarterly financial results and quarterly unaudited financial statements, the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Company’s selection, application and disclosure of critical accounting policies and practices used in such financial statements. The discussion of financial statements and the related critical accounting policies and practices shall occur prior to the public release of such financial statements or results, and the discussion of the related disclosure, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” shall occur prior to the filing of the Form 10-Q.

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4.

Discuss with management and the independent auditors policies with respect to risk assessment and risk management and the quality and adequacy of the Company’s processes and controls that could materially affect the Company’s financial statements and financial reporting. Discuss significant financial risk exposures and the steps management has taken to monitor, control and report such exposures. Review significant findings prepared by the independent auditors together with management’s responses.

5.

Discuss with management and the independent auditors the Company’s earnings guidance prior to the release thereof.

6.

Discuss with the independent auditors any significant changes to the Company’s accounting principles and any items required to be communicated by the independent auditors in accordance with SAS 61 and SAS 90, as such standards may be modified or supplemented.

7.

Review disclosures made to the Committee by the Company’s Chief Executive Officer and Chief Financial Officer during their certification process for the Form 10-K and Forms 10-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company’s internal controls.

Independent Auditors

8.

The independent auditors are accountable to the Committee and the Board of Directors and shall report directly to the Committee. The Committee shall review the independence and performance of the auditors annually. In addition, the Committee shall:

•

oversee the work of the outside auditors and review the independent auditors’ audit plan including scope, staffing, locations, reliance upon management and general audit approval;

•

resolve disagreements between management and the outside auditors regarding financial reporting;

•

establish hiring policies for employees or former employees of the outside auditors;

•

pre-approve all auditing services to be provided by the outside auditors;

•

pre-approve all non-auditing services, including tax services, to be provided by the outside auditors, subject to such exceptions as may be determined by the Committee to be appropriate and consistent with federal and regulatory provisions;

•

receive reports from the outside auditors regarding critical accounting policies and practices, alternative treatments of financial information and generally accepted accounting principles, and such other information as may be required by federal and regulatory provisions;

•

receive from the outside auditors annually a formal written statement delineating all relationships between the outside auditors and the Company that may impact the objectivity and independence of the outside auditors; and

•

discuss with the outside auditors in an active dialogue any such disclosed relationships or services and their impact on the outside auditors’ objectivity and independence.

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9.

The Committee shall have the ultimate authority and responsibility to select (subject, if sought, to shareholder ratification), determine the compensation of, and where appropriate, terminate and replace the outside auditors.

Legal Compliance

10.

On at least an annual basis, review with the Company’s counsel any legal matters that could have a significant impact on the organization’s financial statements, the Company’s compliance with applicable laws and regulations, inquiries received from regulators or governmental agencies.

Other Audit Committee Responsibilities

11.

Review and approve all related-party transactions involving Covered Persons as defined in the Company’s Code of Ethics.

12.

Annually prepare a report to shareholders as required by the Securities and Exchange Commission. The report should be included in the Company’s annual proxy statement.

13.

Perform any other activities consistent with this Charter, the Company’s Bylaws and governing law, as the Committee or the Board deems necessary or appropriate.

14.

Maintain minutes of meetings and periodically report to the Board of Directors on significant results of the foregoing activities.

15.

Establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, or auditing matters and of the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

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THIS PROXY IS SOLICITED ON BEHALF OF

     The undersigned shareholder(s) of HealthStream, Inc., a Tennessee corporation, hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy Statement, each dated April 30, 2003, and hereby appoints Robert A. Frist, Jr. and Robert H. Laird, Jr. and each of them, proxies and attorneys-in-fact, with full POWER to each of substitution, on behalf and in the name of the undersigned, to represent the undersigned at the 2003 Annual Meeting of Shareholders of HealthStream, Inc. to be held on Friday, May 30, 2003 at 2:00 p.m. Central Daylight Time, at 209 10th Avenue, Suite 450, Nashville, Tennessee 37203, and at any adjournment or adjournments thereof, and to vote all shares of Common Stock which the undersigned would be entitled to vote if then and there personally present, on the matters set forth below:

(1)	To elect Robert A. Frist, Jr., M. Fazle Husain and Frank Gordon for election as Class III directors to the Board of Directors until the 2006 Annual Meeting of Shareholders and until their respective successors are elected and qualified.

o		FOR all nominees listed below (except as indicated to the contrary below);		o		WITHHOLD AUTHORITY to vote for all nominees
		Robert A. Frist, Jr., M. Fazle Husain and Frank Gordon

    INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee’s name in the space below:

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(2)	To vote in accordance with their best judgment with respect to any other matters which may properly come before the meeting or any adjournment or adjournments thereof.

     PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY.

     THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, IT WILL BE VOTED FOR THE PROPOSAL SET FORTH HEREIN AND AS THE PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.

     (This Proxy should be marked, dated, and signed by the shareholder(s) exactly as his or her name appears hereon, and returned promptly in the enclosed envelope. Persons signing in a fiduciary capacity should so indicate. If shares are held by joint tenants or as community property, both should sign.)

		Dated:
		Signature:
		Dated:
		Signature: