10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2012

or

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____  to _____

Commission File Number 000-19364

HEALTHWAYS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	62-1117144
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

701 Cool Springs Boulevard, Franklin, TN  37067

(Address of Principal Executive Offices) (Zip Code)

615-614-4929

(Registrant’s Telephone Number, Including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x  No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x   No   ¨

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

Large accelerated filer ¨                                           Accelerated filer x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨   No  x

As of May 4, 2012 there were outstanding 33,404,576 shares of the registrant’s common stock, par value $.001 per share.

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Healthways, Inc.

Form 10-Q

Table of Contents

			Page
Part I
	Item 1.	Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
	Item 4.	Controls and Procedures	31
Part II
	Item 1.	Legal Proceedings	32
	Item 1A.	Risk Factors	32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 3.	Defaults Upon Senior Securities	33
	Item 4.	Mine Safety Disclosures	33
	Item 5.	Other Information	33
	Item 6.	Exhibits	33

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Part I

Item 1. Financial Statements

HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

	March 31,			December 31,
	2012			2011
Current assets:
Cash and cash equivalents	$	1,146		$	864
Accounts receivable, net		107,714			97,459
Prepaid expenses		9,797			11,417
Other current assets		1,007			1,412
Income taxes receivable		6,575			6,065
Deferred tax asset		10,594			10,314
Total current assets		136,833			127,531
Property and equipment:
Leasehold improvements		40,952			41,622
Computer equipment and related software		249,153			239,732
Furniture and office equipment		25,455			26,324
Capital projects in process		22,434			17,811
		337,994			325,489
Less accumulated depreciation		(189,981	)		(183,301	)
		148,013			142,188
Other assets		10,441			10,797
Intangible assets, net		92,464			92,997
Goodwill, net		335,392			335,392
Total assets	$	723,143		$	708,905
See accompanying notes to the consolidated financial statements.

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HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		March 31,			December 31,
		2012			2011
Current liabilities:
Accounts payable	$	21,725		$	22,578
Accrued salaries and benefits		23,209			35,617
Accrued liabilities		33,061			28,639
Deferred revenue		9,732			9,273
Contract billings in excess of earned revenue		16,724			13,154
Current portion of long-term debt		3,393			3,725
Current portion of long-term liabilities		5,628			5,771
Total current liabilities		113,472			118,757
Long-term debt		290,796			266,117
Long-term deferred tax liability		30,120			26,964
Other long-term liabilities		27,936			31,351
Stockholders’ equity:
Preferred stock
$.001 par value, 5,000,000 shares
authorized, none outstanding		—			—
Common stock
$.001 par value, 120,000,000 shares authorized,
33,401,898 and 33,304,681 shares outstanding		33			33
Additional paid-in capital		244,498			247,137
Retained earnings		45,852			48,517
Treasury stock, at cost, 2,254,953 shares in treasury		(28,182	)		(28,182	)
Accumulated other comprehensive loss		(1,382	)		(1,789	)
Total stockholders’ equity		260,819			265,716
Total liabilities and stockholders’ equity	$	723,143		$	708,905

See accompanying notes to the consolidated financial statements.

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HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except earnings (loss) per share data)

(Unaudited)

	Three Months Ended
	March 31,
	2012			2011
Revenues	$	165,218		$	162,969
Cost of services (exclusive of depreciation and amortization of $8,683 and $9,023, respectively, included below)		140,235			121,908
Selling, general and administrative expenses		13,739			17,842
Depreciation and amortization		12,173			12,433
Operating income (loss)		(929	)		10,786
Interest expense		3,187			3,418
Income (loss) before income taxes		(4,116	)		7,368
Income tax (benefit) expense		(1,451	)		3,233
Net income (loss)	$	(2,665	)	$	4,135
Earnings (loss) per share:
Basic	$	(0.08	)	$	0.12
Diluted(1)	$	(0.08	)	$	0.12
Comprehensive income (loss)	$	(2,258	)	$	4,833
Weighted average common shares and equivalents:
Basic		33,346			33,975
Diluted (1)		33,346			34,690
(1)The assumed exercise of stock-based compensation awards for the three months ended March 31, 2012 was not considered because the impact would be anti-dilutive.

See accompanying notes to the consolidated financial statements.

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HEALTHWAYS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2012

(In thousands)

(Unaudited)

											Accumulated
				Additional							Other
	Preferred		Common	Paid-in		Retained			Treasury		Comprehensive
	Stock		Stock	Capital		Earnings			Stock		Loss			Total
Balance, December 31, 2011		$—	$33	$247,137			$48,517			$(28,182	)	$(1,789	)	$265,716
Comprehensive loss		—	—	—			(2,665	)		—		407		(2,258	)
Exercise of stock options		—	—	9			—			—		—		9
Tax effect of stock options and restricted      stock units		—	—	(4,042	)		—			—		—		(4,042	)
Share-based employee compensation expense		—	—	1,394			—			—		—		1,394
Balance, March 31, 2012		$—	$33	$244,498			$45,852			$(28,182	)	$(1,382	)	$260,819

See accompanying notes to the consolidated financial statements.

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HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2012					2011
Cash flows from operating activities:
Net income (loss)	$	(2,665		)	$	4,135
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities, net of business acquisitions:
Depreciation and amortization		12,173				12,433
Amortization of deferred loan costs		435				477
Share-based employee compensation expense		1,394				2,252
Deferred income taxes		(1,562		)		(2,700	)
Excess tax benefits from share-based payment arrangements		(3		)		(172	)
(Increase) decrease in accounts receivable, net		(10,226		)		1,909
Decrease in other current assets		2,024				7,022
Decrease in accounts payable		(5,002		)		(2,782	)
Decrease in accrued salaries and benefits		(14,063		)		(10,248	)
Increase in other current liabilities		8,241				7,805
Other		(2,320		)		707
Net cash flows (used in) provided by operating activities		(11,574		)		20,838
Cash flows from investing activities:
Acquisition of property and equipment		(15,085		)		(9,787	)
Other		(1,825		)		(1,327	)
Net cash flows used in investing activities		(16,910		)		(11,114	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		115,575				119,918
Payments of long-term debt		(91,228		)		(123,445	)
Deferred loan costs		—				(40	)
Excess tax benefits from share-based payment arrangements		3				172
Exercise of stock options		9				1,862
Repurchases of common stock		—				(3,868	)
Change in outstanding checks and other		4,287				(1,320	)
Net cash flows provided by (used in) financing activities		28,646				(6,721	)
Effect of exchange rate changes on cash		120				269
Net increase in cash and cash equivalents		282				3,272
Cash and cash equivalents, beginning of period		864				1,064
Cash and cash equivalents, end of period	$		1,146		$	4,336

See accompanying notes to the consolidated financial statements.

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HEALTHWAYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  In our opinion, the accompanying consolidated financial statements of Healthways, Inc. and its wholly-owned subsidiaries (“Healthways”, the “Company”, or such terms as “we,” “us,” or “our”) reflect all adjustments consisting of normal, recurring accruals necessary for a fair presentation.  We have reclassified certain items in prior periods to conform to current classifications.

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes. You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

(2) Recently Adopted Accounting Standard

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)  No. 2011-05, “Presentation of Comprehensive Income”.  This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present net income and other comprehensive income in one continuous statement or in two separate but consecutive statements.  In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which defers the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income while the FASB further deliberates this aspect of the proposal. ASU No. 2011-05, as amended by ASU 2011-12, is effective for interim and annual reporting periods beginning after December 15, 2011.  We adopted this standard for the interim period beginning January 1, 2012 and elected to present net income and other comprehensive income in one continuous statement.  The adoption of this standard did not have an impact on our consolidated results of operations, financial position, cash flows, or notes to the consolidated financial statements.

(3) Share-Based Compensation

We have several stockholder-approved stock incentive plans for our employees and directors.  We currently have three types of share-based awards outstanding under these plans: stock options, restricted stock units, and restricted stock.  We believe that such awards align the interests of our employees and directors with those of our stockholders.

For the three months ended March 31, 2012 and 2011, we recognized share-based compensation costs of $1.4 million and $2.3 million, respectively.

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A summary of our stock options as of March 31, 2012 and changes during the three months then ended is presented below:

					Weighted-
					Average
			Weighted-		Remaining	Aggregate
	Shares		Average		Contractual	Intrinsic
Options	(000s)		Exercise Price		Term (years)	Value ($000s)
Outstanding at January 1, 2012	5,659		$	17.58
Granted	677			7.95
Exercised	(1	)		7.24
Forfeited	(214	)		11.70
Expired	(542	)		33.53
Outstanding at March 31, 2012	5,579			15.10	5.79	$61
Exercisable at March 31, 2012	3,181			18.39	3.46	$56

      The weighted-average grant-date fair value of options granted during the three months ended March 31, 2012 was $4.02.

      The following table shows a summary of our restricted stock and restricted stock units (“nonvested shares”)as of March 31, 2012, as well as activity during the three months then ended:

			Weighted-
			Average
	Shares		Grant Date
Nonvested Shares	(000s)		Fair Value
Nonvested at January 1, 2012	910		$	12.22
Granted	316			7.44
Vested	(137	)		14.63
Forfeited	(80	)		11.23
Nonvested at March 31, 2012	1,009		$	10.46

(4) Income Taxes

For the three months ended March 31, 2012, we had an effective tax benefit rate of 35.3% compared to an effective tax expense rate of 43.9% for the three months ended March 31, 2011.  The decrease in the effective rate was largely attributable to the impact of certain expenses related to international operations for which we currently are not able to recognize a tax benefit.  Because we had a pre-tax loss for the three months ended March 31, 2012, these non-deductible expenses served to reduce our effective tax benefit rate for the period, whereas the same type of expenses served to increase our effective tax expense rate during the three months ended March 31, 2011.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions.  Tax years remaining subject to examination in these jurisdictions include 2008 to present.

(5) Derivative Investments and Hedging Activities

We use derivative instruments to manage risks related to interest rates and foreign currencies.  We record all derivatives at estimated fair value as either assets or liabilities on the consolidated balance sheets and recognize the unrealized gains and losses in either the consolidated balance sheets or consolidated statements of

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comprehensive income (loss), depending on whether the derivative is designated as a hedging instrument.  As permitted under our master netting agreements, the fair value amounts of our derivative instruments are presented on a net basis by counterparty in the consolidated balance sheets.

Interest Rate

In order to reduce our exposure to interest rate fluctuations on our floating rate debt commitments, we maintain interest rate swap agreements with current and original notional amounts of $205.0 million and $220.0 million ($30.0 million of which will become effective in January 2013), respectively, and termination dates ranging from December 31, 2012 to December 31, 2013.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest.  These interest rate swap agreements effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 0.465% to 3.385% plus a spread (see Note 7), thus reducing the impact of interest rate changes on future interest expense.  We have designated these interest rate swap agreements as qualifying cash flow hedges.  We currently meet the hedge accounting criteria under U.S. GAAP in accounting for these interest rate swap agreements.

Foreign Currency

We enter into foreign currency options and/or forward contracts in order to minimize our earnings exposure to fluctuations in foreign currency exchange rates.  Our foreign currency exchange contracts do not qualify for hedge accounting treatment under U.S. GAAP.  We routinely monitor our foreign currency exposures to maximize the overall effectiveness of our foreign currency hedge positions.  We do not execute transactions or hold derivative financial instruments for trading or other purposes.

Fair Values of Derivative Instruments

The estimated gross fair values of derivative instruments at March 31, 2012 and December 31, 2011, excluding the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists, were as follows:

	March 31, 2012		December 31, 2011
(In $000s)	Foreign currency exchange contracts	Interest rate swap agreements	Foreign currency exchange contracts	Interest rate swap agreements
Assets:
Derivatives not designated as hedging instruments:
Other current assets	$148	$—	$315	$—
Total assets	$148	$—	$315	$—
Liabilities:
Derivatives not designated as hedging instruments:
Accrued liabilities	$232	$—	$321	$—
Derivatives designated as hedging instruments:
Accrued liabilities	—	227	—	251
Other long-term liabilities	—	3,450	—	3,984
Total liabilities	$232	$3,677	$321	$4,235

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Cash Flow Hedges

Derivative instruments that are designated and qualify as cash flow hedges are recorded at estimated fair value in the consolidated balance sheets, with the effective portion of the gains and losses being reported in accumulated other comprehensive income or loss (“accumulated OCI”).  Cash flow hedges for all periods presented consist solely of interest rate swap agreements.  Gains and losses on these interest rate swap agreements are reclassified to interest expense in the same period during which the hedged transaction affects earnings or the period in which all or a portion of the hedge becomes ineffective.  As of March 31, 2012, we expect to reclassify $2.8 million of net losses on interest rate swap agreements from accumulated OCI to interest expense within the next 12 months due to the scheduled payment of interest associated with our debt.

The following table shows the effect of our cash flow hedges on the consolidated balance sheets during the three months ended March 31, 2012 and March 31, 2011:

(In $000s)	Amount of Gain Recognized in Accumulated OCI on Derivatives (Effective Portion) For the Three Months Ended
Derivatives in Cash Flow Hedging Relationships	March 31, 2012	March 31, 2011
Interest rate swap agreements, gross of tax effect	$558	$1,294

Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.  During the three months ended March 31, 2012 and 2011, there were no gains or losses on cash flow hedges recognized in our consolidated statements of comprehensive income (loss) resulting from hedge ineffectiveness.

Derivative Instruments Not Designated as Hedging Instruments

Our foreign currency exchange contracts require current period mark-to-market accounting, with any change in fair value being recorded each period in the consolidated statements of comprehensive income (loss) in selling, general and administrative expenses.  At March 31, 2012, we had forward contracts with notional amounts of $13.0 million to exchange foreign currencies, primarily the Australian dollar and Euro, that were entered into in order to hedge forecasted foreign net income (loss) and intercompany debt.

These forward contracts did not have a material effect on our consolidated statements of comprehensive income (loss) during the three months ended March 31, 2012 and 2011.

(6) Fair Value Measurements

We account for certain assets and liabilities at fair value.  Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

Fair Value Hierarchy

The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of

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these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1:  Quoted prices in active markets for identical assets or liabilities;

Level 2:  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3:  Unobservable inputs that are supported by little or no market activity and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present our assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011:

(In $000s) March 31, 2012		Level 2		Gross Fair Value		Netting (1)			Net Fair Value
Assets:
Foreign currency exchange contracts	$	148	$	148	$	(139	)	$	9
Liabilities:
Foreign currency exchange contracts	$	232	$	232	$	(139	)	$	93
Interest rate swap agreements		3,677		3,677		—			3,677

(In $000s) December 31, 2011		Level 2		Gross Fair Value		Netting (1)			Net Fair Value
Assets:
Foreign currency exchange contracts	$	315	$	315	$	(212	)	$	103
Liabilities:
Foreign currency exchange contracts	$	321	$	321	$	(212	)	$	109
Interest rate swap agreements		4,235		4,235		—			4,235

(1) This column reflects the impact of netting derivative assets and liabilities by counterparty when a legally enforceable master netting agreement exists.

The fair values of forward foreign currency exchange contracts are valued using broker quotations of similar assets or liabilities in active markets.  The fair values of interest rate swap agreements are primarily determined based on the present value of future cash flows using internal models and third-party pricing services with observable inputs, including interest rates, yield curves and applicable credit spreads.

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Fair Value of Other Financial Instruments

In addition to foreign currency exchange contracts and interest rate swap agreements, the estimated fair values of which are disclosed above, the estimated fair value of each class of financial instruments at March 31, 2012 was as follows:

· Cash and cash equivalents – The carrying amount of $1.1 million approximates fair value because of the short maturity of those instruments (less than three months).

· Long-term debt – The estimated fair value of outstanding borrowings under the Fourth Amended and Restated Credit Agreement (the “Fourth Amended Credit Agreement”), which includes the 2013 Revolving Credit Facility and a term loan facility (see Note 7), is determined based on the fair value hierarchy as discussed above.  The 2013 Revolving Credit Facility is not actively traded and therefore is classified as a Level 2 valuation based on the market for other revolvers with similar maturities.  The term loan facility is actively traded and therefore is classified as a Level 1 valuation based on the market for identical instruments.  In both instances, the estimated fair value is based on the average of the prices set by the issuing bank given current market conditions and is not necessarily indicative of the amount we could realize in a current market exchange. The estimated fair value and carrying amount of outstanding borrowings under the Fourth Amended Credit Agreement at March 31, 2012 are $288.7 million and $290.9 million, respectively.

(7) Long-Term Debt

On March 30, 2010, we entered into the Fourth Amended Credit Agreement.  The Fourth Amended Credit Agreement provides us with the 2013 Revolving Credit Facility, which is a $345.0 million revolving credit facility that expires December 1, 2013 and includes a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters of credit.  The Fourth Amended Credit Agreement also provides a continuation of the term loan facility provided pursuant to the Third Amended and Restated Credit Agreement, of which $189.5 million remained outstanding on March 31, 2012, and an uncommitted incremental accordion facility of $200.0 million.  As of March 31, 2012, availability under the 2013 Revolving Credit Facility totaled $55.7 million as calculated under the most restrictive covenant.

Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%.  Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.  See Note 5 for a description of our interest rate swap agreements.  The Fourth Amended Credit Agreement also provides for a fee ranging between 0.275% and 0.425% of the unused commitments under the 2013 Revolving Credit Facility.  The Fourth Amended Credit Agreement is secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in substantially all of the Company’s and its subsidiaries’ assets.

We are required to repay outstanding revolving loans under the 2013 Revolving Credit Facility on December 1, 2013. We are required to repay term loans in quarterly principal installments aggregating $0.5 million each, which commenced on March 31, 2007.  The entire unpaid principal balance of the term loans is due and payable at maturity on December 1, 2013.

The Fourth Amended Credit Agreement contains various financial covenants, which require us to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net worth.  The Fourth Amended Credit Agreement also restricts the payment of dividends and limits the amount of repurchases of the Company’s common stock.  As of March 31, 2012, we were in compliance with all of the covenant requirements of the Fourth Amended Credit Agreement.

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As described in Note 5 above, as of March 31, 2012, we are a party to interest rate swap agreements for which we receive a variable rate of interest based on LIBOR and for which we pay a fixed rate of interest.

(8) Restructuring and Related Charges

In November 2011, we began a restructuring of the Company (the “2011 Restructuring”), which was largely completed by the end of fiscal 2011, primarily focused on aligning our capacity requirements and organizational structure following CIGNA’s decision to wind-down its contract beginning in 2012.  We do not expect to incur significant additional costs or adjustments related to this restructuring.

In November 2010, we began a restructuring of the Company (the “2010 Restructuring”), which was largely completed by the end of fiscal 2010, primarily focused on aligning resources with current and emerging markets and consolidating operating capacity.  We do not expect to incur significant additional costs or adjustments related to this restructuring.

The change in accrued restructuring and related charges associated with the 2011 Restructuring and 2010 Restructuring activities described above during the three months ended March 31, 2012 were as follows:

(In 000s)		2011			2010
		Restructuring			Restructuring			Total
Accrued restructuring and related charges at January 1, 2012	$	8,426		$	1,583		$	10,009
Additions		41			—			41
Payments		(5,050	)		(211	)		(5,261	)
Adjustments (1)		(314	)		(35	)		(349	)
Accrued restructuring and related charges at March 31, 2012	$	3,103		$	1,337			4,440
(1) Adjustments for the three months ended March 31, 2012 resulted primarily from actual employee tax and benefit amounts differing from previous estimates.

(9) Commitments and Contingencies

Contract Dispute

We currently are involved in a contractual dispute with Blue Cross Blue Shield of Minnesota regarding fees paid to us as part of a former contractual relationship.  In 2010, we received a notice of arbitration under the terms of our agreement alleging a violation of certain contract provisions.  We believe we performed our services in compliance with the terms of our agreement and that the assertions made in the arbitration notice are without merit.  On August 3, 2011, we asserted numerous counterclaims against Blue Cross Blue Shield of Minnesota.  We are not able to reasonably estimate a range of potential losses, if any.

Anti-Trust Lawsuit

On May 1, 2012, American Specialty Health Group (“ASH”) amended a claim (the “Amended Claim”) that it had previously filed against the Company in the U.S. District Court in the Southern District of California on December 2, 2011 (the “Original Claim”).  The Original Claim alleged that the Company’s exclusivity provisions in some of its contracts with participating locations in its SilverSneakers® fitness network violate California’s Unfair Competition Law and that the Company interfered with ASH’s contractual relations and

15

prospective economic advantages.  The Amended Claim added allegations that the Company is in violation of the Sherman Antitrust Act (the “Act”) because such exclusivity provisions create illegal restraints on trade and constitute monopolization or attempted monopolization in violation of the Act.  Under the Amended Claim, ASH is seeking damages in excess of $15,000,000, treble damages under the Act, and injunctive relief.

We believe ASH’s claims are without merit and intend to vigorously defend ourselves against the Amended Claim.

Outlook

We are also subject to other contractual disputes, claims and legal proceedings that arise from time to time in the ordinary course of our business.  While we are unable to estimate a range of potential losses, we do not believe that any of the legal proceedings pending against us as of the date of this report will have a material adverse effect on our liquidity or financial condition.  As these matters are subject to inherent uncertainties, our view of these matters may change in the future.

Contractual Commitment

In May 2011, we entered into a ten-year applications and technology services outsourcing agreement with HP Enterprise Services, LLC that contains minimum fee requirements.  Total payments over the remaining term must equal or exceed a minimum level of approximately $171.9 million; however, based on initial required service and equipment level assumptions, we estimate that the remaining payments will be approximately $359.6 million.  The agreement allows us to terminate all or a portion of the services after the first two years provided we pay certain termination fees, which could be material to the Company.

(10) Share Repurchases

The Company’s Board of Directors authorized a share repurchase program, which was publicly announced on October 21, 2010. The share repurchase program allows for the repurchase of up to $60 million of our common stock from time to time in the open market or in privately negotiated transactions through October 19, 2012. No shares were repurchased between January 1, 2012 and March 31, 2012 pursuant to the program.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 through 31, 2012	—		—	2,254,953		$31,813,383
February 1 through 29, 2012	—		—	2,254,953		$31,813,383
March 1 through 31, 2012	—		—	2,254,953		$31,813,383
Total	—

(11) Comprehensive Income

Comprehensive income (loss), net of income taxes, was ($2.3 million) and $4.8 million for the three months ended March 31, 2012 and 2011, respectively.

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(12) Earnings (Loss) Per Share

The following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the three months ended March 31, 2012 and 2011:

(In 000s, except per share data)	Three Months Ended March 31,
	2012			2011
Numerator:
Net income (loss) - numerator for basic earnings (loss) per share	$	(2,665	)	$	4,135
Denominator:
Shares used for basic earnings (loss) per share		33,346			33,975
Effect of dilutive securities outstanding:
Non-qualified stock options (1)		—			380
Restricted stock units (1)		—			335
Shares used for diluted earnings (loss) per share (1)		33,346			34,690
Earnings (loss) per share:
Basic	$	(0.08	)	$	0.12
Diluted (1)	$	(0.08	)	$	0.12
Dilutive securities outstanding not included in the computation of diluted earnings (loss) per share because their effect is antidilutive:
Non-qualified stock options		5,376			4,441
Restricted stock units		487			128
(1) The assumed exercise of stock-based compensation awards for the three months ended March 31, 2012 was not considered because the impact would be anti-dilutive.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Founded in 1981, Healthways provides specialized, comprehensive solutions to help people improve physical, emotional and social well-being, thereby reducing both direct healthcare costs and health-related costs associated with the loss of employee productivity.

We provide highly specific and personalized interventions for each individual in a population, irrespective of health status, age or payor.  Our evidence-based health, prevention and well-being services are made available to consumers via phone, mobile devices, direct mail, the Internet, face-to-face consultations and venue-based interactions.

In North America, our customers include health plans, employers, integrated healthcare systems, hospitals, physicians, and government entities in all 50 states, the District of Columbia and Puerto Rico. We also provide health improvement programs and services in Brazil, Australia and France.  We operate domestic and international care enhancement and coaching centers staffed with licensed health professionals.  Our fitness center network encompasses approximately 14,000 U.S. locations.  We also maintain an extensive network of over 88,000 complementary, alternative and physical medicine practitioners, which offers convenient access to the significant number of individuals who seek health services outside of the traditional healthcare system.

Our guiding philosophy and approach to market is predicated on the fundamental belief that healthier people cost less and are more productive.  As described more fully below, our programs are designed to improve well-being by helping people to adopt or maintain healthy behaviors, reduce health-related risk factors, and optimize care for identified health conditions.

First, our programs are designed to help people adopt or maintain healthy behaviors by:

· fostering wellness and disease prevention through total population screening, well-being assessments and supportive interventions; and

· providing access to health improvement programs, such as fitness solutions, weight management, chiropractic, and complementary and alternative medicine.

Our prevention programs focus on education, physical fitness, health coaching, and behavior change techniques and support.  We believe this approach improves the well-being status of member populations and reduces the short- and long-term direct healthcare costs for participants, including associated costs from the loss of employee productivity.

Second, our programs are designed to help people reduce health-related risk factors by:

· promoting the change and improvement of the lifestyle behaviors that lead to poor health or chronic conditions; and

· providing educational materials and personal interactions with highly trained nurses and other healthcare professionals to create and sustain healthier behaviors for those individuals at-risk or in the early stages of chronic conditions.

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We enable our customers to engage everyone in their covered populations through specific interventions that are sensitive to each individual’s health risks and needs. Our programs are designed to motivate people to make positive lifestyle changes and accomplish individual goals, such as increasing physical activity for seniors through the Healthways SilverSneakers fitness solution or overcoming nicotine addiction through the QuitNet® on-line smoking cessation community.

Finally, our programs are designed to help people optimize care for identified health conditions by:

· incorporating the latest, evidence-based clinical guidelines into interventions to optimize patient health outcomes;

· developing care support plans and motivating members to set attainable goals for themselves;

· providing local market resources to address acute episodic interventions;

· coordinating members’ care with their healthcare providers;

· providing software licensing and management consulting in support of well-being improvement services; and

· providing high-risk care management for members at risk for hospitalization due to complex conditions.

Our approach is to use proprietary, analytic models to identify individuals who are likely to incur future high costs, including those who have specific gaps in care, and through evidence-based interventions drive adherence to proven standards of care, medication regimens and physicians’ plans of care to reduce disease progression and related medical spending.

We recognize that each individual plays a variety of roles in his or her pursuit of health, often simultaneously.  By providing the full spectrum of services to meet each individual’s needs, we believe our interventions can be delivered at scale and in a manner that reflects those unique needs over time.  We believe creating real and sustainable behavior change generates measurable, long-term cost savings and improved individual and business performance.

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which are based upon current expectations, involve a number of risks and uncertainties, and are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include all statements that are not historical statements of fact and those regarding the intent, belief, or expectations of the Company, including, without limitation, all statements regarding the Company’s future earnings and results of operations, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” or “continue” and similar expressions.  Those forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to:

· our ability to sign and implement new contracts for our solutions;

· our ability to accurately forecast the costs required to successfully implement new contracts;

· our ability to renew and/or maintain contracts with our customers under existing terms or restructure these contracts on terms that would not have a material negative impact on our results of operations;

· our ability to effectively compete against other entities, whose financial, research, staff, and marketing resources may exceed our resources;

· our ability to accurately forecast the Company’s revenues, margins, earnings and net income, as well as any potential charges that we may incur as a result of changes in our business;

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· our ability to accurately forecast variables that affect performance and the timing of revenue recognition under the terms of our customer contracts ahead of data collection and reconciliation;

· the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ( “PPACA”) on our operations and/or the demand for our services;

· the outcome of lawsuits challenging the constitutionality of PPACA;

· the impact of any new or proposed legislation, regulations and interpretations relating to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, including the potential expansion to Phase II for Medicare Health Support programs and any legislative or regulatory changes with respect to Medicare Advantage;

· our ability to anticipate the rate of market acceptance of our solutions in potential international markets;

· our ability to accurately forecast the costs necessary to establish a presence in international markets;

· the risks associated with foreign currency exchange rate fluctuations and our ability to hedge against such fluctuations;

· the risks associated with deriving a significant concentration of our revenues from a limited number of customers;

· our ability to achieve and reach mutual agreement with customers with respect to contractually required performance metrics, cost savings and clinical outcomes improvements, or to achieve such metrics, savings and improvements within the time frames contemplated by us;

· our ability to achieve estimated annualized revenue in backlog in the manner and within the timeframe we expect, which is based on certain estimates regarding the implementation of our services;

· our ability and/or the ability of our customers to enroll participants and to estimate their level of enrollment and participation in our programs in a manner and within the timeframe anticipated by us;

· the ability of our customers to provide timely and accurate data that is essential to the operation and measurement of our performance under the terms of our contracts;

· our ability to favorably resolve contract billing and interpretation issues with our customers;

· our ability to service our debt, make principal and interest payments as those payments become due, and remain in compliance with our debt covenants;

· the risks associated with changes in macroeconomic conditions, which may reduce the demand and/or the timing of purchases for our services from customers or potential customers, reduce the number of covered lives of our existing customers, or restrict our ability to obtain additional financing;

· counterparty risk associated with our interest rate swap agreements and foreign currency exchange contracts;

· our ability to integrate acquired businesses, services (including outsourced services), or technologies into our business and to accurately forecast the related costs;

· our ability to anticipate and respond to strategic changes, opportunities, and trends in our industry and/or business and to accurately forecast the related impact on our earnings;

· the impact of any impairment of our goodwill or other intangible assets;

· our ability to develop new products and deliver outcomes on those products;

· our ability to implement our integrated data and technology solutions platform within the required timeframe and expected cost estimates and to develop and enhance this platform and/or other technologies to meet evolving customer and market needs;

· our ability to obtain adequate financing to provide the capital that may be necessary to support our operations and to support or guarantee our performance under new contracts;

· unusual and unforeseen patterns of healthcare utilization by individuals with diseases or conditions for which we provide services;

· the ability of our customers to maintain the number of covered lives enrolled in the plans during the terms of our agreements;

· the impact of legal proceedings involving us and/or our subsidiaries;

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· the impact of future state, federal, and international legislation and regulations applicable to our business, including PPACA, on our ability to deliver our services and on the financial health of our customers and their willingness to purchase our services;

· current geopolitical turmoil, the continuing threat of domestic or international terrorism, and the potential emergence of a health pandemic; and

· other risks detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and other filings with the Securities and Exchange Commission.

We undertake no obligation to update or revise any such forward-looking statements.

Customer Contracts

Contract Terms

Our fees are generally billed on a per member per month (“PMPM”) basis or upon member participation.  For PMPM fees, we generally determine our contract fees by multiplying the contractually negotiated PMPM rate by the number of members covered by our services during the month.  We typically set PMPM rates during contract negotiations with customers based on the value we expect our programs to create and a sharing of that value between the customer and the Company.  In addition, some of our services, such as the Healthways SilverSneakers fitness solution, include fees that are based upon member participation.

Our contracts with health plans generally range from three to five years with provisions for subsequent renewal; contracts with self-insured employers, either directly or through their health plans or pharmacy benefit manager, typically have one to three-year terms.  Some of our contracts allow the customer to terminate early.

Some of our contracts place a portion of our fees at risk based on achieving certain performance metrics, cost savings, and/or clinical outcomes improvements (“performance-based”).  Approximately 3% of revenues recorded during the three months ended March 31, 2012 were performance-based and were subject to final reconciliation as of March 31, 2012.  We anticipate that this percentage will increase throughout 2012 due to the level of performance-based fees in new contracts and the timing and amount of revenue recognition associated with performance-based fees.

Contract Revenues

Our contract revenues depend on the contractual terms we establish and maintain with customers to provide our services to their members.  Restructurings of contracts and possible terminations at, or prior to, renewal could have a material negative impact on our results of operations and financial condition.

Technology

Our solutions require sophisticated analytical, data management, Internet and computer-telephony solutions based on state-of-the-art technology. These solutions help us deliver our services to large populations within our customer base. Our predictive modeling capabilities allow us to identify and stratify those participants who are most at risk for an adverse health event. We incorporate behavior-change science with consumer-friendly interactions to facilitate consumer preferences for engagement and convenience. We use sophisticated data analytical and reporting solutions to validate the impact of our programs on clinical and financial outcomes. We continue to invest heavily in technology, as evidenced by our long-term applications and technology services outsourcing agreement with HP Enterprise Services, LLC, and are continually expanding and improving our proprietary clinical, data management, and reporting systems to continue to meet the information management requirements of our services.  The behavior change techniques and predictive modeling incorporated in our technology identify an individual’s readiness to change and provide personalized

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support through appropriate interactions using a range of methods desired by an individual, including venue-based face-to-face; print; phone; mobile and remote devices; on-line; emerging modalities; and any combination thereof to motivate and sustain healthy behaviors.

Business Strategy

The World Health Organization defines health as “…not only the absence of infirmity and disease, but also a state of physical, mental, and social well-being.”

Our business strategy reflects our passion to enhance health and well-being, and as a result, reduce overall healthcare costs and improve workforce engagement, yielding better business performance for our customers.  Our programs are designed to improve well-being by helping people to:

· adopt or maintain healthy behaviors;

· reduce health-related risk factors; and

· optimize care for identified health conditions.

Through our solutions, we work to optimize the health and well-being of entire populations, one person at a time, domestically and internationally, thereby creating value by reducing overall healthcare costs and improving productivity and performance for individuals, families, health plans, governments, employers, integrated healthcare systems and communities.

We believe it is critical to impact an entire population’s underlying health status and well-being in a long-term, cost effective way.  Believing that what gets measured gets acted upon, in 2008, we entered into an exclusive, 25-year relationship with Gallup to provide a national, daily pulse of individual and collective well-being.  The Gallup-Healthways Well-Being IndexTM is the result of a unique partnership in well-being measurement and research that is based upon surveys of 1,000 Americans every day through 2012, with nearly 1.6 million surveys completed to date.  Under the agreement, Gallup evaluates and reports on the well-being of individuals of countries, states and communities; Healthways provides similar services for companies, families and individuals.  This relationship was expanded in 2011 with the launch of the Gallup-Healthways Well-Being Index in the United Kingdom and Germany, which we believe indicates the growing global interest in gaining clear insights for government and business leaders charged with shaping the policy responses necessary to improve health, increase individual and organizational performance, lower healthcare costs and achieve sustained economic growth.

To enhance health and well-being within their respective populations, our current and prospective customers require solutions that focus on the underlying drivers of healthcare demand, address worsening health status, reverse or slow unsustainable cost trends, foster healthy behaviors, mitigate health risk factors, and manage chronic conditions.  Our strategy is to deliver programs that engage individuals and help them enhance their health status and well-being regardless of their starting point.  We believe we can achieve health and well-being improvements in a population and generate significant cost savings and increases in productivity by providing effective programs that support the individual throughout his or her well-being journey.

We are adding and enhancing solutions to extend our reach and effectiveness and to meet increasing demand for integrated solutions.  The flexibility of our programs allows customers to provide a range of services they deem appropriate for their organizations.  Customers may select from certain single program options up to a total-population approach, in which all members of a customer’s population are eligible to receive our services.  Recently signed contracts have expanded both the level of integration and breadth of services provided to major health plans as they develop and implement a number of patient-centered medical home models.  Our services extend beyond chronic care and wellness programs to include care management and pharmacy benefit management, as well as health promotion, prevention and quality improvement solutions.

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Our strategy includes, as a priority, the ongoing expansion of our value proposition through our total population management solution.  This solution, in addition to improving individuals’ health and reducing direct healthcare costs, targets a much larger improvement in employer profitability by reducing the impact of lost productivity for health-related reasons.  With the success of our total population management solution, we expect to gain an even greater competitive advantage in responding to employers’ needs for a healthier, higher-performing and less costly workforce.

Our strategy also includes the further enhancement and deployment of our proprietary next generation technology platform known as Embrace™.  This platform, which is essential to our total population management solution, enables us to integrate data from the healthcare organizations and other entities interacting with an individual.  Embrace provides for the delivery of our integrated solutions and ongoing communications between the individual and his or her medical and health experts, using a range of methods, including venue-based face-to-face; print; phone; mobile and remote devices; on-line; emerging modalities; and any combination thereof.

Significant changes in government regulation of healthcare are affording us expanding opportunities to provide services to integrated healthcare systems, hospitals, and physicians in addition to health plans and employers. We provide integrated healthcare systems, hospitals, and physician enterprises both consultative strategic planning services and a range of capabilities that enable and support the delivery of Physician-Directed Population Health solutions.

We plan to increase our competitive advantage in delivering our services by leveraging our scalable, state-of-the-art call centers, medical information content, behavior change processes and techniques, strategic relationships, health provider networks, fitness center relationships, and proprietary technologies and techniques.  We may add new capabilities and technologies through internal development, strategic alliances with other entities, and/or selective acquisitions or investments.  Recent examples include our collaboration with Blue Zones, LLC in delivering a scaled well-being improvement solution to support the Healthiest State initiative in Iowa; our investment in our wholly-owned subsidiary MeYou Health, LLC in bringing to market well-being improvement tools in the social media space through web and personal device delivery methods; and our expanded strategic relationship with Johns Hopkins Medicine to commercialize the sustained weight loss program Innergy™ resulting from a three-year clinical trial conducted by the National Heart, Lung and Blood Institute.

We anticipate continuing to enhance, expand and integrate additional capabilities with health plans and integrated healthcare systems and to pursue opportunities with employers, domestic government entities, and communities, as well as the public and private sectors of healthcare in international markets.

Critical Accounting Policies

We describe our accounting policies in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  We prepare the consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from those estimates.

We believe the following accounting policies are the most critical in understanding the estimates and judgments that are involved in preparing our financial statements and the uncertainties that could impact our consolidated results of operations, financial condition and cash flows.

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Revenue Recognition

Our fees are generally billed on a per member per month (“PMPM”) basis or upon member participation.  For PMPM fees, we generally determine our contract fees by multiplying the contractually negotiated PMPM rate by the number of members covered by our services during the month.  We typically set PMPM rates during contract negotiations with customers based on the value we expect our programs to create and a sharing of that value between the customer and the Company.  In addition, some of our services, such as the Healthways SilverSneakers fitness solution, include fees that are based upon member participation.

Our contracts with health plans generally range from three to five years with provisions for subsequent renewal; contracts with self-insured employers, either directly or through their health plans or pharmacy benefit manager, typically have one to three-year terms. Some of our contracts allow the customer to terminate early.

Some of our contracts place a portion of our fees at risk based on achieving certain performance metrics, cost savings, and/or clinical outcomes improvements (“performance-based”).  Approximately 3% of revenues recorded during the three months ended March 31, 2012 were performance-based and were subject to final reconciliation as of March 31, 2012.  We anticipate that this percentage will increase throughout 2012 due to the level of performance-based fees in new contracts and the timing and amount of revenue recognition associated with performance-based fees.

We recognize revenue as follows: 1) we recognize the fixed portion of PMPM fees and fees for service as revenue during the period we perform our services; and 2) we recognize performance-based revenue based on the most recent assessment of our performance, which represents the amount that the customer would legally be obligated to pay if the contract were terminated as of the latest balance sheet date.

We generally bill our customers each month for the entire amount of the fees contractually due for the prior month’s enrollment, which typically includes the amount, if any, that is performance-based and may be subject to refund should we not meet performance targets.  Deferred revenues arise from contracts which permit upfront billing and collection of fees covering the entire contractual service period, generally 12 months.  A limited number of our contracts provide for certain performance-based fees that cannot be billed until after they are reconciled with the customer.  Fees for service are typically billed in the month after the services are provided.

We assess our level of performance for our contracts based on medical claims and other data that the customer is contractually required to supply.  A minimum of four to nine months’ data is typically required for us to measure performance.  In assessing our performance, we may include estimates such as medical claims incurred but not reported and a medical cost trend compared to a baseline year.  In addition, we may also provide contractual allowances for billing adjustments (such as data reconciliation differences) as appropriate.

If data is insufficient or incomplete to measure performance, or interim performance measures indicate that we are not meeting performance targets, we do not recognize performance-based fees subject to refund as revenues but instead record them in a current liability account entitled “contract billings in excess of earned revenue.”  Only in the event we do not meet performance levels by the end of the measurement period, typically one year, are we contractually obligated to refund some or all of the performance-based fees.  We would only reverse revenues that we had already recognized if performance to date in the measurement period, previously above targeted levels, subsequently dropped below targeted levels.  Historically, any such adjustments have been immaterial to our financial condition and results of operations.

During the settlement process under a contract, which generally occurs six to eight months after the end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data.  As of March 31, 2012, cumulative performance-based revenues that have not yet been settled with our customers but

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that have been recognized in the current and prior years totaled approximately $38.0 million, all of which were based on actual data received from our customers.  Data reconciliation differences, for which we provide contractual allowances until we reach agreement with respect to identified issues, can arise between the customer and us due to customer data deficiencies, omissions, and/or data discrepancies.

Performance-related adjustments (including any amounts recorded as revenue that were ultimately refunded), changes in estimates, or data reconciliation differences may cause us to recognize or reverse revenue in a current fiscal year that pertains to services provided during a prior fiscal year.  During the three months ended March 31, 2012, we recognized a net increase in revenue of $1.4 million that related to services provided prior to 2012.

Impairment of Intangible Assets and Goodwill

We review goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment).  On an annual basis or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable, we perform a qualitative assessment to determine the likelihood that the fair value of a reporting unit is less than its carrying value. If there are no qualitative factors indicating a possible impairment, we do not perform a quantitative review.

If we conclude during our qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of each reporting unit using a combination of a discounted cash flow model and a market-based approach, and we reconcile the aggregate fair value of our reporting units to our consolidated market capitalization.  Estimating fair value requires significant judgments, including management’s estimate of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital, as well as relevant comparable company earnings multiples for the market-based approach.  Changes in these estimates and assumptions could materially affect the estimate of fair value and potential goodwill impairment for each reporting unit.

If we determine that the carrying value of goodwill is impaired based upon an impairment review, we calculate any impairment using a fair-value-based goodwill impairment test as required by U.S. GAAP.  The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.

Except for a certain trade name which has an indefinite life and is not subject to amortization, we amortize identifiable intangible assets, such as acquired technologies and customer contracts, using the straight-line method over their estimated useful lives.  We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.  If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset’s fair value based on the estimated price that would be received to sell the asset in an orderly transaction between market participants.

We review intangible assets not subject to amortization, which consist of a certain trade name, on an annual basis or more frequently whenever events or circumstances indicate that the assets might be impaired.  We estimate the fair value of the trade name using a present value technique, which requires management’s estimate of future revenues attributable to this trade name, estimation of the long-term growth rate for these revenues, and determination of our weighted average cost of capital.  Changes in these estimates and assumptions could materially affect the estimate of fair value for the trade name.

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Future events could cause us to conclude that impairment indicators exist and that goodwill and/or other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.  Accounting for income taxes requires significant judgment in determining income tax provisions, including determination of deferred tax assets, deferred tax liabilities, and any valuation allowances that might be required against deferred tax assets, and in evaluating tax positions.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  U.S. GAAP also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.  Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial position, results of operations, or cash flows.

Share-Based Compensation

We measure and recognize compensation expense for all share-based payment awards based on estimated fair values at the date of grant.  Determining the fair value of stock options at the grant date requires judgment in developing assumptions, which involve a number of variables.  These variables include, but are not limited to, the expected stock price volatility over the term of the awards and expected stock option exercise behavior.  In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.

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Results of Operations

The following table shows the components of the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2012 and 2011 expressed as a percentage of revenues.

	Three Months Ended
	March 31,
	2012		2011
Revenues	100.0	%	100.0	%
Cost of services (exclusive of depreciation
and amortization included below)	84.9	%	74.8	%
Selling, general and administrative expenses	8.3	%	10.9	%
Depreciation and amortization	7.4	%	7.6	%
Operating income (loss) (1)	(0.6	)%	6.6	%
Interest expense	1.9	%	2.1	%
Income (loss) before income taxes	(2.5	)%	4.5	%
Income tax (benefit) expense	(0.9	)%	2.0	%
Net income (loss)	(1.6	)%	2.5	%

(1) Figures may not add due to rounding.

Revenues

Revenues increased $2.2 million, or 1.4%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, primarily due to the following:

·   an increase in participation in our fitness solutions, as well as in the number of members eligible to participate in such programs; and

·   the commencement of new contracts.

These increases were somewhat offset by decreases in revenue primarily due to the wind-down of our current contract with CIGNA in advance of the contract’s expiration in February 2013, as well as certain other contract or program terminations with three smaller health plan customers.

Cost of Services

Cost of services (excluding depreciation and amortization) as a percentage of revenues increased to 84.9% for the three months ended March 31, 2012, compared to 74.8% for the three months ended March 31, 2011 primarily due to the following:

·   the wind-down of our current contract with CIGNA and certain other contract or program terminations with three smaller health plan customers to whom we provided traditional disease management services, all of which carried a lower than average cost of services as a percentage of revenues.  In addition, due to the timing of the notification from CIGNA in late 2011, some of the related costs could not be reduced until the first quarter of 2012; and

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·   an increase in the level of performance-based fees such that a significant portion of these fees will not be recognized as revenue until future periods, whereas the related costs are incurred and recognized in the current period.

These increases were somewhat offset by a decrease in cost of services (excluding depreciation and amortization) as a percentage of revenues related to changes in the contract structure of certain incentive-based wellness programs from a utilization model to a fixed margin percentage model.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenues decreased to 8.3% for the three months ended March 31, 2012 compared to 10.9% for the three months ended March 31, 2011, primarily due to a restructuring of the Company that was largely completed during the fourth quarter of 2011, partially offset by increased costs involved in pursuing business in emerging markets.

Depreciation and Amortization

Depreciation and amortization expense remained relatively consistent for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Interest Expense

Interest expense remained relatively consistent for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Income Tax Expense

For the three months ended March 31, 2012, we had an effective tax benefit rate of 35.3% compared to an effective tax expense rate of 43.9% for the three months ended March 31, 2011.  The decrease in the effective rate was largely attributable to the impact of certain expenses related to international operations for which we currently are not able to recognize a tax benefit.  Because we had a pre-tax loss for the three months ended March 31, 2012, these non-deductible expenses served to reduce our effective tax benefit rate for the period, whereas the same type of expenses served to increase our effective tax expense rate during the three months ended March 31, 2011.

 Outlook

We anticipate that revenues for 2012 will remain relatively consistent with 2011 primarily due to increased revenues from new and expanded contracts and an increase in participation in our fitness solutions, as well as in the number of members eligible to participate in such solutions, offset by the wind-down of our current contract with CIGNA in advance of the contract’s expiration in February 2013.

We expect cost of services as a percentage of revenues for 2012 to increase compared to 2011 primarily due to the wind-down of our current contract with CIGNA and certain contract or program terminations with three smaller health plan customers to whom we provided traditional disease management services, all of which carried a lower than average cost of services as a percentage of revenues.  In addition, we anticipate that the level of performance-based fees will increase in 2012 compared to 2011, and a portion of these fees may not be recognized until the following year, whereas the related costs will be incurred and recognized in the current year.  We expect selling, general and administrative expenses as a percentage of revenues for 2012 to decrease compared to 2011 primarily due to cost savings from a restructuring of the Company that was largely completed during the fourth quarter of 2011.  We anticipate depreciation and

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amortization expense for 2012 will increase compared to 2011 primarily due to continued investment in our Embrace platform.

We anticipate that quarterly revenues and earnings will increase sequentially throughout 2012 primarily due to the timing of recognizing performance-based fees as revenue.

As discussed in “Liquidity and Capital Resources” below, a significant portion of our long-term debt is subject to fixed interest rate swap agreements; however, we cannot predict the potential for changes in interest rates, which would impact our variable rate debt.

Liquidity and Capital Resources

Operating activities for the three months ended March 31, 2012 used cash of $11.6 million compared to providing cash of $20.8 million for the three months ended March 31, 2011, primarily due to the following:

·   a decrease in net income;

·   an increase in certain long-term incentive and other benefit payments;

·   an increase in severance payments in the first quarter of 2012 made as a result of a restructuring of the Company that was largely completed during the fourth quarter of 2011; and

·   a decrease in cash collections on accounts receivable due to routine timing of collections.

Investing activities during the three months ended March 31, 2012 used $16.9 million in cash, which primarily consisted of capital expenditures associated with our Embrace platform.

Financing activities during the three months ended March 31, 2012 provided $28.6 million in cash, primarily due to net borrowings under our credit agreement.

On March 30, 2010, we entered into the Fourth Amended Credit Agreement.  The Fourth Amended Credit Agreement provides us with the 2013 Revolving Credit Facility, which is a $345.0 million revolving credit facility that expires December 1, 2013 and includes a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters of credit.  The Fourth Amended Credit Agreement also provides a continuation of the term loan facility provided pursuant to the Third Amended and Restated Credit Agreement, of which $189.5 million remained outstanding on March 31, 2012, and an uncommitted incremental accordion facility of $200.0 million.  As of March 31, 2012, availability under the 2013 Revolving Credit Facility totaled $55.7 million as calculated under the most restrictive covenant.

Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%.  Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.  See below for a description of our interest rate swap agreements.  The Fourth Amended Credit Agreement also provides for a fee ranging between 0.275% and 0.425% of the unused commitments under the 2013 Revolving Credit Facility.  The Fourth Amended Credit Agreement is secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in substantially all of the Company’s and its subsidiaries’ assets.

We are required to repay outstanding revolving loans under the 2013 Revolving Credit Facility on December 1, 2013. We are required to repay term loans in quarterly principal installments aggregating $0.5 million each, which commenced on March 31, 2007.  The entire unpaid principal balance of the term loans is due and payable at maturity on December 1, 2013.

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The Fourth Amended Credit Agreement contains various financial covenants, which require us to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net worth.  The Fourth Amended Credit Agreement also restricts the payment of dividends and limits the amount of repurchases of the Company’s common stock.  As of March 31, 2012, we were in compliance with all of the covenant requirements of the Fourth Amended Credit Agreement.

In order to reduce our exposure to interest rate fluctuations on our floating rate debt commitments, we maintain interest rate swap agreements with current and original notional amounts of $205.0 million and $220.0 million ($30.0 million of which will become effective in January 2013), respectively, and termination dates ranging from December 31, 2012 to December 31, 2013.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest.  These interest rate swap agreements effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 0.465% to 3.385% plus a spread, thus reducing the impact of interest rate changes on future interest expense.  We have designated these interest rate swap agreements as qualifying cash flow hedges.  We currently meet the hedge accounting criteria under U.S. GAAP in accounting for these interest rate swap agreements.

In October 2010, our Board of Directors authorized a share repurchase program, which allows for the repurchase over a two-year period of up to $60 million of our common stock from time to time in the open market or in privately negotiated transactions.  As of March 31, 2012, $31.8 million of our common stock is still subject to repurchase under this program.

We believe that cash flows from operating activities, our available cash, and our anticipated available credit under the Fourth Amended Credit Agreement will continue to enable us to meet our contractual obligations and to fund our current operations for the foreseeable future.  However, if our operations require significant additional financing resources, such as capital expenditures for technology improvements, additional call centers and/or letters of credit or other forms of financial assurance to guarantee our performance under the terms of new contracts, or if we are required to refund performance-based fees pursuant to contract terms, we may need to raise additional capital by expanding our existing credit facility and/or issuing debt or equity.  If we face a limited ability to arrange such financing, it may restrict our ability to effectively operate our business.  We cannot assure you that we would always be able to secure additional financing if needed and, if such funds were available, whether the terms or conditions would be acceptable to us.

As noted above, we are required to repay outstanding revolving and term loans under the Fourth Amended Credit Agreement on or before December 1, 2013.  Total borrowings under this agreement were $290.9 million as of March 31, 2012.  We anticipate that we will amend the terms or refinance the borrowings under the Fourth Amended Credit Agreement prior to its expiration.  However, we cannot assure you that we will be able to amend the terms or refinance the borrowings under the Fourth Amended Credit Agreement in an amount sufficient, or on terms acceptable, to us.

If contract development accelerates or acquisition opportunities arise, we may need to issue additional debt or equity to provide the funding for these increased growth opportunities.  We may also issue equity in connection with future acquisitions or strategic alliances.  We cannot assure you that we would be able to issue additional debt or equity on terms that would be acceptable to us.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk related to interest rate changes, primarily as a result of the Fourth Amended Credit Agreement, which bears interest based on floating rates. Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%.  Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.

In order to manage our interest rate exposure under the Fourth Amended Credit Agreement, we have entered into interest rate swap agreements effectively converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 0.465% to 3.385%.

A one-point interest rate change would have resulted in a change in interest expense of approximately $0.3 million for the three months ended March 31, 2012.

As a result of our investment in international initiatives, we are also exposed to foreign currency exchange rate risks. Because a significant portion of these risks is economically hedged with currency options and forwards contracts and because our international initiatives are not yet material to our consolidated results of operations, a 10% change in foreign currency exchange rates would not have had a material impact on our consolidated results of operations, financial position, or cash flows for the three months ended March 31, 2012.  We do not execute transactions or hold derivative financial instruments for trading purposes.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2012.  Based on that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective.  They are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II

Item 1. Legal Proceedings

Contract Dispute

We currently are involved in a contractual dispute with Blue Cross Blue Shield of Minnesota regarding fees paid to us as part of a former contractual relationship.  In 2010, we received a notice of arbitration under the terms of our agreement alleging a violation of certain contract provisions.  We believe we performed our services in compliance with the terms of our agreement and that the assertions made in the arbitration notice are without merit.  On August 3, 2011, we asserted numerous counterclaims against Blue Cross Blue Shield of Minnesota.  We are not able to reasonably estimate a range of potential losses, if any.

Anti-Trust Lawsuit

On May 1, 2012, American Specialty Health Group (“ASH”) amended a claim (the “Amended Claim”) that it had previously filed against the Company in the U.S. District Court in the Southern District of California on December 2, 2011 (the “Original Claim”).  The Original Claim alleged that the Company’s exclusivity provisions in some of its contracts with participating locations in its SilverSneakers fitness network violate California’s Unfair Competition Law and that the Company interfered with ASH’s contractual relations and prospective economic advantages.  The Amended Claim added allegations that the Company is in violation of the Sherman Antitrust Act (the “Act”) because such exclusivity provisions create illegal restraints on trade and constitute monopolization or attempted monopolization in violation of the Act.  Under the Amended Claim, ASH is seeking damages in excess of $15,000,000, treble damages under the Act, and injunctive relief.

We believe ASH’s claims are without merit and intend to vigorously defend ourselves against the Amended Claim.

Outlook

We are also subject to other contractual disputes, claims and legal proceedings that arise from time to time in the ordinary course of our business.  While we are unable to estimate a range of potential losses, we do not believe that any of the legal proceedings pending against us as of the date of this report will have a material adverse effect on our liquidity or financial condition.  As these matters are subject to inherent uncertainties, our view of these matters may change in the future.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties previously reported under the caption “Part I — Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, the occurrence of which could materially and adversely affect our business, prospects, financial condition and operating results. The risks previously reported and described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in this report are not the only risks facing our business. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.

There have been no material changes to our risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s Board of Directors authorized a share repurchase program, which was publicly announced on October 21, 2010. The share repurchase program allows for the repurchase of up to $60 million of our common stock from time to time in the open market or in privately negotiated transactions through October 19, 2012. No shares were repurchased between January 1, 2012 and March 31, 2012 pursuant to the program.

Period		Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 through 31, 2012		—		—	2,254,953		$31,813,383
February 1 through 29, 2012		—		—	2,254,953		$31,813,383
March 1 through 31, 2012		—		—	2,254,953		$31,813,383
Total		—
Item 3.	Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

(a) Exhibits

10.1	Employment Agreement dated January 1, 2012 between the Company and Peter Choueiri
10.2	Healthways, Inc. Non-Qualified Stock Option Agreement
10.3	Healthways, Inc. Restricted Stock Unit Award Agreement
10.4	Healthways, Inc. Performance Cash Award Agreement
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

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32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

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

			Healthways, Inc.
			(Registrant)
Date	May 9, 2012	By	/s/ Alfred Lumsdaine
			Alfred Lumsdaine
			Chief Financial Officer
			(Principal Financial Officer)

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EX-10.1

Exhibit 10.1

Anstellungsvertrag	Employment Contract
DIESER ANSTELLUNGSVERTRAG vom 1. Januar 2012 (der „Vertrag”) ist von und zwischen Healthways, Inc., einer Gesellschaft nach dem Recht des US-Staates Delaware (das „Unternehmen“) und Peter Choueiri (der „leitende Angestellte“) geschlossen. Dieser Vertrag ersetzt und hebt alle anderen Anstellungsverträge zwischen dem Unternehmen und dem leitenden Angestellten auf.	THIS EMPLOYMENT AGREEMENT dated as of January 1, 2012 (the “Agreement”), is entered into by and between Healthways, Inc., a Delaware corporation (the “Company”), and Peter Choueiri (the “Executive”). This Agreement replaces and supersedes any other employment agreement between the Company and Executive.
Das Unternehmen möchte, dass der leitende Angestellte als President, Healthways International unter den Bedingungen dieses Vertrages tätig wird und der leitende Angestellte möchte diese Position unter den Bedingungen dieses Vertrages wahrnehmen; und	WHEREAS, the Company desires that the Executive serves as President, Healthways International and the Executive desires to hold such position under the terms and conditions of this Agreement; and
die Parteien möchten diesen Vertrag unter den nachstehenden Bedingungen für das Anstellungsverhältnis des leitenden Angestellten mit dem Unternehmen abschließen.	WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company.
In der Absicht, hierdurch rechtlich gebunden zu sein, vereinbaren die Parteien was folgt:	NOW, THEREFORE, intending to be legally bound hereby, the parties agree as follows:
I. ANSTELLUNGSVERHÄLTNIS	I. EMPLOYMENT
Das Unternehmen beschäftigt hiermit den leitenden Angestellten und der leitende Angestellte nimmt hiermit das Anstellungsverhältnis mit dem Unternehmen an, beide unter den Bedingungen und als Verpflichtete der nachstehenden Bedingungen.	The Company hereby employs the Executive and the Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein.

II. LAUFZEIT UND URLAUB	II. TERM AND VACATION
Die nach Abschnitt VI. der Kündigung unterliegende Laufzeit der Anstellung des leitenden Angestellten beginnt entsprechend dieses Vertrags (gegebenenfalls verlängert, die „Laufzeit“) am 1. Januar 2012 (der „Vertragsbeginn“) und ist unbefristet. Der leitende Angestellte hat einen Anspruch auf dreißig Werktage Erholungsurlaub pro Jahr.	Subject to termination as stated in Section VI., the term of employment of the Executive pursuant to this Agreement (as the same may be extended, the “Term”) shall commence on January 1, 2012 (the “Starting Date”), and shall be indefinite in time thereafter. The Executive shall be entitled to thirty working days vacation per year.
III. POSITION	III. POSITION
Während der Laufzeit soll der leitende Angestellte als President, Healthways International des Unternehmens der Position entsprechende und zusätzliche von dem Unternehmen zu bestimmende Pflichten erfüllen. Der leitende Angestellte stimmt zu, auf Anfrage, ohne zusätzliche Vergütung, als Mitglied des Board of Directors des Unternehmens (das „Board“) und/oder eines Organs einer Tochtergesellschaft des Unternehmens und/oder in einer oder mehreren leitenden Positionen innerhalb des Unternehmens und/oder einer Tochtergesellschaft des Unternehmens tätig zu werden, solange dies für den leitenden Angestellten durchführbar und zumutbar ist. Falls das Dienstverhältnis des leitenden Angestellten, aus welchem Grund auch immer, gekündigt wird, unabhängig davon, ob eine solche Kündigung freiwillig oder unfreiwillig erfolgt, wird der leitende Angestellte als Boardmitglied und geschäftsführendes Organ des Unternehmens (und jeder seiner Tochtergesellschaften) zurücktreten. Dieser Rücktritt darf nicht später wirksam werden als zum Zeitpunkt des Wirksamwerdens der Kündigung des Anstellungsverhältnisses des leitenden Angestellten mit dem Unternehmen. Das Unternehmen schließt für den leitenden Angestellten eine D&O-Versicherung bis zu einer Höhe von USD 65 Millionen ab.	During the Term, the Executive shall serve as President, Healthways International of the Company performing duties commensurate with the position and such additional duties as the Company shall determine. If asked, the Executive agrees to serve, without any additional compensation, as a director on the Board of Directors of the Company (the “Board”) and/or the board of directors of any subsidiary of the Company, and/or in one or more officer positions with the Company and/or any subsidiary of the Company as long as it is executable and feasible for the Executive. If the Executive’s employment is terminated for any reason, whether such termination is voluntary or involuntary, the Executive shall resign as a director and officer of the Company (and any of its subsidiaries), such resignation to be effective no later than the effective date of termination of the Executive’s employment with the Company. The Company provides the Executive protection through D&O insurance of up to USD 65 million.

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IV. PFLICHTEN

IV. DUTIES

Der leitende Angestellte wird während der Laufzeit seine vollständige Zeit und Aufmerksamkeit während der üblichen deutschen Geschäftszeiten dem Geschäft und den Angelegenheiten des Unternehmens widmen. Soweit es keine Verletzung dieses Vertrages durch den leitenden Angestellten darstellt, kann der leitende Angestellte mit Zustimmung des Unternehmens angemessene Zeitperioden karitativen und gesellschaftlichen Aktivitäten und brancheninternen sowie beruflichen Aktivitäten und/oder der Erledigung persönlicher Investitionen widmen, solange diese Aktivitäten nicht die Erbringung der Pflichten des leitenden Angestellten beeinträchtigen. Der Arbeitsplatz ist München, Deutschland. Die Pflichten des leitenden Angestellten erfordern nationale und internationale Reisen.

During the Term, the Executive shall devote his full time and attention during normal German business hours to the business and affairs of the Company; provided, however, that it shall not be a violation of this Agreement for the Executive with the approval of the Company to devote reasonable periods of time to charitable and community activities and industry or professional activities, and/or to manage personal investments, so long as such activities do not interfere with the performance of the Executive’s responsibilities under this Agreement. The place of work is Munich, Germany; the Executive’s duties require national and international travel.

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V. VERGÜTUNG	V. COMPENSATION
A.      Grundgehalt Das anfängliche jährliche Grundgehalt des leitenden Angestellten beträgt ab dem Vertragsbeginn 312.000 Euro brutto. Während der Laufzeit dieses Vertrages wird das Board (oder ein Ausschuss des Boards), auf Empfehlung des Chief Executive Officer („CEO“) mit Wirkung zum 1. Januar jedes Kalenderjahres nach Vertragsbeginn, das Grundgehalt des leitenden Angestellten überprüfen und dieses anheben falls und wenn dieses für angebracht erachtet wird. Das anfängliche Grundgehalt, welches gegebenenfalls während der Laufzeit erhöht wurde, ist definiert als das „Grundgehalt“. Das Grundgehalt ist netto abzüglich aller Bankgebühren in monatlich gleichen Beträgen in Übereinstimmung mit den üblichen Gehaltsabrechungsverfahren des Unternehmens zu zahlen und ist allen entsprechenden Steuern und Einbehaltungen unterworfen. Die Höhe des Grundgehalts, welches dem leitenden Angestellten zum Beendigungszeitpunkt (wie nachstehend definiert) auszubezahlen ist, ist zur Bestimmung der gesamten Abfindungszahlungen an den leitenden Angestellten heranzuziehen.	A.Base Salary The Executive’s initial base salary as of the Starting Date is 312,000 Euros gross annually. Effective January 1 of each calendar year after the Starting Date during the Term of this Agreement, upon the recommendation of the Chief Executive Officer (“CEO”), the Board (or a committee of the Board) shall review the Executive’s base salary and may increase such amount if and as it may deem advisable. Such initial base salary, as it may be increased during the Term, is defined as the “Base Salary”. The Base Salary shall be payable net of all bank fees in monthly equal installments in accordance with the Company’s normal payroll practices, and is subject to all proper taxes and withholding. The Base Salary rate at which the Executive is being compensated on the Date of Termination (as defined below) shall be the Base Salary rate used in determining all severance amounts payable to the Executive hereunder.
B.Bonusplan Ein solcher Bonus wird gegebenenfalls auf Empfehlung des CEO von dem Board (oder einem gebildeten Ausschuss, bestehend ausschließlich aus unabhängigen Direktoren), bestimmt und ist in Übereinstimmung mit den Bedingungen des Bonusplans, welcher durch das Unternehmen eingeführt wurde („Bonusplan“), auszubezahlen.	B.Bonus Plan Such bonus, if any, as shall be determined upon the recommendation of the CEO by the Board (or any designated Committee of the Board comprised solely of independent directors), shall be paid in accordance with the terms and conditions of the bonus plan established for the Company (“Bonus Plan”).

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C.Langfristige Leistungsprämien Während der Laufzeit steht es dem Board (oder einem gebildeten Ausschuss, bestehend ausschließlich aus unabhängigen Direktoren) auf Empfehlung des CEO frei, langfristige Leistungsprämien entsprechend der Equity Incentive Pläne der Gesellschaft für den leitenden Angestellten in Betracht zu ziehen.	C.Long Term Incentive Awards During the Term, upon the recommendation of the CEO, the Board (or any designated committee of the Board comprised solely of independent directors) is free to consider any long term incentive awards to the Executive pursuant to the Company’s equity incentive plans.
D.Geschäftswagen Das Unternehmen stellt dem leitenden Angestellten einen Geschäftswagen zur Verfügung.	D.Company Car The Company will provide the Executive with a company car.
1.Der leitende Angestellte hat einen Anspruch auf einen Geschäftswagen zu einer monatlichen Leasingrate von 1.000 Euro brutto („Fahrzeugwert“) zuzüglich Versicherung, Service und Instandhaltung und Verbrauchsmaterialien (z.B. Benzin, Öl etc.). Die Leasingrate ist unter Zugrundelegen einer Leasingdauer von drei Jahren berechnet, nach welcher ein neues Fahrzeug vom leitenden Angestellten ausgewählt werden kann.	1.The Executive shall be entitled to receive a company car with a monthly leasing rate of 1,000 Euro gross (“Car Value”) plus insurance, service and maintenance and consumables (e.g., petrol, oil, etc.). This leasing rate is calculated on the basis of a three-year leasing after which a new car can be chosen by the Executive.
2.Falls sich der leitende Angestellte entscheidet ein Fahrzeug zu nutzen, dessen Leasingrate höher ist als der Fahrzeugwert, muss der leitende Angestellte die Differenz zur tatsächlichen Leasingrate tragen.	2.If the Executive decides to use a car, of which the leasing rate is higher than the Car Value, the Executive has to bear the difference in the factual leasing rate.
3.Falls sich der leitende Angestellte entscheidet ein Fahrzeug zu verwenden, dessen Leasingrate niedriger ist als der Fahrzeugwert, erhält der leitende Angestellte die Differenz als zusätzliche Bruttovergütung.	3.If the Executive decides to use a car, of which the leasing rate is lower than the Car Value, the Executive receives the difference as additional gross salary.

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4.Der Dienstwagen kann für private Zwecke genutzt werden. Dies führt zu einem geldwerten Vorteil, dessen Betrag zu einem einheitlichen Steuersatz entsprechend den derzeitigen steuerrechtlichen Bestimmungen oder anderer nach dem deutschen Steuerrecht zulässiger steuerlicher Ansätze zu versteuern ist. Diese Steuer ist von dem leitenden Angestellten zu entrichten.	4.The company car can be used for private purposes. This results in a non-cash benefit of which the amount will be taxed on a flat-rate according to the current tax regulations, or through other tax approaches as permitted by German tax law. This tax is to be borne by the Executive.
5.Falls zum Ende der Leasingdauer der leitende Angestellte eine höhere Kilometerleistung abgerufen hat als im Leasingvertrag festgelegt wurde, muss der leitende Angestellte für die zusätzliche Kilometerleistung aufkommen.	5.If at the end of the leasing period the Executive has used more mileage than provided for in the leasing agreement the Executive has to pay for the additional mileage.
6.Falls zum Ende der Leasingdauer der leitende Angestellte eine niedrigere Kilometerleistung abgerufen hat als im Leasingvertrag festgelegt wurde, hat der leitende Angestellte einen Anspruch auf Erhalt der Differenz als zusätzlichen Bruttoverdienst.	6.If at the end of the leasing period the Executive has used less mileage than provided for in the leasing agreement, the Executive is entitled to receive the difference as additional gross salary.
E.Arbeitsverhinderung Im Falle einer vorübergehenden Arbeitsverhinderung aufgrund von Krankheit oder anderen unverschuldeten Gründen, wird das Unternehmen dem leitenden Angestellten sein Grundgehalt und weitere Leistungen bis zu einer Dauer von sechs Wochen fortzahlen. Im Falle der Arbeitverhinderung über einen längeren Zeitraum als sechs Wochen wird das Unternehmen dem leitenden Angestellten für eine Höchstdauer von 18 Monaten (um Zweifel auszuschließen, einschließlich der sechs Wochen vorübergehender Arbeitsunfähigkeit) die Differenz zwischen jeglichen Leistungen, die der leitende Angestellte von einer Krankenversicherung (z.B. Krankengeld) erhält und seinem Grundgehalt und den weiteren Leistungen fortzahlen. Die demnach versprochene Entgeltfortzahlung wird in keinem Fall für die Zeit nach der Beendigung des Anstellungsverhältnisses geleistet.	E.Disability to Work In the event of temporary disability to work for reasons of illness or any other cause beyond his control, the Company shall continue to pay the Executive his base salary and other benefits for up to six weeks. In the event of disability to work for a longer period then six weeks the Company will pay to the Executive for a maximum of total 18 months (for the avoidance of doubt including the six weeks of temporary disability to work) the difference between any benefits that the Executive receives from any health insurance (e.g. sickness pay) and his base salary and benefits. The continued payment of salary provided for hereunder shall in no event be made for any period after termination of employment.

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F.Doppelbesteuerung Sollte der leitende Angestellte wegen seiner Tätigkeit aufgrund dieses Vertrages in anderen Ländern als Deutschland steuerpflichtig werden, wird das Unternehmen die Kosten für eine Steuerberatung übernehmen und den finanziellen Nachteil gegenüber einer (fiktiven) Besteuerung in Deutschland, welche aufgrund dieses Sachverhalts anfallen würde, kompensieren.	F.Dual Taxation Should the Executive due to his employment according to this Agreement be subject to taxes in other countries then Germany the Company will pay for tax advice and compensate for the financial disadvantage vis-à-vis a (fictitious) taxation in Germany accruing from this fact.
G.      Andere Leistungen Zusätzlich zu den hierin besonders vorgesehenen Leistungen hat der leitende Angestellte während der Laufzeit einen Anspruch auf Zahlungen in der Höhe von 80% seiner monatlichen Beiträge zur privaten Krankenversicherung und auf Zahlung eines Beitrages in der Höhe von 5% seines monatlichen Bruttogrundlohnes in einen privaten Pensionsfond seiner Wahl. Der 5%ige Beitrag erfolgt zusätzlich zu den standardmäßigen 4%, welche bereits von dem Unternehmen zu seinen Gunsten bezahlt werden.	G.Other Benefits In addition to the benefits specifically provided for herein, during the Term the Executive shall be entitled to payments in the amount of 80% of his monthly private health insurance contributions and a payment in the amount of 5% of his monthly gross base salary towards a private pension fund of his choice. The 5% contribution is in addition to the standard 4% which are already being contributed by the Company on his behalf.
Zusätzlich zu den hierin besonders vorgesehenen Leistungen hat der leitende Angestellte während der Laufzeit einen Anspruch auf Teilhabe an allen besonderen Leistungsplänen für leitende Mitarbeiter, die von dem Unternehmen unterhalten werden, allgemein gemäß den Bedingungen dieser Pläne (ausschließlich CAP, nationale LTIP), sofern nicht anderweitigen Vereinbarungen zwischen dem leitenden Angestellten und dem Unternehmen getroffen wurden.	In addition to the benefits specifically provided for herein, during the Term the Executive shall be entitled to participate in all officer specific benefit plans maintained by the Company generally according to the terms of such plans (excluding CAP, domestic LTIP) unless agreed otherwise by the Executive and the Company.

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VI. BEENDIGUNG DES VERTRAGES	VI. TERMINATION OF AGREEMENT
Die Anstellung des leitenden Angestellten gemäß dieses Vertrags kann nur unter Beachtung der im nachfolgenden Abschnitt genannten Bedingungen gekündigt werden. Im Rahmen dieses Abschnitts VI. bezeichnet das „Datum der Beendigung“ das Datum der Übergabe der Kündigungs- oder Rücktrittserklärung, sowohl durch das Unternehmen als auch durch den leitenden Angestellten, und das „Wirksamkeitsdatum“ den letzten Tag des rechtsgültigen Arbeitsverhältnisses (z.B. den Tag, an welchem die Kündigung wirksam wird).	The Executive’s employment under this Agreement shall not be terminated except as set forth in this Section. For this Section VI. the date of delivery of a notice of termination or resignation by either the Company or the Executive shall constitute the “Date of Termination” and the last day of the legal employment relationship (i.e. the day on which the notice will be effective) shall constitute the “Effective Date”.
A.Durch beiderseitige Zustimmung Das Anstellungsverhältnis des leitenden Angestellten entsprechend dieses Vertrages kann jederzeit durch eine beidseitige schriftliche Vereinbarung des Unternehmens und dem leitenden Angestellten unter den zwischen den Parteien vereinbarten Bedingungen beendet werden.	A.By Mutual Consent The Executive’s employment pursuant to this Agreement may be terminated at any time by the mutual written agreement of the Company and the Executive upon such terms as are agreed upon between the parties.

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B.Tod Falls der leitende Angestellte während der Laufzeit dieses Vertrages verstirbt, wird das Unternehmen das bis zum Datum seines Todes fällige Grundgehalt an den von dem leitenden Angestellten vorgesehnen Begünstigten zahlen sowie einen anteiligen Betrag nach Maßgabe eines jeden Bonusplanes oder anderer Vergütung, zu welcher er ansonsten zu seinem Todeszeitpunkt berechtigt wäre. Der Betrag des Bonusplanes wird nach Ende des Geschäftsjahres, für welches der Bonusplan besteht, bestimmt und ausbezahlt. Der Betrag des bis zum Datum seines Todes fälligen Grundgehaltes soll seinem vorgesehenen Begünstigten innerhalb von dreißig (30) Tagen nach dem Tod des leitenden Angestellten ausbezahlt werden, wobei das Auszahlungsdatum nach alleinigem Ermessen des Unternehmens gewählt werden kann. Jeglicher Bonus wird zu dem im Bonusplan vorgesehnen Zeitpunkt ausbezahlt. Des weiteren werden alle ausstehenden Aktienoptionen, Belegschaftsaktien, Belegschaftsaktieneinheiten und jegliche andere noch nicht ausübbare aktienbasierende Leistungszulagen für ihren festgelegten Zeitraum ausschließlich in Übereinstimmung mit den Zuerkennungsbedingungen, die zwischen dem Unternehmen und dem leitende Angestellten zu seinem Todeszeitpunkt gelten, übertragen und/oder verbleiben ausübbar. Darüber hinaus hat das Unternehmen keine weiteren Verpflichtungen gegenüber dem leitenden Angestellten, den Vertretern seines Nachlasses oder seinen Erben, mit der Ausnahme, dass den Nachlassvertretern und/oder den Begünstigten des leitenden Angestellten solche Beträge auszubezahlen sind, die unter den dann gültigen Lebensversicherungsrichtlinien des Unternehmens oder anderen Plänen auszubezahlen sind, da sie zu Leistungen in Beziehung stehen, die an den Todesfall anknüpfen. B.Death If Executive dies during the Term of this Agreement, the Company shall pay his Base Salary due through the date of his death to the Executive’s designated beneficiary plus a pro-rata portion of any Bonus Plan or other compensation to which he is otherwise entitled as of the time of his death, which Bonus Plan amount will be determined and paid after the end of the fiscal year for which the Bonus Plan was in place. The amount of Base Salary due through the date of the Executive’s death shall be paid to his designated beneficiary within thirty (30) days of the Executive’s death, with the date of such payment chosen by the Company in its sole discretion. Any bonus shall be paid at such time designated in the Bonus Plan. Furthermore, all outstanding stock options, restricted stock, restricted stock units and any other unvested equity incentives shall vest and/or remain exercisable for their stated terms solely in accordance with the terms of the award agreements to which the Company and the Executive are parties at the time of his death. The Company shall then have no further obligations to the Executive or any representative of his estate or his heirs except that Executive’s estate or beneficiaries, as the case may be, shall be paid such amounts as may be payable under the Company’s life insurance policies and other plans as they relate to benefits following death then in effect.

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C.Durch das Unternehmen aus wichtigem Grund	C.By the Company for Cause
1.Die Anstellung des leitenden Angestellten kann durch das Unternehmen aus wichtigem Grund („außerordentliche Kündigung“) mit sofortiger Wirkung beendet werden. Im Rahmen dieses Abschnitts (C) sind das Datum der Beendigung und das Wirksamkeitsdatum identisch.	1.The Executive’s employment may be terminated by the Company for cause (“außerordentliche Kündigung”) with immediate effect. Under this Section (C) Date of Termination and Effective Date are the same.
2.Falls das Anstellungsverhältnis des leitenden Angestellten aufgrund dieses Abschnitts (C) beendet wird, hat der leitende Angestellte einen Anspruch auf Erhalt des gesamtem Grundgehaltes und anderer Leistungen, welche dem leitenden Angestellten aufgrund dieses Vertrages bis zum Wirksamkeitsdatum der Beendigung zustehen.	2.If the Executive’s employment is terminated under this Section (C), the Executive shall be entitled to receive all Base Salary and benefits to be paid or provided to the Executive under this Agreement through the effective Date of Termination.
3.Alle ausstehenden Aktienoptionen, Belegschaftsaktien, Belegschaftsaktieneinheiten und jegliche anderen ausübbaren aktienbasierten Vergütungen verbleiben ausschließlich in Übereinstimmung mit den Zuerkennungsbedingungen, die zwischen dem Unternehmen und dem leitende Angestellten zu Datum der Wirksamkeit der Beendigung des Arbeitsverhältnisses gelten, ausübbar. Alle aktienbasierten Leistungszulagen, die zum Wirksamkeitsdatum noch nicht ausübbar sind, verfallen mit dem Wirksamkeitsdatum der Beendigung des Arbeitsverhältnisses.	3.All outstanding stock options, restricted stock, restricted stock units and any other vested equity incentives shall remain exercisable solely in accordance with the terms of the award agreements to which the Company and the Executive are parties on the Date of Termination. All equity incentives that are not vested at the Effective Date shall terminate on the Effective Date.

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4.Des Weiteren findet das nachvertragliche Wettbewerbsverbot einschließlich der entsprechenden Entschädigungszahlung gemäß nachfolgendem Abschnitt IX. Anwendung.	4.In addition, the post-contractual non-compete including the respective payment as per Section IX. below applies.
D.Durch das Unternehmen ohne wichtigen Grund	D.By the Company Without Cause
1.Das Anstellungsverhältnis des leitenden Angestellten kann nach Empfehlung des CEO von dem Board jederzeit ohne wichtigen Grund durch Übergabe einer schriftlichen Kündigungserklärung an den leitenden Angestellten gekündigt werden. Falls das Anstellungsverhältnis des leitenden Angestellten aufgrund dieses Abschnittes (D) gekündigt wird, hat der leitende Angestellte einen Anspruch auf:	1.The Executive’s employment may be terminated by the Board upon recommendation of the CEO at any time without cause by delivery of a written notice of termination to the Executive. If the Executive’s employment is terminated under this Section (D), the Executive shall be entitled to receive:
a.jegliches Grundgehalt und Leistungen, welche dem leitenden Angestellten bis zum Wirksamkeitsdatum zustehen und einen anteiligen Betrag nach Maßgabe eines jeden Bonusplanes oder anderer Vergütungen, zu welcher er ansonsten zum Zeitpunkt des Wirksamkeitsdatums berechtigt ist. Der Betrag des Bonusplans wird am Ende des Geschäftsjahrs für welches der Bonusplan bestand, bestimmt und entsprechend den Bedingungen eines solchen Bonusplans ausbezahlt;	a.all Base Salary and benefits due to the Executive through the Effective Date and a pro-rata portion of any Bonus Plan or other compensation to which he is otherwise entitled as of the Effective Date, which Bonus Plan amount will be determined after the end of the fiscal year for which the Bonus Plan was in place and paid in accordance with the terms of such Bonus Plan;
b.einen Betrag im Wert des Grundgehalts des leitenden Angestellten für insgesamt achtzehn (18) Monate für die Zeit nach dem Wirksamkeitsdatum.	b.an amount equal to the Executive’s Base Salary for a total of eighteen (18) months following the Effective Date.

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2.Der Betrag der obigen Bestimmung 1(b) ist dem leitenden Angestellten periodisch zu den regulären Gehaltsabrechnungsdaten, beginnend am Wirksamkeitstag, auszubezahlen. Des weiteren werden oder bleiben alle ausstehenden Aktienoptionen, Belegschaftsaktien, Belegschaftsaktieneinheiten und jegliche anderen noch nicht ausübbaren aktienbasierten Leistungszulagen für ihren festgelegten Zeitraum ausschließlich in Übereinstimmung mit den Zuerkennungsbedingungen, die zwischen dem Unternehmen und dem leitende Angestellten zum Datum der Wirksamkeit der Beendigung des Arbeitsverhältnisses gelten, ausübbar.	2.The amount in clause 1(b) above shall be paid to the Executive periodically at the regular payroll dates commencing as of the Effective Date. Furthermore, all outstanding stock options, restricted stock, restricted stock units and any other unvested equity incentives shall vest and/or remain exercisable for their stated terms solely in accordance with the terms of the award agreements to which the Company and the Executive are parties on the Effective Date.
3.Die Beteiligung an der privaten Krankenversicherung wird für achtzehn (18) Monate nach dem Wirksamkeitsdatum fortgeführt werden.	3.The contribution to the private health insurance will continue for eighteen months after the Effective Date.
4.Im Falle einer Kündigung entsprechend diesem Abschnitts (D) hat der leitende Angestellte einen Anspruch auf einen Geschäftswagen entsprechend dem obigen Abschnitt V.(D) für einen Zeitraum von achtzehn (18) Monaten nach dem Wirksamkeitsdatum.	4.In case of a termination according to this Section (D) the Executive shall be entitled to a company car according to Section V.(D) above for a period of eighteen (18) months following the Effective Date.
5.Des Weiteren findet das nachvertragliche Wettbewerbsverbot einschließlich der entsprechenden Entschädigungszahlung gemäß unten stehendem Abschnitt IX Anwendung.	5.In addition, the post-contractual non-compete including the respective payment as per Section IX. below applies.

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E.Durch den leitenden Angestellten aus triftigem Grund	E.By the Executive for Good Reason
1.Das Dienstverhältnis des leitenden Angestellten kann von dem leitenden Angestellten durch Übergabe einer schriftlichen Mitteilung seiner Kündigung innerhalb von sechzig (60) Tagen nach Eintritt einer der nachfolgenden Gründe gekündigt werden. Jeder dieser Gründe begründet einen „triftigen Grund“ für eine Kündigung:	1.The Executive’s employment may be terminated by the Executive by written notice of his resignation delivered within sixty (60) days after the occurrence of any of the following events, each of which shall constitute “Good Reason” for resignation:
a.eine Anweisung des Unternehmens, den leitenden Angestellten an einen Standort zu versetzen, welcher mehr als fünfundzwanzig (25) Meilen von dem Büro liegt, in welchem der leitende Angestellte seine vertraglich bestehenden Pflichten zum Zeitpunkt einer solchen Versetzung ausübt. Im Sinne dieses Vertrages ist der Standort des leitenden Angestellten München, Deutschland;	a.a requirement by the Company to relocate the Executive to a location that is greater than twenty-five (25) miles from the location of the office in which the Executive performs his duties hereunder at the time of such relocation. For the purpose of this Agreement, the location of the Executive is Munich, Germany;
b.wenn in Zusammenhang mit einem Change of Control der Nachfolger (natürliche oder juristische Person) oder das Board die Pflichten aus diesem Vertrag nicht mehr beachtet oder dem leitenden Angestellten keinen Anstellungsvertrag anbietet, welcher Bestimmungen enthält, die im wesentlichen vergleichbar zu diesem Vertrag oder ansonsten für den leitenden Angestellten zufriedenstellend sind, und welcher von dem leitenden Angestellten unterzeichnet wird; oder	b.in connection with a Change in Control, a failure by the successor person or entity, or the Board, either to honor this Agreement or to present the Executive with an employment agreement containing provisions substantially similar to this Agreement or otherwise satisfactory to the Executive and which is executed by the Executive; or

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c.eine wesentliche Reduzierung des Titels des leitenden Angestellten oder eine wesentliche und nachteilige Änderung des Status und der Verantwortung des leitenden Angestellten oder die Übertragung von Pflichten und Verantwortung an den leitenden Angestellten, welche im wesentlichen nicht dem Status und der Verantwortung des leitenden Angestellten entsprechen;	c.a material reduction in the Executive’s title, or a material and adverse change in Executive’s status and responsibilities, or the assignment to Executive of duties or responsibilities which are materially inconsistent with Executive’s status and responsibilities;
d.wenn im Zusammenhang mit einen Change of Control sich das Vorgesetztenverhältnis zum CEO von Healthways ändert, oder	d.in connection with a Change of Control, the Executive’s reporting relationship is changed from the CEO of Healthways, or
e.bei Vorliegen eines wichtigen Grundes („außerordentliche Kündigung“) nach deutschem Recht.	e.a reason for cause (“außerordentliche Kündigung”) as per German law.
2.Der leitende Angestellte hat dem Unternehmen innerhalb von sechzig (60) Tagen nach Auftreten eines der in den obigen Unterabsätzen (a), (b), (c) oder (d) genannten Ereignissen (die „Ereignisse eines triftigen Grundes“) schriftlich seine Absicht zu kündigen mitzuteilen. Das Unternehmen hat danach sechzig (60) Tage (die „Behebungsfrist“) um das/ die Ereignis(se) eines triftigen Grundes zu beseitigen; in diesem Fall hat dann der leitende Angestellte nicht mehr das Recht aus triftigem Grund zu kündigen. Falls das Unternehmen scheitert das/die Ereignis(se) eines triftigen Grundes vor Ablauf der Behebungsfrist zu beseitigen, kann der leitende Angestellte aus triftigem Grund kündigen und erhält die Leistungen, die nachstehend beschrieben sind, sofern die Kündigung aus triftigem Grund innerhalb von dreißig (30) Tagen nach Ablauf der Behebungsfrist erfolgt, anderenfalls wird davon ausgegangen, dass auf das Recht aus triftigem Grund zu kündigen verzichtet wurde. Im Falle des Unterabsatzes (e) erfolgt die Kündigung aus triftigem Grund sofort und mit sofortiger Wirkung. Falls der leitende Angestellte aus triftigem Grund, wie in diesem Abschnitt (E) definiert, kündigt, hat der leitende Angestellte einen Anspruch auf:	2.The Executive shall give the Company written notice of his intention to resign for Good Reason (stating the reason therefore) within sixty (60) days after the occurrence of one of the events stated in subparagraphs (a), (b), (c), or (d) above (the “Good Reason Events”) and the Company shall have sixty (60) days (the “Cure Period”) thereafter to rescind the Good Reason Event(s), in which event the Executive no longer shall have the right to resign for Good Reason. If the Company fails to rescind the Good Reason Event(s) before the expiration of the Cure Period, then the Executive may resign for Good Reason and receive the benefits described below so long as the resignation for Good Reason occurs within thirty (30) days following the expiration of the Cure Period, otherwise the right to resign on the basis of that Good Reason Event(s) shall be deemed to have been waived. In case of subparagraph (e) the resignation for Good Reason occurs immediately and with immediate effect. If the Executive resigns for Good Reason as defined in this Section (E), the Executive shall be entitled to receive:

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a.jegliches Grundgehalt und Leistungen, welche dem leitenden Angestellten bis zum Wirksamkeitsdatum zustehen und einen anteiligen Betrag nach Maßgabe eines jeden Bonusplanes oder anderer Entschädigung, zu welcher er ansonsten zum Zeitpunkt des Wirksamkeitsdatums berechtigt ist. Der Betrag des Bonusplanes wird am Ende des Geschäftsjahres, für welches der Bonusplan bestand, bestimmt und entsprechend den Bedingungen eines solchen Bonusplanes ausbezahlt. Im Falle einer Kündigung nach Unterabsatz (e) wird das fiktive Wirksamkeitsdatum im Falle der Einhaltung einer Kündigungsfrist zugrunde gelegt;	a.all Base Salary and benefits due to the Executive under this Agreement through the Effective Date and a pro-rata portion of any Bonus Plan or other compensation to which he is otherwise entitled as of the Effective Date, which Bonus Plan amount will be determined after the end of the fiscal year for which the Bonus Plan was in place and paid in accordance with the terms of such Bonus Plan. In case of a resignation according to subparagraph (e) the hypothetical Effective Date in case of an observance of a notice period shall be taken into account;
b.einen Betrag im Wert des Grundgehalts des leitenden Angestellten für insgesamt achtzehn (18) Monate für die Zeit nach dem Wirksamkeitsdatum.	b.an amount equal to Executive’s Base Salary and benefits for a total of eighteen (18) months following the Effective Date; and
c.die Beteiligung an der privaten Krankenversicherung für achtzehn (18) Monate nach dem Wirksamkeitsdatum.	c.contributions to the private health insurance for eighteen months (18) following the Effective Date.

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3.Der Betrag der obigen Bestimmung 2(b) und (c) ist dem leitenden Angestellten periodisch zu den regulären Gehaltsabrechnungsdaten, beginnend am Wirksamkeitsdatum, auszubezahlen. Des weiteren werden alle ausstehenden Aktienoptionen, Belegschaftsaktien, Belegschaftsaktieneinheiten und jegliche andere noch nicht ausübbare aktienbasierte Leistungszulagen für ihren festegelegten Zeitraum ausschließlich in Übereinstimmung mit den Zuerkennungsbedingungen, die zwischen dem Unternehmen und dem leitende Angestellten zu Datum der Wirksamkeit der Beendigung des Arbeitsverhältnisses gelten, übertragen und/oder verbleiben ausübbar.	3.The amount in clause 2(b) and (c) above shall be paid to the Executive periodically at the regular payroll dates commencing as of the Effective Date. Furthermore, all outstanding stock options, restricted stock, restricted stock units and any other unvested equity incentives shall vest and/or remain exercisable for their stated terms solely in accordance with the terms of the award agreements to which the Company and the Executive are parties on the Effective Date.
4.Im Falle einer Kündigung entsprechend dieses Abschnitts (E) hat der leitende Angestellte einen Anspruch auf einen Geschäftswagen entsprechend dem obigen Abschnitt V.(D) für einen Zeitraum von achtzehn (18) Monaten nach dem Wirksamkeitsdatum.	4.In case of a termination according to this Section (E) the Executive shall be entitled to a company car according to Section V. (D) above for a period of eighteen (18) months following the Effective Date.
5.Des Weiteren findet das nachvertragliche Wettbewerbsverbot einschließlich der entsprechenden Entschädigungszahlung gemäß unten stehendem Abschnitt IX. Anwendung.	5.In addition, the post-contractual non-compete including the respective payment as per Section IX. below applies.

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F.Durch den leitenden Angestellten ohne triftigen Grund Der leitende Angestellte kann sein Dienstverhältnis jederzeit durch Übergabe einer schriftlichen Kündigungserklärung an das Unternehmen beenden	F.By the Executive Without Good Reason The Executive may terminate his employment at any time by delivery of a written notice of resignation to the Company
1.Falls das Dienstverhältnis des leitenden Angestellten aufgrund dieses Abschnitts (F) beendet wird, hat der leitende Angestellte bis zum Datum der Wirksamkeit der Kündigung einen Anspruch auf Erhalt des gesamtem Grundgehaltes und anderer Leistungen, welche dem leitenden Angestellten aufgrund dieses Vertrages bezahlt oder zur Verfügung gestellt werden.	1.If the Executive’s employment is terminated under this Section (F), the Executive shall be entitled to receive all Base Salary and benefits to be paid or provided to the Executive under this Agreement through the Effective Date.
2.Des Weiteren findet das nachvertragliche Wettbewerbsverbot einschließlich der entsprechenden Entschädigungszahlung gemäß unten stehendem Abschnitt IX. Anwendung.	2.In addition, the post-contractual non-compete including the respective payment as per Section IX. below applies.
3.Des weiteren werden alle ausstehenden Aktienoptionen, Belegschaftsaktien, Belegschaftsaktieneinheiten und jegliche anderen ausübbare aktienbasierenden Leistungszulagen für ihren festgelegten Zeitraum ausschließlich in Übereinstimmung mit den Zuerkennungsbedingungen, die zwischen dem Unternehmen und dem leitende Angestellten zum Wirksamkeitsdatum gelten, übertragen und/oder verbleiben, ausübbar.	3.Furthermore, all outstanding stock options, restricted stock, restricted stock units and any other vested equity incentives shall remain exercisable solely in accordance with the terms of the award agreements to which the Company and the Executive are parties on the Date of Termination. All equity incentives that are not vested at the Effective Date shall terminate on the Effective Date.

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G.Zahlungen im Anschluss an einen Change of Control	G.Payments following a Change in Control
1.Falls die Kündigung des Dienstverhältnisses des leitenden Angestellten ohne wichtigen Grund (entsprechend Abschnitt (D)) oder aus triftigem Grund (entsprechend Abschnitt (E)) innerhalb von zwölf (12) Monaten nach einem Change of Control erfolgt, werden die entsprechend Abschnitt (D) oder (E) zu bezahlenden Beträge als der „Change of Control-Entschädigungsbetrag“ bezeichnet und sind dem leitenden Angestellten in einem Pauschalbetrag nicht später als sechzig (60) Tage nach dem Wirksamkeitsdatum auszubezahlen, wobei der Zeitpunkt nach dem alleinigen Ermessen des Unternehmens bestimmt wird. Des weiteren werden alle ausstehenden Aktienoptionen, Belegschaftsaktien, Belegschaftsaktieneinheiten und jegliche anderen nicht garantierten aktienbasierenden Leistungszulagen für ihren festgelegten Zeitraum ausschließlich in Übereinstimmung mit den Zuerkennungsbedingungen, die zwischen dem Unternehmen und dem leitende Angestellten zum Wirksamkeitsdatum gelten, übertragen und/oder verbleiben, ausübbar.	1.If the Executive’s termination of employment without cause (pursuant to Section (D)) or for Good Reason (pursuant Section (E)) happens within twelve (12) months following a Change in Control, then the amounts payable pursuant Sections (D) or (E) shall be referred to as the “Change in Control Severance Amount” and shall be paid to the Executive in a lump-sum no later than sixty (60) days following the Effective Date with the date of such payment determined by the Company at its sole discretion. Furthermore, all outstanding stock options, restricted stock, restricted stock units and any other unvested equity incentives shall vest and/or remain exercisable for their stated terms solely in accordance with the terms of the award agreements to which the Company and the Executive are parties on the Effective Date.
2.Im Sinne dieses Vertrages bedeutet ein „Change of Control“ eines der nachfolgenden Ereignisse:	2.For the purposes of this Agreement, a “Change in Control” shall mean any of the following events:
i) Jede natürliche oder juristische Person, einschließlich einer „Gruppe”, wie in Paragraph 13(d)(3) des Security Exchange Act 1934 in aktueller Fassung (der „Exchange Act“) definiert, mit Ausnahme des Unternehmens oder einer hundertprozentigen Tochtergesellschaft davon oder eines Employee Benefit Plan des Unternehmens oder einer seiner Tochtergesellschaften, die wirtschaftliche Eigentümerin von Anteilen am Unternehmen wird und 35% oder mehr der Stimmrechte der zu diesem Zeitpunkt ausgegebenen Anteile am Unternehmen hält, welche für die Wahl des Boards abgeben werden können (andere als in Folge einer durch das Unternehmen eingeleiteten Ausgabe von Anteilen im gewöhnlichen Geschäftslauf);	i) any person or entity, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the Company or a wholly-owned subsidiary thereof or any employee benefit plan of the Company or any of its subsidiaries, becomes the beneficial owner of the Company’s securities having 35% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business);

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ii) wenn als Ergebnis einer oder in Verbindung mit einem Cash-Kauf- oder Tauschangebot, einer Verschmelzung oder anderen Unternehmenszusammenschlüssen, einem Verkauf von Vermögenswerten oder einer angefochtenen Wahl oder einer Kombination der genannten Vorgänge nach einem solchen Vorgang weniger als die Mehrheit der Stimmrechte der zu diesem Zeitpunkt ausgegebenen Anteile am Unternehmen oder einer Nachfolgegesellschaft oder -person, die allgemein dazu berechtigen die Boardmitglieder des Unternehmens oder einer solchen Nachfolgegesellschaft oder -person zu wählen, insgesamt von Inhabern der Anteile des Unternehmens gehalten werden, die allgemein berechtigt waren vor einer solchen Transaktion Boardmitglieder des Unternehmens zu wählen; oder

ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company’s securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or

iii) während eines Zeitraumes von zwei (2) aufeinanderfolgenden Jahren, Personen, welche zu Beginn eines solchen Zeitraumes das Board bilden, aus irgendeinem Grund aufhören wenigstens die Mehrheit hiervon zu bilden, außer wenn die Wahl oder Nominierung zur Wahl durch die Aktieninhaber des Unternehmens eines jeden dieser während dieses Zeitraumes erstmals gewählt Boardmitglieder, durch ein Votum von wenigstens Zweidritteln der Boardmitglieder des Unternehmens genehmigt wurde, die zu diesem Zeitpunkt noch im Amt und zu Beginn eines solchen Zeitraumes bereits Boardmitglieder des Unternehmens waren.

iii) during any period of two (2) consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company’s stockholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period.

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3.Entrichtung der Steuern. Falls in Zusammenhang mit einem Change of Control, irgendeine Zahlung des Unternehmens, welche nach ihrer Art eine Vergütung ist, an oder zugunsten des leitenden Angestellten eine „excess parachute payment“ (und/oder ein deutsches Pendant) darstellt, hat das Unternehmen dem leitenden Angestellten auf Aufforderung einen Betrag gleichwertig zu dem Betrag zu erstatten, der dem Wert der Steuer auf den gesamten Betrag des excess parachute payments entspricht („Aufzahlungsbetrag“). Die Bezahlung des „Aufzahlungsbetrages“ gegenüber dem leitenden Angestellten erfolgt, sobald vernünftigerweise möglich, nach dem Zahlungsverlangen des leitenden Angestellten, aber auf keinen Fall später als am 31. Dezember des Jahres, welches dem Jahr in welchem die Steuer gegenüber der Steuerbehörde entrichtet wurde, nachfolgt. 3.Excise Tax Payment. If, in connection with a Change in Control, any payment in the nature of compensation to, or for the benefit of, the Executive from the Company (or any successor in interest) constitutes an “excess parachute payment” (and/or a German equivalent) the Company shall pay to the Executive, on demand, an amount equal to the amount of excise tax on the entire amount of Excess Parachute Payments (“Gross-up Amount”). The payment of the “Gross-up Amount” due to the Executive shall be paid as soon as reasonably possible following demand of payment by the Executive, but in no event later than on December 31 of the year following the year of the tax is paid to the tax authorities.  

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H.Kündigungsfrist Die Parteien vereinbaren für Kündigungen gemäß den vorstehenden Abschnitten (D), (E) und (F) eine Kündigungsfrist von sechs (6) Monaten zum Ende des Kalendermonats. Im Falle einer Kündigung aus wichtigem Grund entsprechend Abschnitt (E)(1)e. endet das Dienstverhältnis mit sofortiger Wirkung. Das Unternehmen zahlt dem leitenden Angestellten während der Kündigungsfrist wie beschrieben sein Grundgehalt und seine Leistungen bis zum letzten Tag der Kündigungsfrist. Diese Kündigungsfrist beschränkt keinen Anspruch des leitenden Angestellten auf zusätzliche Abfindungszahlungen gemäß den obigen Abschnitten (D), (E) oder (F). Wenn das Unternehmen beschließt den leitenden Angestellten während der Kündigungsfrist freizustellen, ist das zwischen dem ersten Tag der Freistellung und dem Wirksamkeitsdatum zu bezahlende Grundgehalt auf die gemäß den obigen Abschnitten (D) oder (E) zu leistenden Abfindungszahlungen anzurechnen. Die Zahlung von Abfindungszahlungen gemäß den obigen Abschnitten (D) oder (E) beginnt zum Zeitpunkt des ersten Tages der Freistellung. Es besteht Einigkeit darüber, dass der leitende Angestellte nicht weniger erhält, als er aufgrund seines Anspruchs auf Abfindung gemäß (D), (E), oder beziehungsweise (F) hat.	H.Notice Period The parties agree to a notice period for terminations according to Sections (D), (E) and (F) above of six (6) months to the end of a calendar month. In case of a termination for cause according to Section (E)(1)e. the employment relationship will terminate with immediate effect. The Company will pay the Executive his Base Salary and benefits through the notice period until the last day of the notice period as stipulated above. This notice period does not limit any entitlement by the Executive for additional severance payments according to Sections (D), (E) or (F) above. If the Company decides to put the Executive on “Garden Leave” (“Freistellung”) during the notice period, fixed salary paid between the first day of “Garden Leave” and the Effective Date shall be set off against severance payments made according to Sections (D) or (E) above. The payment of severance payments according to Sections (D) or (E) above shall start at the moment of the first day of the Garden Leave. It is understood, however, that the Executive shall not receive less than his entitlement of severance according to Sections (D), (E), or (F) respectively.
VII. ZUSICHERUNGEN	VII. REPRESENTATIONS
Der leitende Angestellte sichert zu und gewährleistet, dass er nicht Partei eines Vertrages oder einer Übereinkunft ist, welche ihn davon abhalten würde in seine Pflichten aus diesem Vertrag einzutreten oder diese zu erfüllen.	The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement.
VIII. ABTRETUNG; VERBINDLICHE VEREINBARUNG	VIII. ASSIGNMENT, BINDING AGREE-MENT

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Dieser Vertrag ist ein höchstpersönlicher Vertrag und die sich hieraus ergebenden Rechte und Interessen des leitenden Angestellten dürfen von ihm nicht verkauft, übertragen, abgetreten, verpfändet oder belastet werden, außer wenn dies anderweitig ausdrücklich aufgrund der Bestimmungen dieses Vertrages erlaubt ist. Dieser Vertrag tritt in Kraft zugunsten des leitenden Angestellten und ist von ihm und seinen persönlichen und gesetzlichen Vertretern, Testamentsvollstreckern, Verwaltern, Rechtsnachfolgern, Erben, Ausschüttungsempfängern und Vermächtnisnehmern vollziehbar. Falls der leitende Angestellte sterben sollte, solange noch ein Betrag hierunter an ihn auszubezahlen wäre, würde der leitende Angestellte noch weiterleben, so sind alle diese Beträge, soweit hierin nichts anderes aufgenommen wurde, in Übereinstimmung mit den Bedingungen dieses Vertrages an seine Erben, Vermächtnisnehmer oder andere Beauftragte, oder, falls es solche Beauftragte nicht gibt in seinen Nachlass auszuzahlen.	This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate.
IX. GEHEIMHALTUNG, WETTBEWERBSVERBOT, ABWERBUNGSVERBOT	IX. CONFIDENTIALITY, NON-COMPETITION, NON-SOLICITATION
A.Der leitende Angestellte bestätigt, dass:	A.The Executive acknowledges that:
1. der vom Unternehmen betriebene Geschäftsbetrieb, nämlich Dienstleistungen der Gesundheitsunterstützung (care and health support) (der „Geschäftsbetrieb“), in hohem Maße dem Wettbewerb ausgesetzt ist und dass das Dienstverhältnis des leitenden Angestellten bei dem Unternehmen erfordert, dass der leitende Angestellte Zugang zu und Kenntnis von vertraulichen Informationen des Unternehmens in Bezug auf seine Businesspläne, Finanzdaten, Marketing-Programmen, Kundeninformationen, Verträge und andere Betriebsgeheimnisse hat, die in jedem Fall umfassender sind, als solche Informationen ohne Verletzung dieses Vertrages dem leitenden Angestellten allgemein bekannt oder öffentlich zugänglich wären;	1.the business made by the Company of providing care and health support services in which the Company is engaged (the “Business”) is intensely competitive and that the Executive’s employment by the Company will require that the Executive have access to and knowledge of confidential information of the Company relating to its business plans, financial data, marketing programs, client information, contracts and other trade secrets, in each case other than as and to the extent such information is generally known or publicly available through no violation of this Agreement by the Executive;

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2.die anderweitige Verwendung oder Offenlegung solcher Informationen als im Rahmen der Unterstützung des Geschäftsbetriebes des Unternehmens zu einem Wettbewerbsnachteil des Unternehmens und zu Schaden finanzieller oder anderer Art im Hinblick auf den Geschäftsbetrieb führen kann; und

2.the use or disclosure of such information other than in furtherance of the Business may place the Company at a competitive disadvantage and may do damage, monetary or otherwise, to the Business; and

3.die Beteiligung des leitenden Angestellten an einer im Rahmen dieses Abschnitts verbotenen Handlung eine unzulässige Aneignung und/oder Verwendung solcher Informationen darstellt. Der leitende Angestellte erkennt ausdrücklich den Betriebsgeheimnisstatus der vertraulichen Informationen des Unternehmens an und dass die vertraulichen Informationen ein zu schützendes Geschäftsinteresse des Unternehmens begründen. Der leitende Angestellte stimmt ausdrücklich zu, solche vertraulichen Informationen ohne vorherige Zustimmung nicht gegenüber jemanden außerhalb des Unternehmens preiszugeben, außer dies ist im Rahmen der Ausübung seiner Pflichten erforderlich.

3.the engaging by the Executive in any of the activities prohibited by this Section shall constitute improper appropriation and/or use of such information. The Executive expressly acknowledges the trade secret status of the Company’s confidential information and that the confidential information constitutes a protectable business interest of the Company. Other than as may be required in the performance of his duties, Executive expressly agrees not to divulge such confidential information to anyone outside the Company without prior permission.

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B. Das „Unternehmen” (welches so auszulegen ist, dass es das Unternehmen, seine Tochtergesellschaften und ihre jeweiligen Untergesellschaften einbezieht) und der leitende Angestellte vereinbaren, dass der leitende Angestellte für eine Dauer von zwölf (12) Monaten nach dem Wirksamkeitsdatum nicht:

B.The “Company” (which shall be construed to include the Company, its subsidiaries and their respective affiliates) and the Executive agree that for a period of twelve (12) months after the Effective Date the Executive shall not:

1.mit dem Unternehmen und seinen Tochtergesellschaft in jedem Land, in welchem das Unternehmen seinen Geschäftsbetrieb zum Zeitpunkt der Beendigung des Anstellungsverhältnisses des leitenden Angestellten ausübt, in Wettbewerb, wie nachstehend definiert, treten wird. Nach derzeitigem Stand soll das Wettbewerbsverbot die entsprechenden Länder weltweit umfassen. Im Rahmen dieses Vertrages bedeutet „Wettbewerb“ durch den leitenden Angestellten, dass der leitende Angestellte in Zusammenhang mit der Tätigkeit eines Unternehmens in diesem Geschäftsbereich, bei diesem angestellt ist oder als Berater oder Kreditgeber tätig wird, oder ein Vorstandmitglied, leitender Mitarbeiter, Angestellter, Geschäftsinhaber, Handelsvertreter, Anteilseigner, Mitglied, Inhaber oder Partner ist oder die Verwendung seines Namens erlaubt (die „Position“). Allerdings mit der Maßgabe, dass es für den leitenden Angestellten keine Verletzung dieses Unterabsatzes darstellt, (a) ein eingetragener oder begünstigter Inhaber von weniger als fünf Prozent (5%) jeglicher Art von Anteilen jeder oder mehrerer im Wettbewerb stehender Kapitalgesellschaften zu sein, sofern der leitende Angestellte am Geschäftsbetrieb einer solchen Kapitalgesellschaft bis zu dem Zeitpunkt, zu welchem diese Vertragsabrede ausläuft, nicht teilnimmt, oder (b) eine Position innerhalb einer Gesellschaft (z.B. Versicherung, Pharma etc.) annimmt, welche im Geschäftsbetrieb wie das Unternehmen tätig ist, sofern der leitende Angestellte nicht unmittelbar in die Erledigung von operativem Tagesgeschäft involviert ist.

1.engage in Competition, as defined below, with the Company or its subsidiaries within any country where the Company is conducting the Business at the time of termination of the Executive’s employment hereunder. Currently this includes the respective countries in the world. For purposes of this Agreement, “Competition” by the Executive shall mean the Executive’s being employed by or acting as a consultant or lender to, or being a director, officer, employee, principal, agent, stockholder, member, owner or partner of, or permitting his name to be used (a “Position”) in connection with the activities of any entity engaged in the Business, provided that, it shall not be a violation of this sub-paragraph for the Executive to (a) become the registered or beneficial owner of less than five percent (5%) of any class of shares in any one or more competing corporations, provided that, the Executive does not participate in the business of such corporation until such time as this covenant expires, or (b) accept a Position within any corporation (e.g., insurance, pharma) engaged in the Business as the Company as long as executive is not directly involved in managing day to day operations.

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2.unmittelbar oder mittelbar, zu seinen Gunsten oder zugunsten einer anderen Person oder Gesellschaft, wie folgt tätig wird:	2.directly or indirectly, for his benefit or for the benefit of any other person or entity, do any of the following:
a.um Geschäft mit jeglichen Kunden, welche mit dem Unternehmen im Zeitpunkt der Kündigung des leitenden Angestellten in Geschäftsbeziehung stehen, wirbt, dass dem Geschäft der Gesellschaft mit diesem Kunden entspricht oder ähnlich ist;	a.solicit from any customer, doing business with the Company as of the Executive’s termination, business of the same or of a similar nature to the Business of the Company with such customer;
b.innerhalb von zwölf (12) Monaten nach Beendigung des Anstellungsverhältnisses des leitenden Mitarbeiters um Geschäft mit jeglichen bekannten potentiellen Kunden der Gesellschaft wirbt, dass dem Geschäft entspricht oder ähnlich ist, welches nach Wissen des leitenden Angestellten Gegenstand eines Bieterverfahrens, Angebots oder Vorschlags der Gesellschaft war oder einer substantiellen Vorbereitung im Hinblick auf ein solches Bieterverfahren, Angebot oder einen solchen Vorschlag unterlag; oder	b.solicit from any known potential known customer of the Company business of the same or of a similar nature to that which, to the knowledge of the Executive, has been the subject of a written or oral bid, offer or proposal by the Company, or of substantial preparation with a view to making such a bid, proposal or offer, within twelve (12) months prior to the Executive’s termination; or

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c.Personen abwirbt, die zum Zeitpunkt der Beendigung des Anstellungsverhältnisses des leitenden Angestellten von dem Unternehmen angestellt waren und zum Zeitpunkt einer solchen Abwerbung noch bei dem Unternehmen beschäftigt sind.

c.recruit or solicit the employment or services of any person who was employed by the Company upon termination of the Executive’s employment and is employed by the Company at the time of such recruitment or solicitation.

3.Der leitende Angestellte erkennt an, dass die von ihm gegenüber dem Unternehmen zu erbringenden Dienste von besonderem und einzigartigen Charakter sind, was dazu führt, dass dieser Vertrag von erheblichem Wert für das Unternehmen ist und deswegen der Ausfall dieses Wertes nicht vernünftig oder adäquat durch gerichtlich geltend gemachten Schadensersatz ausgeglichen werden kann und ein Verstoß oder ein zu befürchtender Verstoß des leitenden Angestellten gegen jede der in diesem Abschnitt enthaltenen Bestimmungen zu einer unersetzbaren Schädigung des Unternehmens führt. Der leitende Angestellte ist deswegen damit einverstanden, dass das Unternehmen um ihm einen solchen Verstoß oder drohenden Verstoß zu untersagen oder davon abzuhalten befugt ist, zusätzlich zu jedem Anspruch oder Rechtsmittel, eine vorläufige oder dauerhafte Unterlassungsverfügung ohne die Notwendigkeit des Nachweises der Unangemessenheit eines finanziellen Schadensersatzanspruches oder der Hinterlegung einer Bürgschaft oder Sicherheitsleistung zu beantragen.

3.The Executive acknowledges that the services to be rendered by him to the Company are of a special and unique character, which causes this Agreement to be of significant value to the Company, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a breach or threatened breach by him of any of the provisions contained in this Section will cause the Company irreparable injury. The Executive therefore agrees that the Company will be entitled, in addition to any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining the Executive from any such violation or threatened violations.

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4.Aufgrund dieser Bestimmung erhält der leitende Angestellte neben seinem Abfindungszahlungen gem. VI D, E und F für die zwölf (12) dem Wirksamkeitsdatum nachfolgenden Monate 50% seiner durchschnittlichen, zuletzt unter Abschnitt V. dieses Vertrages erhaltenen, vertraglichen Vergütung als Ausgleich, zu zahlen während dieser Zeit in gleichen monatlichen Abschlagszahlungen. Zusätzlich finden die Paragraphen 74 ff. HGB Anwendung mit Ausnahme des § 74c, dessen Anwendung explizit ausgeschlossen ist. Falls nicht bereits durch die Abfindung abgedeckt, wird die Krankenversicherung ebenfalls während des Wettbewerbsverbots verlängert.	4.For the purpose of this clause the Executive shall receive in addition to his severance payments according to VI D, E, and F for the twelve (12) months following the Effective Date, 50% of his average contractual remuneration lastly received under Section V. of this agreement as compensation payable in equal monthly installments during this time. In addition, the sects. 74 et seqq. of the German Commercial Code (Handelsgesetzbuch) shall apply with the exception of § 74c which is explicitly excluded. If not covered through severance, health cover will also be extended during the non-compete period.
C.Falls einzelne oder mehrere der im Vertrag enthaltenen Bestimmungen für übermäßig weit in Hinblick auf die Dauer, Tätigkeit oder Gegenstand gehalten werden, sind diese Bestimmungen soweit zu beschränken und zu reduzieren, als dass diese zum weitesten gesetzlich zulässigen Umfang anwendbar sind.	C.If any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable to the fullest extent permitted by law.
X. VERHALTENSCODEX / FOREIGN CORRUPT PRACTICIES ACT	X. CODE OF CONDUCT / FOREIGN CORRUPT PRACTICES ACT
Von dem leitenden Angestellten wird verlangt den Verhaltenscodex der gesamten Healthways-Gruppe und das „Foreign Anti Corruption Program“ zu befolgen.	The Executive is required to abide by Healthways’ group-wide Code of Conduct and the Foreign Anti-Corruption Program.

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XI. GESAMTE VEREINBARUNG	XI. ENTIRE AGREEMENT
Dieser Vertrag, zusammen mit der hierzu beigefügten Anlage A, gibt die Vereinbarungen betreffend der hierin geregelten Angelegenheiten zwischen den Parteien vollständig und inhaltlich zutreffend wieder und hebt sämtliche anderen Zusagen und Vereinbarungen, welche von ihnen bisher, ob schriftlich oder mündlich, getroffen wurde, auf. Der leitende Angestellte erklärt, dass er in Ausübung dieses Vertrages nicht auf eine Erklärung oder Stellungnahme des Unternehmens im Hinblick auf den Gegenstand und die Auswirkung dieses Vertrages oder im Übrigen vertraut oder vertraut hat, welche nicht hierin dargelegt wurde und dass der leitende Angestellte die Gelegenheit hatte, einen Berater seiner Wahl hinzuziehen.	This Agreement, together with Exhibit A attached hereto, contains all the understandings between the parties pertaining to the matters referred to herein, and supersedes any other undertakings and agreements, whether oral or written, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter or effect of this Agreement or otherwise and that Executive has had the opportunity to be represented by counsel of his choosing.
XII. ERGÄNZUNGEN ODER ÄNDERUNGEN, ABBEDINGUNG	XII. AMENDMENT OR MODIFICATION; WAIVER
Keine Bestimmung dieses Vertrages kann ergänzt, geändert oder abbedungen werden, sofern eine solche Ergänzung, Änderung oder Abbedingung, einschließlich einer Ergänzung, Änderung oder Abbedingung dieser Bestimmung, nicht schriftlich zwischen dem leitenden Angestellten und einem ordnungsgemäß bevollmächtigten Vertreter des Unternehmens vereinbart wurde. Kein Verzicht einer Partei auf die Einhaltung einer Bedingung oder Vorschrift dieses Vertrags durch die andere Partei gilt als Verzicht auf die Einhaltung einer ähnlichen oder anderen Bedingung oder Vorschrift, die zur gleichen Zeit, zu einer früheren Zeit oder zu einer späteren Zeit erfolgen sollte.	No provision of this Agreement may be amended or waived, unless such amendment or waiver, including any amendment or waiver of this provision, is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time.

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XIII. MITTEILUNGEN	XIII. NOTICES
Jede Mitteilung nach diesem Vertrag hat schriftlich zu erfolgen und ist als abgegeben anzusehen wenn diese persönlich zugestellt, durch Kurierdienst, per Fax oder durch Einschreiben (Einschreiben mit Rückschein) versendet wurde und an die nachfolgende Adresse der betroffenen Partei oder jede andere Adresse, welche die Partei nachträglich schriftlich mitteilt, adressiert wurde:	Any notice to be given hereunder shall be in writing and shall be deemed given when delivered personally, sent by courier, facsimile or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice in writing:
Für den leitenden Angestellten an: Peter Choueiri Schwedenstrasse 4 80805 Munich Germany Für das Unternehmen an: Healthways, Inc. Attention: CEO 701 Cool Springs Blvd Franklin, Tennessee  37067	To the Executive at: Peter Choueiri Schwedenstrasse 4 80805 Munich Germany To the Company at: Healthways, Inc. Attention: CEO 701 Cool Springs Blvd Franklin, Tennessee  37067
Jede persönlich oder durch Kurier zugestellte Mitteilung ist als am Tag der Zustellung abgegeben anzusehen.	Any notice delivered personally or by courier shall be deemed given on the date delivered.
XIV. SALVATORISCHE KLAUSEL	XIV. SEVERABILITY
Sollte eine Bestimmung dieses Vertrages oder die Anwendung einer Bestimmung auf eine der Parteien oder Gegebenheiten von einem Gericht der zuständigen Gerichtsbarkeit als ganz oder teilweise unwirksam oder nicht durchsetzbar angesehen werden, wird die Gültigkeit, Wirksamkeit und Durchsetzbarkeit der übrigen Bestimmungen oder die Anwendung dieser Bestimmung auf eine Person oder Gegebenheit, die nicht davon betroffen sind, nicht beeinträchtigt. Jede nichtige, unwirksame oder nicht durchsetzbare Bestimmung ist soweit zu beschränken und zu reduzieren, als dass diese zum weitesten gesetzlich zulässigen Umfang anwendbar ist.	If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law.

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XV. AUFRECHTERHALTUNG	XV. SURVIVORSHIP
Die einschlägigen Ansprüche und Verpflichtungen der Parteien hierunter bleiben im Falle einer Kündigung dieses Vertrages in dem erforderlichen Umfang zur beabsichtigten Erhaltung solcher Ansprüche und Rechte bestehen.	The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
XVI. GELTENDES RECHT; GERICHTSSTAND	XVI. GOVERNING LAW; VENUE
Dieser Vertrag unterliegt dem Recht der Bundesrepublik Deutschland und wird in Übereinstimmung mit diesem ausgelegt, ohne Berücksichtigung der Prinzipien des Kollisionsrechts. Der Gerichtsstand ist München, Deutschland. Dieser Vertrag ist in deutscher und englischer Sprache geschlossen. Bei Widersprüchen ist der deutsche Vertragstext maßgeblich.	This Agreement will be governed by and construed in accordance with the laws of the Federal Republic of Germany, without regard to the principles of conflicts of law thereof, and venue shall be the courts of Munich, Germany. The Agreement is concluded in German and English. In case of any discrepancy, the German language shall prevail.
XVII. ÜBERSCHRIFTEN	XVII. HEADINGS
Alle beschreibenden Überschriften von Abschnitten und Paragraphen dienen nur der Übersichtlichkeit und keine Bestimmung dieses Vertrages ist unter Einbeziehung der Überschrift eines Abschnitten oder Paragraphen auszulegen.	All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph.

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XVIII. AUSFERTIGUNGEN	XVIII. COUNTERPARTS
Dieser Vertrag kann in Ausfertigungen unterzeichnet werden; jede dieser ist als Original anzusehen, wobei alle zusammen ein und dasselbe Dokument darstellen.	This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Zu Urkund dessen, haben die Parteien hierzu diesen Anstellungsvertrag in Kraft tretend zum vorstehend festgelegten Datum geschlossen.	IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement effective as of date set forth above

[SEITE MIT UNTERSCHRIFTEN FOLGT]                                                                            [SIGNATURE PAGE FOLLOWS]

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UNTERNEHMEN/COMPANY

By:  /s/ Ben R. Leedle, Jr.

Name:  Ben R. Leedle, Jr.

Title:   CEO

LEITENDER ANGESTELLTER/EXECUTIVE

/s/ Peter Choueiri

        Peter Choueiri

ANLAGE A Ausnahmen Ungeachtet anderslautender Bestimmungen in dem Vertrag, werden diese Bedingungen ebenfalls Teil des Vertrages und heben jede widersprüchliche Bedingung darin auf: EXHIBIT A Exceptions  Notwithstanding anything in the Agreement to the contrary, the following terms are also part of the Agreement and supersede any contradictory term contained therein:  

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EX-10.2

Exhibit 10.2

HEALTHWAYS, INC.

NON-QUALIFIED STOCK OPTION AGREEMENT

THIS STOCK OPTION AGREEMENT is made and entered into on GRANT DATE (the “Grant Date”), by and between HEALTHWAYS, INC., a Delaware corporation (the "Corporation") including its subsidiary corporations, and PARTICIPANT NAME (the "Colleague").

WHEREAS, the Corporation desires to afford the Colleague an opportunity to purchase shares of Common Stock, $.001 par value per share ("Common Stock") of the Corporation, in accordance with the provisions of Healthways 2007 Stock Incentive Plan, as amended (the "Plan").

NOW, THEREFORE, In consideration of the mutual covenants set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.           Grant of Option.  Corporation hereby grants to Colleague the option (the "Option"), exercisable in whole or in part to purchase NUMBER OF SHARES shares of the Corporation's Common Stock, for a price of GRANT PRICE per share.

2.           Option Plan.  This Option is granted as a non-qualified stock option under the Plan, and is not intended to qualify as an incentive stock option, as that term is used in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").  This means that, at the time Colleague exercises all or any portion of this Option, Colleague will have taxable income equal to any positive difference between the market value of the Common Stock at the date of the exercise and the option exercise price paid for the Common Stock under this Option as shown in Section 1 of this Agreement.

The Colleague hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof, which are incorporated herein by reference and made a part hereof.  The terms of this Agreement are governed by the terms of the Plan, and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall govern.  Terms not otherwise defined herein shall have the meanings given them in the Plan.

3.           Timing of Exercise.  Colleague may exercise this Option with respect to the percentage of shares set forth below from and after the dates specified below:

Percentage Vested	Date of Vesting
25% 50% 75% 100%	One Year from Grant Date Two Years from Grant Date Three Years from Grant Date Four Years from Grant Date

This Option will expire ten (10) years from the Grant Date.

4.           Manner of Exercise.  This Option shall be exercised by the Colleague (or other party entitled to exercise the Option under Section 5 of this Agreement) by providing notice to the stock plan administrator of your intent to exercise the stock option, and providing to the stock plan administrator all required information necessary to complete the exercise transaction. Such notice shall not be effective unless accompanied by the full purchase price for all shares so purchased within the timeframe required by the plan administrator. The purchase price shall be payable in cash, personal check (subject to collection), bank draft or such other method as the Committee may determine from time to time.  The purchase price may also be paid by the tender of, by either actual delivery or attestation, Common Stock acceptable to the Committee and valued at its Fair Market Value on the date of exercise or through a combination of Common Stock and cash.  The purchase price shall be calculated as the number of shares to be purchased times the option exercise price per share as shown in Section 1 of this Agreement.  The Corporation shall have the right to require the Colleague to remit to the Corporation an amount sufficient to satisfy any federal, state and local withholding tax requirements prior to the delivery of any certificate for such shares, which may be paid as set forth in Section 5.6 of the Plan.

5.           Nontransferability of Option.  This Option shall not be transferable by the Colleague otherwise than by will or by the laws of descent and distribution, and is exercisable during Colleague's lifetime only by the Colleague.  The terms of this Option shall be binding on the executors, administrators, heirs and successors of the Colleague.

6.           Termination of Employment.

(a)           Termination by Death.  If the Colleague's employment by the Corporation terminates by reason of death, the shares subject to the Option granted hereunder not previously exercisable and vested shall become fully exercisable and vested upon the Colleague’s death, and this Option may thereafter be exercised by the legal representative of the estate or by the legatee of the Colleague under the will of the Colleague until the expiration of the stated term of the Option.

(b)           Termination by Reason of Disability.  If the Colleague's employment by the Corporation terminates by reason of Disability, the shares subject to the Option granted hereunder not previously exercisable and vested shall become fully exercisable and vested upon the date of such termination of employment and this Option may thereafter be exercised by the Colleague until the expiration of the stated term of the Option.

(c)           Retirement.  If the Colleague’s employment by the Corporation terminates by reason of Retirement, as defined in the Plan, the shares subject to the Option granted hereunder not previously exercisable and vested shall continue vesting in accordance with Section 3 and, upon vesting, this Option may be exercised until the expiration of the stated term of the Option.

(d)           Other Termination.  If the Colleague's employment by the Corporation is involuntarily terminated for any reason other than death, Disability, or Retirement, or if the Colleague voluntarily terminates employment,this Option shall thereupon terminate, except that this Option may be exercised by the Colleague, to the extent otherwise then exercisable, for a period of three months from the date of such termination of employment or the expiration of the

Option's term, whichever period is the shorter if the involuntary termination is without Cause.  If the Colleague’s employment by the Company is terminated for Cause, this Option shall immediately terminate.

7.           Restrictions on Purchase and Sale of Shares.  The Corporation shall be obligated to sell or issue shares pursuant to the exercise of this Option only in the event that the shares are at that time effectively registered or otherwise exempt from registration under the Securities Act of 1933, as amended (“the 1933 Act”).  In the event that the shares are not registered under the 1933 Act, the Colleague hereby agrees that, as a further condition to the exercise of this Option, the Colleague (or his successor under Section 5 of this Agreement), if the Corporation so requests, will execute an agreement in form satisfactory to the Corporation in which the Colleague represents that he or she is purchasing the shares for investment purposes, and not with a view to resale or distribution.  The Colleague further agrees that if the shares of Common Stock to be issued upon the exercise of this Option are not subject to an effective registration statement filed with the Securities and Exchange Commission pursuant to the requirements of the 1933 Act, such shares shall bear an appropriate restrictive legend.

8.           Adjustment.  In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, stock dividend, stock split or other change in corporate structure affecting the Common Stock, the number of shares of Common Stock of the Corporation subject to this Option and the price per share of such shares shall be equitably and proportionately adjusted by the Committee in accordance with the Plan.

9.           Change in Control.  Upon a Change in Control, as defined in the Plan, the shares subject to the Option granted hereunder not previously exercisable and vested shall become fully exercisable and vested.

10.           No Rights Until Exercise.  The Colleague shall have no rights hereunder as a stockholder with respect to any shares subject to this Option until the date of the issuance of a stock certificate to him or her for such shares upon due exercise of this Option.

11.           Confidentiality, Non-solicitation and Non-Compete.  It is the interest of all Colleagues to protect and preserve the assets of the Corporation. In this regard, in consideration for granting this Option and as conditions of Colleagues' ability to exercise this Option, Colleague acknowledges and agrees that:

(a)           Confidentiality. In the course of Colleague's employment, Colleague will have access to trade secrets and other confidential information of the Corporation and its clients.  Accordingly, Colleague agrees that, without the prior written consent of the Corporation, Colleague will not, other than in the normal conduct of the Corporation's business affairs, divulge, furnish, publish or use for personal benefit or for the direct or indirect benefit of any other person or business entity, whether or not for monetary gain, any trade secrets or confidential or proprietary information of the Corporation or its clients, including without limitation, any information relating to any business methods, marketing and business plans, financial data, systems, customers, suppliers, policies, procedures, techniques or research developed for the benefit of the Corporation or its clients.  Proprietary information includes, but is not limited to, information developed by the Colleague for the Corporation while employed by

the Corporation.  The obligations of the Colleague under this paragraph will continue after the Colleague has left the employment of the Corporation.  Colleague agrees that upon leaving the employment of the Corporation, Colleague will return to the Corporation all property and confidential information in the Colleague's possession and agrees not to copy or otherwise record in any way such information.

(b)Non-Solicitation.  While employed by the Corporation and for a period of two years thereafter, Colleague shall not, upon Colleague's own behalf or on behalf of any other person or entity, directly or indirectly,

- hire or solicit to leave the employ of the Corporation any person employed by or under contract as an independent contractor to the Corporation; or

- contact, solicit, entice away, or divert any healthcare and/or well-being support services, coaching or management business from any person or entity who is a client or with whom the Corporation was engaged in discussions as a potential client within one year prior to the date of termination of Colleague.

(c)           Non-Compete.  While employed by Corporation and continuing during the period while any amounts are being paid to Colleague and for a period of 18 months thereafter, Colleague will not own or be employed by or assist anyone else in the conduct of any business (i) which is in competition with any business conducted by the Corporation or (ii) which Colleague knows the Corporation was actively evaluating for possible entry, in either case in the United States or in any other jurisdiction in which the Corporation is engaged in business or has been engaged in business during Colleague’s employment by the Corporation, or in such jurisdictions where Colleague knows the Corporation is actively pursuing business opportunities at the time of Colleague’s termination of employment with the Corporation; provided that ownership of five percent (5%) or less of the voting stock or other ownership interests of any business entity that is listed on a national securities exchange shall not constitute a violation hereof.

In the event Colleague breaches any provisions of this Section 11, this Option shall immediately expire and may not be exercised, and the Corporation shall be entitled to seek other appropriate remedies it may have available to limit its damages from such breach.

12.           Amendment.  Subject to the restrictions contained in the Plan, the Committee may amend the terms of this Option, prospectively or retroactively, but, subject to Section 8 above, no such amendment shall impair the rights of the Colleague hereunder without the Colleague's consent.

13.           No Right to Continued Employment.  The grant of the Option shall not be construed as giving Colleague the right to be retained in the employ of the Corporation, and the Corporation may at any time dismiss Colleague from employment, free from any liability or any claim under the Plan.

14.           Notices.  All notices required to be given under this Option shall be deemed to be received if delivered or mailed as provided for herein, to the parties at the following addresses, or to such other address as either party may provide in writing from time to time.

To the Corporation:                                                              Healthways, Inc.

701 Cool Springs Boulevard

Franklin, Tennessee 37067

To the Colleague:                                                                 PARTICIPANT NAME

(Colleague name and address)                                           Address on File

 at Healthways

15.           Severability.  If any provision of this Agreement is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any person or the award of the Option, or would disqualify the Plan or the Option under any laws deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Option, such provision shall be stricken as to such jurisdiction, person or Option, and the remainder of the Plan and Option shall remain in full force and effect.

16.           Governing Law.  The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to conflicts of laws principles.

17.           Resolution of Disputes.  Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Committee.  Any determination made hereunder shall be final, binding and conclusive on the Colleague and the Corporation for all purposes.

18.           Successors in Interest.  This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation.  This Agreement shall inure to the benefit of the Colleague’s legal representative and permitted assignees.  All obligations imposed upon the Colleague and all rights granted to the Corporation under this Agreement shall be binding upon the Colleague's heirs, executors, administrators, successors and assignees.

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IN WITNESS WHEREOF, the parties have caused the Stock Option Agreement to be duly executed as of the day and year first above written.

HEALTHWAYS, INC.:

/s/ Ben R. Leedle, Jr.

Name:           Ben R. Leedle, Jr.

Title:    Chief Executive Officer

Grantee: PARTICIPANT NAME

Online Grant Acceptance Satisfies Signature Requirement

EX-10.3

Exhibit 10.3

HEALTHWAYS, INC.

2007 STOCK INCENTIVE PLAN, AS AMENDED

RESTRICTED STOCK UNIT AWARD AGREEMENT

This RESTRICTED STOCK UNIT AWARD AGREEMENT (the "Agreement"), dated GRANT DATE, is by and between Healthways, Inc., a Delaware corporation (the "Company"), and PARTICIPANT NAME "Grantee"), under the Company's 2007 Stock Incentive Plan, as amended (the "Plan").  Terms not otherwise defined herein shall have the meanings given to them in the Plan.

Section 1.Restricted Stock Unit Award.  The Grantee is hereby granted NUMBER OF SHARES restricted stock units (the "Restricted Stock Units").  Each Restricted Stock Unit represents the right to receive one share of the Company's Common Stock, $.001 par value (the "Stock"), subject to the terms and conditions of this Agreement and the Plan.

Section 2.Vesting of the Award.  Except as otherwise provided in Section 3 below, the Restricted Stock Units will vest at such times (the "Vesting Date") and in the percentages set forth below, as long as the Grantee is serving as an employee of the Company on the Vesting Date.

Vesting Date	Award Percentage of Restricted Stock Units
One Year from Grant Date Two Years from Grant Date Three Years from Grant Date Four Years from Grant Date	25% 25% 25% 25%

The Company shall issue one share of the Stock to the Grantee for each vested Restricted Stock Unit (the “Distributed Shares”) at the time the Restricted Stock Unit vests.  The Distributed Shares shall be represented by a certificate.

Section 3.Forfeiture on Termination of Employment.  If the Grantee ceases to be employed by the Company for any reason, all Restricted Stock Units that have not vested prior to the date of termination of Grantee's employment will be forfeited and the Grantee shall have no further rights with respect to such Restricted Stock Units; provided, however, that if the Grantee’s employment by the Company terminates by reason of Retirement (as defined in the Plan), the Restricted Stock Units granted hereunder shall not be forfeited and shall continue vesting in accordance with Section 2, and provided further if the Grantee’s employment by the Company terminates by reason of death or Disability (as defined in the Plan), the Restricted Stock Units granted hereunder shall immediately vest.

Section 4.Voting Rights and Dividends.  Prior to the Vesting Date, the Grantee shall

be credited with dividend equivalents with respect to the Restricted Stock Unitsat the time of any payment of dividends to stockholders on shares of Common Stock in accordance with the terms set forth in the Plan.  The Grantee shall not have any voting rights with respect to the shares of Stock underlying the Restricted Stock Units prior to the vesting of the Restricted Stock Units and the issuance of the shares of Stock as set forth in Section 2.  A holder of Distributed Shares shall have full dividend and voting rights as a holder of Stock.

Section 5.Restrictions on Transfer.

5.1.General Restrictions.  The Restricted Stock Units shall not be transferable by the Grantee (or his or her personal representative or estate) other than by will or by the laws of descent and distribution.  The terms of this Agreement shall be binding on the executors, administrators, heirs and successors of the Grantee.

5.2.Change in Control.  All restrictions imposed on the Restricted Stock Units shall expire automatically and the Restricted Stock United granted hereby shall be deemed fully vested upon a Change in Control, as such term is defined in the Plan, and the Company shall issue the shares of Stock underlying the Restricted Stock Units.

Section 6.Restrictive Agreement.  As a condition to the receipt of any Distributed Shares, the Grantee (or his or her legal representative or estate or any third party transferee), if the Company so requests, will execute an agreement in form satisfactory to the Company in which the Grantee or such other recipient of the shares represents that he or she is purchasing the shares for investment purposes, and not with a view to resale or distribution.

Section 7.Adjustment.  In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, stock dividend, stock split or other change in corporate structure affecting the Stock, the number of Restricted Stock Units subject to this Agreement shall be equitably and proportionately adjusted by the Committee in accordance with the Plan.

Section 8.Tax Withholding.  The Company shall withhold from any distribution of Stock an amount of Stock equal to such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.

Section 9.Governing Provisions.  This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this Agreement.  If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan will govern.  By signing this Agreement, the Grantee confirms that he or she has received a copy of the Plan.

Section 10.Confidentiality, Non-Solicitation and Non-Compete.  It is in the interest of all colleagues to protect and preserve the assets of the Company. In this regard, in consideration for granting these Restricted Stock Units and as conditions of Grantee’s ability to receive the Distributed Shares, Grantee acknowledges and agrees that:

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(a)Confidentiality. In the course of Grantee's employment, Grantee will have access to trade secrets and other confidential information of the Company and its clients.  Accordingly, Grantee agrees that, without the prior written consent of the Company, Grantee will not, other than in the normal conduct of the Company's business affairs, divulge, furnish, publish or use for personal benefit or for the direct or indirect benefit of any other person or business entity, whether or not for monetary gain, any trade secrets or confidential or proprietary information of the Company or its clients, including without limitation, any information relating to any business methods, marketing and business plans, financial data, systems, customers, suppliers, policies, procedures, techniques or research developed for the benefit of the Company or its clients.  Proprietary information includes, but is not limited to, information developed by the Grantee for the Company while employed by the Company.  The obligations of the Grantee under this paragraph will continue after the Grantee has left the employment of the Company.  Grantee agrees that upon leaving the employment of the Company, Grantee will return to the Company all property and confidential information in the Grantee's possession and agrees not to copy or otherwise record in any way such information.

(b)Non-Solicitation.  While employed by the Company and for a period of two years thereafter, Grantee shall not, upon Grantee's own behalf or on behalf of any other person or entity, directly or indirectly,

- hire or solicit to leave the employ of the Company any person employed by or under contract as an independent contractor to the Company; or

- contact, solicit, entice away, or divert any healthcare and/or well-being support services, coaching or management business from any person or entity who is a client or with whom the Company was engaged in discussions as a potential client within one year prior to the date of termination of Grantee.

(c)Non-Compete.  While employed by the Company and continuing during the period while any amounts are being paid to Grantee and for a period of 18 months thereafter, Grantee will not own or be employed by or assist anyone else in the conduct of any business (i) which is in competition with any business conducted by the Company or (ii) which Grantee knows the Company was actively evaluating for possible entry, in either case in the United States or in any other jurisdiction in which the Company is engaged in business or has been engaged in business during Grantee’s employment by the Company, or in such jurisdictions where Grantee knows the Company is actively pursuing business opportunities at the time of Grantee’s termination of employment with the corporation; provided that ownership of five percent (5%) or less of the voting stock or other ownership interests of any business entity that is listed on a national securities exchange shall not constitute a violation hereof.

In the event Grantee breaches any provisions of this Section 10, these Restricted Stock Units shall immediately expire, and the Company shall be entitled to seek other appropriate remedies it may have available to limit its damages from such breach.

Section 11.Miscellaneous.

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11.1.Entire Agreement.  This Agreement and the Plan contain the entire understanding and agreement between the Company and the Grantee concerning the Restricted Stock Units granted hereby, and supersede any prior or contemporaneous negotiations and understandings.  The Company and the Grantee have made no promises, agreements, conditions, or understandings relating to the Restricted Stock Units, either orally or in writing, that are not included in this Agreement or the Plan.

11.2.Employment.  By establishing the Plan, granting awards under the Plan, and entering into this Agreement, the Company does not give the Grantee any right to continue to be employed by the Company or to be entitled to any remuneration or benefits not set forth in this Agreement or the Plan.

11.3.Captions.  The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience.  They do not define, limit, construe, or describe the scope or intent of the provisions of this Agreement.

11.4.Counterparts.  This Agreement may be executed in counterparts, each of which when signed by the Company and the Grantee will be deemed an original and all of which together will be deemed the same Agreement.

11.5.Notice.  Any notice or communication having to do with this Agreement must be given by personal delivery or by certified mail, return receipt requested, addressed, if to the Company, to the principal office of the Company and, if to the Grantee, to the Grantee's address set forth below or any address of which the Grantee subsequently notifies the Company.

To the Grantee:	PARTICIPANT NAME
(Grantee name and address)	Address on File at Healthways

11.6.Amendment.  Subject to the restrictions contained in the Plan, the Committee may amend the terms of this Agreement, prospectively or retroactively, but, subject to Section 7 above, no such amendment shall impair the rights of the Grantee hereunder without the Grantee's consent.

11.7.Governing Law.  This Agreement shall be governed and construed exclusively in accordance with the law of the State of Delaware applicable to agreements to be performed in the State of Delaware to the extent it may apply.

11.8.Validity; Severability.  If, for any reason, any provision hereof shall be determined to be invalid or unenforceable, the validity and effect of the other provisions hereof shall not be affected thereby.  Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.  If any court determines that any provision of Section 10 or any

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other provision hereof is unenforceable but has the power to reduce the scope or duration of such provision, as the case may be, such provision, in its reduced form, shall then be enforceable.

11.9.Successors in Interest.  This Agreement shall inure to the benefit of and be binding upon any successor to the Company.  This Agreement shall inure to the benefit of the Grantee’s legal representative and permitted assignees.  All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee’s heirs, executors, administrators, successors and assignees.

[remainder of page intentionally left blank; signature page follows]

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IN WITNESS WHEREOF, the parties have caused the Restricted Stock Unit Agreement to be duly executed as of the day and year first written above.

HEALTHWAYS, INC.

By: /s/ Ben R. Leedle, Jr.

Name:           Ben R. Leedle, Jr.

Title:           Chief Executive Officer

GRANTEE: PARTICIPANT NAME

Online Grant Acceptance Satisfies

Signature Requirement

6

EX-10.4

Exhibit 10.4

HEALTHWAYS, INC.

2007 STOCK INCENTIVE PLAN, AS AMENDED

PERFORMANCE CASH AWARD AGREEMENT

This PERFORMANCE CASH AWARD AGREEMENT (the “Agreement”) dated as of the GRANT DATE (the “Grant Date”) is by and between Healthways, Inc., a Delaware Company (the “Company”), and PARTICIPANT NAME (the “Grantee”).  Capitalized terms used but not defined in this Agreement shall have the meaning ascribed to such terms in the Company’s 2007 Stock Incentive Plan, as amended (the “Plan”).

Section 1.  Performance Cash Award.  The Grantee is hereby granted the right to receive a cash payment in the amount of $SHARES GRANTED (the “Cash Payment”), subject to the terms and conditions of this Agreement and the Plan.

Section 2.  Performance Cycle.  Subject to the vesting provisions of Section 3 hereof, the Grantee shall be eligible to earn the total Cash Payment granted hereunder as follows: one-third of the total Cash Payment during the fiscal year in which the award was granted (year one), one-third of the total Cash Payment during the following fiscal year (year two) and one-third of the total Cash Payment during the next following fiscal year (year three). Each such fiscal year shall hereinafter be referred to as a “Performance Cycle”.  No later than ninety (90) days following the beginning of each Performance Cycle, the Committee shall establish and direct the Company to communicate to the Grantee (i) one or more performance metrics (each, a “Performance Metric”) which will be used during the applicable Performance Cycle and (ii) the methodology for determining, based upon such Performance Metric(s), whether or not the Grantee earned the applicable portion of the Cash Payment during the applicable Performance Cycle.  Following the conclusion of each Performance Cycle, the Committee shall determine whether or at what level the Performance Metric(s) established for such Performance Cycle has been met and the amount of the Cash Payment, if any, which was earned by the Grantee in respect of such Performance Cycle.  If one or more of the Performance Metric(s) for each Performance Cycle has not been met, as determined in the sole discretion of the Committee, then the portion of the Cash Award eligible to be earned during such Performance Cycle will be immediately forfeited and the Grantee shall have no further rights with respect to that portion of the Cash Payment. The determinations of the Committee under this Section 2 shall be final and conclusive as to the Grantee.

Section 3.  Vesting.

(a)           Vesting Date.  The amount of the Cash Payment earned by the Grantee during each Performance Cycle, if any, (as determined in Section 2 above) shall vest on the third anniversary of the Grant Date (the “Vesting Date”); provided the Grantee remains continuously employed with the Company through the Vesting Date.  If prior to the Vesting Date the Grantee’s employment with the Company is terminated for any reason other than as set forth in Section 3(b) of this Agreement or the Grantee’s employment agreement, then the entire Cash Payment set forth in this Agreement

 (including amounts earned in a previous Performance Cycle) shall be immediately forfeited and the Grantee shall have no further rights with respect to such Cash Payment.

(b)           Accelerated Vesting Event.  Notwithstanding the foregoing, if the Grantee dies while employed by the Company or if the Grantee’s employment is terminated by Disability or Retirement (each an “Accelerated Vesting Event”), the Grantee shall be entitled to receive the amount of the Cash Payment previously earned by the Grantee during any Performance Cycle(s) which ended on or prior to the Accelerated Vesting Event.  For illustrative purposes only, in the event a Grantee’s employment is terminated by reason of death, Disability or Retirement  during year two (prior to the completion of the Performance Cycle for year two) and the Performance Metrics for the Performance Cycle ending year one were achieved, then the Grantee shall be entitled to receive 1/3 of the Cash Payment based on meeting the Performance Metrics for the Performance Cycle ending year one but shall not be entitled to any Cash Payment for the Performance Cycle ending year two or year three.  The terms of any applicable employment agreement between Grantee and Company shall supersede the terms and conditions set forth in this Section 3(b).

Section 4.  Distribution of the Cash Payment.

(a)           The portion of the Cash Payment which (i) is earned by the Grantee during each Performance Cycle pursuant to Section 2 above and (ii) becomes vested as of the Vesting Date (as determined in Section 3(a) above) shall be distributed to the Grantee within ninety (90) days (as determined by the Company in its sole discretion) of the Vesting Date.

(b)           Notwithstanding the forgoing, in the event of the occurrence of an Accelerated Vesting Event, the portion of the Cash Payment which (i) is earned during each Performance Cycle pursuant to Section 2 above and (ii) becomes vested due to an Accelerated Vesting Event, shall be distributed to the Grantee between January 1 and March 31 of the year following the year in which the Accelerated Vesting Event occurs.

Section 5.  Tax Withholding.  The Company may withhold from any distribution of the Cash Payment an amount equal to such federal, state or local taxes or as otherwise shall be required to be withheld pursuant to any applicable law or regulation.

Section 6.  Change of Control.  Unless the Committee otherwise determines, if before the Vesting Date described in Section 3(a) above or an Accelerated Vesting Event as described in Section 3(b) above, there occurs a Change in Control, the entire amount of the Cash Payment (to the extent not previously vested or forfeited) shall be deemed fully vested and shall be paid to the Grantee at the time of the Change in Control.

Section 7.  No Right to Continued Employment.  This Agreement shall not be construed as giving the Grantee the right to be retained in the employ of the Company, and, except as expressly set forth herein, the Company may at any time dismiss the Grantee from employment, free from any liability or any claim under the Plan.

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Section 8.  Adjustments.  The Committee may make adjustments in the terms and conditions of, and the criteria included in this Agreement, as supplemented by the Performance Metric(s) and methodology communicated to the Grantee annually, in recognition of unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan and this Agreement; provided, that the circumstances under which such adjustments shall be made to a Covered Employee that would increase the amount of the Cash Payment otherwise earned shall be set forth at the time the relevant Performance Metric is established.

Section 9.  Plan Governs.  The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. The terms of this Agreement are governed by the terms of the Plan, and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall govern.

Section 10.  Confidentiality, Non-solicitation and Non-Compete.  It is the interest of all Grantees to protect and preserve the assets of the Company. In this regard, in consideration for granting the Grantee the rights hereunder and as conditions of Grantee's receipt of any Cash Payment, Grantee acknowledges and agrees that:

10.1  Confidentiality.  In the course of Grantee's employment, Grantee will have access to trade secrets and other confidential information of the Company and its clients. Accordingly, Grantee agrees that, without the prior written consent of the Company, Grantee will not, other than in the normal conduct of the Company's business affairs, divulge, furnish, publish or use for personal benefit or for the direct or indirect benefit of any other person or business entity, whether or not for monetary gain, any trade secrets or confidential or proprietary information of the Company or its clients, including without limitation, any information relating to any business methods, marketing and business plans, financial data, systems, customers, suppliers, policies, procedures, techniques or research developed for the benefit of the Company or its clients. Proprietary information includes, but is not limited to, information developed by the Grantee for the Company while employed by the Company. The obligations of the Grantee under this paragraph will continue after the Grantee has left the employment of the Company. Grantee agrees that upon leaving the employment of the Company, Grantee will return to the Company all property and confidential information in the Grantee's possession and agrees not to copy or otherwise record in any way such information.

10.2  Non-Solicitation.  While employed by the Company and for a period of two years thereafter, Grantee shall not, upon Grantee's own behalf or on behalf of any other person or entity, directly or indirectly, (a) hire or solicit to leave the employ of the Company any person employed by or under contract as an independent contractor to the Company; or (b) contact, solicit, entice away, or divert any healthcare and/or well-being support services, coaching or management business from any person or entity who is a client or with whom the Company was engaged in discussions as a potential client within one year prior to the date of termination of Grantee.

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10.3  Non-Compete.  While employed by Company and continuing during the period while any amounts are being paid to Grantee and for a period of eighteen (18) months thereafter, the Grantee will not own or be employed by or assist anyone else in the conduct of any business (i) which is in competition with any business conducted by the Company or (ii) which Grantee knows the Company was actively evaluating for possible entry, in either case in the United States or in any other jurisdiction in which the Company is engaged in business or has been engaged in business during Grantee’s employment by the Company, or in such jurisdictions where Grantee knows the Company is actively pursuing business opportunities at the time of Grantee’s termination of employment with the Company; provided that ownership of five percent (5%) or less of the voting stock or otherwise ownership interests of any business entity that is listed on a national securities exchange shall not constitute a violation hereof.

In the event Grantee breaches any provisions of this Section 10, this Agreement shall immediately expire, the Grantee shall have no further rights with respect to the Cash Payment, and the Company shall be entitled to seek other appropriate remedies it may have available to limit its damages from such breach.

Section 11.  Repayment of Certain Amounts. If any of the Company's financial statements are required to be restated, resulting from errors, omissions, or fraud, and if, as a result, it is determined that any Cash Payment paid to Grantee as described above was greater than the amount that should otherwise have been accrued and payable hereunder (the excess an “Excess Payment”), then the Company shall be entitled to recover the Excess Payment, if any.

Section 12.  Miscellaneous.

12.1  Entire Agreement.  This Agreement and the Plan, as supplemented by the Performance Metric(s) and methodology communicated to the Grantee annually, contain the entire understanding and agreement between the Company and the Grantee concerning the Cash Payment granted hereby, and supersede any prior or contemporaneous negotiations and understandings.  The Company and the Grantee have made no promises, agreements, conditions, or understandings relating to the Cash Payment, either orally or in writing, that are not included in this Agreement or the Plan.

12.2.  Severability.  If any provision of this Agreement is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any person or the award of the Cash Payment, or would disqualify the Plan or the Cash Payment under any laws deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Cash Payment, such provision shall be stricken as to such jurisdiction, person or Cash Payment, and the remainder of the Plan and Agreement shall remain in full force and effect.

12.3  Captions.  The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience.  They do not define, limit, construe, or describe the scope or intent of the provisions of this Agreement.

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12.4  Counterparts.  This Agreement may be executed in counterparts, each of which when signed by the Company and the Grantee will be deemed an original and all of which together will be deemed the same Agreement.

12.5  Notice.  All notices required to be given with respect to the Cash Payment shall be deemed to be received if delivered or mailed as provided for herein, to the parties at the following addresses, or to such other address as either party may provide in writing from time to time.

To the Company:	Healthways, Inc. 701 Cool Springs Boulevard Franklin, Tennessee 37067
To the Grantee (Grantee name and address)	PARTICIPANT NAME  Address on File At Healthways

12.6  Amendment.  Subject to the restrictions contained in the Plan, the Committee may amend the terms of this Agreement, prospectively or retroactively, but, subject to Section 8 above, no such amendment shall impair the rights of the Grantee hereunder without the Grantee's consent.

12.7  Successors in Interest.  This Agreement shall inure to the benefit of and be binding upon any successor to the Company.  This Agreement shall inure to the benefit of the Grantee’s legal representative and permitted assignees.  All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee's heirs, executors, administrators, successors and assignees.

12.8  Governing Law.  The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to conflicts of laws principles.

12.9.  Resolution of Disputes.  Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee and the Company for all purposes.

12.10.            No Guarantee of Favorable Tax Treatment.  Although the Company intends to administer this Agreement so that any Cash Payments will be exempt from, or will comply with, the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), the Company does not warrant that any Cash Payments made under this Agreement will qualify for favorable tax treatment under Section 409A of the Code or any other

5

provision of federal, state, local or foreign law.  The Company shall not be liable to the Grantee for any tax, interest, or penalties that Grantee might owe as a result of any Cash Payments made under this Agreement.

12.11.  Delay of Payments Pursuant to Section 409A.  It is intended that the Cash Payment eligible to be made under this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the Code, including those provided under Treasury Regulations 1.409A-1(b)(4), 1.409A-1(b)(9)(iii), and 1.409A-1(b)(9)(v).  Notwithstanding anything to the contrary in this Agreement, if the Company determines (i) that on the date the Grantee’s employment with the Company terminates or at such other time that the Company determines to be relevant, the Grantee is a “specified employee” (as such term is defined under Treasury Regulation 1.409A-1(i)(1)) of the Company and (ii) that any payments to be provided to the Grantee pursuant to this Agreement are or may become subject to the additional tax under Section 409A(a)(1)(B) of the Code or any other taxes or penalties imposed under Section 409A of the Code if provided at the time otherwise required under this Agreement, then such payment shall be delayed until the date that is six (6) months after the date of the Grantee’s “separation from service” (as such term is defined under Treasury Regulation 1.409A-1(h)) with the Company, or, if earlier, the date of the Grantee’s death.  Any payments delayed pursuant to this Section 12.12 shall be made in a lump sum on the first day of the seventh month following the Grantee’s “separation from service” (as such term is defined under Treasury Regulation 1.409A-1(h)), or, if earlier, the date of the Executive’s death.

6

IN WITNESS WHEREOF, the Company and the Grantee have executed this Agreement to be effective as of the day and year first above written.

HEALTHWAYS, INC.

By: /s/ Ben R. Leedle, Jr.

Name: Ben R. Leedle, Jr.

Title: Chief Executive Officer

GRANTEE: PARTICIPANT NAME

Online Grant Acceptance Satisfies

Signature Requirement

7

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ben R. Leedle, Jr., certify that:

1.           I have reviewed this quarterly report on Form 10-Q of Healthways, 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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(s) 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 the 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:    May 9, 2012

/s/ Ben R. Leedle, Jr.

Ben R. Leedle, Jr.

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Alfred Lumsdaine, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of Healthways, 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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(s) 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 the 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: May 9, 2012

/s/ Alfred Lumsdaine

Alfred Lumsdaine

Chief Financial Officer

EX-32

Exhibit 32

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 Quarterly Report of Healthways, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Ben R. Leedle, Jr., Chief Executive Officer of the Company, and Alfred Lumsdaine, Chief Financial Officer of the Company, certify, 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/ Ben R. Leedle, Jr.

Ben R. Leedle, Jr.

Chief Executive Officer

May 9, 2012

/s/ Alfred Lumsdaine

Alfred Lumsdaine

Chief Financial Officer

May 9, 2012

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Recently Adopted Accounting Standard

3 Months Ended

Mar. 31, 2012

Recently Adopted Accounting Standard [Abstract]

Recently Adopted Accounting Standard

(2) Recently Adopted Accounting Standard

In June 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU")  No. 2011-05, "Presentation of Comprehensive Income".  This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders' equity and requires an entity to present net income and other comprehensive income in one continuous statement or in two separate but consecutive statements.  In December 2011, the FASB issued ASU 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05", which defers the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income while the FASB further deliberates this aspect of the proposal. ASU No. 2011-05, as amended by ASU 2011-12, is effective for interim and annual reporting periods beginning after December 15, 2011.  We adopted this standard for the interim period beginning January 1, 2012 and elected to present net income and other comprehensive income in one continuous statement.  The adoption of this standard did not have an impact on our consolidated results of operations, financial position, cash flows, or notes to the consolidated financial statements.

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Basis of Presentation

3 Months Ended

Mar. 31, 2012

Basis of Presentation [Abstract]

Basis of Presentation

(1) Basis of Presentation

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").  In our opinion, the accompanying consolidated financial statements of Healthways, Inc. and its wholly-owned subsidiaries ("Healthways", the "Company", or such terms as "we," "us," or "our") reflect all adjustments consisting of normal, recurring accruals necessary for a fair presentation.  We have reclassified certain items in prior periods to conform to current classifications.

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes. You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 1,146	$ 864
Accounts receivable, net	107,714	97,459
Prepaid expenses	9,797	11,417
Other current assets	1,007	1,412
Income taxes receivable	6,575	6,065
Deferred tax asset	10,594	10,314
Total current assets	136,833	127,531
Property and equipment:
Leasehold improvements	40,952	41,622
Computer equipment and related software	249,153	239,732
Furniture and office equipment	25,455	26,324
Capital projects in process	22,434	17,811
Property plant and equipment, gross	337,994	325,489
Less accumulated depreciation	(189,981)	(183,301)
Property plant and equipment, net	148,013	142,188
Other assets	10,441	10,797
Intangible assets, net	92,464	92,997
Goodwill, net	335,392	335,392
Total assets	723,143	708,905
Current liabilities:
Accounts payable	21,725	22,578
Accrued salaries and benefits	23,209	35,617
Accrued liabilities	33,061	28,639
Deferred revenue	9,732	9,273
Contract billings in excess of earned revenue	16,724	13,154
Current portion of long-term debt	3,393	3,725
Current portion of long-term liabilities	5,628	5,771
Total current liabilities	113,472	118,757
Long-term debt	290,796	266,117
Long-term deferred tax liability	30,120	26,964
Other long-term liabilities	27,936	31,351
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding	0	0
Common stock $.001 par value, 120,000,000 shares authorized,33,401,898 and 33,304,681 shares outstanding	33	33
Additional paid-in capital	244,498	247,137
Retained earnings	45,852	48,517
Treasury stock, at cost, 2,254,953 shares in treasury	(28,182)	(28,182)
Accumulated other comprehensive loss	(1,382)	(1,789)
Total stockholders' equity	260,819	265,716
Total liabilities and stockholders' equity	$ 723,143	$ 708,905

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (USD $) In Thousands, unless otherwise specified	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Treasury Stock [Member]	Accumulated Other Comprehensive Loss [Member]	Total
Balance at Dec. 31, 2011	$ 0	$ 33	$ 247,137	$ 48,517	$ (28,182)	$ (1,789)	$ 265,716
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Comprehensive loss	0	0	0	(2,665)	0	407	(2,258)
Exercise of stock options	0	0	9	0	0	0	9
Tax effect of stock options and restricted stock units	0	0	(4,042)	0	0	0	(4,042)
Share-based employee compensation expense	0	0	1,394	0	0	0	1,394
Balance at Mar. 31, 2012	$ 0	$ 33	$ 244,498	$ 45,852	$ (28,182)	$ (1,382)	$ 260,819

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net income (loss)	$ (2,665)	$ 4,135
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities, net of business acquisitions:
Depreciation and amortization	12,173	12,433
Amortization of deferred loan costs	435	477
Share-based employee compensation expense	1,394	2,252
Deferred income taxes	(1,562)	(2,700)
Excess tax benefits from share-based payment arrangements	(3)	(172)
(Increase) decrease in accounts receivable, net	(10,226)	1,909
Decrease in other current assets	2,024	7,022
Decrease in accounts payable	(5,002)	(2,782)
Decrease in accrued salaries and benefits	(14,063)	(10,248)
Increase in other current liabilities	8,241	7,805
Other	(2,320)	707
Net cash flows (used in) provided by operating activities	(11,574)	20,838
Cash flows from investing activities:
Acquisition of property and equipment	(15,085)	(9,787)
Other	(1,825)	(1,327)
Net cash flows used in investing activities	(16,910)	(11,114)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	115,575	119,918
Payments of long-term debt	(91,228)	(123,445)
Deferred loan costs	0	(40)
Excess tax benefits from share-based payment arrangements	3	172
Exercise of stock options	9	1,862
Repurchases of common stock	0	(3,868)
Change in outstanding checks and other	4,287	(1,320)
Net cash flows provided by (used in) financing activities	28,646	(6,721)
Effect of exchange rate changes on cash	120	269
Net increase in cash and cash equivalents	282	3,272
Cash and cash equivalents, beginning of period	864	1,064
Cash and cash equivalents, end of period	$ 1,146	$ 4,336

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CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Stockholders' equity:
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	120,000,000	120,000,000
Common stock, shares outstanding (in shares)	33,401,898	33,304,681
Treasury stock (in shares)	2,254,953	2,254,953

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Share Repurchases

3 Months Ended

Mar. 31, 2012

Share Repurchases [Abstract]

Share Repurchases

(10)  Share Repurchases

The Company's Board of Directors authorized a share repurchase program, which was publicly announced on October 21, 2010. The share repurchase program allows for the repurchase of up to $60 million of our common stock from time to time in the open market or in privately negotiated transactions through October 19, 2012. No shares were repurchased between January 1, 2012 and March 31, 2012 pursuant to the program.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 through 31, 2012	-		-	2,254,953		$31,813,383
February 1 through 29, 2012	-		-	2,254,953		$31,813,383
March 1 through 31, 2012	-		-	2,254,953		$31,813,383
Total	-

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 04, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	HEALTHWAYS, INC
Entity Central Index Key	0000704415
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		33,404,576
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012

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Comprehensive Income

3 Months Ended

Mar. 31, 2012

Comprehensive Income [Abstract]

Comprehensive Income

(11) Comprehensive Income

Comprehensive income (loss), net of income taxes, was ($2.3 million) and $4.8 million for the three months ended March 31, 2012 and 2011, respectively.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012		Mar. 31, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Revenues	$ 165,218		$ 162,969
Cost of services (exclusive of depreciation and amortization of $8,683 and $9,023, respectively, included below)	140,235		121,908
Selling, general and administrative expenses	13,739		17,842
Depreciation and amortization	12,173		12,433
Operating income (loss)	(929)		10,786
Interest expense	3,187		3,418
Income (loss) before income taxes	(4,116)		7,368
Income tax (benefit) expense	(1,451)		3,233
Net income (loss)	(2,665)		4,135
Earnings (loss) per share:
Basic (in dollars per share)	$ (0.08)		$ 0.12
Diluted (in dollars per share)	$ (0.08)	[1]	$ 0.12	[1]
Comprehensive income (loss)	$ (2,258)		$ 4,833
Weighted average common shares and equivalents
Basic (in shares)	33,346		33,975
Diluted (in shares)	33,346	[1]	34,690	[1]

[1] The assumed exercise of stock-based compensation awards for the three months ended March 31, 2012 was not considered because the impact would be anti-dilutive.

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Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2012

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

(5) Derivative Investments and Hedging Activities

We use derivative instruments to manage risks related to interest rates and foreign currencies.  We record all derivatives at estimated fair value as either assets or liabilities on the consolidated balance sheets and recognize the unrealized gains and losses in either the consolidated balance sheets or consolidated statements of comprehensive income (loss), depending on whether the derivative is designated as a hedging instrument.  As permitted under our master netting agreements, the fair value amounts of our derivative instruments are presented on a net basis by counterparty in the consolidated balance sheets.

Interest Rate

In order to reduce our exposure to interest rate fluctuations on our floating rate debt commitments, we maintain interest rate swap agreements with current and original notional amounts of $205.0 million and $220.0 million ($30.0 million of which will become effective in January 2013), respectively, and termination dates ranging from December 31, 2012 to December 31, 2013.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest.  These interest rate swap agreements effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 0.465% to 3.385% plus a spread (see Note 7), thus reducing the impact of interest rate changes on future interest expense.  We have designated these interest rate swap agreements as qualifying cash flow hedges.  We currently meet the hedge accounting criteria under U.S. GAAP in accounting for these interest rate swap agreements.

Foreign Currency

We enter into foreign currency options and/or forward contracts in order to minimize our earnings exposure to fluctuations in foreign currency exchange rates.  Our foreign currency exchange contracts do not qualify for hedge accounting treatment under U.S. GAAP.  We routinely monitor our foreign currency exposures to maximize the overall effectiveness of our foreign currency hedge positions.  We do not execute transactions or hold derivative financial instruments for trading or other purposes.

Fair Values of Derivative Instruments

The estimated gross fair values of derivative instruments at March 31, 2012 and December 31, 2011, excluding the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists, were as follows:

	March 31, 2012		December 31, 2011
(In $000s)	Foreign currency exchange contracts	Interest rate swap agreements	Foreign currency exchange contracts	Interest rate swap agreements
Assets:
Derivatives not designated as hedging instruments:
Other current assets	$148	$-	$315	$-
Total assets	$148	$-	$315	$-
Liabilities:
Derivatives not designated as hedging instruments:
Accrued liabilities	$232	$-	$321	$-
Derivatives designated as hedging instruments:
Accrued liabilities	-	227	-	251
Other long-term liabilities	-	3,450	-	3,984
Total liabilities	$232	$3,677	$321	$4,235

Cash Flow Hedges

Derivative instruments that are designated and qualify as cash flow hedges are recorded at estimated fair value in the consolidated balance sheets, with the effective portion of the gains and losses being reported in accumulated other comprehensive income or loss ("accumulated OCI").  Cash flow hedges for all periods presented consist solely of interest rate swap agreements.  Gains and losses on these interest rate swap agreements are reclassified to interest expense in the same period during which the hedged transaction affects earnings or the period in which all or a portion of the hedge becomes ineffective.  As of March 31, 2012, we expect to reclassify $2.8 million of net losses on interest rate swap agreements from accumulated OCI to interest expense within the next 12 months due to the scheduled payment of interest associated with our debt.

The following table shows the effect of our cash flow hedges on the consolidated balance sheets during the three months ended March 31, 2012 and March 31, 2011:

(In $000s)	Amount of Gain Recognized in Accumulated OCI on Derivatives (Effective Portion) For the Three Months Ended
Derivatives in Cash Flow Hedging Relationships	March 31, 2012	March 31, 2011
Interest rate swap agreements, gross of tax effect	$558	$1,294

Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.  During the three months ended March 31, 2012 and 2011, there were no gains or losses on cash flow hedges recognized in our consolidated statements of comprehensive income (loss) resulting from hedge ineffectiveness.

Derivative Instruments Not Designated as Hedging Instruments

Our foreign currency exchange contracts require current period mark-to-market accounting, with any change in fair value being recorded each period in the consolidated statements of comprehensive income (loss) in selling, general and administrative expenses.  At March 31, 2012, we had forward contracts with notional amounts of $13.0 million to exchange foreign currencies, primarily the Australian dollar and Euro, that were entered into in order to hedge forecasted foreign net income (loss) and intercompany debt.

These forward contracts did not have a material effect on our consolidated statements of comprehensive income (loss) during the three months ended March 31, 2012 and 2011.

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Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes [Abstract]

Income Taxes

(4) Income Taxes

For the three months ended March 31, 2012, we had an effective tax benefit rate of 35.3% compared to an effective tax expense rate of 43.9% for the three months ended March 31, 2011.  The decrease in the effective rate was largely attributable to the impact of certain expenses related to international operations for which we currently are not able to recognize a tax benefit.  Because we had a pre-tax loss for the three months ended March 31, 2012, these non-deductible expenses served to reduce our effective tax benefit rate for the period, whereas the same type of expenses served to increase our effective tax expense rate during the three months ended March 31, 2011.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions.  Tax years remaining subject to examination in these jurisdictions include 2008 to present.

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Earnings (Loss) Per Share

3 Months Ended

Mar. 31, 2012

Earnings (Loss) Per Share [Abstract]

Earnings (Loss) Per Share

(12) Earnings (Loss) Per Share

The following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the three months ended March 31, 2012 and 2011:

(In 000s, except per share data)	Three Months Ended March 31,
	2012			2011
Numerator:
Net income (loss) - numerator for basic earnings (loss) per share	$	(2,665	)	$	4,135
Denominator:
Shares used for basic earnings (loss) per share		33,346			33,975
Effect of dilutive securities outstanding:
Non-qualified stock options (1)		-			380
Restricted stock units (1)		-			335
Shares used for diluted earnings (loss) per share (1)		33,346			34,690
Earnings (loss) per share:
Basic	$	(0.08	)	$	0.12
Diluted (1)	$	(0.08	)	$	0.12
Dilutive securities outstanding not included in the computation of diluted earnings (loss) per share because their effect is antidilutive:
Non-qualified stock options		5,376			4,441
Restricted stock units		487			128
(1) The assumed exercise of stock-based compensation awards for the three months ended March 31, 2012 was not considered because the impact would be anti-dilutive.

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Restructuring and Related Charges

3 Months Ended

Mar. 31, 2012

Restructuring and Related Charges [Abstract]

Restructuring and Related Charges

(8) Restructuring and Related Charges

In November 2011, we began a restructuring of the Company (the "2011 Restructuring"), which was largely completed by the end of fiscal 2011, primarily focused on aligning our capacity requirements and organizational structure following CIGNA's decision to wind-down its contract beginning in 2012.  We do not expect to incur significant additional costs or adjustments related to this restructuring.

In November 2010, we began a restructuring of the Company (the "2010 Restructuring"), which was largely completed by the end of fiscal 2010, primarily focused on aligning resources with current and emerging markets and consolidating operating capacity.  We do not expect to incur significant additional costs or adjustments related to this restructuring.

The change in accrued restructuring and related charges associated with the 2011 Restructuring and 2010 Restructuring activities described above during the three months ended March 31, 2012 were as follows:

(In 000s)		2011			2010
		Restructuring			Restructuring			Total
Accrued restructuring and related charges at January 1, 2012	$	8,426		$	1,583		$	10,009
Additions		41			-			41
Payments		(5,050	)		(211	)		(5,261	)
Adjustments (1)		(314	)		(35	)		(349	)
Accrued restructuring and related charges at March 31, 2012	$	3,103		$	1,337			4,440
(1) Adjustments for the three months ended March 31, 2012 resulted primarily from actual employee tax and benefit amounts differing from previous estimates.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

(6) Fair Value Measurements

We account for certain assets and liabilities at fair value.  Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

Fair Value Hierarchy

The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1:  Quoted prices in active markets for identical assets or liabilities;

Level 2:  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3:  Unobservable inputs that are supported by little or no market activity and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present our assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011:

(In $000s) March 31, 2012		Level 2		Gross Fair Value		Netting (1)			Net Fair Value
Assets:
Foreign currency exchange contracts	$	148	$	148	$	(139	)	$	9
Liabilities:
Foreign currency exchange contracts	$	232	$	232	$	(139	)	$	93
Interest rate swap agreements		3,677		3,677		-			3,677

(In $000s) December 31, 2011		Level 2		Gross Fair Value		Netting (1)			Net Fair Value
Assets:
Foreign currency exchange contracts	$	315	$	315	$	(212	)	$	103
Liabilities:
Foreign currency exchange contracts	$	321	$	321	$	(212	)	$	109
Interest rate swap agreements		4,235		4,235		-			4,235

(1) This column reflects the impact of netting derivative assets and liabilities by counterparty when a legally enforceable master netting agreement exists.

The fair values of forward foreign currency exchange contracts are valued using broker quotations of similar assets or liabilities in active markets.  The fair values of interest rate swap agreements are primarily determined based on the present value of future cash flows using internal models and third-party pricing services with observable inputs, including interest rates, yield curves and applicable credit spreads.

Fair Value of Other Financial Instruments

In addition to foreign currency exchange contracts and interest rate swap agreements, the estimated fair values of which are disclosed above, the estimated fair value of each class of financial instruments at March 31, 2012 was as follows:

· Cash and cash equivalents - The carrying amount of $1.1 million approximates fair value because of the short maturity of those instruments (less than three months).

· Long-term debt - The estimated fair value of outstanding borrowings under the Fourth Amended and Restated Credit Agreement (the "Fourth Amended Credit Agreement"), which includes the 2013 Revolving Credit Facility and a term loan facility (see Note 7), is determined based on the fair value hierarchy as discussed above.  The 2013 Revolving Credit Facility is not actively traded and therefore is classified as a Level 2 valuation based on the market for other revolvers with similar maturities.  The term loan facility is actively traded and therefore is classified as a Level 1 valuation based on the market for identical instruments.  In both instances, the estimated fair value is based on the average of the prices set by the issuing bank given current market conditions and is not necessarily indicative of the amount we could realize in a current market exchange. The estimated fair value and carrying amount of outstanding borrowings under the Fourth Amended Credit Agreement at March 31, 2012 are $288.7 million and $290.9 million, respectively.

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Long-Term Debt

3 Months Ended

Mar. 31, 2012

Long-Term Debt [Abstract]

Long-Term Debt

(7) Long-Term Debt

On March 30, 2010, we entered into the Fourth Amended Credit Agreement.  The Fourth Amended Credit Agreement provides us with the 2013 Revolving Credit Facility, which is a $345.0 million revolving credit facility that expires December 1, 2013 and includes a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters of credit.  The Fourth Amended Credit Agreement also provides a continuation of the term loan facility provided pursuant to the Third Amended and Restated Credit Agreement, of which $189.5 million remained outstanding on March 31, 2012, and an uncommitted incremental accordion facility of $200.0 million.  As of March 31, 2012, availability under the 2013 Revolving Credit Facility totaled $55.7 million as calculated under the most restrictive covenant.

Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%.  Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.  See Note 5 for a description of our interest rate swap agreements.  The Fourth Amended Credit Agreement also provides for a fee ranging between 0.275% and 0.425% of the unused commitments under the 2013 Revolving Credit Facility.  The Fourth Amended Credit Agreement is secured by guarantees from most of the Company's domestic subsidiaries and by security interests in substantially all of the Company's and its subsidiaries' assets.

We are required to repay outstanding revolving loans under the 2013 Revolving Credit Facility on December 1, 2013. We are required to repay term loans in quarterly principal installments aggregating $0.5 million each, which commenced on March 31, 2007.  The entire unpaid principal balance of the term loans is due and payable at maturity on December 1, 2013.

The Fourth Amended Credit Agreement contains various financial covenants, which require us to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net worth.  The Fourth Amended Credit Agreement also restricts the payment of dividends and limits the amount of repurchases of the Company's common stock.  As of March 31, 2012, we were in compliance with all of the covenant requirements of the Fourth Amended Credit Agreement.

As described in Note 5 above, as of March 31, 2012, we are a party to interest rate swap agreements for which we receive a variable rate of interest based on LIBOR and for which we pay a fixed rate of interest.

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

(9) Commitments and Contingencies

Contract Dispute

We currently are involved in a contractual dispute with Blue Cross Blue Shield of Minnesota regarding fees paid to us as part of a former contractual relationship.  In 2010, we received a notice of arbitration under the terms of our agreement alleging a violation of certain contract provisions.  We believe we performed our services in compliance with the terms of our agreement and that the assertions made in the arbitration notice are without merit.  On August 3, 2011, we asserted numerous counterclaims against Blue Cross Blue Shield of Minnesota.  We are not able to reasonably estimate a range of potential losses, if any.

Anti-Trust Lawsuit

On May 1, 2012, American Specialty Health Group ("ASH") amended a claim (the "Amended Claim") that it had previously filed against the Company in the U.S. District Court in the Southern District of California on December 2, 2011 (the "Original Claim").  The Original Claim alleged that the Company's exclusivity provisions in some of its contracts with participating locations in its SilverSneakers® fitness network violate California's Unfair Competition Law and that the Company interfered with ASH's contractual relations and prospective economic advantages.  The Amended Claim added allegations that the Company is in violation of the Sherman Antitrust Act (the "Act") because such exclusivity provisions create illegal restraints on trade and constitute monopolization or attempted monopolization in violation of the Act.  Under the Amended Claim, ASH is seeking damages in excess of $15,000,000, treble damages under the Act, and injunctive relief.

We believe ASH's claims are without merit and intend to vigorously defend ourselves against the Amended Claim.

Outlook

We are also subject to other contractual disputes, claims and legal proceedings that arise from time to time in the ordinary course of our business.  While we are unable to estimate a range of potential losses, we do not believe that any of the legal proceedings pending against us as of the date of this report will have a material adverse effect on our liquidity or financial condition.  As these matters are subject to inherent uncertainties, our view of these matters may change in the future.

Contractual Commitment

In May 2011, we entered into a ten-year applications and technology services outsourcing agreement with HP Enterprise Services, LLC that contains minimum fee requirements.  Total payments over the remaining term must equal or exceed a minimum level of approximately $171.9 million; however, based on initial required service and equipment level assumptions, we estimate that the remaining payments will be approximately $359.6 million.  The agreement allows us to terminate all or a portion of the services after the first two years provided we pay certain termination fees, which could be material to the Company.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Cost of services, depreciation and amortization	$ 8,683	$ 9,023

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Share-Based Compensation

3 Months Ended

Mar. 31, 2012

Share-Based Compensation [Abstract]

Share-Based Compensation

(3) Share-Based Compensation

We have several stockholder-approved stock incentive plans for our employees and directors.  We currently have three types of share-based awards outstanding under these plans: stock options, restricted stock units, and restricted stock.  We believe that such awards align the interests of our employees and directors with those of our stockholders.

For the three months ended March 31, 2012 and 2011, we recognized share-based compensation costs of $1.4 million and $2.3 million, respectively.

A summary of our stock options as of March 31, 2012 and changes during the three months then ended is presented below:

					Weighted-
					Average
			Weighted-		Remaining	Aggregate
	Shares		Average		Contractual	Intrinsic
Options	(000s)		Exercise Price		Term (years)	Value ($000s)
Outstanding at January 1, 2012	5,659		$	17.58
Granted	677			7.95
Exercised	(1	)		7.24
Forfeited	(214	)		11.70
Expired	(542	)		33.53
Outstanding at March 31, 2012	5,579			15.10	5.79	$61
Exercisable at March 31, 2012	3,181			18.39	3.46	$56

      The weighted-average grant-date fair value of options granted during the three months ended March 31, 2012 was $4.02.

      The following table shows a summary of our restricted stock and restricted stock units ("nonvested shares")as of March 31, 2012, as well as activity during the three months then ended:

			Weighted-
			Average
	Shares		Grant Date
Nonvested Shares	(000s)		Fair Value
Nonvested at January 1, 2012	910		$	12.22
Granted	316			7.44
Vested	(137	)		14.63
Forfeited	(80	)		11.23
Nonvested at March 31, 2012	1,009		$	10.46