10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended February 29, 2004

Commission File Number 000-19364

AMERICAN HEALTHWAYS, INC.

(Exact Name of Registrant as Specified in its Charter)

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

3841 Green Hills Village Drive, Nashville, TN 37215

(Address of Principal Executive Offices) (Zip Code)

615-665-1122

(Registrant’s Telephone Number, Including Area Code)

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 twelve 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes     [X]         No   [   ]   

As of April 9, 2004 there were outstanding 32,563,660 shares of the Registrant’s Common Stock, par value $.001 per share.

TABLE OF CONTENTS

Part I
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		LIABILITIES AND STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-3.1 RESTATED CERTIFICATE OF INCORPORATION
EX-3.2 AMENDED AND RESTATED BYLAWS
EX-11 EARNINGS PER SHARE RECONCILIATION
EX-31.1 SECTION 302 CEO CERTIFICATION
EX-31.2 SECTION 302 CFO CERTIFICATION
EX-32 SECTION 906 CEO AND CFO CERTIFICATION

Part I

Item 1. Financial Statements

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

(Unaudited)

	February 29,			August 31,
	2004			2003
Current assets:
Cash and cash equivalents	$	29,260		$	35,956
Accounts receivable, net
Billed		34,683			18,526
Unbilled		3,817			7,971
Other current assets		5,378			4,267
Deferred tax asset		1,215			758
Total current assets		74,353			67,478
Property and equipment:
Leasehold improvements		6,103			5,045
Computer equipment and related software		46,000			38,214
Furniture and office equipment		10,944			9,558
		63,047			52,817
Less accumulated depreciation		(31,836	)		(25,166	)
		31,211			27,651
Long-term deferred tax asset		67			—
Other assets		3,026			182
Intangible assets, net		21,876			264
Goodwill, net		93,541			44,438
	$	224,074		$	140,013

See accompanying notes to the consolidated financial statements.

2

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY

(Unaudited)

	February 29,			August 31,
	2004			2003
Current liabilities:
Accounts payable	$	4,904		$	4,067
Accrued salaries and benefits		3,603			9,162
Accrued liabilities		5,019			2,790
Contract billings in excess of earned revenue		7,817			3,272
Income taxes payable		219			391
Current portion of long-term debt		12,404			389
Current portion of long-term liabilities		955			360
Total current liabilities		34,921			20,431
Long-term debt		42,634			109
Long-term deferred tax liability		11,838			2,380
Other long-term liabilities		5,053			4,662
Stockholders’ equity:
Preferred stock
$.001 par value, 5,000,000 shares authorized, none outstanding		—			—
Common stock
$.001 par value, 75,000,000 and 40,000,000 shares authorized, 32,116,632 and 31,593,464 shares outstanding		32			32
Additional paid-in capital		82,163			74,070
Retained earnings		47,610			38,329
Accumulated other comprehensive loss		(177	)		—
Total stockholders’ equity		129,628			112,431
	$	224,074		$	140,013

See accompanying notes to the consolidated financial statements.

3

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except earnings per share data)

(Unaudited)

	Three Months Ended				Six Months Ended
	February 29/28,				February 29/28,
	2004		2003		2004		2003
Revenues	$	57,122	$	40,101	$	108,200	$	77,639
Cost of services		37,020		24,806		71,164		49,432
Gross margin		20,102		15,295		37,036		28,207
Selling, general and administrative expenses		6,022		3,793		11,164		7,711
Depreciation and amortization		4,429		2,663		8,570		5,201
Interest expense		890		120		1,834		306
Income before income taxes		8,761		8,719		15,468		14,989
Income tax expense		3,437		3,575		6,187		6,146
Net income	$	5,324	$	5,144	$	9,281	$	8,843
Earnings per share:
Basic	$	0.17	$	0.17	$	0.29	$	0.29
Diluted	$	0.15	$	0.16	$	0.27	$	0.27
Weighted average common shares and equivalents:
Basic		32,039		30,883		31,915		30,838
Diluted		34,746		32,680		34,507		32,685

See accompanying notes to the consolidated financial statements.

4

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended February 29, 2004

(In thousands)

(Unaudited)

									Accumulated
					Additional				Other
	Preferred		Common		Paid-in		Retained		Comprehensive
	Stock		Stock		Capital		Earnings		Loss			Total
Balance, August 31, 2003	$	—	$	32	$	74,070	$	38,329	$	—		$	112,431
Net income		—		—		—		9,281		—			9,281
Net change in fair value of interest rate swap, net of income taxes of $118		—		—		—		—		(177	)		(177	)
Total comprehensive income													9,104
Exercise of stock options and other		—		—		2,500		—		—			2,500
Tax benefit of option exercises		—		—		3,781		—		—			3,781
Stock issued in conjunction with strategic alliance		—		—		1,812		—		—			1,812
Balance, February 29, 2004	$	—	$	32	$	82,163	$	47,610	$	(177	)	$	129,628

See accompanying notes to the consolidated financial statements.

5

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	February 29/28,
	2004			2003
Cash flows from operating activities:
Net income	$	9,281		$	8,843
Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisitions:
Depreciation and amortization		8,570			5,201
Amortization of deferred loan costs		384			138
Tax benefit of stock option exercises		3,781			719
Increase in accounts receivable, net		(11,574	)		(5,249	)
Increase in other current assets		(232	)		(781	)
Increase in accounts payable		294			50
Decrease in accrued salaries and benefits		(6,179	)		(5,780	)
Increase in other current liabilities		2,947			9,778
Other		1,488			727
Decrease in other assets		170			168
Payments on other long-term liabilities		(300	)		(204	)
Net cash flows provided by operating activities		8,630			13,610
Cash flows from investing activities:
Acquisition of property and equipment		(8,538	)		(7,757	)
Business acquisitions, net of cash acquired		(60,223	)		—
Net cash flows used in investing activities		(68,761	)		(7,757	)
Cash flows from financing activities:
Increase in restricted cash and cash equivalents		—			(3,000	)
Proceeds from issuance of long-term debt, net of deferred loan costs		57,685			—
Exercise of stock options		1,964			392
Payments of long term-debt		(6,214	)		(189	)
Net cash flows provided by (used in) financing activities		53,435			(2,797	)
Net increase (decrease) in cash and cash equivalents		(6,696	)		3,056
Cash and cash equivalents, beginning of period		35,956			23,924
Cash and cash equivalents, end of period	$	29,260		$	26,980

See accompanying notes to the consolidated financial statements.

6

AMERICAN HEALTHWAYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Interim Financial Reporting

     The accompanying consolidated financial statements of American Healthways, Inc. and its subsidiaries (the “Company”) for the three and six months ended February 29, 2004 and February 28, 2003 are unaudited. However, in the opinion of the Company, all adjustments consisting of normal, recurring accruals necessary for a fair presentation have been reflected therein. Certain items in prior periods have been reclassified to conform to current classifications.

     Certain financial information, which is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, but which is not required for interim reporting purposes, has been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003.

(2) Segment Disclosures

     Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information,” establishes disclosure standards for segments of a company based on a management approach to defining operating segments. Historically, the Company has distinguished operating and reportable segments based upon the types of customers (hospitals or health plans) that contract for the Company’s services. In order to improve operational efficiency, in December 2003 the Company merged its operations into a single operating segment for purposes of presenting financial information and evaluating performance.

(3)	Recently Issued Accounting Standards
	Consolidation of Variable Interest Entities

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 requires consolidation of variable interest entities (“VIE”) if certain conditions are met and generally applies to periods ending after March 15, 2004. The adoption of FIN No. 46 is not expected to have a material impact on the Company’s financial position or results of operations.

Derivative Instruments and Hedging Activities

      In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities that fall within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 regarding implementation issues raised in relation to the application of the definition of a derivative. The amendments set forth in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging

7

relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial position or results of operations.

(4) Stock-Based Compensation

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company’s financial position or results of operations.

     The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148. Compensation expense recorded under APB No. 25 for the three and six months ended February 29, 2004 was approximately $530,000. This expense resulted primarily from the grant, subject to stockholder approval, of stock options to two new directors of the Company in June 2003. Such approval was obtained at the Annual Meeting of Stockholders in January 2004, at which time the options were issued. The Company recognizes compensation expense related to fixed award stock options on a straight-line basis.

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

8

	Three Months Ended						Six Months Ended
	February 29/28,						February 29/28,
(In $000s, except per share data)	2004			2003			2004			2003
Net income, as reported	$	5,324		$	5,144		$	9,281		$	8,843
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		329			—			329			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,370	)		(820	)		(2,531	)		(1,641	)
Pro forma net income	$	4,283		$	4,324		$	7,079		$	7,202
Earnings per share:
Basic - as reported	$	0.17		$	0.17		$	0.29		$	0.29
Basic - pro forma	$	0.13		$	0.14		$	0.22		$	0.23
Diluted - as reported	$	0.15		$	0.16		$	0.27		$	0.27
Diluted - pro forma	$	0.12		$	0.13		$	0.21		$	0.22

(5) Business Acquisitions

     On September 5, 2003, the Company completed the acquisition of StatusOne Health Systems, Inc. (“StatusOne”) through the merger of a wholly-owned subsidiary of the Company with and into StatusOne in accordance with the terms of an Agreement and Plan of Merger (the “Merger Agreement”). The addition of StatusOne expands the Company’s product offerings and provides for additional opportunities for initiating and expanding total-population care management programs with health plans.

     The aggregate purchase price paid by the Company was approximately $65.7 million, which was funded through a $60 million term loan and cash of $5.7 million, including acquisition costs of approximately $0.7 million. In addition, pursuant to an earn-out agreement (the “Earn-Out Agreement”), the Company is obligated to pay the former stockholders of StatusOne up to $12.5 million in additional purchase price, payable either in cash or common stock at the Company’s discretion, if StatusOne achieves certain revenue targets during the one-year period immediately following the acquisition (the “Earn-Out Period”). At the closing, the Company delivered $5 million of the purchase price into an escrow account under the terms and conditions of a separate escrow agreement to secure certain obligations of the former stockholders under the terms of the Merger Agreement.

9

     The allocation of the StatusOne purchase price, shown below, is preliminary and subject to adjustments, primarily related to any additional purchase price attributable to StatusOne’s results during the Earn-Out Period.

(In $000s)
Fair value of current net tangible assets acquired	$	1,688
Fair value of long-term net tangible liabilities assumed		(8,783	)
Intangible assets:
Acquired technology		10,163
Customer contracts		9,137
Trade name		4,344
Goodwill		49,103
Total purchase price	$	65,652

     The results of operations of StatusOne were consolidated with those of the Company beginning September 5, 2003. The unaudited pro forma results of operations as if the transaction had occurred on September 1, 2002 are as follows:

	Three Months Ended		Six Months Ended
(In $000s, except per share data)	February 28, 2003		February 28, 2003
Revenues	$	45,397	$	87,776
Net income	$	4,819	$	8,319
Earnings per share:
Basic	$	0.16	$	0.27
Diluted	$	0.15	$	0.25

(6) Intangible and Other Assets

     Intangible assets subject to amortization at February 29, 2004 consist of the following:

	Gross Carrying		Accumulated
(In $000s)	Amount		Amortization		Net
Acquired technology	$	10,163	$	1,016	$	9,147
Customer contracts		9,349		1,052		8,297
Other intangibles		1,242		1,154		88
Total	$	20,754	$	3,222	$	17,532

     Acquired technology and customer contracts are being amortized on a straight-line basis over a five-year estimated useful life. Other intangible assets included in the table above are being amortized on

10

a straight-line basis over their estimated useful lives (one to three years) and consist primarily of non-competition agreements associated with business acquisitions. Total amortization expense for the six months ended February 29, 2004 was $2,162,000. Estimated amortization expense for the remainder of fiscal 2004 and the following four fiscal years thereafter is $2,047,000, $3,888,000, $3,873,000, $3,865,000 and $3,859,000, respectively. The Company assesses the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

     Intangible assets not subject to amortization at February 29, 2004 consist of the trade name associated with the StatusOne acquisition of $4,344,000. The Company reviews intangible assets not subject to amortization on an annual basis or more frequently whenever events or circumstances indicate that the assets might be impaired.

     Other assets consist primarily of deferred loan costs net of accumulated amortization.

(7) Long-Term Debt

     On September 5, 2003, in conjunction with the acquisition of StatusOne, the Company entered into a new revolving credit and term loan agreement (the “Credit Agreement”) with eight financial institutions that replaced its previous credit agreement dated November 22, 2002. The Credit Agreement provides the Company with up to $100 million in borrowing capacity, including a $60 million term loan (the “Term Loan”) and a $40 million revolving line of credit, under a credit facility that expires on August 31, 2006. The Company is required to make principal installment payments of $3 million at the end of each fiscal quarter beginning on November 30, 2003 and ending with a $27 million balloon payment due on August 31, 2006. Borrowings under the Credit Agreement bear interest, at the Company’s option, at the prime rate plus a spread of 0.5% to 1.25% or LIBOR plus a spread of 2.0% to 2.75%, or a combination thereof. Substantially all of the Company’s and its subsidiaries’ assets are pledged as collateral for any borrowings under the credit facility. The Credit Agreement also contains various financial covenants, provides for a fee ranging between 0.375% and 0.5% of unused commitments, prohibits the payment of dividends, and limits the amount of repurchases of the Company’s common stock. On September 16, 2003, the Company entered into an interest rate swap agreement to reduce the exposure to interest rate fluctuations. By entering into the interest rate swap agreement the Company effectively converted $40 million of floating rate debt to a fixed obligation with an interest rate of 4.99%. The Company currently believes that it meets and will continue to meet the criteria for the “shortcut” method under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” in accounting for the interest rate swap agreement, which allows for an assumption of no hedge ineffectiveness. As such, there is no income statement impact from changes in the fair value of the interest rate swap. The interest rate swap agreement is marked to market each reporting period, and the change in the fair value, net of income taxes, of the interest rate swap agreement is reported through other comprehensive income (loss) in the consolidated statement of changes in stockholders’ equity.

(8) Commitments and Contingencies

     In June 1994, a “whistle blower” action was filed on behalf of the United States government by a former employee dismissed by the Company in February 1994. The case is currently pending before the United States District Court for the District of Columbia. The employee sued American Healthways, Inc. (“AMHC”) and a wholly-owned subsidiary of AMHC, American Healthways Services, Inc. (“AHSI”), as well as certain named and unnamed medical directors and one named client hospital, West Paces Medical Center (“WPMC”), and other unnamed client hospitals. AMHC has since been dismissed as a defendant; however, the case is still pending against AHSI. In addition, WPMC has agreed to settle the claims filed

11

against it subject to the court’s approval as part of a larger settlement agreement that WPMC’s parent organization, HCA Inc., has reached with the United States government. The complaint alleges that AHSI, the client hospitals and the medical directors violated the federal False Claims Act by entering into certain arrangements that allegedly violated the federal anti-kickback statute and provisions of the Social Security Act prohibiting physician self-referrals. Although no specific monetary damage has been claimed, the plaintiff, on behalf of the federal government, seeks treble damages plus civil penalties and attorneys’ fees. The plaintiff also has requested an award of 30% of any judgment plus expenses. The Office of the Inspector General of the Department of Health and Human Services determined not to intervene in the litigation, and the complaint was unsealed in February 1995. The case is still in the discovery stage and has not yet been set for trial.

     The Company believes that its operations have been conducted in full compliance with applicable statutory requirements. Although there can be no assurance that the results of the matter would not have a material adverse impact on the Company, nor can an estimate of possible loss be made, the Company believes that the resolution of issues, if any, which may be raised by the government and the resolution of the civil litigation would not have a material adverse effect on the Company’s financial position or results of operations except to the extent that the Company incurs material legal expenses associated with its defense of this matter and the civil suit.

(9) Stockholders’ Equity

     In December 2001, the Company established an industry-wide Outcomes Evaluation Program with Johns Hopkins University and Health System to independently evaluate the effectiveness of clinical interventions, and their clinical and financial results, produced by the Company as well as other members of the disease management and care enhancement industry. In addition to a five-year funding commitment by the Company that began December 1, 2001, additional funding may be provided for this program through research sponsored by other outcomes-based health-care organizations. Pursuant to the terms of the funding commitment, amended in December 2003, the Company will provide Johns Hopkins compensation of $0.7 million annually for the remaining three years of the commitment. The Company issued 150,000 unregistered shares of common stock to Johns Hopkins on December 31, 2001. One half of the 150,000 shares vested immediately, and the remaining 75,000 shares vested on December 1, 2003.

     On November 17, 2003, the Company’s Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend which was distributed on December 19, 2003 to stockholders of record at the close of business on December 5, 2003. The consolidated financial statements and notes and exhibits hereto have been restated to give effect to the stock split.

(10) Comprehensive Income

     SFAS No. 130, “Reporting Comprehensive Income,” requires that changes in the amounts of certain items, including changes in the fair value of interest rate swap agreements, be shown in the financial statements. The Company displays comprehensive income, which includes net income and net changes in the fair value of the interest rate swap agreement, in the consolidated statement of changes in stockholders’ equity. Comprehensive income, net of income taxes, was $5,128,000 and $9,104,000, respectively, for the three and six months ended February 29, 2004.

12

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

Overview

     Founded in 1981, American Healthways, Inc. (the “Company”) provides specialized, comprehensive care enhancement and disease management services to individuals in all 50 states, the District of Columbia, Puerto Rico, and Guam. The Company’s integrated care enhancement programs serve entire health plan populations through member and physician care support interventions, advanced neural network predictive modeling, and confidential, secure Internet-based applications that provide patients and physicians with individualized health information and data. The Company’s integrated care enhancement programs enable health plans to develop relationships with all of their members, not just the chronically ill, and to identify those at highest risk for a health problem, allowing for early interventions.

     The Company’s integrated care enhancement product line includes programs for health plan members with diabetes, coronary artery disease, heart failure, asthma, chronic obstructive pulmonary disease, end-stage renal disease, acid-related stomach disorders, atrial fibrillation, decubitus ulcer, fibromyalgia, hepatitis C, inflammatory bowel disease, irritable bowel syndrome, low-back pain, osteoarthritis, osteoporosis and urinary incontinence. The programs are designed to create and maintain key desired behaviors of each program member and of the providers who care for them in order to improve member health status, thereby reducing health-care costs. The programs incorporate interventions necessary to optimize member care and are based on the most current, evidence-based clinical guidelines as approved/adopted by the nation’s leading nonprofit health organizations.

     The flexibility of the Company’s programs allows health plans to enter the disease management and care enhancement market at the level they deem appropriate for their organization, including the management of a single chronic disease, multiple chronic diseases or total-population in which all members receive the benefit of multiple programs at a single cost.

     On September 5, 2003, the Company completed the acquisition of StatusOne Health Systems, Inc. (“StatusOne”), a provider of health management services for high-risk populations of health plans and integrated systems nationwide. The addition of StatusOne expands the Company’s product offerings and provides for additional opportunities for initiating and expanding total-population care management programs with health plans.

     As of February 29, 2004, the Company had contracts with 38 health plans to provide 89 disease management and care enhancement program services, and also had 49 contracts to provide its services at 67 hospitals.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which are based upon current expectations and involve a number of risks and uncertainties. In order for the Company to utilize the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, investors are hereby cautioned that these statements may be affected by the important factors, among others, set forth below, and consequently, actual operations and results may differ materially from those expressed in these forward-looking statements. The important factors include:

• the Company’s ability to sign and implement new contracts for disease management and care enhancement services;

13

• the risks associated with a significant concentration of the Company’s revenues with a limited number of customers;

• the Company’s ability to effect cost savings and clinical outcomes improvements under disease management and care enhancement contracts and reach mutual agreement with customers with respect to cost savings, or to effect such savings and improvements within the time frames contemplated by the Company;

• the ability of the Company to accurately forecast performance and the timing of revenue recognition under the terms of its contracts ahead of data collection and reconciliation;

• the Company’s ability to collect contractually earned performance incentive bonuses;

• the ability of the Company’s customers to provide timely and accurate data that is essential to the operation and measurement of the Company’s performance under the terms of its health plan contracts;

• the Company’s ability to resolve favorably contract billing and interpretation issues with its customers;

• the Company’s ability to integrate the operations of StatusOne into the Company’s business;

• the Company’s ability to achieve the expected financial results for StatusOne;

• the Company’s ability to service its debt and make principal and interest payments as those payments become due;

• the ability of the Company to develop new products and deliver outcomes on those products;

• the ability of the Company to effectively integrate new technologies and approaches, such as those encompassed in its care enhancement initiatives, into the Company’s care enhancement platform;

• the Company’s ability to renew and/or maintain contracts with its customers under existing terms or restructure these contracts on terms that would not have a material negative impact on the Company’s results of operations;

• the Company’s ability to implement its care enhancement strategy within expected cost estimates;

• the ability of the Company to obtain adequate financing to provide the capital that may be needed to support the growth of the Company’s operations and to support or guarantee the Company’s performance under new contracts;

• unusual and unforeseen patterns of healthcare utilization by individuals with diabetes, cardiac, respiratory and/or other diseases or conditions for which the Company provides services, in the health plans with which the Company has executed a disease management contract;

• the ability of the health plans to maintain the number of covered lives enrolled in the plans during the terms of the agreements between the health plans and the Company;

• the Company’s ability to attract and/or retain and effectively manage the employees required to implement its agreements;

• the impact of litigation involving the Company;

• the impact of future state and federal healthcare legislation and regulations on the ability of the Company to deliver its services and on the financial health of the Company’s customers and their willingness to purchase the Company’s services; and

• general economic conditions.

The Company undertakes no obligation to update or revise any such forward-looking statements.

14

Customer Contracts

     The Company’s disease management and care enhancement services range from telephone and mail contacts directed primarily to health plan members with targeted diseases or who are at high risk for a future adverse health event to services that include providing local market resources to address acute episode interventions and coordination of care with local health-care providers. Calls are primarily made from one of the Company’s care enhancement centers.

     Fees under the Company’s contracts are generally determined by multiplying the contractually negotiated rate per health plan member per month (“PMPM”) by the number of health plan members covered by the Company’s services during the month. PMPM rates are set during contract negotiations with customers regarding the value to be created by the Company’s programs and a sharing of that value between the customer and the Company. In some contracts, the PMPM rate may differ between the health plan’s lines of business (e.g. PPO, HMO, Medicare). Contracts are generally for terms of three to seven years with provisions for subsequent renewal and may provide that some portion (up to 100%) of the Company’s fees may be refundable to the health plan (“performance-based”) if a targeted percentage reduction in the health plan’s health-care costs and clinical and/or other criteria that focus on improving the health of the members, compared to a baseline year, are not achieved. Approximately 8% of the Company’s revenues recorded during the six months ended February 29, 2004 were performance-based and are subject to final reconciliation. The Company anticipates that this percentage will fluctuate due to the timing of data reconciliation, which varies according to contract terms, and revenue recognition associated with performance-based fees. A limited number of contracts also provide opportunities for the Company to receive incentive bonuses in excess of the contractual PMPM rate if the Company is able to exceed contractual performance targets.

     The Company’s contract revenues are dependent upon the contractual relationships it establishes and maintains with health plans to provide disease management and care enhancement services to their members. Some contracts provide for early termination by the health plan under certain conditions. No assurances can be given that the results from restructurings and possible terminations at or prior to renewal would not have a material negative impact on the Company’s results of operations and financial condition.

     Disease management and care enhancement contracts require sophisticated management information systems to enable the Company to manage the care of large populations of health plan members with targeted chronic diseases or other medical conditions and to report clinical and financial outcomes before and after the implementation of the Company’s programs. The Company has developed and is continually expanding and enhancing its clinical and data management and reporting systems, which it believes meet its information management needs for its disease management and care enhancement services. The anticipated expansion and enhancement in its information management systems will continue to require significant investments by the Company in information technology software, hardware and its information technology staff.

     Approximately 58% of the Company’s revenues for the three and six months ended February 29, 2004 were derived from three contracts that each comprised more than 10% of the Company’s revenue for the period. The loss of any of these contracts or any other large health plan contract or a reduction in the profitability of any of these contracts would have a material negative impact on the Company’s results of operations, cash flows, and financial condition.

     Of the four health plan contracts scheduled to expire in fiscal 2004, representing in aggregate approximately 4% of the Company’s revenues for the six months ended February 29, 2004, one contract,

15

comprising less than 1% of revenues, has been renewed; one contract, representing 2% of revenues, has been renewed and expanded; and one contract, representing less than 1% of revenues for the six months ended February 29, 2004, has been terminated. As of February 29, 2004, twenty-four of the Company’s health plan contracts, which represent approximately 27% of the Company’s revenues for the six months ended February 29, 2004, allow for early termination. The average length of time the Company has been providing services for this group of 24 contracts is three years. No assurance can be given that unscheduled contract terminations or renegotiations would not have a material negative impact on the Company’s results of operations, cash flows, and financial condition.

     The Company’s 49 hospital contracts represent hospital-based diabetes treatment centers located in and operated under contracts with general acute-care hospitals. The primary goal of each center is to create a center of excellence for the treatment of diabetes in the community in which it is located, thereby increasing the hospital’s market share of diabetes patients and lowering the hospital’s cost of providing services while enhancing the quality of care to this population. For the six months ended February 29, 2004, revenues from the Company’s hospital contracts accounted for approximately 6% of the Company’s total revenues.

Actual Lives under Management

     The Company measures the volume of participation in its programs by the actual number of health plan members and hospital patients who are benefiting from the Company’s services, which is reported as “actual lives under management”. At February 29, 2004, the Company had contracts with 38 health plans to provide 89 disease management and care enhancement program services and 49 contracts to provide its services at 67 hospitals. Annualized revenue in backlog represents the estimated annualized revenue associated with signed contracts at February 29, 2004 for which the Company has not yet begun to provide services. The number of actual lives under management and annualized revenue in backlog are shown below at February 29, 2004 and February 28, 2003.

At February 29/28,	2004		2003(1)
Actual lives under management		1,054,000		686,000
Annualized revenue in backlog (in $000s)	$	18,833	$	16,320

⁽¹⁾ Restated to reflect diabetes patients discharged from the Company’s hospital-based diabetes treatment centers.

     The annual membership enrollment and disenrollment processes of employers (whose employees are the health plan members) from health plans can result in a seasonal reduction in actual lives under management during the Company’s second fiscal quarter. Employers typically make decisions on which health insurance carriers they will offer to their employees and may also allow employees to switch between health plans on an annual basis. Historically, the Company has found that a majority of these decisions are made effective December 31 of each year. An employer’s change in health plans or employees’ changes in health plan elections may result in the Company’s loss of actual lives under management as of January 1. Although these decisions may also result in a gain in enrollees as new employers sign up with the Company’s customers, the process of identifying new members eligible to participate in the Company’s programs is dependent on the submission of health-care claims, which lags enrollment by an indeterminate period. As a result, historically the Company has experienced a loss of actual lives under management of between 5% and 7% on January 1 that is not restored through new member identification until later in the fiscal year, thereby negatively affecting the Company’s revenues

16

on existing contracts in its second fiscal quarter.

     The Company has experienced increasing demand for its health plan customers’ administrative services only (“ASO”) business. ASO business represents self-insured employers for which the Company’s health plan customers do not assume risk but provide only administrative claim and health network access services, principally to self-insured employers. Signed contracts between these self-insured employers and the Company’s health plan customers are incorporated in the Company’s contracts with its health plan customers, and these program-eligible members are included in the lives under management or the annualized revenue in backlog reported in the table above, when appropriate.

Business Strategy

     The Company’s primary strategy is to develop new and expand existing relationships with health plans to provide disease management and care enhancement services. The Company anticipates that it will utilize its scaleable state-of-the-art care enhancement centers and medical information content and technologies to gain a competitive advantage in delivering its disease management and care enhancement services. In addition, the Company will continue to add services to its product mix that extend the Company’s programs for health plans beyond a chronic disease focus and provide care enhancement services to members identified with one or more additional conditions or who are at risk for developing these diseases or conditions. The Company believes that improvements in care, and therefore significant cost savings, can result from providing care enhancement programs to members with these additional selected diseases and conditions, which will enable the Company to address a much larger percentage of a health plan’s population and total health-care costs. The Company anticipates that significant costs will be incurred during the remainder of fiscal 2004 for the enhancement and expansion of clinical programs and data reporting systems, the enhancement of information technology support, the opening of additional care enhancement centers as needed, and the integration of StatusOne. The Company expects that a significant portion of these costs will be incurred prior to the initiation of revenues from new contracts. The Company also recognizes the possibility that some of these new capabilities and technologies may be added through strategic alliances with other entities and that the Company may choose to make minority interest investments in or acquire for stock or cash one or more of these entities.

Critical Accounting Policies

     The Company’s accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management 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.

     The Company believes the following accounting policies to be the most critical in understanding the judgments that are involved in preparing its financial statements and the uncertainties that could impact its results of operations, financial condition and cash flows.

Revenue Recognition

     Fees under the Company’s contracts are generally determined by multiplying a contractually negotiated PMPM rate by the number of health plan members covered by the Company’s services during the month. In some contracts, the PMPM rate may differ between the health plan’s lines of business (e.g.

17

PPO, HMO, Medicare). These contracts are generally for terms of three to seven years with provisions for subsequent renewal and may provide that some portion (up to 100%) of the Company’s fees may be refundable to the health plan (“performance-based”) if a targeted percentage reduction in the health plan’s health-care costs and clinical and/or other criteria that focus on improving the health of the members, compared to a baseline year, are not achieved. Approximately 8% of the Company’s revenues recorded during the six months ended February 29, 2004 were performance-based and are subject to final reconciliation. The Company anticipates that this percentage will fluctuate due to the timing of data reconciliation, which varies according to contract terms, and revenue recognition associated with performance-based fees. A limited number of contracts also provide opportunities for the Company to receive incentive bonuses in excess of the contractual PMPM rate if the Company is able to exceed contractual performance targets.

     The Company bills its 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, which is performance-based and may be subject to refund should performance targets not be met. The monthly billing does not include any potential incentive bonuses which, if earned, are not due until after contract settlement. The Company recognizes revenue during the period the services are performed as follows: the fixed portion of the monthly fees is recognized as revenue during the period the services are performed; the performance-based portion of the monthly fees is recognized based on performance to date in the contract year; and additional incentive bonuses are recognized based on performance to date in the contract year to the extent such amounts are considered collectible based on credit risk and/or business relationships. The Company assesses its level of performance based on medical claims and other data contractually required to be supplied monthly by the health plan customer. Estimates that may be included in the Company’s assessment of performance include medical claims incurred but not reported and a health plan’s medical cost trend compared to a baseline year. In addition, the Company may also provide reserves, when appropriate, for billing adjustments at contract reconciliation (“contractual reserves”). In the event data from the health plan is insufficient or incomplete to measure performance, or interim performance measures indicate that performance targets are not being met, fees subject to refund are not recognized as revenues but rather are recorded in a current liability account “contract billings in excess of earned revenue.” In the event that performance levels are not met by the end of the contract year, the Company is contractually obligated to refund some or all of the performance-based fees. The Company would reverse revenues previously recognized if performance to date in the contract year, previously above targeted levels, dropped below targeted levels due to subsequent adverse performance and/or adjustments in contractual reserves.

     The settlement process under a contract, which generally is not completed until six to eight months after the end of a contract year, involves reconciliation of both health-care claims and clinical data and includes the settlement of any performance-based fees. Data reconciliation differences between the Company and the customer can arise due to health plan data deficiencies, omissions and/or data discrepancies, for which the Company provides contractual reserves until agreement is reached with respect to identified issues.

Impairment of Intangible Assets and Goodwill

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill is reviewed for impairment by reporting unit on an annual basis or more frequently whenever events or circumstances indicate that the carrying value of a reporting unit may not be recoverable.

18

     In the event the Company determines that the carrying value of goodwill is impaired based upon an impairment review, the measurement of any impairment is calculated using a fair-value-based goodwill impairment test as required under the provisions of SFAS No. 142. Fair value is the amount at which the asset could be bought or sold in a current transaction between two willing parties and may be estimated using a number of techniques, including quoted market prices or valuations by third parties, present value techniques based on estimates of cash flows, or multiples of earnings or revenues performance measures.

     The Company’s other identifiable intangible assets, such as acquired technology and customer contracts, are amortized on the straight-line method over their estimated useful lives, except for trade names, which have an indefinite life and are not subject to amortization. The Company reviews intangible assets not subject to amortization on an annual basis or more frequently whenever events or circumstances indicate that the assets might be impaired. The Company assesses the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

     In the event the Company determines that the carrying value of other identifiable intangible assets may not be recoverable, the measurement of any impairment is calculated using an estimate of the asset’s fair value based on the projected net cash flows expected to result from that asset, including eventual disposition.

     Future events could cause the Company to conclude that impairment indicators exist and that goodwill and/or other intangible assets associated with its acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

Results of Operations

     The following table shows the components of the statements of operations for the three and six months ended February 29, 2004 and February 28, 2003 expressed as a percentage of revenues.

	Three Months Ended						Six Months Ended
	February 29/28,						February 29/28,
	2004			2003			2004			2003
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services		64.8	%		61.9	%		65.8	%		63.7	%
Gross margin		35.2	%		38.1	%		34.2	%		36.3	%
Selling, general and administrative expenses		10.5	%		9.5	%		10.3	%		9.9	%
Depreciation and amortization		7.8	%		6.6	%		7.9	%		6.7	%
Interest expense		1.6	%		0.3	%		1.7	%		0.4	%
Income before income taxes		15.3	%		21.7	%		14.3	%		19.3	%
Income tax expense		6.0	%		8.9	%		5.7	%		7.9	%
Net income		9.3	%		12.8	%		8.6	%		11.4	%

19

Revenues

     Revenues for the three and six months ended February 29, 2004 increased 42.4% and 39.4%, respectively, over the three and six months ended February 28, 2003 primarily due to an increase in average actual lives under management.

     The average number of actual lives under management increased from approximately 677,000 and 652,000 lives, respectively, for the three and six months ended February 28, 2003 to 1,061,000 and 1,019,000 lives, respectively, for the three and six months ended February 29, 2004. The increase in average actual lives under management was primarily due to existing health plan customers adding new programs, the signing of new health plan contracts during fiscal 2003 and 2004, the acquisition of StatusOne on September 5, 2003, and an increase in the ASO/PPO actual lives under management.

     The calculated average revenue per actual life managed under the Company’s contracts for the three and six months ended February 29, 2004 decreased 9.1% and 10.8%, respectively, compared to the same periods in the prior year, primarily as a result of changes in the mix of products purchased by customers; new contracts in fiscal 2004 with performance-based fees that will not be recognizable as revenue until data is sufficient to determine performance; a decrease in contract performance incentive bonus revenues of $1.5 million and $1.8 million, respectively, for the three and six months ended February 29, 2004 compared to the same periods in fiscal 2003; and renegotiated contracts with two of its largest customers, both of which eliminated performance risk (and the corresponding risk-based premium included in the fees) and incentive bonus revenue provisions. In addition to adding new programs and actual lives managed under these contracts, thereby creating additional economies of scale for the Company, the renegotiated contracts also lengthened the contract terms. The decreases in the average revenue per actual life for the three and six months ended February 29, 2004 were somewhat offset by the renegotiation of one contract at the beginning of fiscal 2004 for which the Company did not recognize any revenue in fiscal 2003 because it was unable to measure performance due to contracting and outcomes measurement provisions unique to this contract.

     The Company anticipates that total revenues for the remainder of fiscal 2004 will increase over fiscal 2003 revenues primarily as a result of additional actual lives under management for its existing and anticipated new health plan contracts and revenues from StatusOne. The increase may be somewhat offset by lower performance incentive bonus revenues, primarily resulting from the aforementioned renegotiated contracts.

Cost of Services

     Cost of services for the three and six months ended February 29, 2004 increased 49.2% and 44.0%, respectively, over the same periods in fiscal 2003 primarily due to higher staffing levels (including the employees of StatusOne) and other direct contract support costs associated with increases in the number of actual lives under management covered in the Company’s contracts. Cost of services as a percentage of revenues increased to 64.8% and 65.8%, respectively, for the three and six months ended February 29, 2004 compared to 61.9% and 63.7% for the same periods in fiscal 2003, primarily as a result of a $1.5 million and $1.8 million decrease in contract performance incentive bonus revenues recognized during the three and six months ended February 29, 2004, respectively, as well as the incremental costs of preparing for and servicing new contracts that have not yet begun or which have performance-based fees that have not been recognized as revenue because data is insufficient to determine performance.

     The Company anticipates that cost of services for the remainder of fiscal 2004 will increase over fiscal 2003 cost of services primarily as a result of increased operating staff required for expected

20

increases in the number of actual lives under management, the incremental cost of services attributable to StatusOne, increased indirect staff costs associated with the continuing development and implementation of its care enhancement services, and increases in information technology staff.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses as a percentage of revenues increased to 10.5% and 10.3%, respectively, for the three and six months ended February 29, 2004 compared to 9.5% and 9.9% for the same periods in fiscal 2003, primarily as a result of a $530,000 increase in stock-based compensation expense resulting from the grant, subject to stockholder approval, of stock options to two new directors of the Company in June 2003. Such approval was obtained at the Annual Meeting of Stockholders in January 2004, at which time the options were issued.

     The Company anticipates that selling, general and administrative expenses for the remainder of fiscal 2004 will increase over fiscal 2003 primarily as a result of increased sales and marketing expenses, increased support costs required for the Company’s increasing actual lives under management, and the incremental selling, general and administrative expenses attributable to StatusOne.

Depreciation and Amortization

     Depreciation and amortization expense for the three and six months ended February 29, 2004 increased 66.3% and 64.8%, respectively, over the same periods in fiscal 2003 primarily due to amortization on intangible assets related to the acquisition of StatusOne and an increase in depreciation and amortization expense associated with equipment, software development, and computer-related capital expenditures. These capital expenditures related to enhancements in the Company’s health plan information technology capabilities, the opening of one new care enhancement center, and the expansion of the corporate office and three existing care enhancement centers since February 28, 2003.

     The Company anticipates that depreciation and amortization expense for the remainder of fiscal 2004 will increase over fiscal 2003 primarily as a result of the additional amortization associated with intangible assets related to the StatusOne acquisition, additional capital expenditures associated with expected increases in the number of actual lives under management, and growth and improvement in the Company’s information technology capabilities.

Interest Expense

     Interest expense for the three and six months ended February 29, 2004 increased $0.8 million and $1.5 million, respectively, compared to the same periods in fiscal 2003. The increase in interest expense was primarily attributable to interest costs related to a $60 million term loan (the “Term Loan”) incurred in connection with the Company’s acquisition of StatusOne (described more fully in “Liquidity and Capital Resources” below), offset slightly by decreased fees associated with a decrease in outstanding letters of credit to support certain contractual requirements to repay fees in the event the Company does not perform at target levels and does not repay the fees due in accordance with the contract terms.

     The Company anticipates that interest expense for the remainder of fiscal 2004 will increase significantly over fiscal 2003 primarily as a result of interest costs related to the Company’s Term Loan.

21

Income Tax Expense

     The Company’s effective tax rate decreased to 39% and 40%, respectively, for the three and six months ended February 29, 2004 compared to 41% for the three and six months ended February 28, 2003, primarily as a result of the Company’s geographic mix of earnings, which involves the impact of state income taxes, and other factors. The differences between the statutory federal income tax rate of 34% and the Company’s effective tax rate are due primarily to the impact of state income taxes and certain non-deductible expenses for income tax purposes.

Liquidity and Capital Resources

     Operating activities for the six months ended February 29, 2004 generated $8.6 million in cash flow from operations compared to $13.6 million for the six months ended February 28, 2003. The decrease in operating cash flow resulted primarily from the timing of cash collections on accounts receivable due to an administrative delay in February 2004 in the monthly payment from one customer and a decrease in cash collections recorded to contract billings in excess of earned revenue, offset by increases in adjustments to net income attributable to stock option exercise tax benefits and depreciation and amortization. Investing activities during the six months ended February 29, 2004 used $68.8 million in cash, which consisted of the acquisition of StatusOne and the purchase of property and equipment primarily associated with enhancements in the Company’s information technology capabilities and the development of two care enhancement centers in fiscal 2004. Financing activities for the six months ended February 29, 2004 provided $53.4 million in cash primarily due to net proceeds from the issuance of debt related to the acquisition of StatusOne and the exercise of stock options, offset by payments on long-term debt and debt issuance costs.

     On September 5, 2003, in conjunction with the acquisition of StatusOne, the Company entered into a new revolving credit and term loan agreement (the “Credit Agreement”) with eight financial institutions that replaced its previous credit agreement dated November 22, 2002. The Credit Agreement provides the Company with up to $100 million in borrowing capacity, including a $60 million Term Loan and a $40 million revolving line of credit, under a credit facility that expires on August 31, 2006. The Company is required to make principal installment payments of $3 million at the end of each fiscal quarter beginning on November 30, 2003 and ending with a $27 million balloon payment due on August 31, 2006. Borrowings under the Credit Agreement bear interest, at the Company’s option, at the prime rate plus a spread of 0.5% to 1.25% or LIBOR plus a spread of 2.0% to 2.75%, or a combination thereof. Substantially all of the Company’s and its subsidiaries’ assets are pledged as collateral for any borrowings under the credit facility. The Credit Agreement also contains various financial covenants, provides for a fee ranging between 0.375% and 0.5% of unused commitments, prohibits the payment of dividends, and limits the amount of repurchases of the Company’s common stock. On September 16, 2003, the Company entered into an interest rate swap agreement for the management of interest rate exposure. By entering into the interest rate swap agreement the Company effectively converted $40 million of floating rate debt to a fixed obligation with an interest rate of 4.99%.

     As of February 29, 2004, there was one letter of credit outstanding under the Credit Agreement for $0.4 million to support the Company’s requirement to repay fees under one health plan contract in the event the Company does not perform at established target levels and does not repay the fees due in accordance with the terms of the contract. The Company has never had a draw under an outstanding letter of credit.

22

     Pursuant to an earn-out agreement (the “Earn-Out Agreement”) associated with the acquisition of StatusOne, the Company is obligated to pay the former stockholders of StatusOne up to $12.5 million in additional purchase price, payable either in cash or common stock at the Company’s discretion, if StatusOne achieves certain revenue targets during the one-year period immediately following the acquisition.

     The Company believes that cash flow from operating activities, its available cash and available credit under its credit agreement will continue to enable the Company to meet its contractual obligations, including the $12.5 million contingent consideration under the StatusOne Earn-Out Agreement, and to fund the current level of growth in its operations, including the planned opening of two care enhancement centers in fiscal 2004. However, to the extent that the expansion of the Company’s operations requires significant additional financing resources, such as capital expenditures for technology improvements, additional care enhancement centers and/or the issuance of letters of credit or other forms of financial assurance to guarantee the Company’s performance under the terms of new contracts, or to the extent the Company is required to refund performance-based fees pursuant to contract terms, the Company may need to raise additional capital through an expansion of the Company’s existing credit facility and/or issuance of debt or equity. The Company’s ability to arrange such financing may be limited and, accordingly, the Company’s ability to expand its operations could be restricted. In addition, should contract development accelerate or should acquisition opportunities arise that would enhance the Company’s planned expansion of its operations, the Company may need to issue additional debt or equity to provide the funding for these increased growth opportunities or may issue equity in connection with future acquisitions or strategic alliances. No assurance can be given that the Company would be able to issue additional debt or equity on terms that would be acceptable to the Company.

23

Material Commitments

     The following schedule summarizes the Company’s contractual cash obligations at February 29, 2004. It does not include the $12.5 million contingent consideration under the StatusOne Earn-Out Agreement.

	Twelve Months Ended February 28/29,
							2010 and
(In $000s)	2005		2006 - 2007		2008 - 2009		After		Total
Long-term debt (1)	$	12,404	$	42,320	$	314	$	—	$	55,038
Deferred compensation plan payments		714		1,438		628		1,971		4,751
Operating lease obligations		5,277		9,971		6,443		6,171		27,862
Other contractual cash obligations (2)		700		1,225		—		—		1,925
Total contractual cash obligations	$	19,095	$	54,954	$	7,385	$	8,142	$	89,576

(1)	Long-term debt consists of principal payments due under the Credit Agreement and capital lease obligations, including the current portion, and does not include future cash obligations for interest associated with the Company’s outstanding indebtedness.
(2)	Other contractual cash obligations represent cash payments in connection with the Company’s funding an industry-wide Outcomes Evaluation Program independently evaluated by Johns Hopkins University and Health System.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company is subject to market risk related to interest rate changes, primarily as a result of its Credit Agreement, which bears interest based on floating rates. Borrowings under the Credit Agreement bear interest, at the Company’s option, at the prime rate plus a spread of 0.5% to 1.25% or LIBOR plus a spread of 2.0% to 2.75%, or a combination thereof. In order to manage its interest rate exposure, as described under “Liquidity and Capital Resources” in Item 2, the Company entered into an interest rate swap agreement, effectively converting $40 million of floating rate debt to a fixed obligation with an interest rate of 4.99%. The Company does not anticipate any material changes in its primary market risk exposures or how those exposures are managed in fiscal 2004. The Company does not execute transactions or hold derivative financial instruments for trading purposes.

     A one-point interest rate change on the variable rate debt outstanding at February 29, 2004 would have resulted in interest expense fluctuating approximately $91,000 for the six months ended February 29, 2004.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of February

24

29, 2004. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures effectively and timely provide them with material information relating to the Company and its consolidated subsidiaries required to be disclosed in the reports the Company files or submits under the Exchange Act.

25

Part II

Item 1. Legal Proceedings.

     In June 1994, a “whistle blower” action was filed on behalf of the United States government by a former employee dismissed by the Company in February 1994. The case is currently pending before the United States District Court for the District of Columbia. The employee sued American Healthways, Inc. (“AMHC”) and a wholly-owned subsidiary of AMHC, American Healthways Services, Inc. (“AHSI”), as well as certain named and unnamed medical directors and one named client hospital, West Paces Medical Center (“WPMC”), and other unnamed client hospitals. AMHC has since been dismissed as a defendant; however, the case is still pending against AHSI. In addition, WPMC has agreed to settle the claims filed against it subject to the court’s approval as part of a larger settlement agreement that WPMC’s parent organization, HCA Inc., has reached with the United States government. The complaint alleges that AHSI, the client hospitals and the medical directors violated the federal False Claims Act by entering into certain arrangements that allegedly violated the federal anti-kickback statute and provisions of the Social Security Act prohibiting physician self-referrals. Although no specific monetary damage has been claimed, the plaintiff, on behalf of the federal government, seeks treble damages plus civil penalties and attorneys’ fees. The plaintiff also has requested an award of 30% of any judgment plus expenses. The Office of the Inspector General of the Department of Health and Human Services determined not to intervene in the litigation, and the complaint was unsealed in February 1995. The case is still in the discovery stage and has not yet been set for trial.

     The Company believes that its operations have been conducted in full compliance with applicable statutory requirements. Although there can be no assurance that the results of the matter would not have a material adverse impact on the Company, nor can an estimate of possible loss be made, the Company believes that the resolution of issues, if any, which may be raised by the government and the resolution of the civil litigation would not have a material adverse effect on the Company’s financial position or results of operations except to the extent that the Company incurs material legal expenses associated with its defense of this matter and the civil suit.

Item 2. Changes in Securities and Use of Proceeds.

     Not Applicable.

Item 3. Defaults Upon Senior Securities.

     Not Applicable.

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

(a)	The Annual Meeting of Stockholders of American Healthways, Inc. was held on January 21, 2004.
(c)	The following proposals were voted upon at the Annual Meeting of Stockholders:

(i) Nominations to elect Frank A. Ehmann, William C. O’Neil, Jr., and Ben R. Leedle, Jr. as Directors of the Company. The results of the election of the above-mentioned nominees were as follows:

26

	For		Against		Withheld
Frank A. Ehmann		13,826,774		—		489,995
William C. O’Neil, Jr.		13,939,206		—		377,563
Ben R. Leedle, Jr.		14,054,377		—		262,392

(ii) Approval to amend the Company’s 1996 Stock Incentive Plan (the “1996 Plan”) to increase the number of shares of the Company’s common stock available for issuance under the 1996 Plan by 500,000 shares and to provide that future awards to Outside Directors be in the form of non-qualified stock options instead of restricted stock. The voting results of the above-mentioned amendment were as follows:

For	Against		Withheld		Broker No Vote
8,043,422		3,404,612		16,555		2,852,180

(iii) Approval to amend the Company’s Restated Certificate of Incorporation, as amended, to increase the number of authorized shares from 45,000,000 to 80,000,000, of which 75,000,000 shall be common stock and 5,000,000 shares shall be preferred stock. The voting results were as follows:

For	Against		Withheld
13,729,369		576,638		10,762

Item 5. Other Information.

     The Nominating and Corporate Governance Committee will consider nominees for the Board of Directors recommended by stockholders if stockholders comply with the advance notice provisions contained in the Company’s Restated Bylaws. The Committee has adopted a policy which requires a nomination by a stockholder to be delivered to the chairman of the Nominating and Corporate Governance Committee and contain certain information concerning the nominee, including a detailed listing of educational and professional qualifications and an affidavit signed by the proposed nominee indicating a willingness to serve, if elected.

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

(a) Exhibits

3.1	Restated Certificate of Incorporation for American Healthways, Inc., as amended
3.2	Bylaws, as amended
11	Earnings Per Share Reconciliation
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Ben R. Leedle, Jr., President and Chief Executive Officer
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Mary A. Chaput, Executive Vice President and Chief Financial Officer

27

32.1 Certification Pursuant to 18 U.S.C section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by Ben R. Leedle, Jr., President and Chief Executive Officer and Mary A. Chaput, Executive Vice President and Chief Financial Officer

(b)	Reports on Form 8-K
	No Current Reports on Form 8-K were filed with the SEC during the quarter ended February 29, 2004. However, the following Current Reports on Form 8-K were furnished to the SEC during the quarter ended February 29, 2004.

A Current Report on Form 8-K was furnished on December 5, 2003 reporting a live broadcast on the Internet of the first quarter conference call to analysts.

A Current Report on Form 8-K was furnished on December 18, 2003 reporting earnings results for the first quarter ended November 30, 2003.

A Current Report on Form 8-K was furnished on December 22, 2003 reporting the Company’s participation in the Sixth Annual Needham Growth Conference hosted by Needham & Company, Inc. and the related live broadcast on the Internet of the Company’s presentation.

A Current Report on Form 8-K was furnished on January 9, 2004 reporting the Company’s participation in the 22nd Annual Health Care Conference hosted by JPMorgan and the related live broadcast on the Internet of the Company’s presentation.

28

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.

		American Healthways, Inc.
		(Registrant)
Date April 13, 2004	By	/s/ Mary A. Chaput
		Mary A. Chaput
		Executive Vice President Chief Financial Officer (Principal Financial Officer)
Date April 13, 2004	By	/s/ Alfred Lumsdaine
		Alfred Lumsdaine
		Senior Vice President and
		Controller
		(Principal Accounting Officer)

29

EX-3.1

                                                                     Exhibit 3.1


                RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED
                                       OF
                            AMERICAN HEALTHWAYS, INC.

                 (Originally incorporated on September 2, 1981)

FIRST: The name of the corporation (hereinafter called the "Corporation") is
American Healthways, Inc.

SECOND: The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle. The
name of the registered agent of the Corporation at such address is The
Corporation Trust Company.

THIRD: The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.

FOURTH: The aggregate number of shares of capital stock the Corporation is
authorized to issue is 80,000,000 shares, of which 75,000,000 shares shall be
Common Stock, par value $.001 per share (the "Common Stock"), and 5,000,000
shares shall be preferred stock, par value $.001 per share (the "Preferred
Stock"), of which 750,000 shares are designated as Series A Preferred Stock (the
"Series A Preferred Stock").

         The designations and the powers, preferences and relative,
participating, optional or other rights of the capital stock and the
qualifications, limitations or restrictions thereof are as follows:

A.       COMMON STOCK PROVISIONS

         1.       Voting Rights.

         Except as otherwise required by law or expressly provided herein, the
holder of each share of Common Stock shall have one vote on each matter
submitted to a vote of the stockholders of the Corporation.

         2.       Dividend Rights.

         Subject to the provisions of law, the holders of the Common Stock shall
be entitled to receive dividends at such times and in such amounts as may be
determined by the Board of Directors of the Corporation.




         3.       Liquidation Rights.

         In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Corporation and the
preferential amounts to which the holders of any outstanding shares of Preferred
Stock shall be entitled upon dissolution, liquidation, or winding up, the
holders of the Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation.

B.       PREFERRED STOCK PROVISIONS

         1.       Designation.

         The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of the
State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
certificate or certificates establishing the series of Preferred Stock.

         2.       Liquidation Rights.

         If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution to holders
of shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts payable with
respect thereto.

         3.       Series A Preferred Stock.

          Pursuant to the authority vested in the Board of Directors in
accordance with the provisions of this Article Fourth of the Restated
Certificate of Incorporation, the Board of Directors does hereby create,
authorize and provide for the issuance of the Series A Preferred Stock out of
the class of 5,000,000 shares of Preferred Stock, having the voting powers,
designation, relative, participating, optional and other special rights,
preferences, and qualifications, limitations and restrictions thereof that are
set forth as follows:

                (a) Designation and Amount. The shares of such series shall be
         designated as Series A Preferred Stock ("Series A Preferred Stock") and
         the number of shares constituting such series shall be 150,000. Such
         number of shares may be adjusted by appropriate action of the Board of
         Directors.



                                       2


                (b) Dividends and Distributions. Subject to the prior and
         superior rights of the holders of any shares of any other series of
         Preferred Stock or any other shares of Preferred Stock of the
         Corporation ranking prior and superior to the shares of Series A
         Preferred Stock with respect to dividends, each holder of one
         one-hundredth (1/100) of a share (a "Unit") of Series A Preferred Stock
         shall be entitled to receive, when, as and if declared by the Board of
         Directors out of funds legally available for that purpose, dividends at
         the same rate as dividends are paid with respect to the Common Stock.
         In the event that the Corporation shall at any time after June 19, 2000
         (the "Rights Dividend Declaration Date") (i) declare or pay any
         dividend on outstanding shares of Common Stock payable in shares of
         Common Stock; (ii) subdivide outstanding shares of Common Stock; or
         (iii) combine outstanding shares of Common Stock into a smaller number
         of shares, then in each such case the amount to which the holder of a
         Unit of Series A Preferred Stock was entitled immediately prior to such
         event pursuant to the preceding sentence shall be adjusted by
         multiplying such amount by a fraction the numerator of which shall be
         the number of shares of Common Stock that are outstanding immediately
         after such event and the denominator of which shall be the number of
         shares of Common Stock that were outstanding immediately prior to such
         event.

                (c) Voting Rights. The holders of Units of Series A Preferred
         Stock shall have the following voting rights:

                        (i) Subject to the provision for adjustment hereinafter
                set forth, each Unit of Series A Preferred Stock shall entitle
                the holder thereof to one vote on all matters submitted to a
                vote of the stockholders of the Corporation. In the event the
                Corporation shall at any time after the Rights Dividend
                Declaration Date (i) declare any dividend on outstanding shares
                of Common Stock payable in shares of Common Stock; (ii)
                subdivide outstanding shares of Common Stock; or (iii) combine
                the outstanding shares of Common Stock into a smaller number of
                shares, then in each such case the number of votes per Unit to
                which holders of Units of Series A Preferred Stock were entitled
                immediately prior to such event shall be adjusted by multiplying
                such number by a fraction the numerator of which shall be the
                number of shares of Common Stock that are outstanding
                immediately after such event and the denominator of which shall
                be the number of shares of Common Stock that were outstanding
                immediately prior to such event.

                        (ii) Except as otherwise provided herein or by law, the
                holders of Units of Series A Preferred Stock and the holders of
                shares of Common Stock shall vote together as one class on all
                matters submitted to a vote of stockholders of the Corporation.

                        (iii) Except as set forth herein or required by law,
                holders of Units of Series A Preferred Stock shall have no
                special voting rights and their consent shall not be required
                (except to the extent they are entitled to vote with holders of



                                       3


                shares of Common Stock as set forth herein) for the taking of
                any corporate action.

                (d) Reacquired Shares. Any Units of Series A Preferred Stock
         purchased or otherwise acquired by the Corporation in any manner
         whatsoever shall be retired and cancelled promptly after the
         acquisition thereof. All such Units shall, upon their cancellation,
         become authorized but unissued Units of Series A Preferred Stock to be
         created by resolution or resolutions of the Board of Directors, subject
         to the conditions and restrictions on issuance set forth herein.

                (e) Liquidation. Upon any liquidation, dissolution or winding
         up of the Corporation, whether voluntary or involuntary, the holders of
         Units of Series A Preferred Stock shall be entitled to share in any
         assets remaining ratably with the holders of the Common Stock. In the
         event the Corporation shall at any time after the Rights Dividend
         Declaration Date (i) increase by way of stock split or similar
         transaction the number of outstanding shares of Common Stock; (ii)
         subdivide the outstanding shares of Common Stock; or (iii) combine the
         outstanding shares of Common Stock into a smaller number of shares,
         then in each such case the aggregate amount to which holders of Units
         of Series A Preferred Stock were entitled prior to such event shall be
         adjusted by multiplying such amount by a fraction, the numerator of
         which shall be the number of shares of Common Stock that are
         outstanding immediately after such event and the denominator of which
         shall be the number of shares of Common Stock that were outstanding
         immediately prior to such event.

                (f) Share Exchange, Merger, Etc. In case the Corporation shall
         enter into any share exchange, merger, combination or other transaction
         in which the shares of Common Stock are exchanged for or converted into
         other stock or securities, cash and/or any other property, then in any
         such case Units of Series A Preferred Stock shall at the same time be
         similarly exchanged for or converted into an amount per Unit (subject
         to the provision for adjustment hereinafter set forth) equal to the
         aggregate amount of stock, securities, cash and/or any other property
         (payable in kind), as the case may be, into which or for which each
         share of Common Stock is converted or exchanged. In the event the
         Corporation shall at any time after the Rights Dividend Declaration
         Date (i) declare any dividend on outstanding shares of Common Stock
         payable in shares of Common Stock; (ii) subdivide outstanding shares of
         Common Stock; or (iii) combine outstanding shares of Common Stock into
         a smaller number of shares, then in each such case the amount set forth
         in the immediately preceding sentence with respect to the exchange or
         conversion of Units of Series A Preferred Stock shall be adjusted by
         multiplying such amount by a fraction the numerator of which shall be
         the number of shares of Common Stock that are outstanding immediately
         after such event and the denominator of which shall be the number of
         shares of Common Stock that were outstanding immediately prior to such
         event.


                                       4


                (g) Redemption. The Units of Series A Preferred Stock shall
         not be redeemable at the option of the Corporation or any holder
         thereof. Notwithstanding the foregoing sentence of this Section, the
         Corporation may acquire Units of Series A Preferred Stock in any other
         manner permitted by law and the Certificate of Incorporation or Bylaws
         of the Corporation.

                (h) Ranking. The Units of Series A Preferred Stock shall rank
         junior to all other series of the Preferred Stock and to any other
         class of Preferred Stock that hereafter may be issued by the
         Corporation as to the payment of dividends and the distribution of
         assets, unless the terms of any such series or class shall provide
         otherwise.

                (i) Amendment. The Certificate of Incorporation, including
         without limitation the provisions hereof, shall not hereafter be
         amended, either directly or indirectly, or through merger or share
         exchange with another corporation, in any manner that would alter or
         change the powers, preferences or special rights of the Series A
         Preferred Stock so as to affect the holders thereof adversely without
         the affirmative vote of the holders of a majority or more of the
         outstanding Units of Series A Preferred Stock, voting separately as a
         class.

                (j) Fractional Shares. The Series A Preferred Stock may be
         issued in Units or other fractions of a share, which Units or fractions
         shall entitle the holder, in proportion to such holder's fractional
         shares, to exercise voting rights, receive dividends, participate in
         distributions and to have the benefit of all other rights of holders of
         Series A Preferred Stock.

FIFTH:

         (a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. Except as otherwise fixed by or
pursuant to the provisions of Article FOURTH hereof relating to the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional directors under
specified circumstances, the number of directors shall be fixed by or in the
manner provided in the by-laws of the Corporation.

         (b) The directors, other than those who may be elected by the holders
of any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly equal in
number as possible, of one-third of the total number of directors constituting
the entire Board of Directors. At each annual meeting of stockholders,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible.



                                       5


         (c) A director shall hold office until the annual meeting of
stockholders for the year in which his or her term expires and until his or her
successor shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. Any additional
director of any class appointed or elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director.

         (d) Elections of directors need not be by written ballot unless the
by-laws of the Corporation so provide.

SIXTH: In furtherance and not in limitation of the powers conferred by statute
and unless otherwise provided herein, the Board of Directors, by a majority vote
taken at any meeting at which a quorum is present, is expressly authorized to
make, alter or repeal the by-laws of the Corporation.

SEVENTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that this provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv)
for any transaction from which the director derived an improper personal
benefit.

EIGHTH:

         (a) Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director or an officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section (c) of this Article EIGHTH with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a



                                       6


proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.

         (b) Right to Advancement of Expenses. The right to indemnification
conferred in Section (a) of this Article EIGHTH shall include the right to be
paid by the Corporation the expenses (including attorneys' fees) incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section (b) or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections (a) and (b) of this Article EIGHTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.

         (c) Right of Indemnitee to Bring Suit. If a claim under Section (a) or
(b) of this Article EIGHTH is not paid in full by the Corporation within sixty
(60) days after a written claim has been received by the Corporation, except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the



                                       7


burden of proving that the indemnitee is not entitled to be indemnified, or to
such advancement of expenses, under this Article EIGHTH or otherwise shall be on
the Corporation.

         (d) Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Article EIGHTH shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's Restated Certificate of Incorporation, by-laws,
agreement, vote of stockholders or disinterested directors or otherwise.

         (e) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.

         (f) Indemnification of Employees and Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article EIGHTH with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.

NINTH: No amendment to or repeal of Article SEVENTH or EIGHTH of this Restated
Certificate of Incorporation shall apply to or have any effect on the rights of
any individual referred to in Article SEVENTH or EIGHTH for or with respect to
acts or omissions of such individual occurring prior to such amendment or
repeal.

TENTH:

         A.       Vote Required For Certain Business Combinations

         1.       In addition to any affirmative vote required by law or this
Restated Certificate of Incorporation, and except as otherwise expressly
provided in Section B of this Article TENTH:

                  (a) any merger or consolidation of the Corporation or any
         Subsidiary (as hereinafter defined) with (i) any Interested Stockholder
         (as hereinafter defined) or (ii) any other corporation (whether or not
         itself an Interested Stockholder) which is, or after such merger or
         consolidation would be, an Affiliate (as hereinafter defined) of an
         Interested Stockholder; or

                  (b) any sale, lease, exchange, mortgage, pledge, transfer or
         other disposition (in one transaction or a series of transactions) to
         or with any Interested Stockholder or any Affiliate of any Interested
         Stockholder of any assets of the Corporation or any Subsidiary having
         an aggregate Fair Market Value of $30,000,000 or more; or

                  (c) the issuance or transfer by the Corporation or any
         Subsidiary (in one transaction or a series of transactions) of any
         securities of the Corporation or any



                                       8


         Subsidiary to any Interested Stockholder or any Affiliate of any
         Interested Stockholder in exchange for cash, securities or other
         property (or a combination thereof) having an aggregate Fair Market
         Value of $10,000,000 or more; or

                  (d) the adoption of any plan or proposal for the liquidation
         or dissolution of the Corporation proposed by or on behalf of an
         Interested Stockholder or any Affiliate of any Interested Stockholder;
         or

                  (e) any reclassification of securities (including any reverse
         stock split), or recapitalization of the Corporation, or any merger or
         consolidation of the Corporation with any of its Subsidiaries or any
         other transaction (whether or not with or into or otherwise involving
         an Interested Stockholder) which has the effect, directly or
         indirectly, of increasing the proportionate share of the outstanding
         shares of any class of equity or convertible securities of the
         Corporation or any Subsidiary which is directly or indirectly owned by
         any Interested Stockholder or any Affiliate of any Interested
         Stockholder;

shall require the affirmative vote of the holders of at least 80% of the voting
power of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
excluding shares held by the Interested Stockholder, voting together as a single
class (it being understood that for purposes of this Article TENTH, each share
of the Voting Stock shall have the number of votes granted to it pursuant to
Article FOURTH of this Restated Certificate of Incorporation). Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.

         2.       The term "Business Combination" as used in this Article TENTH
shall mean any transaction which is referred to in any one or more of
subparagraphs (a) through (e) of paragraph 1 of this Section A.

         B.       When Higher Vote Is Not Required. The provisions of Section A
of this Article TENTH shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such affirmative
vote as is required by law and any other provision of this Restated Certificate
of Incorporation, if all of the conditions specified in either of the following
paragraphs 1 or 2 are met:

         1.       The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter defined).

         2.       All of the following conditions shall have been met:

                  (a) The aggregate amount of the cash and the Fair Market Value
         (as hereinafter defined) as of the date of the consummation of the
         Business Combination of consideration other than cash to be received
         per share by holders of Common Stock in such Business Combination shall
         be at least equal to the higher of the following:



                                       9


                           I. (if applicable) the Highest Per Share Price (as
                  hereinafter defined) (including the brokerage commissions,
                  transfer taxes and soliciting dealers' fees) paid by the
                  Interested Stockholder for any shares of Common Stock acquired
                  by it (X) within the two year period immediately prior to the
                  first public announcement of the proposal of the Business
                  Combination (the "Announcement Date") or (Y) in the
                  transaction in which it became an Interested Stockholder,
                  whichever is higher; and

                           II. the Fair Market Value per share of Common Stock
                  on the Announcement Date or on the date on which the
                  Interested Stockholder became an Interested Stockholder (such
                  latter date is referred to in this Article TENTH as the
                  "Determination Date"), whichever is higher.

                  (b) The aggregate amount of the cash and the Fair Market Value
         as of the date of the consummation of the Business Combination of
         consideration other than cash to be received per share by holders of
         shares of any class of outstanding Voting Stock other than Common Stock
         shall be at least equal to the highest of the following (it being
         intended that the requirements of this subparagraph (b) shall be
         required to be met with respect to every such class of outstanding
         Voting Stock, whether or not the Interested Stockholder has previously
         acquired any shares of a particular class of Voting Stock):

                           I. (if applicable) the Highest Per Share Price (as
                  hereinafter defined) (including any brokerage commissions,
                  transfer taxes and soliciting dealers' fees) paid by the
                  Interested Stockholder for any shares of such class of Voting
                  Stock acquired by it (X) within the two-year period
                  immediately prior to the Announcement Date or (Y) in the
                  transaction in which it became an Interested Stockholder,
                  whichever is higher;

                           II. (if applicable) the highest preferential amount
                  per share to which the holders of shares of such class of
                  Voting Stock are entitled in the event of any voluntary or
                  involuntary liquidation, dissolution or winding up of the
                  Corporation; and

                           III. the Fair Market Value per share of such class of
                  Voting Stock on the Announcement Date or on the Determination
                  Date, whichever is higher.

                  (c) The consideration to be received by holders of a
         particular class of outstanding Voting Stock (including Common Stock)
         shall be in cash or in the same form as the Interested Stockholder has
         previously paid for shares of such class of Voting Stock. If the
         Interested Stockholder has paid for shares of any class of Voting Stock
         with varying forms of consideration, the form of consideration for such
         class of Voting Stock shall be either cash or the form used to acquire
         the largest number of shares of such class of Voting Stock previously
         acquired by it.


                                       10


                  (d) After such Interested Stockholder has become an Interested
         Stockholder and prior to the consummation of such Business Combination:
         (i) except as approved by a majority of the Disinterested Directors,
         there shall have been no failure to declare and pay at the regular date
         therefor any full quarterly dividends (whether or not cumulative) on
         any outstanding Preferred Stock; (ii) there shall have been (x) no
         reduction in the annual rate of dividends paid on the Common Stock
         (except as necessary to reflect any subdivision of the Common Stock),
         except as approved by a majority of the Disinterested Directors, and
         (y) an increase in such annual rate of dividends as necessary to
         reflect any reclassification (including any reverse stock split),
         recapitalization, reorganization or any similar transaction which has
         the effect of reducing the number of outstanding shares of the Common
         Stock, unless the failure so to increase such annual rate is approved
         by a majority of the Disinterested Directors; and (iii) such Interested
         Stockholder shall have not become the beneficial owner of any
         additional shares of Voting Stock except as part of the transaction
         which results in such Interested Stockholder becoming an Interested
         Stockholder.

                  (e) After such Interested Stockholder has become an Interested
         Stockholder, such Interested Stockholder shall not have received the
         benefit, directly or indirectly (except proportionately as a
         stockholder), of any loans, advances, guarantees, pledges or other
         financial assistance or any tax credits or other tax advantages
         provided by the Corporation, whether in anticipation of or in
         connection with such Business Combination or otherwise.

                  (f) A proxy or information statement describing the proposed
         Business Combination and complying with the requirements of the
         Securities Exchange Act of 1934, as amended ("Exchange Act"), and the
         rules and regulations thereunder (or any subsequent provisions
         replacing the Exchange Act, rules or regulations) shall be mailed to
         public stockholders of the Corporation at least 30 days prior to the
         consummation of such Business Combination (whether or not such proxy or
         information statement is required to be mailed pursuant to the Exchange
         Act or subsequent provisions).

         C.       Certain Definitions.  For the purposes of this Article TENTH:

         1.       A "person" shall mean any individual, firm, corporation or
other entity.

         2.       "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:

                  (a) is the beneficial owner, directly or indirectly, of more
         than 20% of the voting power of the outstanding Voting Stock; or



                                       11


                  (b) is an Affiliate of the Corporation and at any time within
         the two-year period immediately prior to the date in question was the
         beneficial owner, directly or indirectly, within the meaning of Rule
         13d-3 under the Exchange Act, of 20% or more of the voting power of the
         then outstanding Voting Stock; or

                  (c) is an assignee of or has otherwise succeeded to any shares
         of Voting Stock which were at any time within the two-year period
         immediately prior to the date in question beneficially owned by any
         Interested Stockholder, if such assignment or succession shall have
         occurred in the course of a transaction or series of transactions not
         involving a public offering within the meaning of the Securities Act of
         1933.

         3.       A person shall be a "beneficial owner" of any Voting Stock:

                  (a) which such person or any of its Affiliates or Associates
         (as hereinafter defined) beneficially owns, directly or indirectly,
         within the meaning of Rule 13d-3 under the Exchange Act; or

                  (b) which such person or any of its Affiliates or Associates
         has (i) the right to acquire (whether such right is exercisable
         immediately or only after the passage of time), pursuant to any
         agreement, arrangement or understanding or upon the exercise of
         conversion rights, exchange rights, warrants or options, or otherwise,
         or (ii) the right to vote pursuant to any agreement, arrangement or
         understanding (but neither such person nor any such Affiliate or
         Associate shall be deemed to be the beneficial owner of any shares of
         Voting Stock solely by reason of a revocable proxy granted for a
         particular meeting of stockholders, pursuant to a public solicitation
         of proxies for such meeting, and with respect to which shares neither
         such person nor any such Affiliate or Associate is otherwise deemed the
         beneficial owner); or

                  (c) which are beneficially owned, directly or indirectly,
         within the meaning of Rule 13d-3 under the Exchange Act, by any other
         person with which such person or any of its Affiliates or Associates
         has any agreement, arrangement or understanding for the purposes of
         acquiring, holding, voting (other than solely by reason of a revocable
         proxy as described in subparagraph (b) of this paragraph (3)) or
         disposing of any shares of Voting Stock;

provided, however, that in the case of any employee stock ownership or similar
plan of the Corporation or of any Subsidiary in which the beneficiaries thereof
possess the right to vote any shares of Voting Stock held by such plan, no such
plan nor any trustee with respect thereto (nor any Affiliate of such trustee),
solely by reason of such capacity of such trustee, shall be deemed, for any
purposes hereof, to beneficially own any shares of Voting Stock held under any
such plan.

         4.       For the purposes of determining whether a person is an
Interested Stockholder pursuant to paragraph 2 of this Section C, the number of
shares of Voting Stock deemed to be



                                       12


outstanding shall include shares deemed owned by such person through application
of paragraph 3 of this Section C but shall not include any other shares of
Voting Stock which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.

         5.       "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.

         6.       "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph 2 of this Section C, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.

         7.       "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Stockholder and was a member
of the Board of Directors prior to the time that the Interested Stockholder
became an Interested Stockholder, and any successor of a Disinterested Director
who is unaffiliated with the Interested Stockholder and is recommended to
succeed a Disinterested Director by a majority of Disinterested Directors then
on the Board of Directors.

         8.       "Fair Market Value" means: (a) in the case of stock, the
highest closing sale price during the 30-day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite
Tape, on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which such stock is listed, or, if such stock is not listed
on any such exchange, the highest closing bid quotation with respect to a share
of such stock during the 30-day period preceding the date in question on the
National Association of Securities Dealers Automated Quotation System or any
system then in use, or if no such quotations are available, the fair market
value on the date in question of a share of such stock as determined by the
Board of Directors in good faith, in each case with respect to any class of
stock, appropriately adjusted for any dividend or distribution in shares of such
stock or any stock split or reclassification of outstanding shares of such stock
into a greater number of shares of such stock or any combination or
reclassification of outstanding shares of such stock into a smaller number of
shares of such stock; and (b) in the case of property other than cash or stock,
the fair market value of such property on the date in question as determined by
the Board of Directors in good faith.

         9.       References to "Highest Per Share Price" shall in each case
with respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock.



                                       13


         10.      In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash" as used in
subparagraphs (a) and (b) of paragraph 2 of Section B of this Article TENTH
shall include the shares of Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.

         D.       Powers of the Board of Directors. A majority of the directors
of the Corporation shall have the power and duty to determine for the purposes
of this Article TENTH, on the basis of information known to them after
reasonable inquiry, (a) whether a person is an Interested Stockholder, (b) the
number of shares of Voting Stock beneficially owned by any person, (c) whether a
person is an Affiliate or Associate of another and (d) whether the assets which
are the subject of any Business Combination have, an aggregate Fair Market Value
of $30,000,000 or more, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $10,000,000 or more.

         E.       No Effect on Fiduciary Obligations of Interested Stockholders.
Nothing contained in this Article TENTH shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.

         F.       Amendment or Repeal. Notwithstanding any other provisions of
this Restated Certificate of Incorporation or the by-laws of the Corporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
this Restated Certificate of Incorporation or the by-laws of the Corporation),
the affirmative vote of the holders of 80% or more of the outstanding Voting
Stock, excluding shares held by an Interested Stockholder, voting together as a
single class, shall be required to amend or repeal, or adopt any provisions
inconsistent with this Article TENTH.


ELEVENTH: No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent, in writing, without a
meeting, to the taking of any action is specifically denied.


                                       14



TWELFTH: The Corporation shall not be governed by the provisions of Section 203
of the General Corporation Law of the State of Delaware.

         IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates, integrates and amends the provisions of the Certificate of
Incorporation of the Corporation, and which has been duly adopted in accordance
with Section 242 of the General Corporation Law of the State of Delaware, has
been executed by its President and attested by its Secretary, this ____ day of
August, 1991.

                                             AMERICAN HEALTHWAYS, INC.


                                             By: /s/ Thomas G. Cigarran
                                                 -------------------------------
                                                     President

ATTEST:

   /s/ Henry D. Herr
- -----------------------------
Henry D. Herr
Secretary





                                       15

EX-3.2

                                                                     EXHIBIT 3.2

                          AMENDED AND RESTATED BYLAWS
                                       OF
                           AMERICAN HEALTHWAYS, INC.

                                   ARTICLE I.

                                    OFFICES

         The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The Corporation may also
have offices at such other places both within and without the State of Delaware
as the Board of Directors from time to time determine or the business of the
Corporation may require.

                                  ARTICLE II.

                                  STOCKHOLDERS

         2.1      Annual Meeting.

         An annual meeting of the stockholders of the Corporation shall be held
on such date as may be determined by the Board of Directors. The business to be
transacted at such meeting shall be the election of directors and such other
business as shall be properly brought before the meeting.

         2.2      Notice of Nominations and Other Business at Annual Meetings.

                  (a)      Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (1) pursuant
to the Corporation's notice of meeting, (2) by or at the direction of the Board
of Directors or (3) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of the notice provided for in this Section,




who is entitled to vote at the meeting and who complied with the notice
procedures set forth in this Section.

                  (b)      For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (3) of
paragraph (a) of this Section, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than ninety (90) days nor more
than one hundred twenty (120) days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than thirty (30) days or delayed
by more than sixty (60) days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 120th day
prior to such annual meeting and not later than the close of business on the
later of the 90th day prior to such annual meeting or the 10th day following
the day on which public announcement of the date of such meeting is first made.
In no event shall the public announcement of an adjournment of an annual
meeting commence a new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (1) as to each
person whom the stockholder proposes to nominate for election or reelection as
a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (2) as to any other business
that the stockholder


                                       2


proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (3) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.

                  (c)      Notwithstanding anything in the second sentence of
paragraph (b) of this Section to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least one hundred (100) days prior to the first anniversary of
the preceding year's annual meeting, a stockholder's notice required by this
Section shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the Corporation.

                  (d)      Only such persons who are nominated in accordance
with the procedures set forth in this Section 2.2 shall be eligible to serve as
directors and only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section. The Chairman of the meeting shall


                                       3


have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made in accordance with the
procedures set forth in this Section and, if any proposed nomination or
business is not in compliance with these Bylaws, to declare that such defective
proposed business or nomination shall be disregarded.

                  (e)      For purposes of this Section, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or a comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

                  (f)      Notwithstanding the foregoing provisions of this
Section, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section. Nothing in this Section shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.

         2.3      Special Meetings.

         Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by law, may be called by the Chairman or the Board
of Directors pursuant to a resolution adopted by a majority of the entire Board
of Directors. The Board of Directors may postpone or reschedule any previously
scheduled special meeting. Only such business shall be conducted at a special
meeting of stockholders as shall have been brought before the meeting pursuant
to the Corporation's notice of meeting. Nominations of persons for election to
the Board of Directors may be made at a special meeting of stockholders at
which directors are to be selected pursuant to the Corporation's notice of
meeting (a) by or at the direction of


                                       4


the Board of Directors or (b) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
Bylaw, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.2(b) of these Bylaws. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders if the stockholder's notice required by
Section 2.2(b) of these Bylaws shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the 120th day
prior to such special meeting and not later than the close of business on the
later of the 90th day prior to such special meeting or the 10th day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be selected
at such meeting.

         2.4      Place of Meetings.

         All meetings of the stockholders for the election of directors shall
be held in Nashville, Tennessee, at such place as may be fixed from time to
time by the Board of Directors, or at such other place either within or without
the State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.

         2.5      Notice of Meetings; Waiver.

                  (a)      Notice. Notice of the date, time and place of each
annual and special stockholders' meeting and, in the case of a special meeting,
a description of the purpose or


                                       5


purposes for which the meeting is called, shall be given no fewer than ten (10)
days nor more than sixty (60) days before the date of the meeting. Such notice
shall comply with the requirements of Article XI of these Bylaws.

                  (b)      Waiver. A stockholder may waive any notice required
by law, the Certificate of Incorporation or these Bylaws before or after the
date and time stated in such notice. The waiver must be in writing, be signed
by the stockholder entitled to the notice and be delivered to the Corporation
for inclusion in the minutes or filing with the corporate records. A
stockholder's attendance at a meeting: (1) waives objection to lack of notice
or defective notice of the meeting, unless the stockholder at the beginning of
the meeting (or promptly upon his arrival) objects to holding the meeting or
transacting business at the meeting; and (2) waives objection to consideration
of a particular matter at the meeting that is not within the purpose or
purposes described in the meeting notice, unless the stockholder objects to
considering the matter when it is presented.

         2.6      Record Date.

         In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment
of any dividend or other distribution or allotment of any rights or to exercise
any rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided,


                                       6


however, that if no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held, and, for
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of rights or to exercise any rights of change,
conversion or exchange of stock or for any other purpose, the record date shall
be at the close of business on the day on which the Board of Directors adopts a
resolution relating thereto.

         A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.

         2.7      Stockholders' List.

         After the record date for a meeting has been fixed, the Corporation
shall prepare an alphabetical list of the names of all stockholders who are
entitled to notice of a stockholders' meeting. Such list will be arranged by
voting group (and within each voting group by class or series of shares), and
will show the address of and number of shares held by each stockholder. The
stockholders' list will be available for inspection by any stockholder, for any
purpose germane to the meeting, during ordinary business hours, for at least
ten (10) days prior to the meeting, at the Corporation's principal office or at
a place identified in the meeting notice in the city where the meeting will be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.


                                       7


         2.8      Voting Groups; Quorum; Adjournment.

         The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.

         When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question (except the election of directors) brought
before such meeting, unless the question is one upon which by express provision
of law or of the Certificate of Incorporation, a different vote is required in
which case such express provision shall govern and control the decision of such
question, and directors shall be elected by a plurality of the votes of such
stock.


                                       8


         2.9      Voting of Shares.

         Unless otherwise provided in the Certificate of Incorporation, each
outstanding share is entitled to one (1) vote in person or by proxy on each
matter voted on at a stockholders' meeting.

         2.10     Proxies.

         A stockholder may vote his shares in person or by proxy. A stockholder
may appoint a proxy to vote or otherwise act for him either by signing an
appointment personally or by his attorney-in-fact or by otherwise authorizing
such proxy in a manner consistent with Delaware law. An appointment of a proxy
is effective when received by the Secretary or other officer or agent
authorized to tabulate votes. No proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. An
appointment of a proxy is revocable by the stockholder unless the appointment
form conspicuously states that it is irrevocable and the appointment is coupled
with an interest sufficient in law to support an irrevocable power.

         2.10     Presiding Officer and Secretary.

         Meetings of the stockholders shall be presided over by the Chairman,
or if he is not present, by the President, or if neither the Chairman nor the
President is present, by a chairman to be chosen by a majority of the
stockholders entitled to vote at such meeting. The Secretary or, in his
absence, an Assistant Secretary shall act as secretary of every meeting, but if
neither the Secretary nor an Assistant Secretary is present, the stockholders
entitled to vote at such meeting shall choose any person present to act as
secretary of the meeting.

         2.11     Conduct of Business.


                                       9


        The Chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him in order. The
date and time of the opening and closing of the polls for each matter upon
which the stockholders will vote at the meeting shall be announced at the
meeting.

                                  ARTICLE III.

                                   DIRECTORS

         3.1      Powers and Duties.

         All corporate powers shall be exercised by or under the authority of
and the business and affairs of the Corporation managed under the direction of
the Board of Directors.

         3.2      Number; Term.

         The Board of Directors shall consist of no fewer than five (5) nor
more than twelve (12) members. The exact number of directors may be fixed,
changed or determined from time to time by resolution of the Board of Directors.
A director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.

         3.3      Meetings; Notice.

         The Board of Directors may hold regular and special meetings either
within or without the State of Delaware. The Board of Directors may permit any
or all directors to participate in a regular or special meeting by, or conduct
the meeting through the use of, any means of


                                       10


communication by which all directors participating may simultaneously hear each
other during the meeting. A director participating in a meeting by this means
is deemed to be present in person at the meeting.

                  (a)      Regular Meetings. Unless the Certificate of
Incorporation otherwise provides, regular meetings of the Board of Directors
may be held without notice of the date, time, place or purpose of the meeting.

                  (b)      Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman, the President or one-third of the
entire Board of directors. Unless the Certificate of Incorporation otherwise
provides, special meetings must be preceded by at least twenty-four (24) hours'
notice of the date, time and place of the meeting but need not describe the
purpose of such meeting. Such notice shall comply with the requirements of
Article XI of these Bylaws.

                  (c)      Adjourned Meetings. Notice of an adjourned meeting
need not be given if the time and place to which the meeting is adjourned are
fixed at the meeting at which the adjournment is taken, and if the period of
adjournment does not exceed one month in any one adjournment.

                  (d)      Waiver of Notice. A director may waive any required
notice before or after the date and time stated in the notice. Except as
provided in the next sentence, the waiver must be in writing, signed by the
director and filed with the minutes or corporate records. A director's
attendance at or participation in a meeting waives any required notice to him
of such meeting unless the director at the beginning of the meeting (or
promptly upon his


                                       11


arrival) objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.

         3.4      Quorum.

         Unless the Certificate of Incorporation requires a greater number, a
quorum of the Board of Directors consists of a majority of the fixed number of
directors.

         3.5      Voting.

         If a quorum is present when a vote is taken, the affirmative vote of a
majority of directors present is the act of the Board of Directors, unless the
Certificate of Incorporation or these Bylaws require the vote of a greater
number of directors.

         3.6      Action Without Meeting.

         Unless the Certificate of Incorporation otherwise provides, any action
required or permitted to be taken at a Board of Directors' meeting may be taken
without a meeting if all members of the Board of Directors consent in writing
to the taking of such action without a meeting. Such action must be evidenced
by one or more written consents describing the action taken, signed by each
director, which consents shall be included in the minutes or filed with the
corporate records reflecting the action taken. Action taken by consent is
effective when the last director signs the consent, unless the consent
specifies a different effective date.

         3.7      Compensation.

         Directors, and members of any committee created by the Board of
Directors, shall be entitled to such compensation for their services as
directors and members of such committee as shall be fixed from time to time by
the Board, and shall also be entitled to reimbursement for any reasonable
expenses incurred in attending meetings of the Board or of any such committee


                                       12


meetings. Any director receiving such compensation shall not be barred from
serving the Corporation in any other capacity and receiving reasonable
compensation for such other services.

         3.8      Resignation.

         A director may resign at any time by delivering written notice to the
Board of Directors, the Chairman or President, or to the Corporation. A
resignation is effective when the notice is delivered unless the notice
specifies a later effective date.

         3.9      Vacancies.

         If a vacancy occurs on the Board of Directors, or if there is a
newly-created directorship resulting from an increase in the number of
directors, the Board of Directors may fill such vacancy by an affirmative vote
of a majority of the Board of Directors then in office, even though the
directors remaining in office may constitute fewer than a quorum of the Board
of Directors.

         3.10     Removal of Directors.

         A director may be removed by the stockholders only at a meeting called
for the purpose of removing him, and the meeting notice must state that the
purpose, or one of the purposes, of the meeting is the removal of directors.


                                      13


                                  ARTICLE IV.

                                   COMMITTEES

         4.1      Committees.

         The Board of Directors may, by resolution passed by a majority of the
whole board, establish an Audit Committee, a Compensation Committee, a
Nominating Committee, and such other committees as the Board of Directors may
from time to time deem appropriate. Each committee established by the Board
shall consist of one or more of the directors of the Corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.

         Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of the State of
Delaware fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other
class or classes of stock of the Corporation) adopting an agreement of merger
or consolidation, recommending to the


                                       14


stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending
the Bylaws of the Corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock or to
adopt a certificate of ownership and merger.

         Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.

                                   ARTICLE V.

                                    OFFICERS

         5.1      Number.

         The officers of the Corporation shall be a Chairman, a President, one
or more Vice- Presidents, a Secretary, a Treasurer (collectively the "principal
officers") and such other officers as may be from time to time appointed by the
Board of Directors or by the President with the approval of the Board. One
person may simultaneously hold more than one office except the President may
not simultaneously hold the office of Secretary.

         5.2      Appointment.

         The principal officers shall be appointed annually by the Board at the
first meeting of the Board following the annual meeting of the stockholders, or
as soon thereafter as is conveniently possible. Each officer shall serve at the
pleasure of the Board and until his successor shall have been appointed, or
until his death, resignation or removal.


                                      15


         5.3      Resignation and Removal.

         An officer may resign at any time by delivering notice to the
Corporation. Such resignation is effective when such notice is delivered unless
such notice specifies a later effective date.

         An officer's resignation does not affect the Corporation's contract
rights, if any, with the officer.

         The Board of Directors may remove any officer at any time with or
without cause, but such removal shall not prejudice the contract rights, if
any, of the person so removed.

         5.4      Vacancies.

         Any vacancy in an office from any cause may be filled for the
unexpired portion of the term by the Board of Directors.

         5.5      Duties.

                  (a)      Chairman. The Chairman shall preside at all meetings
of the stockholders and the Board of Directors and shall see that all orders and
resolutions of the Board of Directors are carried into effect.

                  (b)      Chief Executive Officer. The Chief Executive Officer
shall have the general supervision over the active management of the business of
the Company and shall be the chief policy making officer. He shall have the
general powers and duties of supervision and management usually vested in the
office of the Chief Executive Officer of a company and shall perform such other
duties as the Board of Directors may from time to time prescribe.

                  (c)      President. If the President is not the Chief
Executive Officer, then the President shall report to the Chief Executive
Officer of the Company. The President shall have general charge of the business
affairs and property of the Company and control over its officers, agents and
employees. The President shall have the duties of supervision and management
usually vested in the office of the President of a company and shall perform
such other duties as the Chief Executive Officer (provided that the President is
not also the Chief Executive Officer) or Board of Directors may from time to
time prescribe.

                  (d)      Vice President. The Vice President or Vice
Presidents (if any) shall be active executive officers of the Corporation,
shall assist the Chairman and the President in the


                                       16


active management of the business, and shall perform such other duties as the
Board of Directors may from time to time prescribe. The Board may designate a
Vice President to be the chief financial officer of the Corporation, in which
event such authority shall preempt the duties and responsibilities set forth
herein for the Treasurer.

                  (e)      Secretary. The Secretary shall attend all meetings
of the Board of Directors and all meetings of the share holders and shall
prepare and record all votes and all minutes of all such meetings in a book to
be kept for that purpose; he shall perform like duties for any committee when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors when required, and
unless directed otherwise by the Board of Directors, shall keep a stock record
containing the names of all persons who are stockholders of the Corporation,
showing their place of residence and the number of shares held by them
respectively. The Secretary shall have the responsibility of authenticating
records of the Corporation. The Secretary shall perform such other duties as
may be prescribed from time to time by the Board of Directors.

                  (f)      Treasurer. The Treasurer shall have the custody of
the Corporation's funds and securities, shall keep or cause to be kept full and
accurate account of receipts and disbursements in books belonging to the
Corporation, and shall deposit or cause to be deposited all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer
shall disburse or cause to be disbursed the funds of the Corporation as
required in the ordinary course of business or as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the
Chairman, the President and directors at the


                                       17


regular meetings of the Board, or whenever they may require it, an account of
all of his transactions as Treasurer and the financial condition of the
Corporation. He shall perform such other duties as may be incident to his
office or as prescribed from time to time by the Board of Directors. The
Treasurer shall give the Corporation a bond, if required by the Board of
Directors, in a sum and with one or more sureties satisfactory to the Board for
the faithful performance of the duties of his office and for the restoration to
the Corporation in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.

                  (g)      Other Officers. Other officers appointed by the
Board of Directors shall exercise such powers and perform such duties as may be
delegated to them.

                  (h)      Delegation of Duties. In case of the absence or
disability of any officer of the Corporation or of any person authorized to act
in his place, the Board of Directors may from time to time delegate the powers
and duties of such officer to any officer, or any director, or any other person
whom it may select, during such period of absence or disability.

                                  ARTICLE VI.

                                SHARES OF STOCK

         6.1      Shares with or without Certificates.

         The Board of Directors may authorize that some or all of the shares of
any or all of the Corporation's classes or series of stock be evidenced by a
certificate or certificates of stock. The Board of Directors may also authorize
the issue of some or all of the shares of any or all


                                       18


of the Corporation's classes or series of stock without certificates. The
rights and obligations of stockholders with the same class and/or series of
stock shall be identical whether or not their shares are represented by
certificates.

                  (a)      Shares with Certificates. If the Board of Directors
chooses to issue shares of stock evidenced by a certificate or certificates,
each individual certificate shall include the following on its face: (i) the
Corporation's name, (ii) the fact that the Corporation is organized under the
laws of the State of Delaware, (iii) the name of the person to whom the
certificate is issued, (iv) the number of shares represented thereby, (v) the
class of shares and the designation of the series, if any, which the
certificate represents, and (vi) such other information as applicable law may
require or as may be lawful.

         If the Corporation is authorized to issue different classes of shares
or different series within a class, the designations, relative rights,
preferences and limitations determined for each series (and the authority of
the Board of Directors to determine variations for future series) shall be
summarized on the front or back of each certificate. Alternatively, each
certificate shall state on its front or back that the Corporation will furnish
the stockholder this information in writing, without charge, upon request.

         Each certificate of stock issued by the Corporation shall be signed
(either manually or in facsimile) by the Chairman, the President or a
Vice-President, and by the Secretary, an Assistant Secretary, the Treasurer or
an Assistant Treasurer. If the person who signed a certificate no longer holds
office when the certificate is issued, the certificate is nonetheless valid.


                                       19


                  (b)      Shares without Certificates. If the Board of
Directors chooses to issue shares of stock without certificates, the
Corporation shall, within a reasonable time after the issuance or transfer of
the uncertificated stock, send to the registered owner of the stock a written
notice containing the information required to be stated on certificates
pursuant to Sections 151, 156, 202(a) and 218(a) of the General Corporation Law
of the State of Delaware or a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.

         6.2      Subscriptions for Shares.

         Subscriptions for shares of the Corporation shall be valid only if
they are in writing and signed by the subscriber. Unless the subscription
agreement provides otherwise, subscriptions for shares, regardless of the time
when they are made, shall be paid in full at such time, or in such installments
and at such periods, as shall be determined by the Board of Directors. All
calls for payment on subscriptions shall be uniform as to all shares of the
same class or of the same series, unless the subscription agreement specifies
otherwise.

         6.3      Transfers.

         Transfers of shares of the capital stock of the Corporation shall be
made only on the books of the Corporation by (i) the holder of record thereof,
(ii) by his legal representative, who, upon request of the Corporation, shall
furnish proper evidence of authority to transfer, or (iii) his attorney,
authorized by a power of attorney duly executed and filed with the Secretary of
the Corporation or a duly appointed transfer agent. Such transfers shall be
made


                                       20


only upon surrender, if applicable, of the certificate or certificates for such
shares properly endorsed and with all taxes thereon paid.

         6.4      Lost, Destroyed or Stolen Certificates.

         No certificate for shares of stock of the Corporation shall be issued
in place of any certificate alleged to have been lost, destroyed or stolen
except on production of evidence, satisfactory to the Board of Directors or
Transfer Agent for the Corporation's stock, of such loss, destruction or theft,
and, if the Board of Directors or Transfer Agent for the Corporation's stock so
requires, upon the furnishing of an indemnity bond in such amount and with such
terms and such surety as either the Board of Directors or Transfer Agent for
the Corporation's stock may in its discretion require.

                                  ARTICLE VII.

                               CORPORATE ACTIONS

         7.1      Contracts.

         Unless otherwise required by the Board of Directors, the Chairman, the
President or any Vice President shall execute contracts or other instruments on
behalf of and in the name of the Corporation. The Board of Directors may from
time to time authorize any other officer, assistant officer or agent to enter
into any contract or execute any instrument in the name of and on behalf of the
Corporation as it may deem appropriate, and such authority may be general or
confined to specific instances.

         7.2      Loans.


                                       21


         No loans shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by the
Chairman, the President or the Board of Directors. Such authority may be
general or confined to specific instances.

         7.3      Checks, Drafts, Etc.

         Unless otherwise required by the Board of Directors, all checks,
drafts, bills of exchange and other negotiable instruments of the Corporation
shall be signed by either the Chairman, the President, a Vice-President or such
other officer or agent of the Corporation as may be authorized so to do by the
Board of Directors, the chief financial officer or the President. Such
authority may be general or confined to specific business, and, if so directed
by the Board of Directors, the chief financial officer or the President, the
signatures of two or more such officers may be required.

         7.4      Deposits.

         All funds of the Company not otherwise employed shall be deposited
from time to time to the credit of the Corporation in such banks or other
depositories as the Board of Directors may authorize.

         7.5      Voting Securities Held by the Corporation.

         Unless otherwise required by the Board of Directors, the Chairman or
the President shall have full power and authority on behalf of the Corporation
to attend any meeting of security holders, or to take action on written consent
as a security holder, of other corporations in which the Corporation may hold
securities. In connection therewith the Chairman or the President shall possess
and may exercise any and all rights and powers


                                       22


incident to the ownership of such securities which the Corporation possesses.
The Board of Directors may, from time to time, confer like powers upon any
other person or persons.

         7.6      Dividends.

         Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.

         Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.

                                 ARTICLE VIII.

                                  FISCAL YEAR

         The fiscal year of the Corporation shall be determined by the Board of
Directors, and in the absence of such determination shall be August 31.


                                       23


                                  ARTICLE IX.

                                 CORPORATE SEAL

         The Corporation shall not have a corporate seal.

                                   ARTICLE X.

                              AMENDMENT OF BYLAWS

         These Bylaws may be altered, amended or repealed, and new Bylaws may
be adopted at any meeting of the stockholders by the affirmative vote of a
majority of the stock represented at such meeting, or by the affirmative vote
of a majority of the members of the Board of Directors who are present at any
regular or special meeting.

                                  ARTICLE XI.

                                     NOTICE

         Unless otherwise provided for in these Bylaws, any notice required
shall be in writing except that oral notice is effective if it is reasonable
under the circumstances and not prohibited by the Certificate of Incorporation
or these Bylaws. Notice may be communicated in person; by telephone, telegraph,
teletype or other form of wire or wireless communication; or by mail or private
carrier. Written notice to a domestic or foreign corporation authorized to
transact business in Delaware may be addressed to its registered agent at its
registered office or to the corporation or its secretary at its principal
office as shown in its most recent annual report or, in the case of a foreign
corporation that has not yet delivered an annual report, in its application for
a certificate of authority.


                                       24


         Written notice to stockholders, if in a comprehensible form, if mailed
postpaid and correctly, is effective at the earliest of the following: (a) when
received, (b) upon deposit in the United States mail, if mailed correctly
addressed and with first class postage affixed thereon; (c) on the date shown
on the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee; or (d)
twenty (20) days after its deposit in the United States mail, as evidenced by
the postmark if mailed correctly addressed, and with other than first class,
registered or certified postage affixed. Oral notice is effective when
communicated if communicated in a comprehensible manner.


                                      25

EX-11

                                                                      EXHIBIT 11

                            AMERICAN HEALTHWAYS, INC.
                        EARNINGS PER SHARE RECONCILIATION
                                FEBRUARY 29, 2004
                                   (UNAUDITED)
                 (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)

         The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:



                                                             Three Months Ended       Six Months Ended
                                                              February 29/28,         February 29/28,
                                                              2004        2003        2004        2003
                                                            -------------------     -------------------
                                                                                    
Numerator:
    Net income - numerator for basic earnings per share     $ 5,324     $ 5,144     $ 9,281     $ 8,843
    Effect of dilutive securities                                 -           -           -           -
                                                            -------     -------     -------     -------
    Numerator for diluted earnings per share                $ 5,324     $ 5,144     $ 9,281     $ 8,843
                                                            =======     =======     =======     =======

Denominator:
   Shares used for basic earnings per share                  32,039      30,883      31,915      30,838
   Effect of dilutive stock options outstanding               2,707       1,797       2,592       1,847
                                                            -------     -------     -------     -------
   Shares used for diluted earnings per share                34,746      32,680      34,507      32,685
                                                            =======     =======     =======     =======

Earnings per share:
Basic                                                       $  0.17     $  0.17     $  0.29     $  0.29
                                                            =======     =======     =======     =======
Diluted                                                     $  0.15     $  0.16     $  0.27     $  0.27
                                                            =======     =======     =======     =======

EX-31.1

                                                                    EXHIBIT 31.1

                                 CERTIFICATIONS

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

1.       I have reviewed this quarterly report on Form 10-Q of American
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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

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

         c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter 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 officers and I have disclosed, based
on our most recent evaluation, 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: April 13, 2004

                                           /s/ Ben R. Leedle, Jr.
                                           -------------------------------------
                                           Ben R. Leedle, Jr.
                                           President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

I, Mary A. Chaput, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of American
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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

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

         c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter 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 officers and I have disclosed, based
on our most recent evaluation, 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: April 13, 2004

                                           /s/ Mary A. Chaput
                                           -------------------------------------
                                           Mary A. Chaput
                                           Executive Vice President and 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 American Healthways, Inc. (the
"Company") on Form 10-Q for the period ended February 29, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), we,
Ben R. Leedle, Jr., President and Chief Executive Officer of the Company, and
Mary A. Chaput, Executive Vice President and 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.
President and Chief Executive Officer
April 13, 2004

/s/ Mary A. Chaput
- -----------------------
Mary A. Chaput
Executive Vice President and Chief Financial Officer
April 13, 2004