HEALTHWAYS, INC (Form: 10-Q, Received: 08/06/2010 12:42:15)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2010

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

For the transition period from _____ to _____

Commission File Number 000-19364

HEALTHWAYS, INC.

(Exact Name of Registrant as Specified in its Charter)

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

701 Cool Springs Boulevard, Franklin, TN 37067

(Address of Principal Executive Offices) (Zip Code)

615-614-4929

(Registrant’s Telephone Number, Including Area Code)

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

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

Yes x No ¨

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

Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer x

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

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

Yes ¨ No x

As of August 4, 2010 there were outstanding 34,227,837 shares of the Registrant’s Common Stock, par value $.001 per share.

Healthways, Inc.

Form 10-Q

Table of Contents

			Page
Part I
	Item 1.	Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
	Item 4.	Controls and Procedures	33
Part II
	Item 1.	Legal Proceedings	34
	Item 1A.	Risk Factors	36
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 3.	Defaults Upon Senior Securities	36
	Item 4.	Removed and Reserved	37
	Item 5.	Other Information	37
	Item 6.	Exhibits	37

Part I

Item 1.

Financial Statements

HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

	June 30,			December 31,
	2010			2009
Current assets:
Cash and cash equivalents	$	1,082		$	2,356
Accounts receivable, net		112,596			100,833
Prepaid expenses		10,329			10,433
Other current assets		4,282			4,945
Income taxes receivable		2,769			6,452
Deferred tax asset		22,359			24,197
Total current assets		153,417			149,216

Property and equipment:
Leasehold improvements		40,887			40,609
Computer equipment and related software		200,579			166,448
Furniture and office equipment		28,287			28,096
Capital projects in process		8,295			23,052
		278,048			258,205
Less accumulated depreciation		(154,636	)		(134,046	)
		123,412			124,159

Other assets		15,292			11,498

Customer contracts, net		26,494			29,343
Other intangible assets, net		71,243			71,704
Goodwill, net		496,306			496,446

Total assets	$	886,164		$	882,366

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		June 30,			December 31,
		2010			2009
Current liabilities:
Accounts payable	$	17,046		$	29,171
Accrued salaries and benefits		30,359			58,212
Accrued liabilities		30,646			25,004
Deferred revenue		6,128			4,639
Contract billings in excess of earned revenue		75,759			70,440
Current portion of long-term debt		3,271			2,192
Current portion of long-term liabilities		3,348			3,854
Total current liabilities		166,557			193,512

Long-term debt		256,328			254,345
Long-term deferred tax liability		15,788			14,617
Other long-term liabilities		43,716			42,615

Stockholders’ equity:
Preferred stock
$.001 par value, 5,000,000 shares
authorized, none outstanding		—			—
Common stock
$.001 par value, 120,000,000 shares authorized,
34,200,161 and 33,858,917 shares outstanding		34			34
Additional paid-in capital		228,677			222,472
Retained earnings		180,132			158,880
Accumulated other comprehensive loss		(5,068	)		(4,109	)
Total stockholders’ equity		403,775			377,277

Total liabilities and stockholders’ equity	$	886,164		$	882,366

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except earnings per share data)

(Unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009

Revenues	$	175,523		$	177,836	$	354,522		$	360,572
Cost of services (exclusive of depreciation and amortization of $9,928, $8,540, $20,161, and $17,326, respectively, included below)		121,985			127,762		250,852			260,599
Selling, general & administrative expenses		18,703			18,449		35,938			37,234
Depreciation and amortization		13,341			11,949		26,895			24,199

Operating income		21,494			19,676		40,837			38,540
Gain on sale of investment		(1,163	)		—		(1,163	)		(2,581	)
Interest expense		3,612			4,142		7,034			8,202
Legal settlement and related costs		—			—		—			39,956

Income (loss) before income taxes		19,045			15,534		34,966			(7,037	)
Income tax expense (benefit)		7,207			6,658		13,714			(1,100	)

Net income (loss)	$	11,838		$	8,876	$	21,252		$	(5,937	)

Earnings (loss) per share:
Basic	$	0.35		$	0.26	$	0.62		$	(0.18	)

Diluted (1)	$	0.34		$	0.26	$	0.61		$	(0.18	)

Weighted average common shares
and equivalents:
Basic		34,117			33,689		34,037			33,679
Diluted (1)		34,933			34,186		34,928			33,679

(1) The assumed exercise of stock-based compensation awards for the six months ended June 30, 2009 was not considered because the impact would be anti-dilutive.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2010

(In thousands)

(Unaudited)

									Accumulated
					Additional				Other
	Preferred		Common		Paid-in		Retained		Comprehensive
	Stock		Stock		Capital		Earnings		Income (Loss)			Total
Balance, December 31, 2009		$—		$34		$222,472		$158,880		$(4,109	)		$377,277

Comprehensive income:

Net income		—		—		—		21,252		—			21,252

Net change in fair value of interest rate
swaps, net of income tax benefit of $518		—		—		—		—		(801	)		(801	)

Foreign currency translation adjustment		—		—		—		—		(158	)		(158	)

Total comprehensive income													20,293

Exercise of stock options		—		—		532		—		—			532

Tax effect of stock options and restricted stock units		—		—		82		—		—			82

Share-based employee compensation expense		—		—		5,591		—		—			5,591

Balance, June 30, 2010		$—		$34		$228,677		$180,132		$(5,068	)		$403,775

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	21,252		$	(5,937	)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of business acquisitions:
Depreciation and amortization		26,895			24,199
Amortization of deferred loan costs		869			738
Gain on sale of investment		(1,163	)		(2,581	)
Loss on disposal of property and equipment		28			726
Share-based employee compensation expense		5,591			5,306
Excess tax benefits from share-based payment arrangements		(806	)		(56	)
Increase in accounts receivable, net		(11,782	)		(3,365	)
Decrease (increase) in other current assets		6,152			(5,825	)
(Decrease) increase in accounts payable		(6,437	)		482
(Decrease) increase in accrued salaries and benefits		(27,779	)		14,675
Increase (decrease) in other current liabilities		13,797			(360	)
Deferred income taxes		1,908			2,305
Other		2,317			3,187
Increase in other assets		(909	)		(1,018	)
Payments on other long-term liabilities		(2,845	)		(2,461	)
Net cash flows provided by operating activities		27,088			30,015

Cash flows from investing activities:
Change in restricted cash		—			(538	)
Sale of investment		1,163			11,626
Acquisition of property and equipment		(23,384	)		(22,241	)
Other		(2,814	)		(2,286	)
Net cash flows used in investing activities		(25,035	)		(13,439	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		417,450			165,200
Payments of long-term debt		(415,766	)		(173,035	)
Deferred loan costs		(3,166	)		(784	)
Excess tax benefits from share-based payment arrangements		806			56
Exercise of stock options		532			139
Repurchases of stock options		—			(736	)
Change in outstanding checks		(2,881	)		(6,149	)
Net cash flows used in financing activities		(3,025	)		(15,309	)

Effect of exchange rate changes on cash		(302	)		93

Net (decrease) increase in cash and cash equivalents		(1,274	)		1,360

Cash and cash equivalents, beginning of period		2,356			5,157

Cash and cash equivalents, end of period	$	1,082		$	6,517

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)

Basis of Presentation

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

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes. You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

(2)

Recently Issued Accounting Standards

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements”, an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures”. This amendment requires an entity to: 1) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and 2) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements (rather than presenting such information on a net basis). ASU No. 2010-06 is effective for the Company for interim and annual reporting periods beginning after December 15, 2009, except for item 2) above, which is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this ASU did not have a material impact on our results of operations or statement of financial position. We expect the adoption of item 2) above will not have a material impact on the results of operations or statement of financial position.

(3)

Share-Based Compensation

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

For the three and six months ended June 30, 2010, we recognized share-based compensation costs of $2.6 million and $5.6 million, respectively. For the three months and six months ended June 30, 2009, we recognized share-based compensation costs of $2.5 million and $5.3 million, respectively.

A summary of our stock options as of June 30, 2010 and changes during the six months then ended is presented below:

					Weighted-
					Average
			Weighted-		Remaining	Aggregate
	Shares		Average		Contractual	Intrinsic
Options	(000s)		Exercise Price		Term (years)	Value ($000s)
Outstanding at January 1, 2010	4,936		$	18.46
Granted	855			15.37
Exercised	(128	)		4.61
Forfeited or expired	(118	)		23.21
Outstanding at June 30, 2010	5,545			18.21	5.15	$4,277
Exercisable at June 30, 2010	3,498			19.28	3.33	3,590

The weighted-average grant-date fair value of options granted during the three and six months ended June 30, 2010 was $8.28 and $8.97, respectively.

The following table shows a summary of our restricted stock and restricted stock units (“nonvested shares”) as of June 30, 2010 as well as activity during the six months then ended:

			Weighted-
			Average
	Shares		Grant Date
Nonvested Shares	(000s)		Fair Value
Nonvested at January 1, 2010	1,015		$	22.21
Granted	141			15.26
Vested	(212	)		16.15
Forfeited	(18	)		26.51
Nonvested at June 30, 2010	926			22.44

(4)

Income Taxes

Our effective tax rate decreased to 37.8% for the three months ended June 30, 2010 compared to 42.9% for the three months ended June 30, 2009, primarily due to an earn-out adjustment recorded during the three months ended June 30, 2010 (see Note 6), as well as a change in the geographic mix of our earnings during the three months ended June 30, 2010.

Our effective tax rate increased to an expense of 39.2% for the six months ended June 30, 2010 compared to a benefit of 15.6% for the six months ended June 30, 2009, primarily due to a change to a pretax profit for the six months ended June 30, 2010 from a pretax loss for the six months ended June 30, 2009, as well as certain unrecognized tax benefits and tax interest accruals related to the six months ended June 30, 2009.

We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions. Tax years remaining subject to examination in these jurisdictions include 2007 to present.

(5)

Derivative Investments and Hedging Activities

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

Interest Rate

We currently maintain six interest rate swap agreements to reduce our exposure to interest rate fluctuations on our floating rate debt commitments (see Note 7 for further information). These interest rate swap agreements effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 3.375% to 3.855%, thus reducing the impact of interest rate changes on future interest expense. Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest. We have designated these interest rate swap agreements as qualifying cash flow hedges.

Foreign Currency

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

Fair Values of Derivative Instruments

The estimated gross fair values of derivative instruments at June 30, 2010, excluding the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists, were as follows:

(In $000s)	Foreign currency exchange contracts	Interest rate swap agreements
Assets:
Derivatives not designated as hedging instruments:
Other current assets	$339	$—
Total assets	$339	$—

Liabilities:
Derivatives not designated as hedging instruments:
Accrued liabilities	$75	$—

Derivatives designated as hedging instruments:
Accrued liabilities	—	703
Other long-term liabilities	—	7,707
Total liabilities	$75	$8,410

See also Note 6.

Cash Flow Hedges

Derivative instruments that are designated and qualify as cash flow hedges are recorded at estimated fair value in the balance sheet, with the effective portion of the gains and losses being reported in other comprehensive income (“OCI”) or loss. These gains and losses are reclassified into earnings in the same period during which the hedged transaction affects earnings or the period in which all or a portion of the hedge becomes ineffective. As of June 30, 2010, we expect to reclassify $4.6 million of net losses on interest rate swap agreements from accumulated OCI to interest expense within the next 12 months due to the scheduled payment of interest associated with floating rate debt.

As of June 30, 2010, we are a party to the following interest rate swap agreements for which we receive a variable rate of interest based on LIBOR and for which we pay the following fixed rates of interest:

Swap #	Original Notional Amount (in $000s)	Fixed Interest Rate		Termination Date
1	30,000	3.760	%	March 30, 2011
2	40,000	3.433	%	December 30, 2011
3	50,000	3.688	%	December 30, 2011
4	40,000	3.855	%	December 30, 2011
5	57,500	3.385	%	December 31, 2013	(1)
6	57,500	3.375	%	December 31, 2013	(2)

(1) This swap agreement becomes effective January 1, 2012. The principal value of this swap agreement will amortize over a 24-month period.

(2) This swap agreement becomes effective January 3, 2012. The principal value of this swap agreement will amortize over a 24-month period.

We currently meet the hedge accounting criteria under U.S. GAAP in accounting for these interest rate swap agreements.

Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. The following table shows the effect of our cash flow hedges on the consolidated statement of operations (or when applicable, the consolidated balance sheet) during the three and six months ended June 30, 2010:

(In $000s)

Three Months Ended June 30, 2010

Six Months Ended June 30, 2010

Derivatives in

Cash Flow Hedging Relationships

Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)

Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)

Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

Interest rate swap agreements, gross of tax effect

$(2,048)

Interest expense

$(1,371)

$(4,293)

Interest expense

$(2,974)

During the three and six months ended June 30, 2010, there were no gains or losses on cash flow hedges recognized in income resulting from hedge ineffectiveness.

Derivative Instruments Not Designated as Hedging Instruments

Our foreign currency exchange contracts require current period mark-to-market accounting, with any change in fair value being recorded each period in the statement of operations in selling, general and administrative expenses. At June 30, 2010, we had forward contracts with notional amounts of $4.7 million to exchange foreign currencies, primarily the Australian dollar and Euro, that were entered into to hedge forecasted foreign net income (loss) and intercompany debt.

These forward contracts did not have a material effect on our consolidated statement of operations during the three and six months ended June 30, 2010.

(6)

Fair Value Measurements

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

Fair Value Hierarchy

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

	Level 1: Quoted prices in active markets for identical assets or liabilities;
	Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
	Level 3: Unobservable inputs that are supported by little or no market activity and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis at June 30, 2010 :

(In 000s)		Level 2		Level 3		Gross Fair Value		Netting (1)			Net Fair Value
Assets:
Foreign currency exchange contracts	$	339	$	—	$	339	$	(35	)	$	304
Liabilities:
Foreign currency exchange contracts	$	75	$	—	$	75	$	(35	)	$	40
Interest rate swap agreements		8,410		—		8,410		—			8,410
Contingent consideration liability		—		1,563		1,563		—			1,563

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

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

The contingent consideration liability represents the fair value of a multi-year earn-out arrangement in connection with a business combination entered into during the fourth quarter of 2009. The fair value was determined u sing a discounted cash flow model based on management’s estimate of future cash flows. During the three months ended June 30, 2010, we revised our estimate of future cash flows, resulting in a net decrease of $1.5 million in the fair value of the contingent consideration liability, which was recorded to other income. The change in the contingent consideration liability during the three and six months ended June 30, 2010 is shown below:

(In $000s)		Contingent Consideration Liability
Balance, January 1, 2010 and April 1, 2010	$	3,043
Adjustment to liability		(1,480	)
Balance, June 30, 2010	$	1,563

Fair Value of Other Financial Instruments

In addition to foreign currency exchange contracts and interest rate swap agreements, the estimated fair values of which are disclosed above, the estimated fair value of each class of financial instruments at June 30, 2010 was as follows:

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

Long-term debt –The estimated fair value of outstanding borrowings under our credit agreement is based on the average of the prices set by the issuing bank given current market conditions and is not necessarily indicative of the amount we could realize in a current market exchange. The estimated fair value and carrying amount of outstanding borrowings under the Fourth Amended Credit Agreement (see Note 7) at June 30, 2010 are $242.8 million and $258.0 million, respectively.

(7)

Long-Term Debt

On March 30, 2010, we entered into the Fourth Amended and Restated Credit Agreement (the “Fourth Amended Credit Agreement”). The Fourth Amended Credit Agreement provides us with a $55.0 million revolving credit facility from March 30, 2010 to December 1, 2011 (the “2011 Revolving Credit Facility”) and a $345.0 million revolving credit facility from March 30, 2010 to December 1, 2013 (the “2013 Revolving Credit Facility”), including a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters of credit. The Fourth Amended Credit Agreement also provides a continuation of the term loan facility provided pursuant to the Third Amended and Restated Credit Agreement, of which $193.0 million remained outstanding on June 30, 2010, and an uncommitted incremental accordion facility of $200.0 million.

Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to 1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to 0.250%. Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate. See Note 5 for a description of our interest rate swap agreements. The Fourth Amended Credit Agreement also provides for a fee ranging between 0.150% and 0.300% of the unused commitments under the 2011 Revolving Credit Facility and 0.275% and 0.425% of the unused commitments under the 2013 Revolving Credit Facility. The Fourth Amended Credit Agreement is secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in substantially all of the Company’s and such subsidiaries’ assets.

We are required to repay outstanding revolving loans on the applicable commitment termination date, which is December 1, 2011 for the 2011 Revolving Credit Facility and December 1, 2013 for the 2013 Revolving Credit Facility. We are required to repay term loans in quarterly principal installments aggregating $0.5 million each, which commenced on March 31, 2007. The entire unpaid principal balance of the term loans is due and payable at maturity on December 1, 2013.

The Fourth Amended Credit Agreement contains various financial covenants, which require us to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net worth. The Fourth Amended Credit Agreement also restricts the payment of dividends and limits the amount of repurchases of the Company’s common stock. As of June 30, 2010, we were in compliance with all of the covenant requirements of the Fourth Amended Credit Agreement.

As described in Note 5 above, as of June 30, 2010, we are a party to six interest rate swap agreements for which we receive a variable rate of interest based on LIBOR and for which we pay a fixed rate of interest.

(8)

Commitments and Contingencies

Securities Class Action Litigation

Beginning on June 5, 2008, Healthways and certain of its present and former officers and/or directors were named as defendants in two putative securities class actions filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division. On August 8, 2008, the court ordered the consolidation of the two related cases, appointed lead plaintiff and lead plaintiff’s counsel, and granted lead plaintiff leave to file a consolidated amended complaint.

The amended complaint, filed on September 22, 2008, alleged that the Company and the individual defendants violated Sections 10(b) of the Securities Exchange Act of 1934 (the “Act”) and that the individual defendants violated Section 20(a) of the Act as “control persons” of Healthways. The amended complaint further alleges that certain of the individual defendants also violated Section 20A of the Act based on their stock sales. The plaintiff purports to bring these claims for unspecified monetary damages on behalf of a class of investors who purchased Healthways stock between July 5, 2007 and August 25, 2008.

Support (“MHS”) pilot program for the Centers for Medicare & Medicaid Services, and (3) the Company’s guidance for fiscal year 2008. The defendants filed a motion to dismiss the amended complaint on November 13, 2008. On March 9, 2009, the Court denied the defendants’ motion to dismiss. On April 27, 2010, the parties reached an agreement in principle to settle this matter for $23.6 million. The District Court must approve this settlement after notice to the class before it may be considered final. The Court has preliminarily approved the settlement and scheduled a hearing for final approval of the settlement on September 24, 2010. In July 2010, all parties to the litigation effected a settlement and stipulation agreement pursuant to which the Company’s insurers made all required payments to a qualified settlement fund. As a result of the Company’s insurance coverage, this settlement is not expected to result in any charge to the Company.

Shareholder Derivative Lawsuits

Also, on June 27, 2008 and July 24, 2008, respectively, two shareholders filed putative derivative actions purportedly on behalf of Healthways in the Chancery Court for the State of Tennessee, Twentieth Judicial District, Davidson County, against certain directors and officers of the Company. These actions are based upon substantially the same facts alleged in the securities class action litigation described above. The plaintiffs are seeking to recover damages in an unspecified amount and equitable and/or injunctive relief.

On August 13, 2008, the Court consolidated these two lawsuits and appointed lead counsel. On October 3, 2008, the Court ordered that the consolidated action be stayed until the motion to dismiss in the securities class action had been resolved by the District Court. By stipulation of the parties, the plaintiffs filed their consolidated complaint on May 9, 2009. On June 19, 2009, the defendants filed a motion to dismiss the consolidated complaint. The Court granted the defendants’ motion to dismiss on October 14, 2009. The plaintiffs filed a notice of appeal on November 12, 2009.

ERISA Lawsuits

Additionally, on July 31, 2008, a purported class action alleging violations of the Employee Retirement Income Security Act (“ERISA”) was filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division against Healthways, Inc. and certain of its directors and officers alleging breaches of fiduciary duties to participants in the Company’s 401(k) plan. The central allegation is that Company stock was an imprudent investment option for the 401(k) plan.

An amended complaint was filed on September 29, 2008, naming as defendants the Company, the Board of Directors, certain officers, and members of the Investment Committee charged with administering the 401(k) plan. The amended complaint alleged that the defendants violated ERISA by failing to remove the Company stock fund from the 401(k) plan when it allegedly became an imprudent investment, by failing to disclose adequately the risks and results of the MHS pilot program to 401(k) plan participants, and by failing to seek independent advice as to whether to continue to permit the plan to hold Company stock. It further alleged that the Company and its directors should have been more closely monitoring the Investment Committee and other plan fiduciaries. The amended complaint sought damages in an undisclosed amount and other equitable relief. The defendants filed a motion to dismiss on October 29, 2008. On January 28, 2009, the Court granted the defendants’ motion to dismiss the plaintiff’s claims for breach of the duty to disclose with regard to any non-public information and information beyond the specific disclosure requirements of ERISA and denied Defendants’ motion to dismiss as to the remainder of the plaintiff’s claims. A period of discovery ensued.

On May 12, 2009, the plaintiff filed a motion for class certification. After the plaintiff failed, without explanation, to appear for his scheduled deposition, the Court issued an Order on July 10, 2009 warning the plaintiff that his failure to participate in the lawsuit could result in sanctions, including but not limited to dismissal. After the plaintiff’s failure to participate continued, on July 23, 2009, the defendants filed a motion to dismiss for failure to prosecute the action. On August 6, 2009, the parties filed a stipulation of dismissal with

prejudice as to the named plaintiff but otherwise without prejudice, and the Court entered an Order to that effect on the same date.

On February 1, 2010, a new named plaintiff filed another putative class action complaint in the United States District Court for the Middle District of Tennessee, Nashville Division, alleging ERISA violations in the administration of the Company’s 401(k) plan. The new complaint is identical to the original complaint, including the allegations and the requests for relief. Defendants’ answer to this complaint was filed on March 22, 2010. A scheduling order was entered on April 1, 2010, and discovery commenced thereafter. On April 30, 2010, Plaintiff filed a motion for class certification. On June 23, 2010, the parties reached an agreement in principle to settle this matter for $1,250,000, with such settlement being funded by the Company’s fiduciary liability insurance carrier. The District Court must approve this settlement after notice to the class before it may be considered final. The class settlement will be reduced to writing and presented to the Court for preliminary approval in the coming weeks.

Outlook

We are also subject to other contractual disputes, claims and legal proceedings that arise from time to time in the ordinary course of our business. We currently are involved in a contractual dispute with a customer regarding fees paid to us as part of a former contractual relationship. We believe we performed our services in compliance with the contractual requirements and the customer’s assertions are without merit. In the event the parties are unable to resolve the dispute, the parties will proceed to arbitration as specified in the applicable agreement. While we are unable to estimate a range of potential losses, we do not believe that the contractual disputes or any of the legal proceedings pending against us as of the date of this report will have a material adverse effect on our liquidity or financial condition; however, we may settle disputes, claims, sustain judgments or incur expenses relating to these matters in a particular fiscal quarter which may adversely affect our results of operations. As these matters are subject to inherent uncertainties, our view of these matters may change in the future.

Contractual Commitment

In January 2008, we entered into a perpetual license agreement and 25-year strategic relationship agreement. We have remaining contractual cash obligations of $32.5 million related to these agreements, $12.5 million of which will occur ratably from July 2010 through December 2012, and the remaining $20.0 million of which will occur ratably over a 20-year period beginning in 2013.

(9)

Sale of Investment

In January 2009, a private company in which we held preferred stock was acquired by a third party. As part of this sale, we received two payments totaling $11.6 million in January and February 2009 and recorded a gain of $2.6 million during the first quarter of 2009. During the second quarter of 2010, we recognized a gain of $1.2 million related to the receipt of a final escrow payment.

(10)

Comprehensive Income (Loss)

Comprehensive income (loss), net of income taxes, was $11.3 million and $10.7 million for the three months ended June 30, 2010 and 2009, respectively, and $20.3 million and ($5.5) million for the six months ended June 30, 2010 and 2009, respectively.

(11)

Earnings (Loss) Per Share

The following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2010 and 2009:

(In 000s, except per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Numerator:
Net income (loss) - numerator for basic earnings (loss) per share	$	11,838	$	8,876	$	21,252	$	(5,937	)

Denominator:
Shares used for basic earnings (loss) per share		34,117		33,689		34,037		33,679
Effect of dilutive securities outstanding:
Non-qualified stock options		456		253		493		—
Restricted stock units		360		244		398		—
Shares used for diluted earnings (loss) per share (1)		34,933		34,186		34,928		33,679

Earnings (loss) per share:
Basic	$	0.35	$	0.26	$	0.62	$	(0.18	)
Diluted (1)	$	0.34	$	0.26	$	0.61	$	(0.18	)

Dilutive securities outstanding not included in the computation of earnings (loss) per share because their effect is antidilutive:
Non-qualified stock options		3,935		4,234		3,601		4,314
Restricted stock units		83		592		3		713

(1) The assumed exercise of stock-based compensation awards for the six months ended June 30, 2009 was not considered because the impact would have been anti-dilutive.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

In North America, our customers include health plans, governments, employers, pharmacy benefit managers, and hospitals in all 50 states, the District of Columbia and Puerto Rico. We also provide health improvement programs and services in Germany, Brazil and Australia. We operate care enhancement and coaching centers worldwide staffed with licensed health professionals. Our fitness center network encompasses approximately 15,000 U.S. locations. We also maintain an extensive network of over 37,000 complementary and alternative medicine and chiropractic practitioners, which offers convenient access to the significant number of individuals who seek health services outside of the traditional healthcare system.

Our guiding philosophy and approach to market is predicated on the fundamental belief that healthier people cost less and are more productive. As described more fully below, our programs are designed to help keep healthy people healthy, mitigate or eliminate lifestyle risk factors that can lead to disease, and optimize care for those with chronic illness.

First, our programs are designed to help keep healthy people healthy by:

fostering wellness and disease prevention through total population screening, health risk assessments and supportive interventions; and

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

Our prevention programs focus on education, physical fitness, health coaching, behavior change techniques and support, and evidence-based interventions to drive adherence to proven standards of care, medication regimens and physicians’ plans of care. We believe this approach optimizes the health status of member populations and reduces the short- and long-term direct healthcare costs for participants, including costs associated with the loss of health-related employee productivity.

Second, our programs are designed to mitigate or eliminate lifestyle risk factors that can lead to disease by:

promoting the reduction of lifestyle behaviors that lead to poor health or chronic conditions; and

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

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

Finally, our programs are designed to optimize care for those with chronic illness by:

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

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

providing local market resources to address acute episodic interventions;

coordinating members’ care with their healthcare providers;

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

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

Our approach is to use proprietary, analytic models to identify individuals who are likely to incur future high costs without intervention, including those who have specific gaps in care that can be addressed to reduce disease progression and related medical spending.

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

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which are based upon current expectations and involve a number of risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” or “continue.” In order for us to use the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution you that the following important factors, among others, may affect these forward-looking statements. Consequently, actual operations and results may differ materially from those expressed in the forward-looking statements. The important factors include but are not limited to:

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

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

our ability to accurately forecast performance and the timing of revenue recognition under the terms of our customer contracts ahead of data collection and reconciliation in order to provide forward-looking guidance;

the impact of recently enacted national healthcare reform legislation on our operations and/or the demand for our services;

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

our ability to reach mutual agreement with the Centers for Medicare & Medicaid Services (“CMS”) with respect to results under Phase I of Medicare Health Support;

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

our ability to accurately forecast the costs necessary to implement our strategy of establishing a presence in international markets;

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

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

our ability to effect cost savings and clinical outcomes improvements under our 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 us;

our ability to collect contractually earned performance incentive bonuses;

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

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

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

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

our ability to service our debt and make principal and interest payments as those payments become due;

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

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

our ability to integrate acquired businesses or technologies into our business;

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

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

our ability to implement our new integrated data and technology solutions platform within the timeframe and cost estimates that we expect;

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

unusual and unforeseen patterns of healthcare utilization by individuals with diabetes, cardiac, respiratory and/or other diseases or conditions for which we provide services;

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

the impact of litigation involving us and/or our subsidiaries;

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

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

other risks detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and other filings with the Securities and Exchange Commission.

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

Customer Contracts

Contract Terms

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

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

Some of our contracts provide that a portion of our fees may be refundable to the customer (“performance-based”) if our programs do not achieve, when compared to a baseline year, a targeted percentage reduction in the customer’s healthcare costs and selected clinical and/or other criteria that focus on improving the health of the members. Approximately 3% of revenues recorded during the six months ended June 30, 2010 were performance-based and were subject to final reconciliation as of June 30, 2010. We anticipate that this percentage will fluctuate due to the level of performance-based fees in new contracts and the timing and amount of revenue recognition associated with performance-based fees. Some contracts also provide opportunities for us to receive incentive bonuses in excess of the contractual PMPM rate if we exceed contractual performance targets.

Technology

Our solutions require sophisticated analytical, data management, Internet and computer-telephony solutions based on state-of-the-art technology. These solutions help us deliver our services to large populations within our customer base. Our predictive modeling capabilities allow us to identify and stratify those participants who are most at risk for an adverse health event. We incorporate behavior-change science with consumer-friendly interactions such as face-to-face, telephonic, print materials and web portals to facilitate consumer preferences for engagement and convenience. We use sophisticated data analytical and reporting solutions to validate the impact of our programs on clinical and financial outcomes. We continue to invest heavily in technology and are continually expanding and improving our proprietary clinical, data management, and reporting systems to continue to meet the information management requirements of our services. The behavior change techniques incorporated in our technology identify an individual’s readiness to change and provide personalized support through appropriate messaging and convenient venues to motivate and sustain healthy behaviors.

Contract Revenues

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

Approximately 18% of our revenues for the three and six months ended June 30, 2010 were derived from one customer. The loss of this customer or any other large customer or a reduction in the profitability of a contract with any large customer could have a material negative impact on our results of operations, cash flows, and financial condition.

Business Strategy

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

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

keep healthy people healthy;

mitigate or eliminate lifestyle risk factors that can lead to disease; and

optimize care for those with chronic illness.

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

We believe it is critical to impact an entire population’s underlying health status and well-being in a long-term, cost effective way. Believing that what gets measured gets acted upon, in January 2008, we entered into an exclusive, 25-year relationship with Gallup to provide a national, daily pulse of individual and collective well-being. The Gallup-Healthways Well-Being Index TM is the result of a unique partnership in well-being measurement and research that is based on surveys of 1,000 Americans every day, seven days a week. Under the agreement, Gallup evaluates and reports on the well-being of individuals of countries, states and communities; Healthways provides similar services for companies, families and individuals.

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

We are adding and enhancing solutions to extend our reach and effectiveness and to meet increasing demand for integrated solutions. The flexibility of our programs allows customers to provide those services they deem appropriate for their organizations. Customers may select from certain single program options up to a total-population approach, in which all members of a customer’s population are eligible to receive our services.

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

Our strategy also includes the further enhancement of our proprietary next generation technology platform known as Embrace. This platform, which is essential to our total population management solution, enables us to integrate data from all the healthcare and other entities interacting with an individual. Embrace enables the delivery of our integrated solutions and ongoing communications between the individual and his/her

medical and health experts, using any method desired, including venue-based face-to-face; print; phone; mobile and remote devices; on-line; emerging modalities; and any combination thereof.

We plan to increase our competitive advantage in delivering our services by leveraging our scalable, state-of-the-art call centers, medical information content, behavior change processes and techniques, strategic relationships, health provider networks, fitness center relationships, and proprietary technologies and techniques. We anticipate we will continue to enhance, expand and further integrate capabilities, pursue opportunities in domestic government and international markets, and enhance our information technology platform. We may add some of these new capabilities and technologies through internal development, strategic alliances with other entities and/or through selective acquisitions or investments.

Critical Accounting Policies

We describe our accounting policies in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. We prepare the consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

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

Revenue Recognition

We generally bill our customers each month for the entire amount of the fees contractually due for the prior month’s enrollment, which typically includes the amount, if any, that is performance-based and may be subject to refund should we not meet performance targets. Deferred revenues arise from contracts which permit upfront billing and collection of fees covering the entire contractual service period, generally 12 months.

Contractually, we cannot bill for any incentive bonus until after contract settlement. Fees for service are typically billed in the month after the services are provided.

We recognize revenue as follows: 1) we recognize the fixed portion of PMPM fees and fees for service as revenue during the period we perform our services; 2) we recognize the performance-based portion of the monthly fees based on the most recent assessment of our performance, which represents the amount that the customer would legally be obligated to pay if the contract were terminated as of the latest balance sheet date; and 3) we recognize additional incentive bonuses based on the most recent assessment of our performance, to the extent we consider such amounts collectible.

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

In 2005, we began participating in two Medicare Health Support pilots, which concluded in January 2008 and July 2008, respectively. Substantially all of the fees under these pilots were performance-based. Our original cooperative agreements required that, by the end of the third year, we achieve a cumulative net savings (total savings for the intervention population as compared to the control group less fees received from CMS) of 5.0%. Under an amendment to our agreement for our stand-alone Medicare Health Support pilot in Maryland and the District of Columbia, we began serving a “refresh population” of approximately 4,500 beneficiaries on August 1, 2006, which was measured as a separate cohort for two years, by the end of which the program was required to achieve a 2.5% cumulative net savings when compared to a new control cohort. In April 2008, we signed an amendment to our Medicare Health Support protocol with CMS, which changed the financial performance target for both the initial and the refresh populations to budget neutrality. In late April 2009, we received the final reconciliation report from CMS’ independent financial reconciliation contractor. Based upon this final reconciliation report as well as our performance over the term of the pilots, we have recognized $9.5 million of cumulative performance-based fees related to these pilots and $12.2 million of fixed fees. At June 30, 2010, approximately $57.8 million of performance-based fees related to these pilots was recorded in contract billings in excess of earned revenue, $50.3 million of which related to fees collected, and the remaining $7.5 million of which related to fees billed but not collected due to CMS withholding payment of these fees. We submitted our objections to the final reconciliation report and engaged in discussions with CMS regarding our objections. We, along with several other participating organizations in the Medicare Health Support pilots, have submitted a proposal to CMS to resolve the issues related to the reconciliation; however, such proposal remains subject to approval by the United States government.

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

During the settlement process under a contract, which generally occurs six to eight months after the end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data. As of June 30, 2010, performance-based fees that have not yet been settled with our customers but that have been recognized as revenue in the current and prior years totaled approximately $35.9 million, all of which was based on actual data received from our customers. Data reconciliation differences, for which we provide contractual

allowances until we reach agreement with respect to identified issues, can arise between the customer and us due to customer data deficiencies, omissions, and/or data discrepancies.

Performance-related adjustments (including any amounts recorded as revenue that were ultimately refunded), changes in estimates, data reconciliation differences, or adjustments to incentive bonuses may cause us to recognize or reverse revenue in a current fiscal year that pertains to services provided during a prior fiscal year. During the six months ended June 30, 2010, we recognized a net increase in revenue of approximately $3.9 million that related to services provided prior to January 1, 2010.

Impairment of Intangible Assets and Goodwill

We review goodwill for impairment on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.

We estimate the fair value of each reporting unit using a discounted cash flow model and reconcile the aggregate fair value of our reporting units to our consolidated market capitalization. The discounted cash flow model requires significant judgments, including management’s estimate of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the estimate of fair value and goodwill impairment for each reporting unit.

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

Except for trade names which have an indefinite life and are not subject to amortization, we amortize identifiable intangible assets, such as acquired technologies and customer contracts, using the straight-line method over their estimated useful lives. We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

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

If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset’s fair value based on the estimated price that would be received to sell the asset in an orderly transaction between market participants.

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

Income Taxes

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

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

Share-Based Compensation

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

Results of Operations

The following table shows the components of the statements of operations for the three and six months ended June 30, 2010 and 2009 expressed as a percentage of revenues.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009

Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services (exclusive of depreciation
and amortization included below)	69.5	%	71.8	%	70.8	%	72.3	%
Selling, general and administrative expenses	10.7	%	10.4	%	10.1	%	10.3	%
Depreciation and amortization	7.6	%	6.7	%	7.6	%	6.7	%
Operating income	12.2	%	11.1	%	11.5	%	10.7	%

Gain on sale of investment	(0.7	)%	—		(0.3	)%	(0.7	)%
Interest expense	2.1	%	2.3	%	2.0	%	2.3	%
Legal settlement and related costs	—		—		—		11.1	%

Income (loss) before income taxes (1)	10.9	%	8.7	%	9.9	%	(2.0	)%
Income tax expense (benefit)	4.1	%	3.7	%	3.9	%	(0.3	)%

Net income (loss) (1)	6.7	%	5.0	%	6.0	%	(1.6	)%

(1) Figures may not add due to rounding.

Revenues

Revenues decreased $2.3 million and $6.1 million, or 1.3% and 1.7%, respectively, for the three and six months ended June 30, 2010 compared to the same periods in 2009, primarily due to contract restructurings and terminations with certain customers, somewhat offset by increased revenues from the commencement of contracts with new customers and from an increase in participation in our fitness center programs as well as in the number of members eligible to participate in such programs.

Cost of Services

Cost of services (excluding depreciation and amortization) as a percentage of revenues decreased to 69.5% for the three months ended June 30, 2010 compared to 71.8% for the three months ended June 30, 2009, primarily due to the following:

·	a decrease in the level of short-term incentive compensation based on the Company’s year-to-date financial performance against established internal targets for these periods;

·	a decrease in salaries and benefits expense, primarily due to certain employee reductions in 2009 and a net decrease in health insurance costs related to changes in employee medical plan design, which included a number of wellness initiatives aimed at improving employee health, in 2010; and

·	a more favorable cost structure within our fitness center programs, primarily related to certain contract restructurings and the integration of two fitness center networks into a single, common network.

These decreases were partially offset by an increase in cost of services as a percentage of revenues, primarily due to a higher portion of our revenue being generated by fitness center and certain health improvement programs, which typically have a higher cost of services as a percentage of revenue than our other programs.

Cost of services (excluding depreciation and amortization) as a percentage of revenues decreased to 70.8% for the six months ended June 30, 2010 compared to 72.3% for the six months ended June 30, 2009, primarily due to the following:

·	a decrease in the level of short-term incentive compensation based on the Company’s year-to-date financial performance against established internal targets for these periods;

a decrease in salaries and benefits expense, primarily due to 1) a restructuring of the Company, which was largely completed during the fourth quarter of calendar 2008 but for which some terminations continued into early 2009; 2) certain other employee reductions in 2009; and 3) a net decrease in health insurance costs related to changes in employee medical plan design, which included a number of wellness initiatives aimed at improving employee health, in 2010;

·	cost savings related to certain operational efficiencies; and

·	a more favorable cost structure within our fitness center programs, primarily related to certain contract restructurings and the integration of two fitness center networks into a single, common network.

These decreases were somewhat offset by an increase in cost of services as a percentage of revenues primarily due to a higher portion of our revenue being generated by fitness center and certain health improvement programs, which typically have a higher cost of services as a percentage of revenue than our other programs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenues for the three and six months ended June 30, 2010 remained relatively consistent with the comparable periods in 2009.

Depreciation and Amortization

Depreciation and amortization expense increased $1.4 million and $2.7 million, or 11.6% and 11.1%, respectively, for the three and six months ended June 30, 2010 compared to the same periods in 2009, primarily due to increased depreciation expense resulting from the implementation of our new Embrace platform and other capital expenditures related to computer software, which we anticipate will also result in increased depreciation expense for the remainder of 2010 compared to the same period in 2009.

Gain on Sale of Investment

Interest Expense

Interest expense for the three and six months ended June 30, 2010 decreased $0.5 million and $1.2 million, respectively, compared to the three and six months ended June 30, 2009, primarily as a result of a decrease in floating interest rates on outstanding borrowings under our credit agreement during the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009.

Legal Settlement and Related Costs

In March 2009, our Board of Directors approved a settlement of a qui tam lawsuit filed in 1994 on behalf of the United States government related to the Company’s former Diabetes Treatment Center of America business. As a result of the settlement, which was effective as of April 1, 2009, we incurred a charge of approximately $40 million, including a $28 million payment to the United States government and payment of approximately $12 million for other costs and fees related to the settlement, including the estimated legal costs and expenses of the plaintiff’s attorneys.

Income Tax Expense

Our effective tax rate decreased to 37.8% for the three months ended June 30, 2010 compared to 42.9% for the three months ended June 30, 2009, primarily due to an earn-out adjustment recorded during the three months ended June 30, 2010, as well as a change in the geographic mix of our earnings during the three months ended June 30, 2010.

We anticipate that our effective tax rate for the remainder of calendar 2010 will remain consistent with the effective rate for the six months ended June 30, 2010; however, we will continue to monitor and adjust the rate based upon changes in the geographic mix of our earnings, adjustments to uncertain tax positions, and consideration of other tax issues affecting the company.

Liquidity and Capital Resources

Operating activities for the six months ended June 30, 2010 provided cash of $27.1 million compared to $30.0 million for the six months ended June 30, 2009. The decrease in operating cash flow is primarily due to the following:

·	payments during the six months ended June 30, 2010 related to short-term incentive compensation earned and accrued over the sixteen months ended December 31, 2009;

·	decreased cash collections on accounts receivable for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 ; and

·	the timing of several significant vendor payments.

These decreases in operating cash flow were mostly offset by an increase in operating cash flow primarily due to income tax payments, which were higher during the six months ended June 30, 2009 primarily due to a change in the timing of estimated tax payments resulting from the change in our fiscal year .

Investing activities during the six months ended June 30, 2010 used $25.0 million in cash, which primarily consisted of capital expenditures associated with our new Embrace platform.

Financing activities during t he six months ended June 30, 2010 used $3.0 million in cash, primarily due to deferred loan costs incurred in connection with the Fourth Amended and Restated Credit Agreement as well as the settlement of certain checks outstanding at December 31, 2009, partially offset by net proceeds from borrowings under our credit agreement.

Revolving advances under the Fourth Amended Credit Agreement are drawn first under the 2013 Revolving Credit Facility, with any advances in excess of $345.0 million being drawn under the 2011 Revolving Credit Facility. Revolving advances under the 2011 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to 1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to 0.250%. Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate. See below for a description of our interest rate swap agreements. The Fourth Amended Credit Agreement also provides for a fee ranging between 0.150% and 0.300% of the unused commitments under the 2011 Revolving Credit Facility and 0.275% and 0.425% of the unused commitments under the 2013 Revolving Credit Facility. The Fourth Amended Credit Agreement is secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in substantially all of the Company’s and such subsidiaries’ assets.

Swap #	Original Notional Amount (in $000s)	Fixed Interest Rate		Termination Date
1	30,000	3.760	%	March 30, 2011
2	40,000	3.433	%	December 30, 2011
3	50,000	3.688	%	December 30, 2011
4	40,000	3.855	%	December 30, 2011
5	57,500	3.385	%	December 31, 2013	(1)
6	57,500	3.375	%	December 31, 2013	(2)

(1) This swap agreement becomes effective January 1, 2012. The principal value of this swap agreement will amortize over a 24-month period.

(2) This swap agreement becomes effective January 3, 2012. The principal value of this swap agreement will amortize over a 24-month period.

We currently meet the hedge accounting criteria under U.S. GAAP in accounting for these interest rate swap agreements.

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

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

Recently Issued Accounting Standards

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk related to interest rate changes, primarily as a result of the Fourth Amended Credit Agreement, which bears interest based on floating rates. Revolving advances under the 2011 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to 1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to 0.250%. Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.

In order to manage our interest rate exposure under the Fourth Amended Credit Agreement, we have entered into six interest rate swap agreements effectively converting our floating rate debt to fixed obligations with interest rates ranging from 3.375% to 3.855%.

A one-point interest rate change would have resulted in interest expense fluctuating approximately $0.5 million for the six months ended June 30, 2010.

As a result of our investment in international initiatives, as of June 30, 2010 we are also exposed to foreign currency exchange rate risks. Because a significant portion of these risks is economically hedged with currency options and forwards contracts and because our international initiatives are not yet material to our consolidated results of operations, a 10% change in foreign currency exchange rates would not have had a material impact on our results of operations or financial position for the six months ended June 30, 2010. We do not execute transactions or hold derivative financial instruments for trading purposes.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2010. Based on that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective. They are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the three months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1.

Legal Proceedings

Securities Class Action Litigation

In support of these claims, the lead plaintiff alleges generally that, during the proposed class period, the Company made misleading statements and omitted material information regarding (1) the purported loss or restructuring of certain contracts with customers, (2) the Company’s participation in the Medicare Health Support (“MHS”) pilot program for the Centers for Medicare & Medicaid Services, and (3) the Company’s guidance for fiscal year 2008. The defendants filed a motion to dismiss the amended complaint on November 13, 2008. On March 9, 2009, the Court denied the defendants’ motion to dismiss. On April 27, 2010, the parties reached an agreement in principle to settle this matter for $23.6 million. The District Court must approve this settlement after notice to the class before it may be considered final. The Court has preliminarily approved the settlement and scheduled a hearing for final approval of the settlement on September 24, 2010. In July 2010, all parties to the litigation effected a settlement and stipulation agreement pursuant to which the Company’s insurers made all required payments to a qualified settlement fund. As a result of the Company’s insurance coverage, this settlement is not expected to result in any charge to the Company.

Shareholder Derivative Lawsuits

ERISA Lawsuits

Nashville Division against Healthways, Inc. and certain of its directors and officers alleging breaches of fiduciary duties to participants in the Company’s 401(k) plan. The central allegation is that Company stock was an imprudent investment option for the 401(k) plan.

Outlook

Contractual Commitment

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties previously reported under the caption “Part I — Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, the occurrence of which could materially and adversely affect our business, prospects, financial condition and operating results. The risks previously reported and described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and in this report are not the only risks facing our business. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.

There have been no material changes to our risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except that we modified our risk factor relating to healthcare reform, as set forth below, due to the enactment of healthcare reform legislation.

Recently enacted healthcare reform may result in a reduction to our revenues from government health plans and private insurance companies.

In March 2010, President Obama signed the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (collectively “PPACA”) into law. Among other things, PPACA seeks to decrease the number of uninsured individuals and expand coverage through the expansion of public programs and private sector health insurance and a number of health insurance market reforms. PPACA also contains several provisions that encourage the utilization of preventive services and wellness programs, such as those provided by the Company. However, PPACA also contains various provisions that directly affect the customers or prospective customers that contract for our services and may increase their costs and/or reduce their revenues. While we believe that our programs and services specifically assist our customers in controlling their costs, it is possible that these provisions will adversely affect the profitability of our customers in such a manner that the demand for our programs and services would be reduced. Because of the many variables involved, including PPACA’s complexity, lack of implementing regulations or interpretive guidance, gradual implementation, and possible amendment or repeal, we are unable to predict all of the ways in which PPACA could impact the Company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

Removed and Reserved

Item 5.

Other Information

Not Applicable.

Item 6.

Exhibits

(a)

Exhibits


10.1		2007 Stock Incentive Plan, as amended

10.2		Non-Qualified Stock Option Agreement for Directors

10.3		Restricted Stock Unit Agreement for Directors

10.4		Capital Accumulation Plan, as amended and restated

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

			Healthways, Inc.
			(Registrant)




Date	August 6, 2010	By	/s/ Mary A. Chaput
			Mary A. Chaput
			Chief Financial Officer
			(Principal Financial Officer)




Date	August 6, 2010	By	/s/ Alfred Lumsdaine
			Alfred Lumsdaine
			Chief Accounting Officer
			(Principal Accounting Officer)

Exhibit 10.1

HEALTHWAYS, INC.

2007 STOCK INCENTIVE PLAN, AS AMENDED

Section 1. Purpose; Definitions.

The purpose of the Healthways, Inc. 2007 Stock Incentive Plan (the "Plan") is to enable Healthways, Inc. (the "Corporation") to attract, retain and reward key employees of and consultants to the Corporation and its Subsidiaries and Affiliates, and directors who are not also employees of the Corporation, and strengthen the mutuality of interests between such key employees, consultants and directors by awarding such key employees, consultants and directors performance-based stock incentives and/or other equity interests or equity-based incentives in the Corporation, as well as performance-based incentives payable in cash. The creation of the Plan shall not diminish or prejudice other compensation programs approved from time to time by the Board.

For purposes of the Plan, the following terms shall be defined as set forth below:

(a) "Affiliate" means any entity other than the Corporation and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Corporation directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity.

(b) “ Award ” shall mean any Option, Stock Appreciation Right, Restricted Share Award, Restricted Share Unit, Performance Award, Other Stock-Based Award or other award granted under the Plan, whether singly, in combination or in tandem, to a Participant by the Committee pursuant to such terms, conditions, restrictions and/or limitations, if any, as the Committee may establish.

(c) “Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant.

(d) " Board " means the Board of Directors of the Corporation.

(e) "Cause" means (i) a felony conviction of a Participant or the failure of a Participant to contest prosecution for a felony, or (ii) a Participant's willful misconduct or dishonesty, which is directly and materially harmful to the business or reputation of the Corporation or any Subsidiary or Affiliate.

(f) "Change in Control" means the happening of any of the following:

(i)

any person or entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act, other than the Corporation or a wholly-owned subsidiary thereof or any employee benefit plan of the Corporation or any of its Subsidiaries, becomes the beneficial owner of the Corporation's securities having 35% or more of the combined voting power of the then outstanding securities of the Corporation that may be cast for the election of directors of the Corporation (other than as a result of an issuance of securities initiated by the Corporation in the ordinary course of business); or

(ii)

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

(iii)

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

(g) "Common Stock" means the Corporation's Common Stock, par value $.001 per share.

(h) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.

(i) "Committee" means a committee of the Board consisting of all of the Outside Directors of the Company. To the extent that compensation realized in respect of Awards is intended to be “performance based” under Section 162(m) of the Code and the Committee is not comprised solely of individuals who are “outside directors” within the meaning of Section 162(m) of the Code, or that any member of the Committee is not a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, the Committee may from time to time delegate some or all of its functions under the Plan to a committee or subcommittee composed of members that meet the relevant requirements. The term “Committee” includes only such committee or subcommittee, to the extent of the Committee’s delegation.

(j) "Corporation" means Healthways, Inc., a corporation organized under the laws of the State of Delaware or any successor corporation.

(k) "Covered Officer" shall mean at any date (i) any individual who, with respect to the previous taxable year of the Corporation, was a "covered employee" of the Corporation within the meaning of Section 162(m) of the Code; provided, however, that the term "Covered Officer" shall not include any such individual who is designated by the Committee, in its discretion, at the time of any Award under the Plan or at any subsequent time, as reasonably expected not to be such a "covered employee" with respect to the current taxable year of the Corporation and (ii) any individual who is designated by the Committee, in its discretion, at the time of any Award or at any subsequent time, as reasonably expected to be such a "covered employee" with respect to the current taxable year of the Corporation or with respect to the taxable year of the Corporation in which any applicable Award hereunder will be paid.

(l) "Disability" means, unless otherwise provided in an Award Agreement, either of the following: (i) the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) the Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant’s employer.

(m) "Early Retirement" for purposes of this Plan, shall be deemed to have occurred if (i) the sum of the participant's age plus years of employment at the Company as of the proposed early retirement date is equal to or greater than 70, (ii) the participant has given written notice to the company at least one year prior to the proposed early retirement date of his or her intent to retire and (iii) the Chief Executive Officer shall have approved in writing such early retirement request prior to the proposed early retirement date, provided that in the event the Chief Executive Officer does not approve the request for early retirement or the Chief Executive Officer is the participant giving notice of his or her intent to retire, then in both cases, the Board of Directors shall make the determination of whether to approve or disapprove such request.

(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto.

(o) "Fair Market Value" means with respect to the Stock, as of any given date or dates, unless otherwise determined by the Committee in good faith, the reported closing price of a share of such class of Stock on the Nasdaq Stock Market ("Nasdaq") or such other exchange or market as is the principal trading market for such class of Stock, or, if no such sale of a share of such class of Stock is reported on the Nasdaq or other exchange or principal trading market on such date, the fair market value of a share of such class of Stock as determined by the Committee in good faith.

(p) "Incentive Stock Option" means any Stock Option intended to be and designated in an Award Agreement as an "Incentive Stock Option" within the meaning of Section 422 of the Code. Under no circumstances shall an Stock Option that is not specifically designated as an Incentive Stock Option be considered an Incentive Stock Option.

(q) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3)(i) as promulgated by the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, or any successor definition adopted by the Commission.

(r) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option.

(s) "Normal Retirement" means retirement from active employment with the Corporation and any Subsidiary or Affiliate on or after age 65.

(t) "Other Stock-Based Award" means an award under Section 8 below that is valued in whole or in part by reference to, or is otherwise based on, Stock.

(u) "Outside Director" means a member of the Board who is not an officer or employee of the Corporation or any Subsidiary or Affiliate of the Corporation.

(v) "Participant" shall mean any person who is eligible under Section 4 of the Plan and who receives an Award under the Plan.

(w) "Performance Award " shall mean any Award granted under Section 8.2 of the Plan.

(x) "Plan" means this Healthways, Inc. 2007 Stock Incentive Plan, as amended from time to time.

(y) "Restricted Stock" means an award of shares of Stock that is subject to restrictions under Section 7 below.

(z) "Restricted Stock Unit" shall mean any unit granted under Section 7.5 of the Plan.

(aa) "Restriction Period" shall have the meaning provided in Section 7 .

(bb) "Retirement" means Normal or Early Retirement.

(cc) "Stock" means the Common Stock.

(dd) "Stock Appreciation Right" means an award described in Section 6 of the Plan.

(ee) "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 or Section 9 below.

(ff) "Subsidiary" means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

Section 2. Administration.

The Plan shall be administered by the Committee, provided that, in the absence of the Committee or to the extent determined by the Board, any action that could be taken by the Committee may be taken by the Outside Directors. The functions of the Committee specified in the Plan may be exercised by the Compensation Committee of the Board, provided that the full Committee shall have the final authority with respect to the administration of the Plan. The Committee shall have authority to grant, pursuant to the terms of the Plan, Awards to persons eligible under Section 4 . In particular, the Committee shall have the authority, consistent with the terms of the Plan:

(a) to select the officers and other key employees of and consultants to the Corporation and its Subsidiaries and Affiliates to whom Awards may from time to time be granted hereunder;

(b) to determine whether and to what extent Awards are to be granted hereunder to one or more eligible employees;

(d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Award and/or the shares of Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); and to amend or waive any such terms and conditions to the extent permitted by Section 11 hereof;

(e) to determine whether and under what circumstances a Stock Option may be settled in cash or Restricted Stock instead of Stock;

(f) to determine whether, to what extent and under what circumstances Option grants and/or other Awards under the Plan are to be made, and operate, on a tandem basis vis-a-vis other Awards under the Plan and/or awards made outside of the Plan;

(g) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); and

(h) to determine whether to require payment withholding requirements in shares of Stock.

The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan.

All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Corporation and Plan Participants. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Corporation or of any Subsidiary or Affiliate, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards under the Plan to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate such Awards held by Participants who are not officers or directors of the Corporation for purposes of Section 16 of the Exchange Act or who are otherwise not subject to such provision of law.

Section 3. Shares of Stock Subject to Plan.

3.1 Shares Available . The aggregate number of shares of Stock reserved and available for distribution under the Plan shall not exceed 4,036,953 shares (which includes 35,591 shares of Stock with respect to which awards under the Corporation’s 1996 Stock Incentive Plan (the “1996 Plan”) were authorized but not awarded and 1,362 shares of Stock with respect to which awards under the Corporation’s Amended and Restated 2001 Stock Option Plan (the “2001 Plan”)), of which shares of Stock with respect to which Awards other than Stock Appreciation Rights and Options may be granted shall be no more than 2,000,000. Notwithstanding the foregoing and subject to adjustment as provided in Section 3.2 , the maximum number of shares of Stock with respect to which Awards may be granted under the Plan shall be increased by the number of shares with respect to which Options or other Awards were granted under the 1996 Plan, 2001 Plan and the 1991 Employee Stock Incentive Plan (the “1991 Plan”) as of the original effective date of this Plan, but which terminate or terminated, expire or expired unexercised, or are or were forfeited or cancelled without the delivery of shares under the terms of the 1996 Plan, the 2001 Plan or the 1991 Plan, as the case may be, after the original effective date of this Plan. If, after the effective date of the Plan, any shares of Stock covered by an Award granted under this Plan, or to which such an Award relates, are or were forfeited, or if such an Award otherwise terminates or was terminated, expires or expired unexercised or is or was canceled without the delivery of shares of Stock, then the shares covered by such Award, or to which such Award relates, or the number of shares of Stock otherwise counted against the aggregate number of shares with respect to which Awards may be granted, to the extent of any such forfeiture, termination, expiration or cancellation, shall again become Stock with respect to which Awards may be granted.

3.2 Adjustments . In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, Stock dividend, Stock split or other change in corporate structure affecting the Stock, an equitable and proportionate substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and exercise price of shares subject to outstanding Options or Stock Appreciation Rights granted under the Plan and in the number of shares subject to other outstanding Awards granted under the Plan as determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any Award shall always be a whole number. The maximum number of shares that may be awarded to any Participant under Section 4 and Section 8.2(b) of this Plan will be adjusted in the same manner as the number of shares subject to outstanding Awards.

Section 4. Eligibility.

Officers and other key employees of and consultants to the Corporation and its Subsidiaries and Affiliates (but excluding members of the Committee and any person who serves only as a director, except as otherwise provided in Section 9 ) who are responsible for or contribute to the management, growth and/or profitability of the business of the Corporation and/or its Subsidiaries and Affiliates are eligible to be granted Awards. Subject to adjustment as provided in Section 3.2 hereof, no Participant may receive (i) Options or Stock Appreciation Rights under the Plan in any calendar year that, taken together, relate to more than 150,000 shares of Stock or (ii) Awards of Restricted Stock or Restricted Stock Units under the Plan in any calendar year that, taken together, related to more than 75,000 shares of Stock.

Section 5. Stock Options.

5.1 Grant . Stock Options may be granted alone, in addition to or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may be granted only to individuals who are employees of the Corporation or any Subsidiary of the Corporation. Options granted under the Plan shall be subject to the terms and conditions set forth in this Section 5 and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. Options may be settled in cash or Stock.

5.2 Option Price . The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock at grant, in the case of both Incentive Stock Options and Non-Qualified Stock Options (or, in the case of any employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or of any of its Subsidiaries, not less than 110% of the Fair Market Value of the Stock at grant in the case of Incentive Stock Options).

5.3 Option Term . The term of each Stock Option shall be fixed by the Committee, but no Option shall be exercisable more than ten years after the date the Option is granted (or, in the case of an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or any of its Subsidiaries or parent corporations, more than five years after the date the Option is granted in the case of Incentive Stock Options).

5.4 Exercise . Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that except as otherwise provided herein or by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. The Committee may provide that a Stock Option shall vest over a period of future service at a rate specified at the time of grant, or that the Stock Option is exercisable only in installments. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. The Committee may establish performance conditions or other conditions to the exercise of any Stock Options, which conditions may be waived by the Committee in its sole discretion.

5.5 Method of Exercise . The exercise price of a Stock Option Award may be paid in cash, personal check (subject to collection), bank draft or such other method as the Committee may determine from time to time. The exercise price may also be paid by the tender, by either actual delivery or attestation, of Stock acceptable to the Committee and valued at its Fair Market Value on the date of exercise or through a combination of Stock and cash. Without limiting the foregoing, to the extent permitted by applicable law: the Committee may, on such terms and conditions as it may determine, permit a Participant to elect to pay the exercise price by authorizing a third party, pursuant to a brokerage or similar arrangement approved in advance by the Committee, to simultaneously sell all (or a sufficient portion) of the Stock acquired upon exercise of such Option and to remit to the Corporation a sufficient portion of the proceeds from such sale to pay the entire exercise price of such Option and any required tax withholding resulting therefrom. A Participant shall generally have the rights to dividends or other rights of a stockholder with respect to shares subject to the Option only when the Participant has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 13(a) .

5.6 Non-Transferability of Options . Unless otherwise provided by the Committee at or after grant, no Stock Option shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Participant's lifetime, only by the Participant.

5.7 Termination by Death . Unless otherwise provided by the Committee at or after grant, if a Participant's employment by the Corporation and any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such Participant may thereafter be exercised, to the extent such option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee) by the legal representative of the estate or by the legatee of the Participant under the will of the Participant, for a period of one year (or such other period as the Committee may specify at or after grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter.

5.8 Termination by Reason of Disability . Unless otherwise provided by the Committee at or after grant, if a Participant's employment by the Corporation or any Subsidiary or Affiliate terminates by reason of Disability, any Stock Option held by such Participant may thereafter be exercised by the Participant, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of (i) three years from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) one year from the date of termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter, in the case of an Incentive Stock Option; provided however, that, if the Participant dies within the period specified in (i) above, any unexercised Non-Qualified Stock Option held by such Participant shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of any period that would apply if such Stock Option were a Non-Qualified Stock Option, such Stock Option will thereafter be treated as a Non-Qualified Stock Option.

5.9 Termination by Reason of Retirement . Unless otherwise provided by the Committee at or after grant, if a Participant’s employment by the Corporation and any Subsidiary or Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such Participant may thereafter be exercised by the Participant, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine at or after grant (or, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) three months from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the event of an Incentive Stock Option; provided however, that, if the Participant dies within the period specified in (i) above, any unexercised Non-Qualified Stock Option held by such Participant shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of the period that would apply if such Stock Option were a Non-Qualified Stock Option, the option will thereafter be treated as a Non-Qualified Stock Option.

5.10 Other Termination . Unless otherwise provided by the Committee at or after grant, if a Participant's employment by the Corporation and any Subsidiary or Affiliate is involuntarily terminated for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of three months or the balance of such Stock Option's term if the involuntary termination is without Cause. If a Participant voluntarily terminates employment with the Corporation and any Subsidiary or Affiliate (except for Disability, Normal or Early Retirement), the Stock Option shall thereupon terminate; provided, however, that the Committee at grant may extend the exercise period in this situation for the lesser of three months or the balance of such Stock Option's term.

5.11 Incentive Stock Options . Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. No Incentive Stock Option shall be granted to any Participant under the Plan if such grant would cause the aggregate Fair Market Value (as of the date the Incentive Stock Option is granted) of the Stock with respect to which all Incentive Stock Options issued after December 31, 1986 are exercisable for the first time by such Participant during any calendar year (under all such plans of the Corporation and any Subsidiary) to exceed $100,000. To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement:

(a) if (x) a Participant's employment is terminated by reason of death, Disability or Retirement and (y) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under this Section 5 of the Plan, applied without regard to the $100,000 limitation contained in Section 422(d) of the Code, is greater than the portion of such Option that is immediately exercisable as an "Incentive Stock Option" during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option; and

(b) if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such Option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option.

Section 6. Stock Appreciation Rights.

6.1 Grant and Exercise . A Stock Appreciation Right is a right to receive an amount payable entirely in cash, entirely in Stock or partly in cash and partly in Stock and exercisable at such time or times and subject to such conditions as the Committee may determine in its sole discretion subject to the Plan, including but not limited to the achievement of specific performance goals. Stock Appreciation Rights may be granted alone or in conjunction with all or part of any Stock Option granted under the Plan.

(a) A Stock Appreciation Right may be exercised by a Participant, subject to Section 6.2 , in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the Participant shall be entitled to receive an amount determined in the manner prescribed in Section 6.2 . Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised.

(b) In the case of a Non-Qualified Stock Option, Stock Appreciation Rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option.

6.2 Terms and Conditions . Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following:

(a) Stock Appreciation Rights granted in conjunction with an Option shall be exercisable only at such time or times and to the extent that the Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan; provided, however, that any Stock Appreciation Right granted to a Participant subject to Section 16(a) of the Exchange Act subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of its term. The exercise of Stock Appreciation Rights held by Participants who are subject to Section 16(a) of the Exchange Act shall comply with Rule 16b-3(e) thereunder, to the extent applicable. In particular, such Stock Appreciation Rights shall be exercisable only pursuant to an irrevocable election made at least six months prior to the date of exercise or within the applicable ten business day "window" periods specified in Rule 16b-3(e)(3).

(b) Upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the exercise price per share specified in the Stock Appreciation Right multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment.

(c) Unless otherwise provided by the Committee at or after grant, no Stock Appreciation Right shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution, and all such rights shall be exercisable, during the Participant's lifetime, only by the Participant.

(d) Upon the exercise of a Stock Appreciation Right issued in conjunction with an Option, the Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan.

Section 7. Restricted Stock and Restricted Stock Units.

7.1 Administration . Shares of Restricted Stock may be issued either alone, in addition to or in tandem with other Awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the other terms, restrictions and conditions of the Awards in addition to those set forth in this Section 7 . The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock Awards need not be the same with respect to each Participant.

7.2 Awards and Certificates . A Participant shall not have any rights with respect to a Restricted Stock Award unless and until such Participant has executed an agreement evidencing the Award and has delivered a fully executed copy thereof to the Corporation, and has otherwise complied with the applicable terms and conditions of such Award.

(a) The purchase price for shares of Restricted Stock shall be established by the Committee and may be zero.

(b) Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required under Section 7.2(a) .

(c) Each Participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award.

(d) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Corporation until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such Award.

7.3 Restrictions and Conditions . The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions:

(a) In accordance with the provisions of this Plan and the Award Agreement, during a period set by the Committee commencing with the date of such Award (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber shares of Restricted Stock awarded under the Plan. Subject to Section 10 of the Plan, an Award of Restricted Stock shall be subject to a Restriction Period of not less than three (3) years provided, that the Committee, in its sole discretion, may (i) provide for the lapse of such restrictions in installments over the Restriction Period and (ii) accelerate or waive such restrictions in whole or in part in the event of a Change of Control, death, Disability, Normal or Early Retirement of the Participant or in the event the Participant’s employment with the Company is terminated without cause.

(b) Except as provided in this Section 7.3 , the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Corporation, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of Award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14.5 , in additional Restricted Stock to the extent shares are available under Section 3 , or otherwise reinvested. Pursuant to Section 3 above, stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. If the Committee so determines, the Award Agreement may also impose restrictions on the right to vote and the right to receive dividends.

(c) Subject to the applicable provisions of the Award Agreement, Section 10 of the Plan and this Section 7 , upon termination of a Participant's employment with the Corporation and any Subsidiary or Affiliate for any reason other than death, Disability or Retirement during the Restriction Period, all shares still subject to restriction will be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. Upon termination of a Participant's employment with the Corporation and any Subsidiary or Affiliate for by reason of death, Disability or Retirement during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant.

(d) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the Participant promptly.

7.4 Minimum Value Provisions . In order to better ensure that Award payments actually reflect the performance of the Corporation and service of the Participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee.

7.5 Restricted Stock Units . Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Restricted Stock Units shall be granted, the number of Restricted Stock Units to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock Units may be forfeited to the Corporation, and the other terms and conditions of such awards. The Restricted Stock Unit awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the terms and conditions provided hereunder and any additional terms and conditions determined by the Committee that are consistent with the terms of the Plan.

(a) Each Restricted Stock Unit Award made under the Plan shall be for such number of shares of Stock as shall be determined by the Committee and set forth in the Award Agreement containing the terms of such Restricted Stock Unit Award. The agreement shall set forth a period of time during which the Participant must remain in the continuous employment of the Corporation in order for the forfeiture and transfer restrictions to lapse, which period shall not be less than three (3) years, provided, that the Committee, in its sole discretion, may (i) provide for the lapse of such restrictions in installments over the Restriction Period and (ii) accelerate or waive such restrictions in whole or in part in the event of a Change of Control, death, Disability, Normal or Early Retirement of the Participant or in the event the Participant’s employment with the Company is terminated without cause. The Award Agreement may, in the discretion of the Committee, set forth performance or other conditions that will subject the Restricted Stock Units to forfeiture and transfer restrictions.

(b) Each Restricted Stock Unit shall have a value equal to the Fair Market Value of a share of Stock. Restricted Stock Units shall be paid in cash, shares of Stock, other securities or other property, as determined in the sole discretion of the Committee, upon the lapse of the restrictions applicable thereto, or otherwise in accordance with the applicable Award Agreement or other procedures approved by the Committee. Unless otherwise provided in the applicable Award Agreement, a Participant shall be credited with dividend equivalents on any Restricted Stock Units credited to the Participant's account at the time of any payment of dividends to shareholders on shares of Stock. The amount of any such dividend equivalents shall equal the amount that would have been payable to the Participant as a shareholder in respect of a number of shares of Stock equal to the number of vested Restricted Stock Units then credited to the Participant. Unless otherwise provided by the Committee, any such dividend equivalents shall be credited to the Participant's account as of the date on which such dividend would have been payable and shall be converted into additional Restricted Stock Units (which shall be immediately vested) based upon the Fair Market Value of a share of Stock on the date of such crediting. Except as otherwise determined by the Committee at or after grant, and subject to the "retirement" exceptions, Restricted Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of, and all Restricted Stock Units and all rights of the Participant to such Restricted Stock Units shall terminate, without further obligation on the part of the Corporation, unless the Participant remains in continuous employment of the Corporation for the entire restricted period in relation to which such Restricted Stock Units were granted and unless any other restrictive conditions relating to the Restricted Stock Unit Award are met.

Section 8. Other Stock-Based Awards and Performance Awards.

8.1 Other Stock-Based Awards. The Committee shall have the authority to determine the Participants who shall receive an Other Stock-Based Award, which shall consist of any right that is (i) not an Award described in Sections 6 and 7 above and (ii) an Award of Stock or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Stock (including, without limitation, securities convertible into Stock), as deemed by the Committee to be consistent with the purposes of the Plan, provided that the Other Stock-Based Awards that are payable in Stock shall not exceed 10% of the shares of Stock authorized under the Plan as set forth in Section 3. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award.

8.2 Performance Awards . The Committee shall have sole and complete authority to determine the Participants who shall receive a Performance Award, which shall consist of a right that is (i) denominated in cash or shares of Stock, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish, and (iii) payable at such time and in such form as the Committee shall determine. Subject to Section 10 of the Plan, Performance Awards shall vest no sooner than one year after grant and shall otherwise be subject to the terms and provisions of this Section 8.2 .

(a) The Committee may grant Performance Awards to Covered Officers based solely upon the attainment of performance targets related to one or more performance goals selected by the Committee from among the goals specified below. For the purposes of this Section 8.2 , performance goals shall be limited to one or more of the following Corporation, Subsidiary, operating unit or division financial performance measures:

(i) earnings before interest, taxes, depreciation and/or amortization;

(ii) operating income or profit;

(iii) operating efficiencies;

(iv) return on equity, assets, capital, capital employed, or investment;

(v) after tax operating income;

(vi) net income;

(vii) earnings or book value per share;

(viii) cash flow(s);

(ix) total sales or revenues or sales or revenues per employee;

(x) production;

(xi) stock price or total shareholder return;

(xii) dividends;

(xiii)

strategic business objectives, consisting of one or more objectives based on meeting specified cost targets, business expansion goals, and goals relating to acquisitions or divestitures;

or any combination thereof. Each goal may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on internal targets, the past performance of the Corporation or any Subsidiary, operating unit or division of the Corporation and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital, shareholders' equity and/or shares of Stock outstanding, or to assets or net assets.

(b) With respect to any Covered Officer, the aggregate maximum number of shares of Stock in respect of which all Performance Awards and Stock Options may be granted under Sections 5 and 8.2 of the Plan in each year of the performance period is 450,000, and the maximum amount of the aggregate Performance Awards denominated in cash is $1,000,000 (measured by the Fair Market Value of the maximum Award at the time of grant) in each year of the performance period.

(c) To the extent necessary to comply with Section 162(m) of the Code, with respect to grants of Performance Awards to Covered Officers, no later than 90 days following the commencement of each performance period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (1) select the performance goal or goals applicable to the performance period, (2) establish the various targets and bonus amounts which may be earned for such performance period, and (3) specify the relationship between performance goals and targets and the amounts to be earned by each Covered Officer for such performance period. Following the completion of each performance period, the Committee shall certify in writing whether the applicable performance targets have been achieved and the amounts, if any, payable to Covered Officers for such performance period. In determining the amount earned by a Covered Officer for a given performance period, subject to any applicable Performance Award agreement, the Committee shall have the right to reduce the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the performance period.

Section 9. Awards to Outside Directors.

The Committee or the Nominating and Corporate Governance Committee of the Board (provided such committee is comprised solely of Outside Directors) may provide that all or a portion of an Outside Director’s annual retainer, meeting fees and/or other awards or compensation as determined by the Board, be payable (either automatically or at the election of the Outside Director) in the form of Non-Qualified Stock Options, Restricted Shares, Restricted Share Units and/or Other Stock-Based Awards, including unrestricted Shares. The Committee or the Nominating and Corporate Governance Committee of the Board (provided such committee is comprised solely of Outside Directors) shall determine the terms and conditions of any such Awards, including the terms and conditions which shall apply upon a termination of the Outside Director’s service as a member of the Board, and shall have full power and authority in its discretion to administer such Awards, subject to the terms of the Plan and applicable law.

Section 10. Change in Control Provisions.

In the event of a Change of Control, in addition to any action required or authorized by the terms of an Award Agreement, the Committee may, in its sole discretion, take any of the following actions as a result, or in anticipation, of any such event to assure fair and equitable treatment of Participants: (i) accelerate time periods for purposes of vesting in, or realizing gain from, any outstanding Award made pursuant to this Plan and/or extend the time during which an Award may be exercised following a Participant’s termination of employment; (ii) offer to purchase any outstanding Award made pursuant to this Plan from the holder for its equivalent cash value, as determined by the Committee, as of the date of the Change of Control; or (iii) make adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants following such Change of Control. Unless otherwise provided in an Award Agreement, upon a Change in Control, any Outstanding Awards under the Plan not previously exercisable and vested shall become fully exercisable and vested.

Section 11. Amendments and Termination.

The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of a Participant under an Award theretofore granted, without the Participant's consent or which, without the approval of the Corporation's stockholders, would:

(a) except as expressly provided in this Plan, increase the total number of shares reserved for the purpose of the Plan;

(b) materially increase the benefits accruing to Participants under the Plan;

(c)	materially modify the requirements as to eligibility for participation in the Plan; or

(d)	materially modify the Plan within the meaning of the Nasdaq listing standards.

The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or another basis), provided that, except as provided in Section 3.2, the Committee may not modify any outstanding Stock Option so as to specify a lower exercise price or accept the surrender of an outstanding Stock Option and authorize the granting of a new Stock Option in substitution therefor specifying a lower exercise price. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments.

Section 12. Unfunded Status of the Plan.

The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Corporation, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Corporation. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to Awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan.

Section 13. General Provisions.

(a) The Committee may require each person purchasing shares pursuant to a Stock Option or other Award under the Plan to represent to and agree with the Corporation in writing that the Participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer.

All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

(b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

(c) The adoption of the Plan shall not confer upon any employee of the Corporation or any Subsidiary or Affiliate any right to continued employment with the Corporation or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Corporation or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time.

(d) No later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Corporation, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. The Committee may require withholding obligations to be settled with Stock, including Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements and the Corporation and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant.

(e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or other types of Plan Awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan Awards).

(f) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware.

(g) The members of the Committee and the Board shall not be liable to any employee or other person with respect to any determination made hereunder in a manner that is not inconsistent with their legal obligations as members of the Board. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same.

(h) In addition to any other restrictions on transfer that may be applicable under the terms of this Plan or the applicable Award Agreement, no Option, Stock Appreciation Right, Restricted Stock award, or Other Stock-Based Award or other right issued under this Plan is transferable by the Participant other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. The designation of a beneficiary will not constitute a transfer.

Section 14. Compliance with Section 409A of the Code.

No Award (or modification thereof) shall provide for deferral of compensation that does not comply with Section 409A of the Code unless the Committee, at the time of grant, specifically provides that the Award is not intended to comply with Section 409A of the Code. Notwithstanding any provision of this Plan to the contrary, if one or more of the payments or benefits received or to be received by a Participant pursuant to an Award would cause the Participant to incur any additional tax or interest under Section 409A of the Code, the Committee may reform such provision to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code.

Section 15. Effective Date of Plan.

The original effective date of the Plan was February 2, 2007. The Plan was most recently amended by the Board on February 24, 2010, subject to the approval of the Plan by the stockholders of the Corporation.

Section 16. Term of Plan.

No Award shall be granted pursuant to the Plan on or after February 2, 2017, but Awards granted prior to February 2, 2017 may be extended beyond that date.

Exhibit 10.2

HEALTHWAYS, INC.

NON-QUALIFIED STOCK OPTION AGREEMENT

THIS STOCK OPTION AGREEMENT is made and entered into this «Day1st» day of «Month» «Year» , by and between HEALTHWAYS, INC., a Delaware corporation (the "Corporation") including its subsidiary corporations, and «First_Name» «Last_Name» (the "Director").

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

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

1. Grant of Option . Corporation hereby grants to Director the option (the "Option"), exercisable in whole or in part to purchase «TotalShares» shares of the Corporation's Common Stock, for a price of «AmountPerShare» per share.

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

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

3. Timing of Exercise . Director may exercise this Option with respect to the percentage of shares set forth below from and after the dates specified below, provided that Director is still serving as a director of the Corporation on such date except as set forth in Section 6 hereof:

Percentage Vested	Date of Vesting	Cumulative Options Exercisable
25%	«MoDayYrPlus1»
25%	«MoDayYrPlus2»
25%	«MoDayYrPlus3»
25%	«MoDayYrPlus4»

This Option will expire ten (10) years from the date of grant of this Option.

4. Manner of Exercise. This Option shall be exercised by the Director (or other party entitled to exercise the Option under Section 5 of this Agreement) by delivering written notice to the Corporation stating the number of shares of Common Stock to be purchased, the person or persons in whose name the shares are to be registered and each such person's address and social security number. Such notice shall not be effective unless accompanied by the full purchase price for all shares so purchased. The purchase price shall be payable in cash, personal check (subject to collection), bank draft or such other method as the Committee may determine from time to time. The purchase price may also be paid by the tender of, by either actual delivery or attestation, Common Stock acceptable to the Committee and valued at its Fair Market Value on the date of exercise or through a combination of Stock and cash. The purchase price shall be calculated as the number of shares to be purchased times the option exercise price per share as shown in Section 1 of this Agreement. The Corporation shall have the right to require the Director to remit to the Corporation an amount sufficient to satisfy any federal, state and local withholding tax requirements prior to the delivery of any certificate for such shares, which may be paid as set forth in Section 5.5 of the Plan.

5. Nontransferability of Option. This Option shall not be transferable by the Director without the prior written consent of the Board of Directors otherwise than (i) transfers by the Director to a member of the Director’s immediate family or a trust for the benefit of Director or a member of such Director’s immediate family, or (ii) transfers by will or by the laws of descent and distribution. For purposes of this section, “immediate family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law and shall include adoptive relationships.

6. Termination or Expiration of Director's Position on the Board of Directors .

(a) Termination or Resignation from Board Following Two Terms as a Director. If the Director shall cease to serve as a director of the Corporation for any reason other than involuntary removal by the stockholders for cause and if the Director has (x) (a) served at least two full three-year terms as a director, or (b) served at least two terms as a director of the Corporation (the first of which may be a partial term and the last of which shall be a full three-year term) and offered to resign from the Board on or after such Director’s 70 th birthday, which offer to resign has been accepted by the Corporation, and (y) in the event of the Director’s retirement from the Board, given the Corporation at least nine months’ prior written notice of the Director’s intent not to stand for re-election at the end of the Director’s then-current term, the shares subject to the Option granted hereunder not previously exercisable and vested shall continue vesting in accordance with Section 3 and this Option may be exercised until the expiration of the stated term of the Option (the “Exercise Period”).

(b) Termination by Reason of Retirement . If the Director shall cease to be a director of the Corporation by reason of retirement without meeting the requirements of section 6(a) above, this Option may thereafter be exercised by the Director, to the extent it was exercisable at the time of such cessation, for a period of one year from the date of such cessation or until the expiration of the stated term of the Option, whichever period is shorter; provided, however, that if the Director dies within such one-year period, the Option shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of the Option, whichever period is shorter.

(c) Termination by Reason of Disability . If the Director shall cease to be a director of the Corporation by reason of Disability, the shares subject to the Option granted hereunder not previously exercisable and vested shall vest and become immediately exercisable and may thereafter be exercised by the Director until the expiration of the stated term of the Option.

(d) Termination by Death . If the Director shall cease to be a director of the Corporation by reason of death, the shares subject to the Option granted hereunder not previously exercisable and vested shall vest and become immediately exercisable and may thereafter be exercised, by the legal representative of the estate or by the legatee of the Director under the will of the Director, until the expiration of the stated term of the Option.

(e) Termination for any Other Reason . If the Director shall cease to be a director of the Corporation for any reason (including removal by the stockholders for cause) other than retirement, death or Disability without meeting the requirements of section 6(a) above, this Option may be exercised by the Director, to the extent otherwise then exercisable on the date of such cessation, for a period of three months from the date of such cessation or the expiration of the Option's term, whichever period is the shorter.

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

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

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

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

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

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

To the Corporation: Healthways, Inc.

701 Cool Springs Blvd

Franklin, Tennessee 37067

To the Director: ___________________________________

(Director name and address) ___________________________________

___________________________________

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

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

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

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

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

		HEALTHWAYS, INC.

		Name: Ben R. Leedle, Jr.
		Title: CEO

		DIRECTOR:

Exhibit 10.3

HEALTHWAYS, INC.

2007 STOCK INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

This RESTRICTED STOCK UNIT AWARD AGREEMENT (the "Agreement"), dated this «Day1st» day of «Month» «Year» , is by and between Healthways, Inc., a Delaware corporation (the "Company"), and «First_Name» «Last_Name» (the "Director"), under the Company's 2007 Stock Incentive Plan (the "Plan"). Terms not otherwise defined herein shall have the meanings given to them in the Plan.

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

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

Vesting Date		Award Percentage of Restricted Stock Units
«MoDayYrPlus1 »		25%
«MoDayYrPlus2 »		25%
«MoDayYrPlus3 »		25%
«MoDayYrPlus4 »		25%

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

Section 3. Termination or Expiration of Director’s Position on the Board of Directors

3.1 Termination or Resignation from Board Following Two Terms as a Director. If the Director shall cease to serve as a director of the Corporation for any reason other than involuntary removal by the stockholders for cause and if the Director has (x) (a) served at least two full three-year terms as a director, or (b) served at least two terms as a director of the Corporation (the first of which may be a partial term and the last of which shall be a full three-year term) and offered to resign from the Board on or after such Director’s 70 th birthday, which offer to resign has been accepted by the Corporation, and (y) in the event of the Director’s retirement from the Board, given the Corporation at least nine months’ prior written notice of the Director’s intent not to stand for re-election at the end of the Director’s then-current term, the Restricted Stock Units granted hereunder shall not be forfeited and shall continue vesting in accordance with Section 2.

3.2 Termination for any Other Reason . If the Director shall cease to be a director of the Corporation for any reason (including removal by the stockholders for cause) other than death or Disability without meeting the requirements of section 3.1 above, all Restricted Stock Units that have not vested prior to the date the Director ceases to be a director of the Corporation will be forfeited and the Director shall have no further rights with respect to such Restricted Stock Units; provided, however, that if the Director shall cease to serve as a director of the Corporation by reason of death or Disability (as defined in the Plan), the Restricted Stock Units granted hereunder shall immediately vest.

Section 4. Voting Rights and Dividends . Prior to the Vesting Date, the Director shall be credited with dividend equivalents with respect to the Restricted Stock Units at the time of any payment of dividends to stockholders on shares of Common Stock in accordance with the terms set forth in the Plan. The Director shall not have any voting rights with respect to the shares of Stock underlying the Restricted Stock Units prior to the vesting of the Restricted Stock Units and the issuance of the shares of Stock as set forth in Section 2 . A holder of Distributed Shares shall have full dividend and voting rights as a holder of Stock.

Section 5. Restrictions on Transfer .

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

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

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

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

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

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

Section 10. Miscellaneous .

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

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

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

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

			To the Director:
			(Director name and address)

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

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

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

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

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IN WITNESS WHEREOF, the Company and the Director have executed this Agreement to be effective as of «Day1st» day of «Month» «Year» .

		HEALTHWAYS, INC.
		By: /s/ Ben R. Leedle, Jr.
		Title: Ben R. Leedle, Jr., CEO

		Director Signature:

Exhibit 10.4

Amended and Restated Corporate and Subsidiary

Capital Accumulation Plan

Section 1. Establishment and Purpose

1.1 Establishment . Healthways, Inc. established the CORPORATE AND SUBSIDIARY CAPITAL ACCUMULATION PLAN (hereinafter called the “Plan”) effective as of September 1, 1987, as a deferred compensation plan for Participants as described herein. This Amended and Restated Plan is adopted effective June 1, 2010.

1.2 Purpose . The purpose of this Plan is to provide a means whereby compensation payable to eligible Company and Subsidiary employees may be deferred for a specified period and, when combined with Company additions, provide for capital accumulation toward savings goals.

1.3 Plan for a Select Group . The Plan shall cover certain Employees of the Company who are members of a “select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Company shall have the authority to take any and all actions necessary or desirable in order for the Plan to satisfy the requirements set forth in ERISA and the regulations thereunder applicable to plans maintained for Employees who are members of a select group of management or highly compensated employees.

1.4 Not a Funded Plan . It is the intention and purpose of the Company that the Plan shall be deemed to be “unfunded” for tax purposes and deemed a plan as would properly be described as “unfunded” for purposes of Title I of ERISA. The Plan shall be administered in such a manner, notwithstanding any contrary provision of the Plan, in order that it will be so deemed and would be so described.

1.5 Section 409A . The Plan is intended to conform with the requirements of Section 409A of the Code and the Regulations issued thereunder and shall be implemented and administered in a manner consistent therewith.

Section 2. Definitions

2.1 Definitions. Whenever used hereinafter, the following terms shall have the meaning set forth below:

(a) “Account” means the total of a Participant’s pay deferrals, Company additions and growth additions thereon.

(b) “Alternate Payee” means any spouse, former spouse, child or other dependent of a Participant who is recognized by a Domestic Relations Order as having a right to receive all, or a portion of, the benefits payable under this Plan to that Participant.

(d) “Compensation Committee” means the Compensation Committee of the Board of Directors of the Company.

(e) A “Change in Control” shall be deemed to have occurred upon the first to occur of any of the following events:

(i) Any one person or group (as described in Regulations promulgated under Section 409A) acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; or

(ii) Notwithstanding that the Company has not undergone a Change in Control as described in 2.1(d)(i), a Change in Control of the Company occurs on the date that either:

(A) Any one person or more than one person acting as a group (as described in Regulations promulgated under Section 409A), acquires or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of such corporation; or

(B) A majority of members of the Company’s Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board prior to the date of the appointment or election; or

(iii) Any one person or group (as described in Regulations promulgated under Section 409A) acquires or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons assets from the Company that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

In determining whether a Change in Control has occurred, the following rules shall be applicable:

(I) For purposes of a change in ownership described in Section 2.1(e)(i) above, if any one person or more than one person acting as a group is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as described in Section 2.1(e)(ii)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 2.1(e)(i) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of Section 2.1(e)(i), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(II) For purposes of a change in effective control of a corporation described in Section 2.1(e)(ii) above, if one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of Section 2.1(e)(ii), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation within the meaning of Section 2.1(e)(ii) or to cause a change in the ownership of the corporation within the meaning of Section 2.1(e)(i). Persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in the preceding clause (I) and as specifically provided in section 1.409A-3(i)(5)(vi)(D) of the Regulations under Section 409A.

(III) For purposes of a change in the ownership of a substantial portion of a corporation’s assets described in 2.1(e)(iii) above, there is not a Change in Control event when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in immediately preceding clause (iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets. Persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in the preceding clause (I), and as specifically provided in section 1.409A-3(i)(5)(vii)(C) of the Regulations under Section 409A.

(IV) Section 318(a) of the Code applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested option is exercisable for stock that is not substantially vested (as defined by Regulation 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option.

(V) Whether a Change in Control has occurred will be determined by the Company in accordance with the rules and definitions set forth in this Section 2.1. This determination shall be made in a manner consistent with Section 409A and the Regulations thereunder.

(f) “Code” means the Internal Revenue Code of 1986, as amended. References to any section of the Internal Revenue Code shall include any successor provision thereto.

(g) “Company” means Healthways, Inc., a Delaware corporation.

(h) “Company 401(k) Plan” means the Healthways, Inc. Retirement Savings Plan.

(i) “Disability” means a “disability” as determined under the Company’s long-term disability insurance policy if the Participant receives a distribution from the Plan due to the Participant’s Separation from Service in connection with the Participant’s Disability. Notwithstanding the foregoing, if the Participant will receive a distribution from the Plan upon his Disability and such distribution is not made due to the Participant’s Separation from Service, then Disability means a period of time during which a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company or (iii) is determined to be totally disabled by the Social Security Administration.

(j) “Domestic Relations Order” means a judgment, decree or order (including approval of a property settlement agreement) which is made pursuant to a state domestic relations law, which relates to the provision of child support, alimony payments or marital property rights to an Alternate Payee, and which creates or recognizes the existence of an Alternate Payee’s right to, or assigns to an Alternate Payee the right to, receive all or a portion of the benefits payable to a Participant.

(k) “Early Retirement” means a Participant’s Separation from Service where (i) the sum of the Participant’s age plus years of employment at the Company as of the proposed early retirement date is equal to or greater than 70, (ii) the Participant has given written notice to the Company at least one year prior to the proposed early retirement date of his or her intent to retire and (iii) the Chief Executive Officer has approved in writing such early retirement request prior to the proposed early retirement date, provided that in the event the Chief Executive Officer does not approve the request for early retirement or the Chief Executive Officer is the Participant giving notice of his or her intent to retire, then in both cases, the Compensation Committee shall make the determination of whether to approve or disapprove such request.

(l) “Employee” means a full-time regular salaried employee of the Company or any of its Subsidiaries.

(m) The acronym “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. Whenever a reference is made herein to a specific ERISA section, such reference shall be deemed to include any successor ERISA section having the same or a substantially similar purpose.

(n) “Identification Date” means the date determined by the Company in accordance with Section 1.409A-1(i)(3) of the Regulations which is the last day of the 12-month period for determination of Specified Employees. Unless otherwise designated, the Identification Date shall be December 31.

(o) “Normal Retirement” means a Participant’s Separation from Service on or after the Participant reaches age 65.

(p) “Participant” means an Employee of the Company or an Employee of any Subsidiary of the Company who is designated by the Compensation Committee to participate in this Plan.

(q) “Plan Year” means the 12-month period beginning January 1 and ending December 31.

(r) “Regulations” means the regulations promulgated by the Treasury Department under the Code.

(s) “Section 409A” shall mean Section 409A of the Code, related Regulations and guidance thereunder, including such Regulations and guidance promulgated after the Effective Date of the Plan.

(t) “Separation from Service” means for any Participant the occurrence of any one of the following events:

(i) The Participant is discharged by the Company;

(ii) The Participant voluntarily terminates employment (including an Early or Normal Retirement) with the Company;

(iii) The Participant terminates employment due to the Participant’s Disability; or

(iv) The Participant dies while employed with the Company.

For purposes of determining whether a Separation from Service has occurred, the term “Company” shall include a Subsidiary, and no Separation from Service shall be deemed to have occurred if the Participant remains employed by a Subsidiary.

A Separation from Service does not occur if the Participant is on military leave, sick leave or other bona fide leave of absence if the period of leave does not exceed six months or such longer period during which the Participant’s right to reemployment is provided by statute or contract. If the period of leave exceeds six months and the Participant’s right to reemployment is not provided either by statute or contract, a Separation from Service will be deemed to have occurred on the first day following the six-month period. If the period of leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where the impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence may be substituted for the six-month period.

Whether a Separation from Service has occurred is based on whether the facts and circumstances indicate that the Company and the Participant reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Participant would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period (or the full period of services to the Company if the Participant has been providing services to the Company for less than 36 months).

If a Participant provides services both as an employee and as a member of the Board, the services provided as a director are not taken into account in determining whether the Participant has incurred a Separation from Service as an employee for purposes of Plan, unless this Plan is aggregated under Section 409A with any plan in which the Participant participates as a director.

All determinations of whether a Separation from Service has occurred will be made in a manner consistent with Section 409A and the Regulations thereunder.

(u) “Specified Employee” means a “key employee” of the Company as described in Section 416(i)(1)(A)(i), (ii) or (iii) of the Code (without regard to Section 416(i)(5) of the Code) (generally, an officer having annual compensation of more than $150,000 (in 2008, as adjusted); a 5% owner; or a 1% owner having annual compensation of more than $150,000), determined at any time during the 12-month period ending on the Identification Date. A Participant who is a Specified Employee on an Identification Date shall be treated as a Specified Employee for the twelve month period beginning on January 1 (or such other date designated in accordance with Section 7.3) immediately following such Identification Date. For purposes hereof, the term “officer” shall be determined on the basis of all facts, including the source of his authority, the term for which elected or appointed, and the nature and extent of his duties. Generally, the term “officer” means an administrative executive who is in regular and continued service. An Employee who merely has the title of an officer, but not the authority of an officer, is not to be considered an officer hereunder. Similarly, an Employee who does not have the title of an officer but has the authority of an officer is an officer for this purpose. Furthermore, for purposes hereof, during any 12-month period following an Identification Date, no more than 50 employees of all members of the controlled group consisting of the Company and any corporation required to be aggregated with the Company under Section 414(b) or 414(c) of the Code, or if less, the greater of three individuals or ten percent (10%) of such employees of all members of such controlled group, shall be treated as officers hereunder.

(v) “Subsidiary” means any corporation, 80% or more of the total combined voting power of all classes of stock of which is directly or indirectly owned by the Company.

(w) “Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s beneficiary, or the Participant’s dependent (as defined in Section 152 of the Code without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B) of the Code), loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance), or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Examples of an Unforeseeable Emergency include:

(i) the imminent foreclosure of or eviction from the Participant’s primary residence;

(ii) the need to pay for medical expenses, including nonrefundable deductibles, as well as the costs of prescription drugs; and

(iii) the need to pay for the funeral expenses of the Participant’s spouse, the Participant’s beneficiary, or the Participant’s dependent (as defined in Section 152 of the Code without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B) of the Code).

Notwithstanding the foregoing, the purchase of a home or the payment of college tuition are not normally deemed to be an Unforeseeable Emergency. Whether an event constitutes an Unforeseeable Emergency shall be determined in accordance with Regulation 1.409A-3(i)(3).

(x) The acronym “USERRA” means the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended.

2.2 Gender and Number . Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural.

Section 3. Eligibility for Participation

3.1 Eligibility . Participation in the Plan shall be limited to Employees who are designated as Participants by the Compensation Committee. In the event an Employee no longer meets the requirements for participation in this Plan, he or she shall become an inactive Participant effective as of the end of the Plan Year in which such determination is made and he or she shall retain all the rights described under this Plan, except the right to make any further deferrals or receive any additional Company additions, with the exception of the Discretionary Company Additions for inactive participants described in Section 5.2, until the time that he or she again becomes an active Participant.

Section 4. Election to Defer

4.1 Deferral Amount . No later than the December 31 preceding each Plan Year, any Participant may, by written notice to the Company, elect to defer an amount not less than 1% nor more than 10% of the Participant’s base salary for such Plan Year. Notwithstanding the foregoing, with respect to the first Plan Year a Participant is eligible to participate, the Participant must, by written notice, make his deferral election (subject to the percentage limitations discussed in the previous sentence) during the designated election period. There will be a thirty (30) day waiting period following the initial eligibility date. Following the waiting period, an election period will begin and will last for thirty (30) days. Such election shall only apply to base salary which is payable for services rendered by the Participant during the remainder of the Plan Year following his election. If the Participant fails to make an election during the election period, then the Participant will not be permitted to make a deferral election until the next Plan Year.

4.2 Deferral Period . Simultaneous with a Participant’s deferral election specified in Section 4.1, the Participant shall also designate the time for payout of his or her Account. Payments must begin no earlier than four years from the beginning of each Plan Year, and no later than the earliest to occur of: (a) the date specified in the election (or in the event that no date is specified, the date will be four years from the beginning of such Plan Year), (b) Disability, or (c) Separation from Service.

4.3 Manner of Payment Election . Concurrent with the election in Section 4.1, the Participant, by written notice to the Company, also shall elect the manner in which the Account will be paid. The Participant may choose to have payment made either in a lump sum or in periodic annual installments over a fixed number of years. Notwithstanding the foregoing, if payment results from a Participant’s Separation from Service, such payment shall be made in a lump sum at a date one year following the date of the Participant’s Separation from Service. If payout results from the death or Disability of the Participant, payout will be made in a lump sum within ninety (90) days of the Participant’s death, or after the determination of Disability, with the determination of the date upon which such payments shall be made to be determined by the Company in its sole discretion.

4.4 Separate Payout Elections . The Participant may elect separate payout elections for time and manner of payment during the term of his or her participation. Each separate election regarding time and manner of payment must be made at the time the Participant’s deferral election is made for the particular Plan Year (no later than December 31 preceding the Plan Year as provided in Section 4.1) and will apply only to the amounts deferred during such Plan Year, including base salary, Company additions and growth additions.

4.5 Irrevocable Elections . The elections in this Section 4 are irrevocable and may not be modified or terminated by the Participant or his or her beneficiary except as provided in Section 7.2 following a distribution due to an Unforeseeable Emergency or following a determination that the Participant suffers from a Disability as defined in Section 2.1(i)).

4.6 Fully Vested . Amounts deferred under this Section 4 are fully vested to the Participant.

4.7 USERRA . Notwithstanding any provision of this Plan to the contrary, the Company may permit a deferral election to be made at a different time than specified under this Section 4 as required to satisfy the requirements of USERRA.

Section 5. Company Additions

5.1 Mandatory Company Matching Additions . On the last day of each Plan Year, the Company shall add to each Participant’s Account a matching addition equal to not less than 25% of the Participant’s deferrals during that Plan Year; provided, however, that the amount of deferrals upon which the Company’s aggregate matching additions to the Participant’s Account under the Plan and the Participant’s account under the Company 401(k) Plan are based shall not exceed 6% of the Participant’s base salary for that Plan Year.

5.2 Discretionary Company Additions . The Compensation Committee, in its sole discretion, may provide for discretionary additions to the Plan based solely on the Company’s financial performance for the Plan Year. The maximum discretionary Company addition which may be made in any Plan Year is 20% of a Participant’s base salary paid during the Plan Year. Discretionary Company additions are made to all Participants regardless of a Participant’s deferrals into the Plan and such additions are credited to the Account of Participants following the completion of the audit of the Company’s financial statements for the Plan Year, estimated to occur within ninety (90) days of the end of the Plan Year. In the event that a Participant becomes inactive during a Plan Year (as referenced in Section 3.1), he or she will receive the Discretionary Company Addition for such Plan Year, if any, but will not receive any additional Discretionary Company Additions until the time he or she again becomes an active Participant.

5.3 Vesting . Company additions shall vest 25% per year over four years as long as the Participant continues to be employed by the Company or any of its Subsidiaries. The first vesting date is the date the addition is credited to the Participant’s Account. Subsequent vesting dates occur on the last day of each Plan Year, with the exception of the Discretionary Company Additions for Plan Years 2010 and beyond, which subsequently vest 25% per year for each of the following three years on the anniversary of the date the addition was originally credited to the Participant’s Account. Notwithstanding the foregoing, a Participant shall fully vest in any Company additions pursuant to Section 5.1 and Section 5.2 (i) if the Participant Separates from Service with the Company and any Subsidiary by reason of his or her death, Disability, Normal Retirement or Early Retirement or (ii) as separately provided for in the Participant’s separate employment agreement with the Company. Except as otherwise provided in this Plan, a Participant shall forfeit any Company additions that have not vested as of the Participant’s Separation from Service.

5.4 Employment at Year End . No Company addition shall be made for persons who (i) are no longer employed by the Company or (ii) no longer meet the definition of Employee on the date contributions are credited to Participant’s accounts.

Section 6. Deferred Accounts

6.1 Participant Accounts . The Company shall establish and maintain a bookkeeping Account for each Participant, to be credited as of the date the deferred compensation would have been paid. Accounts also shall be credited as of the date Company additions are made as described in Section 5, and their status as vested or nonvested noted according to Section 5.3.

6.2 Growth Additions . Each Participant’s Account shall be credited with a growth addition. The growth addition shall be equal to said Account balance multiplied by a growth increment, the amount of which shall be determined from time to time by the Compensation Committee. Growth additions shall be calculated on a daily basis based on the Participant’s Account balance but shall be credited to the Participant’s Account and compounded monthly as of the last day of the month. However, for Participants whose payout results from a Separation from Service, the growth factor on employee deferrals and on associated compounded growth factors will be calculated through the date of payment to the Participant.

Growth additions shall vest to the extent the Company additions to which they apply are vested under Section 5.3. Growth additions on Participant deferrals are fully vested when credited to the Participant’s Account. Growth additions will be paid at such time and in such manner as the Participant’s other Account balances.

6.3 Charges Against Accounts . There shall be charged against each Participant’s Account any payments made to the Participant or to his or her beneficiary in accordance with Section 7 hereof.

6.4 Contractual Obligation . It is intended that the Company is under a contractual obligation to make payments from a Participant’s Account when due. Account balances shall not be financed through a trust fund or insurance contracts or otherwise unless such trust fund or insurance contracts are owned by the Company. Payment of Account balances shall be made out of the general funds of the Company.

6.5 Unsecured Interest . No Participant or beneficiary shall have any interest whatsoever in any specific asset of the Company. To the extent that any person acquires a right to receive payments under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.

Section 7. Payment of Deferred Amounts

7.1 Payment of Deferred Amounts . Payment of a Participant’s Account shall be paid in a lump sum or in periodic annual installments over a fixed number of years, in the manner provided for by the Company and elected by the Participant under Section 4.3 of this Plan. Subject to Section 4.3 and Section 7.3, payments shall begin within ninety (90) days following the dates described by Section 4 of this Plan with the determination of the date upon which such payments shall be made to be determined by the Company in its sole discretion.

7.2 Unforeseeable Emergency . The Compensation Committee, in its sole discretion, may permit a distribution from a Participant’s Account in the event that the Participant establishes, to the satisfaction of the Compensation Committee, an Unforeseeable Emergency. In making its determination, the Compensation Committee shall examine the relevant facts and circumstances of each case. A distribution may not be made to the extent that the Unforeseeable Emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not cause severe financial hardship) or by cessation of deferrals under the Plan. If the Compensation Committee determines that an Unforeseeable Emergency exists, then a distribution from the vested portion of the Participant’s Account may be made to the Participant, provided that such distribution shall not be in excess of the amount reasonably necessary to satisfy the Unforeseeable Emergency (which may include amounts necessary to pay any Federal, state, foreign or local income taxes or penalties reasonably anticipated to result from the distribution). A distribution, if any, under this Section 7.2 shall be made as soon as practical following the Compensation Committee’s determination of the occurrence of an Unforeseeable Emergency, but not later than ninety (90) days following the date of the Compensation Committee’s determination, with the determination of the date upon which such distribution shall be made to be determined by the Company in its sole discretion. A Participant’s deferral elections under Section 4.1 for the remainder of the Plan Year will be cancelled upon such a withdrawal due to Unforeseeable Emergency.

7.3 Six-Month Delay of Certain Payments . Except as otherwise provided in this Section 7.3, a distribution made because of a Separation from Service to a Participant who is a Specified Employee as of the date of his Separation from Service shall not occur before the date which is six months after the Separation from Service.

For this purpose, a Participant who is a Specified Employee on an Identification Date shall be treated as Specified Employee for the twelve-month period beginning on the January 1 immediately following such Identification Date. The Company may designate another date for commencement of this twelve month period, provided that such date must follow the Identification Date and occur no later than the first day of the fourth month thereafter, provided that such designation is made in accordance with Regulations under Section 409A and is the same for all nonqualified deferred compensation plans of the Company or any Subsidiary.

The Company may elect to apply an alternative method to identify Participants who will be treated as Specified Employees for purposes of the six-month delay in distributions if the method satisfies each of the following requirements: (i) the alternative method is reasonably designed to include all Specified Employees, (ii) the alternative method is an objectively determinable standard providing no direct or indirect election to any Participant regarding its application, and (iii) the alternative method results in either all Specified Employees or no more than 200 Specified Employees being identified in the class as of any date. Use of an alternative method that satisfies these requirements will not be treated as a change in the time and form of payment for purposes of Section 1.409A-2(b) of the Regulations.

The six-month delay provided for in this Section 7.3 does not apply to payments made to an Alternate Payee pursuant to a Domestic Relations Order described in Section 7.5 or to payments that occur after the death of the Participant.

7.4 Permissible Delays in Payment . Distributions from a Participant’s Account may be delayed beyond the date payment would otherwise occur in accordance with the provisions of this Section 7 in any of the following circumstances as long as the Company treats all payments to similarly situated Participants on a reasonably consistent basis.

(a) The Company may delay payment if it reasonably anticipates that its deduction with respect to such payment would not be permitted by the application of Section 162(m) of the Code. Payment must be made during the Participant’s first taxable year in which the Company reasonably anticipates, or should reasonably anticipate, that if the payment is made during such year the deduction of such payment will not be barred by the application of Section 162(m) of the Code or during the period beginning with the Participant’s Separation from Service and ending on the later of the last day of the Company’s taxable year in which the Participant Separates from Service or the 15th day of the third month following the Participant’s Separation from Service.

(b) The Company may also delay payment if it reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable laws provided payment is made at the earliest date on which the Company reasonably anticipates that the making of the payment will not cause such violation.

(c) The Company may delay payment during the periods specified in Section 11.2 for review and appeal of claims or during any other period while there is a bona fide dispute as to the amount or timing of such payment in accordance with Section 1.409A-3(g) of the Regulations.

(d) The Company may delay payment upon such other events and conditions as the Secretary of the Treasury may prescribe in generally applicable guidance published in the Internal Revenue Bulletin.

7.5 Permitted Acceleration of Payment . The Company may permit acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to a payment under the Plan upon the following events:

(i)

payments to an Alternate Payee (but in no event to a Participant) at such times and in such amounts as specified in a Domestic Relations Order which is determined by the Company to be valid and which does not require the Plan to pay benefits in excess of the balance of the Participant’s Account. The Company may require that reasonable expenses incurred and paid by the Company in evaluating the Domestic Relations Order and complying with its terms shall be deducted from the Participant’s Account;

(ii)

to the extent necessary for any Federal officer or employee in the executive branch to comply with an ethics agreement with the Federal government;

(iii)

to the extent reasonably necessary to avoid the violation of an applicable Federal, state, local or foreign ethics law or conflicts of interest law (in accordance with Regulation 1-409A-3(j)(4)(iii));

(iv)

to the extent required to pay employment taxes on base salary deferred under the Plan (in accordance with Regulation 1.409A-3(j)(4)(vi));

(v)

at any time the Plan fails to meet the requirements of Section 409A (any such payment may not exceed the amount required to be included in income as a result of the failure to comply with Section 409A);

(vi)

upon the occurrence of any of the circumstances when the Plan is terminated pursuant to Sections 12.1(b) or 13.1 of the Plan; or

(vii)

upon the occurrence of any other events permitted by the provisions of Regulation 1.409A-3(j)(4) or any successor thereto.

Notwithstanding the foregoing, the Company shall not allow any Participant discretion with respect to whether a payment will be accelerated and shall not permit any election, direct or indirect, by a Participant as to whether the Company’s discretion under this Section 7.5 will be exercised.

Section 8. Federal Income Tax Consequences

8.1 Federal Income Tax Consequences . It is intended that the Plan shall be considered nonqualified for Federal income tax purposes. Thus, the Company shall not be entitled to a tax deduction until the earlier of (i) the year payment is actually made or (ii) the year in which the Participant reports such amounts as income.

Section 9. Beneficiary

9.1 Beneficiary . A Participant must designate a beneficiary or beneficiaries who, upon his or her death, are to receive the distributions that otherwise would have been paid to him or her. All designations shall be in writing and shall be effective only if and when delivered to the Chief Financial Officer or his or her designee or a replacement designated by the Compensation Committee during the lifetime of the Participant. If a designated beneficiary predeceases the Participant and no revised beneficiary designation is made, amounts will be prorated to living beneficiaries. If all beneficiaries predecease the Participant, amounts shall be paid to the Participant’s estate.

A Participant may from time to time during his or her lifetime change his or her beneficiary or beneficiaries by a written instrument delivered to the Chief Financial Officer or his or her designee or a replacement designated by the Compensation Committee. In the event a Participant shall not designate a beneficiary or beneficiaries pursuant to this Section 9.1, or if for any reason such designation shall be ineffective, in whole or in part, the distribution that otherwise would have been paid to such Participant shall be paid to his or her estate and in such event, the term “beneficiary” shall include his or her estate.

Section 10. Rights of Employees, Participants

10.1 Employment . Nothing in this Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Employee’s or Participant’s employment at any time, nor confer upon any Employee or Participant any right to continue in the employ of the Company or any of its Subsidiaries.

10.2 Nontransferability . Except for payments to an Alternate Payee pursuant to a Domestic Relations Order, no right or interest of any Participant in this Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including executive, levy, garnishment, attachment, pledge, and bankruptcy. In the event of a Participant’s death, payment of any amounts due under this Plan shall be made to the Participant’s designated beneficiary, or in the absence of such designation, to the Participant’s estate within ninety (90) days of the Participant’s death with the determination of the date upon which such distribution shall be made to be determined by the Company in its sole discretion.

10.3 Participation . No Employee shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant.

Section 11. Administration

11.1 Administration . The Compensation Committee shall be responsible for the administration of the Plan. The Compensation Committee is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company, and to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. The Compensation Committee shall determine, within the limits of the express provisions of the Plan, the Employees to whom, and the time or times at which, participation shall be extended, and the amount which may be deferred. In making such determinations, the Compensation Committee may take into account the nature of the services rendered by such Employees or classes of Employees, their present and potential contributions to the Company’s or its Subsidiaries’ success and such other factors as the Compensation Committee in its discretion shall deem relevant. The determination of the Compensation Committee, interpretation or other action made or taken pursuant to the provisions of the Plan, shall be final and shall be binding and conclusive for all purposes and upon all persons.

11.2 Claims Procedures . The Company shall make all determinations in its sole discretion as to the right of any Participant to a benefit under the Plan. Any denial by the Company of a claim for benefits under the Plan by a claimant shall be stated in writing by the Company and delivered or mailed to the claimant within a reasonable period of time but not later than 90 days after receipt by the Company of his claim, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice thereof shall be provided to the claimant before the end of this 90-day period which shall indicate the special circumstances requiring the extension and the date by which the Company expects to render a decision. In no event shall the extension exceed 90 days from the end of the initial 90-day period.

If a claim for benefits under the Plan is wholly or partially denied, the Company shall notify the claimant of the denial of the claim in writing, delivered in person or mailed by first class mail to the claimant’s last known address. Such notice of denial shall contain:

(a) the specific reason or reasons for denial of the claim;

(b) a reference to the relevant provision(s) of the Plan upon which the denial is based;

(c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and

(d) an explanation of the Plan’s claim review procedure.

If no such notice is provided, and if the claim has not been granted within the time specified above for approval of the claim, the claim shall be deemed denied and subject to review as described below.

Any claimant or authorized representative of the claimant whose claim for benefits under the Plan has been denied or deemed denied, in whole or in part, may upon written notice delivered to the Company request a review of such denial of benefits. Such claimant shall have 60 days from the date the claim is deemed denied, or 60 days from receipt of the notice denying the claim, as the case may be, in which to request such a review. The claimant’s notice must specify the relief requested and the reason the claimant believes the denial should be reversed. In pursuing his appeal, the claimant will be permitted to submit written comments, documents, records, or other relevant information relating to his claim. In addition, the claimant will be provided, upon receipt and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his claim.

The Company will conduct the review of any appeal. This review will take into account all information submitted by the claimant regarding his claim, regardless of whether or not such information was submitted or considered in the initial decision. A decision regarding such review will be made within a reasonable period of time but not later than 60 days after receipt of the claimant’s appeal, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice thereof shall be provided to the claimant before the end of this 60-day period which shall indicate the special circumstances requiring the extension and the date by which the Company expects to render the final decision. In no event shall the extension exceed 60 days from the end of the initial 60-day period.

If the claimant’s appeal is denied in whole or in part, the claimant will receive a written notification of the denial which will include (i) the specific reasons for the denial, (ii) reference to the specific provision(s) of the Plan upon which the denial was based, and (iii) a statement of the claimant’s right to bring an action under ERISA. The interpretations, determinations, and decisions of the Company shall be final and binding upon all persons with respect to any right, benefit and privilege hereunder, subject to the review procedures set forth in this Section 11.2.

Section 12. Amendment, Modification, and Termination of the Plan

12.1 Amendment, Modification, and Termination of the Plan .

a. Power to Amend . The Compensation Committee from time to time may amend or modify the Plan in accordance with Section 409A and the Regulations promulgated thereunder, provided, however, that no such action of the Compensation Committee, without approval of the Participant, may adversely affect in any way amounts already deferred pursuant to Section 4.1 of this Plan nor the vesting schedule for an Account as it exists at the time of the modification.

b. Power to Terminate Plan . The Plan may be terminated by the Company under one of the following conditions:

(i) The Company may terminate the Plan at its sole discretion, provided that:

(A) All arrangements sponsored by the Company that would be aggregated with the Plan under Section 1.409A-1(c)(2) of the Regulations are terminated with respect to all Participants;

(B) No payments will be made, other than those otherwise payable under the terms of the Plan absent a Plan termination, within 12 months of the termination of the Plan;

(D) The Company does not adopt a new arrangement that would be aggregated with any terminated arrangement under Section 409A at any time within the three-year period following the date of termination of the Plan; and

(E) The termination does not occur proximate to a downturn in the financial health of the Company.

(ii) The Company, at its discretion, may terminate the Plan within 12 months of a corporate dissolution taxed under Section 331 of the Code, or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that amounts deferred under the Plan are included in the gross income of Participants in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received):

(A) The calendar year in which the Plan termination occurs;

(B) The first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or

(iii) The Company, at its discretion, may terminate the Plan pursuant to irrevocable action taken by the Company within the 30 days preceding or the 12 months following a Change in Control, provided:

(A) All agreements, methods, programs and other arrangements sponsored by the Company (or its successor) immediately after the Change in Control which are treated as a single plan under Section 1.409A-1(c)(2) of the Regulation are also terminated;

(B) All payments to Participants due under the Plan are made within 12 months of the date of the Plan’s termination; and

(C) All participants under the other terminated similar arrangements described in clause (i) are required to receive all amounts of deferred compensation within 12 months of the action taken by the Company (or its successor) to terminate such arrangements.

(iv) In accordance with such other events and conditions as may be prescribed by the Secretary of the Treasury in generally applicable guidance published in the Internal Revenue Bulletin.

If the Plan is terminated pursuant to this Section 12.1(b) at a date other than the date that the Company additions would normally be credited to Participant’s accounts, the Company may make, in the Compensation Committee’s sole discretion, a pro-rated discretionary Company addition to each Participant’s Account based on operating earnings of the Company generated through the date the Plan is terminated.

12.2 No Liability for Plan Amendment or Termination . Neither the Company, nor any officer, nor any Compensation Committee member thereof shall have any liability as a result of the amendment or termination of the Plan (including a termination pursuant to Section 13.1 below). Without limiting the generality of the foregoing, the Company shall have no liability for terminating the Plan notwithstanding the fact that a Participant may have expected to have future allocations made on Participant’s behalf hereunder had the Plan remained in effect.

Section 13. Change in Control

13.1 Change in Control . Notwithstanding any other provision of the Plan to the contrary, if the Company is involved in a Change in Control, the Plan will be terminated in accordance with Section 12.1(b) and Section 409A and all amounts deferred, including any growth additions and Company additions, will immediately vest and be paid out to the Participants in accordance with Section 12.1(b) and Section 409A.

Section 14. Requirements of Law

14.1 Requirements of Law . The payment of cash pursuant to this Plan shall be subject to all applicable laws, rules and regulations as may be required.

14.2 Governing Law . The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Tennessee.

Section 15. Withholding Taxes

15.1 Withholding Taxes . The Company shall have the right to deduct from all payments under this Plan an amount necessary to satisfy any Federal, state, or local withholding tax requirements.

Section 16. Effective Date of the Plan

16.1 Effective Date . This Amended and Restated Plan shall become effective as of June 1, 2010 (the “Effective Date”).

Exhibit 31.1

CERTIFICATION

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

1. I have reviewed this quarterly report on Form 10-Q of Healthways, Inc.;

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

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

Date: August 6, 2010

	/s/ Ben R. Leedle, Jr.
	Ben R. Leedle, Jr.
	Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Mary A. Chaput, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Healthways, Inc.;

(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: August 6, 2010

	/s/ Mary A. Chaput
	Mary A. Chaput
	Chief Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Healthways, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Ben R. Leedle, Jr., Chief Executive Officer of the Company, and Mary A. Chaput, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Ben R. Leedle, Jr.

Ben R. Leedle, Jr.

Chief Executive Officer

August 6, 2010

/s/ Mary A. Chaput

Mary A. Chaput

Chief Financial Officer

August 6, 2010