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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Fiscal Year Ended August 31, 2003

AMERICAN HEALTHWAYS, INC.

3841 Green Hills Village Drive, Nashville, TN 37215

615-665-1122

               Securities registered pursuant to Section 12(b) of the Act:

None

               Securities registered pursuant to Section 12(g) of the Act:

Common Stock - $.001 par value, and related Preferred Stock Purchase Rights

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  [X]  No  [  ]

As of February 28, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares held by non-affiliates of the Registrant was approximately $242,312,000 based on the last sale price reported for such date on The NASDAQ National Market.

As of November 10, 2003, 15,951,646 shares of Common Stock were outstanding. The aggregate market value of the shares held by non-affiliates of the Registrant was approximately $629,611,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held January 21, 2004 are incorporated by reference into Part III of this Form 10-K.

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PART I.

Item 1. Business

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

          The Company’s integrated care enhancement product line includes programs for people with diabetes, coronary artery disease (CAD), heart failure (HF), asthma, chronic obstructive pulmonary disease (COPD), end-stage renal disease (ESRD), acid-related stomach disorders, atrial fibrillation, decubitus ulcer, fibromyalgia, hepatitis C, inflammatory bowel disease, irritable bowel syndrome, low-back pain, osteoarthritis, osteoporosis and urinary incontinence. The programs are designed to create and maintain key desired behaviors of each population and of the providers who care for them to improve member health status, thereby reducing health-care costs. The programs incorporate all interventions necessary to optimize patient care and are based on the most up-to-date, evidence-based clinical guidelines.

          The flexibility of the Company’s programs allows customers to enter the disease management and care enhancement market at the level they deem appropriate for their organization. That includes managing single chronic diseases, multiple chronic diseases or a total-population approach where people with more than one condition get the benefit of multiple programs at a single cost.

Sources of Revenues

          The following table sets forth the sources of the Company’s revenues by customer type as a percentage of total revenues for the years ended August 31, 2003, 2002 and 2001:

          The Company believes that its future revenue growth will result primarily from health plan customer contracts.

          For information on the Company’s business segments, see Note 13 of the Notes to the Consolidated Financial Statements.

Health Plan Contracts

          A majority of the Company’s fiscal 2001 through 2003 revenues were generated from programs that are designed to assist health plans in reducing health-care costs and improving the quality of care for health plan members with chronic diseases such as diabetes, cardiac disease and respiratory disease. The Company believes that a substantial portion of its future revenue growth will continue to result from

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providing disease management and care enhancement services to health plans. Implementation of the Company’s first disease management contracts with health plans occurred in fiscal 1996 for enrollees of these health plans with diabetes. While continuing to contract with additional health plans to provide diabetes services in the years since fiscal 1996, the Company introduced its cardiac disease management program in fiscal 1999 and its respiratory disease management program in fiscal 2000. During fiscal 2000, the Company signed its first contracts with health plans to deliver its cardiac and respiratory disease programs. During fiscal 2001, the Company announced the launch of its total-population care enhancement strategy designed to identify and provide care enhancement services for health plan members identified as having or at risk for developing one or more high-cost diseases or impact conditions. During fiscal 2002, the Company signed and implemented its first total-population care enhancement contracts and became the first organization to be accredited by both the National Committee on Quality Assurance and the American Accreditation Healthcare Commission. During fiscal 2003, the Company obtained certification by the Joint Commission on Accreditation of Healthcare Organizations, making it the first disease management and care enhancement provider in the nation to be accredited or certified by all three accrediting organizations. The Company believes that its patient and physician support regimens, delivered and/or supervised by a multi-disciplinary team, assist in ensuring the provision of effective care for the treatment of the disease or condition, which will improve the health status of the enrollee populations with the disease or condition and reduce both the short-term and long-term health-care costs for these enrollees.

          The Company’s health plan disease management and care enhancement services range from telephone and mail contacts directed primarily to health plan members with targeted diseases from one of the Company’s care enhancement centers to services that include providing local market resources to address acute episode interventions and coordination of care with local health-care providers. Fees under the Company’s health plan contracts are generally determined by multiplying a contractually negotiated rate per health plan member per month by the number of health plan members covered by the Company’s services during the month. In some contracts, the per-member per-month (“PMPM”) rate may differ between the health plan product groups (e.g. PPO, HMO, Medicare). Contracts are generally for terms of three to seven years with provisions for subsequent renewal and may provide that some portion (up to 100%) of the Company’s fees may be refundable to the customer (“performance-based”) if a targeted percentage reduction in the customer’s health-care costs and clinical and other criteria that focus on improving the health of the members, compared to a baseline year, are not achieved. A limited number of contracts also provide opportunities for incentive bonuses in excess of the contractual PMPM rate if the Company is able to exceed contractual performance targets.

          Disease management and care enhancement health plan contracts require sophisticated management information systems to enable the Company to manage the care of large populations of patients with targeted chronic diseases or other medical conditions and to report clinical and financial outcomes before and after the Company’s involvement with a health plan’s enrollees. The Company has developed and is continually expanding and improving its clinical management systems, which it believes meet its information management needs for its disease management and care enhancement services. The Company has installed and is utilizing these systems for the enrollees of each of its health plan contract customers. The anticipated expansion and improvement in its information management systems will continue to require significant investments by the Company in information technology software, hardware and its information technology staff.

          At August 31, 2003, the Company had contracts with 23 health plans consisting of 52 programs to provide disease management and care enhancement services. The Company measures the volume of participation in its programs by the actual number of participating health plan members (or lives) under management. Although the average service intensity and fee for a health plan member differs by disease or health condition, the Company believes that the percent contribution margin is approximately the same for all the Company’s programs.

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          Actual lives under management represent the number of health plan members to whom the Company is currently providing services. Annualized revenue in backlog represents the estimated annual revenue associated with signed contracts at August 31, 2003 for which the Company has not yet begun providing services. The number of actual lives under management and annualized revenue in backlog are shown below at August 31, 2003, 2002 and 2001.

          In December 2001, the Company established an industry-wide Outcomes Verification Program with Johns Hopkins University and Health System to independently evaluate the effectiveness of clinical interventions, and their clinical and financial results, produced by the Company and other members of the disease management and care enhancement industry. In addition to a five-year funding commitment that began December 1, 2001, additional funding may be generated for this program through research sponsored by other outcomes-based health-care organizations. Pursuant to the terms of the funding commitment, the Company provides Johns Hopkins compensation of up to $1.0 million annually and issued 75,000 unregistered shares of common stock to Johns Hopkins. One half of the 75,000 shares vested immediately, and the remaining 37,500 shares vest on December 1, 2003.

          The Health Care Advisory Board of the Johns Hopkins Outcomes Verification Program approved the Company’s diabetes and cardiac care enhancement programs in May 2002, followed by approval of its COPD program in September 2002 and approval of its asthma program in July 2003. In approving the Company’s programs, the Advisory Board conducted a comprehensive review of assessment and interventions, materials and content, patient identification and stratification algorithms, support tools and medical guidelines contained in the Company’s diabetes, COPD, coronary artery disease and heart failure programs. The Advisory Board’s evaluations included extensive site visits to the Company’s corporate offices and one of its six care enhancement centers. The Company was the first in the disease management industry to submit its outcomes-based care enhancement programs for independent review.

Hospital Contracts

          The Company’s hospital-based diabetes treatment center business had 49 contracts in effect in 67 hospital sites at August 31, 2003. The following table presents the number of total hospital contracts in effect during the past three fiscal years:

          The Company’s hospital-based diabetes treatment centers are located in and operated under contracts with general acute-care hospitals. The primary goal of each center is to create a center of excellence for the treatment of diabetes in the community in which it is located and thereby increase the hospital’s market share of diabetes patients and lower the hospital’s cost of providing services while

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enhancing the quality of care to this population. Fee structures under the hospital contracts consist primarily of fixed management fees, but some contracts may also include variable fees based on the program’s performance. Fixed management fees are recorded as services are provided. Variable fees based upon performance generally provide for payments to the Company based on changes in the client hospital’s market share of diabetes inpatients, the costs of providing care to these patients, and/or quality of care measurements. The terms of hospital contracts generally range from two to five years and are subject to periodic renegotiation and renewal that may include reduction in fee structures that would have a negative impact on the Company’s revenues and profitability. These contracts are structured in various forms, ranging from arrangements where all costs of the Company’s program for center professional personnel and community relations are the responsibility of the Company to structures where all Company program costs are the responsibility of the client hospital. The Company is paid directly by the hospital. Patients receiving services from the diabetes treatment centers are charged by the hospital for typical hospital services.

          The hospital industry continues to experience pressures on its profitability as a result of constrained revenues from governmental and private revenue sources as well as from increasing underlying medical care costs. As a result, average revenue per hospital contract for the year ended August 31, 2003 declined by 11% compared with the prior year. The Company believes that these pressures will continue. While the Company believes that its products are geared specifically to assist hospitals in controlling the high costs associated with the treatment of diabetes, the pressures on the hospitals to reduce costs in the short term may have a negative effect, in certain circumstances, on the ability of, or the length of time required by, the Company to sign new hospital contracts as well as on the Company’s ability to retain hospital contracts. This focus of the hospitals on cost reduction may also result in a continuation of downward pressure on the fee structures of existing contracts. There can be no assurance that these financial pressures on the hospitals will not continue to have a negative impact on the Company’s hospital contract operations.

Business Strategy

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

Risk Factors

          In the execution of the Company’s business strategy, its operations and financial condition are subject to certain risks. The primary industry risks are described below, and readers of this Annual Report on Form 10-K should take such risks into account in evaluating any investment decision involving

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the Company. This section does not describe all risks applicable to the Company and is intended only as a summary of certain material factors that impact its operations in the industry in which it operates. More detailed information concerning these and other risks is contained in other sections of this Annual Report on Form 10-K.

The Company depends on payments from health plans and hospitals, and cost reduction pressure on these entities may adversely affect the Company’s business and results of operations.

          The health-care industry in which the Company operates is currently subject to significant cost reduction pressures as a result of constrained revenues from governmental and private revenue sources as well as from increasing underlying medical care costs. The Company believes that these pressures will continue and possibly intensify. While the Company believes that its products are geared specifically to assist health plans, hospitals, and employers in controlling the high costs associated with the treatment of chronic diseases, the pressures to reduce costs in the short term may have a negative effect in certain circumstances on the ability of or the length of time required by the Company to sign new health plan and hospital contracts as well as on the Company’s ability to retain health plan and hospital contracts. In addition, this focus on cost reduction may result in increased focus from health plan and hospital customers on contract restructurings that reduce the fees paid to the Company for the Company’s services. There can be no assurance that these financial pressures will not have a negative impact on the Company’s health plan and hospital contract operations.

Compliance with new federal and state legislative and regulatory initiatives could require the Company to expend substantial sums acquiring and implementing new information systems, which could adversely affect its results of operations.

          Health plan and hospital customers are subject to considerable state and federal government regulation. Many of these regulations are vaguely written and subject to differing interpretations that may, in certain cases, result in unintended consequences that may impact the Company’s ability to effectively deliver its services. The current focus on regulatory and legislative efforts to protect the confidentiality of patient-identifiable medical information, as evidenced by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), is one such example. While the Company believes that its ability to obtain patient-identifiable medical information for disease management purposes from a health plan with which it has contracted is protected in recently released federal regulations governing medical record confidentiality, state legislation or regulation could preempt federal legislation if it is more restrictive. Although the Company continually monitors the extent to which specific state legislation or regulations may govern the Company’s operations, new federal or state legislation or regulation in this area that restricts the availability of this information to the Company or leaves uncertain whether disease management is an allowable use of patient-identifiable medical information would have a material negative impact on the Company’s operations.

Government regulators may interpret current regulations governing the Company’s operations in a manner that negatively impacts the Company’s ability to provide its services.

          Broadly written Medicare fraud and abuse laws and regulations that are subject to varying interpretations may expose the Company to potential civil and criminal litigation regarding the structure of current and past contracts entered into with hospital and health plan customers, such as the civil lawsuit filed against the Company in 1994 as discussed later in this Annual Report on Form 10-K. While the Company believes that its operations have not violated and do not violate the provisions of the fraud and abuse statutes and regulations, no assurances can be given that private individuals acting on behalf of the United States government, or government enforcement agencies themselves, will not pursue a claim against the Company under a new or differing interpretation of these statutes and regulations in return for a portion of potential penalties or recoveries obtained from the Company.

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The disease management and care enhancement industry has a lengthy sales cycle for new contracts because it is a relatively new segment of the health-care industry.

          The disease management and care enhancement industry, which is growing rapidly, is a relatively new segment of the overall health-care industry and has many entrants marketing various services and products labeled as disease management. The generic label of disease management has been utilized to characterize a wide range of activities from the sale of medical supplies and drugs to demand management services. Because the industry is relatively new, health plan purchasers of these services have not had significant experience purchasing, evaluating or monitoring such services, which generally results in a lengthy sales cycle for new health plan contracts.

A large percentage of the Company’s revenues are currently derived from three health plans, and the loss of, or the restructuring of a contract with, one or more of these customers could have a material adverse effect on the Company’s business and results of operations.

          Because the disease management and care enhancement industry is still relatively new and health plans have only recently entered into disease management contracts, the Company has a significant concentration of its revenues represented by contracts with three health plans - Hawaii Medical Services Association, Blue Cross and Blue Shield of Minnesota, and CIGNA HealthCare, Inc. - which collectively accounted for 70% of the Company’s revenues in fiscal 2003. Although the Company believes that the full-year impact of contracts signed in 2003 and anticipated to be signed in 2004 will reduce this revenue concentration, the Company’s results of operations and financial condition would be negatively and materially impacted by the loss or restructuring of a contract with a single large health plan customer.

A failure of the Company’s information systems could adversely affect the Company’s business.

          The disease management industry is dependent on the effective use of information technology. While the Company believes that its state-of-the-art electronic medical record and care enhancement center technology provides it with a competitive advantage in the industry, the Company expects to continually invest in updating and expanding technology and, in some cases, such as those discussed in this Annual Report on Form 10-K, will be required to make systems investments in advance of the generation of revenues from contracts with new health plans. In addition, these system requirements expose the Company to technology obsolescence risks. Accordingly, the Company amortizes its computer software and hardware over periods ranging from three to five years.

The Company’s inability to perform well in response to its contracted diseases or impact conditions could have a material adverse effect on the Company.

          The Company’s health plan growth strategy focuses on the development of care enhancement programs to address chronic diseases and medical conditions, as well as the overall health of all enrollees of a health plan. While the Company has considerable experience in care enhancement efforts with a broad range of medical conditions, most of the Company’s existing health plan contracts address the health-care needs of enrollees with only one or two diseases. Because the Company’s new care enhancement programs will address all the health-care needs of enrollees who are identified as having or being at risk for developing one or more of 27 diseases or impact conditions, these programs will involve additional risks of execution and performance.

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The Company depends on the timely receipt of accurate data from its health plan customers and the accuracy of its analysis of such data. Incomplete or inaccurate data from these customers or flawed analysis of such data could adversely affect the Company’s results of operations.

          The determination of which health plan members are eligible to receive the Company’s services and the measurement of the Company’s performance under its health plan contracts are highly dependent upon the timely receipt of accurate data from its health plan customers and the accuracy of the analysis of such data. Data acquisition, data quality control and data analysis are complex processes subject to error. Untimely, incomplete or inaccurate data from the Company’s health plan customers or flawed analysis of such data could have a material adverse impact on the Company’s revenues.

The Company’s revenues are subject to seasonal pressure from the enrollment processes of its contracted health plans.

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

          Another potential seasonal impact on actual lives could include a decision by a Medicare HMO to withdraw coverage altogether or in a specific geographic area, thereby automatically disenrolling previously covered members. Historically, the Company has experienced minimal covered life disenrollment from such a decision.

The Company faces competition for staffing, which may increase its labor costs and reduce profitability.

          The Company competes with other health-care providers in recruiting qualified management and staff personnel for the day-to-day operations of its business and care enhancement centers, including nurses and other health-care professionals. In some markets, the scarcity of nurses and other medical support personnel has become a significant operating issue to health-care providers. This shortage may require the Company to enhance wages and benefits to recruit and retain qualified nurses and other health-care professionals. Because a significant percentage of the Company’s existing contracts consist of a fixed fee per disease member, the Company’s ability to pass along increased labor costs to existing customers is constrained. The failure of the Company to recruit and retain qualified management, nurses and other health-care professionals, or to control labor costs could have a material adverse effect on profitability.

The Company’s stock price and trading volume may be volatile.

          Stock prices of health-care companies and the Company’s stock price in particular may be volatile. The stock’s volatility may be influenced by the market’s perceptions of the health-care sector in general, or other companies believed to be similar to the Company or by the market’s perception of the

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Company’s operations and future prospects. Many of these perceptions are beyond the ability of the Company to control. In addition, the Company’s stock is not heavily traded, and therefore the ability of stockholders to achieve relatively quick liquidity without a negative impact on the stock price may be limited.

Operating Contract Renewals

          The Company’s health plan contract revenues are dependent upon the contractual relationships it establishes and maintains with health plans to provide disease management and care enhancement services to their members. The terms of these health plan contracts generally range from three to seven years, with some contracts providing for early termination by the health plan under certain conditions. No assurances can be given that the results from restructurings and possible terminations at or prior to renewal would not have a material negative impact on the Company’s results of operations and financial condition. Of the five health plan contracts scheduled to expire in fiscal 2003, two were extended, one was expanded and extended, one was acquired by an existing customer, and one customer, representing less than 1% of revenues for fiscal 2003, notified the Company that it intends to terminate services effective December 31, 2003. Also during fiscal 2003, one of the Company’s customers, representing less than 1% of revenues for fiscal 2003, was acquired by another health plan and terminated its contract with the Company early.

          During the fiscal year ending August 31, 2004, four health plan customer contracts representing 2% of the Company’s revenues for fiscal 2003 are scheduled to expire under the terms of the contracts. Also, eight additional contracts representing 15% of the Company’s revenues for fiscal 2003 have early cancellation provisions that could result in early contract termination. No assurance can be given that unscheduled contract terminations or renegotiations would not have a material negative impact on the Company’s results of operations and financial condition.

          The Company’s hospital contract revenues are also dependent upon the contractual relationships it establishes and maintains with client hospitals to develop and operate diabetes treatment centers. Contracts have been discontinued or not renewed by the Company and by client hospitals for a number of reasons, including financial problems of the hospital, the consolidation of hospitals in a market, and a hospital’s need to reduce operating costs such as the short-term reduction of costs associated with elimination of the Company’s program.

          During fiscal 2003, 13 hospital contracts were renewed. Several of these renewals included contract rate reductions, which the Company has undertaken to maintain long-term contractual relationships. The Company anticipates that continued hospital industry pressures to reduce costs because of constrained revenues may result in a continuation of contract rate reductions and the potential for additional contract terminations.

Competition

          The health-care industry is highly competitive and subject to continual change in the manner in which services are provided. Other companies, including major pharmaceutical companies, health-care organizations, providers, and other entities that provide services to health plan organizations, which may have greater financial, research, staff, and marketing resources than the Company, are marketing diabetes, cardiac and respiratory disease and other care management services to health plans or have announced an intention to offer such services. While the Company believes it has advantages over its competitors because of its state-of-the-art care enhancement center technology linked to its proprietary medical information technology, the comprehensive clinical nature of its product offerings, its established reputation in the provision of care to enrollees with chronic diseases, and the financial and clinical outcomes of its health plan programs, there can be no assurance that the Company can compete

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effectively with these companies.

          Consolidation has been, and may continue to be, an important factor in all aspects of the health-care industry, including the disease management sector. While the Company believes the size of its membership base provides it with the economies of scale to compete even in a consolidating market, there can be no assurance that the Company can effectively compete with companies formed as a result of industry consolidation.

          The Company’s principal competition for its hospital treatment center business is from hospitals that have basic programs for treating patients with diabetes. Historically, hospitals have not committed the time, personnel or financial resources necessary to establish and maintain comprehensive diabetes treatment services comparable to the services offered by the Company’s diabetes treatment centers; however, no assurance can be made that hospitals will not commit such resources in the future.

Governmental Regulation

          In addition to those regulatory risks presented under the “Risk Factors” above, the Company is impacted by governmental regulation in a number of ways.

          While the Company itself is not directly subject to many of the governmental and regulatory requirements affecting health-care delivery, its client hospitals and health plans must comply with a variety of regulations including the licensing and reimbursement requirements of federal, state and local agencies and the requirements of municipal building codes, health codes and local fire departments.

          Certain professional health-care employees of the Company, such as nurses, are subject to individual licensing requirements. All of the Company’s health-care professionals who are subject to licensing requirements are licensed in the state in which they are physically present such as the professionals located at a care enhancement center. Multiple state licensing requirements for health-care professionals who provide services telephonically over state lines may require the Company to license some of its health-care professionals in more than one state. The Company is continually monitoring legislative, regulatory and judicial developments in telemedicine; however, no assurance can be provided that new judicial decisions or federal or state legislation or regulations would not increase the requirement for multistate licensing of all care enhancement center health professionals, which would increase the administrative costs of the Company.

          The Company is indirectly affected by changes in the laws governing hospital and health plan reimbursement under governmental programs such as Medicare and Medicaid. There may be continuing legislative and regulatory initiatives to reduce the funding of the Medicare and Medicaid programs in an effort to curtail or reduce overall federal health-care spending. Federal legislation such as the Balanced Budget Act of 1997 has reduced or will significantly reduce Medicare and Medicaid reimbursements to most hospitals. These reimbursement changes are negatively impacting hospital revenues and operations. Although the Balanced Budget Refinement Act of 1999 partially alleviated the reimbursement impact on hospitals, there can be no assurance that these changes, future legislative initiatives or government regulation would not adversely affect the Company’s operations or reduce the demand for its services.

          In December 2000 and in August 2002, the Department of Health and Human Services issued final privacy regulations, pursuant to HIPAA, which imposed extensive restrictions on the use and disclosure of individually identifiable health information by certain entities. The Company was required to comply with certain aspects of the regulations and implemented all necessary changes to its business operations by the regulatory compliance date. The cost for complying with the privacy regulations did not have a material negative impact on the Company’s results of operations and financial condition.

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          Various federal and state laws regulate the relationship among providers of health-care services, other health-care businesses and physicians. The “fraud and abuse” provisions of the Social Security Act provide civil and criminal penalties and potential exclusion from the Medicare and Medicaid programs for persons or businesses who offer, pay, solicit or receive remuneration in order to induce referrals of patients covered by federal health-care programs (which include Medicare, Medicaid, TriCare and other federally funded health programs). While the Company believes that its business arrangements with its client hospitals, health plans and medical directors are in compliance with these statutes, these fraud and abuse provisions are broadly written, and the full extent of their application is not yet known. The Company is therefore unable to predict the effect, if any, of broad enforcement interpretation of these fraud and abuse provisions.

Insurance

          The Company maintains professional malpractice, errors and omissions and general liability insurance for all of its locations and operations. While the Company believes its insurance policies to be adequate in amount and coverage for its current operations, there can be no assurance that coverage is sufficient to cover all future claims. In recent years, the cost of liability and other forms of insurance have increased significantly. There can be no assurance that such insurance will continue to be available in adequate amounts or at a reasonable cost. The Company also maintains property and workers compensation insurance for each of its locations with commercial carriers on relatively standard commercial terms and conditions.

Employees

          As of October 27, 2003, the Company had 1,151 full-time employees and 360 part-time employees in the following general classifications: 1,056 health-care professionals, including nurses, counselors and dietitians; 112 on-site management and administrative personnel; and 343 operations support and Company management personnel. These totals include employees of StatusOne Health Systems, Inc., which was acquired by the Company in September 2003. See “Recent Developments” below for further discussion of the acquisition. The Company’s employees are not subject to any collective bargaining agreements. Management considers the relationship between the Company and its employees to be good.

Recent Developments

          On September 5, 2003, the Company completed the acquisition of StatusOne Health Systems, Inc. (“StatusOne”), the market-leading provider of health management services for high-risk populations of health plans and integrated systems nationwide, through the merger of a wholly-owned subsidiary of the Company with and into StatusOne in accordance with the terms of an Agreement and Plan of Merger (the “Merger Agreement”). The aggregate purchase price paid by the Company was $65 million. In addition, pursuant to an earn-out agreement (the “Earn-Out Agreement”), the Company is obligated to pay the former stockholders of StatusOne, as additional purchase price, up to $12.5 million, payable either in cash or common stock, at the Company’s discretion, if StatusOne achieves certain revenue targets during the one-year period immediately following the acquisition. At the closing, the Company delivered $5 million of the purchase price into an escrow account under the terms and conditions of a separate escrow agreement to secure certain obligations of the former stockholders under the terms of the Merger Agreement. The Company financed the acquisition through a new syndicated bank facility of $100 million, of which $60 million is structured as a term loan and $40 million as a revolving line of credit. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in this Form 10-K for more information about the bank facility. The additional $5 million of purchase price above the $60 million term loan was provided out of the Company’s existing cash.

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          The terms and conditions of the acquisition are more fully described in the Merger Agreement and the Earn-Out Agreement, copies of which were filed as Exhibits 2.1 and 2.2, respectively, to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on September 9, 2003.

Available Information

          The Company’s Internet address is www.americanhealthways.com. The Company makes available free of charge on or through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

Item 2. Properties

          The Company’s corporate and primary service support office is located in Nashville, Tennessee and contains approximately 70,000 square feet of office space, which the Company leases pursuant to an agreement which expires in September 2007. As of August 31, 2003, the Company also had office space leases associated with its six care enhancement center locations in Phoenix, Arizona; Franklin, Tennessee; Pittsburgh, Pennsylvania; Kapolei, Hawaii; Eagan, Minnesota; and St. Louis, Missouri for an aggregate of approximately 137,000 square feet of space for terms of three to ten years. All of the Company’s diabetes treatment centers are located in hospital space for which the Company pays no rent.

Item 3. Legal Proceedings

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

          The Company believes that its operations have been conducted in full compliance with applicable statutory requirements. Although there can be no assurance that the existence of, or the results of, the matter would not have a material adverse impact on the Company, the Company believes that the resolution of issues, if any, which may be raised by the government and the resolution of the civil litigation would not have a material adverse effect on the Company’s financial position or results of operations except to the extent that the Company incurs material legal expenses associated with its defense of this matter and the civil suit.

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

Not applicable.

Executive Officers of the Registrant

          The following table sets forth certain information regarding executive officers of the Company as of August 31, 2003. Executive officers of the Company serve at the pleasure of the Board of Directors.

(1)  Effective September 1, 2003, Mr. Cigarran retired as Chief Executive Officer of the Company and was succeeded by Mr. Leedle. Mr. Cigarran still serves as Chairman of the Company’s Board of Directors.

(2)  On November 5, 2003, Mr. Taylor was named Chief Operating Officer of the Company effective December 1, 2003.

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

(a) Market Information

          The Company’s common stock is traded over the counter on The NASDAQ National Market (“NASDAQ”) under the symbol AMHC.

          The following table sets forth the high and low sales prices per share of common stock as reported by NASDAQ for the relevant periods.

(b) Holders

          At November 5, 2003, there were approximately 10,900 holders of the Company’s Common Stock, including 189 stockholders of record.

(c) Dividends

          The Company has never declared or paid a cash dividend on its Common Stock. The Company intends to retain its earnings to finance the growth and development of its business and does not expect to declare or pay any cash dividends in the foreseeable future. The declaration of dividends is within the discretion of the Company’s Board of Directors, which will review this dividend policy from time to time. The Company’s existing credit agreement at August 31, 2003 as well as the Company’s new revolving credit and term loan agreement dated September 5, 2003 prohibit the payment of dividends. For further discussion of the credit agreements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in this Form 10-K.

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Item 6. Selected Financial Data